Chinese bank asks for Karuma dam loan service

KARUMA  | MINISTRY OF FINANCE  | CHINA

The Export-Import (EXIM) Bank of China has asked Uganda to begin servicing the $1.7b (sh5.3 trillion) loan for the 600MW Karuma Hydropower Project even before construction is completed.

The bank, in a letter to the finance ministry, expressed uneasiness about the slow pace of completion of the project.

The Government contributed 15% of the project funds, while EXIM Bank provided 85%.

In the letter dated August 25, 2020 and copied to various high-level government officials, the bank requested the finance ministry to: "urge the relevant parties to resolve the problems (delaying the project completion) and make the project move forward".

"According to the Buyer Credit Loan Agreement of the Karuma Project, both the available period and the grace period of the project will expire on December 24, 2020, then the repayment period commences, meaning the principal should be repaid accordingly, no matter the construction of the project is finished or not," stated the letter.

The bank advised that the operational income of the project could help to cushion the repayment pressure.

"So it is very important for your good ministry (finance) to make progress on land acquisition for the transmission line construction to ensure that the project is finished on time," the letter read.

On August 17, the finance minister, Matia Kasaija, wrote to the bank, requesting for an extension of the loan disbursement period and last draw down date.




Kasaija stated that the implementation of the project is still going on, with works being at 98% for the power plant and 88.3% for the transmission line.

Kasaija said according to the credit financing agreements, the available period and grace period expire on December 23, 2020, and February 9, 2022, respectively.

He noted that the Government is to ensure that all funds are drawn down prior to the above expiry dates.

"However, there are some pending remedial and ongoing works at the hydropower plant and transmission line."

He said Sinohydro Corporation Ltd, the project's contractor, has expressed inability to have them completed as earlier planned.

The contractor has requested for a seven-month extension, citing delays in land acquisition.

Kasaija stated that the COVID-19 pandemic also slowed down works.

The contractor has advised Government that works may go beyond the planned period as production lines in China are currently closed, thus delays in delivery of the required materials, as well as transportation of the expatriates.

The minister said with the slow progress of works and the challenges the contractor is facing due to the COVID-19 impact on production, shipment and transportation of the required construction materials and expatriates, it is anticipated that the outstanding funds cannot be certified for payment before the last loan drawdown date of December 23, 2020.

"This is, therefore, to seek your concurrence to grant an extension of the project last drawdown date for two years from December 23, 2020 to facilitate completion of all planned activities and smooth closure of the project.

"I wish to take this opportunity to re-affirm our commitment to fulfil our repayment obligations as earlier agreed. Please note that the requested extension is only for the last drawdown, given the prevailing circumstances and this, if granted, shall not in any way stop us from meeting our repayment obligations as they fall due," Kasaija stated.

The construction of Karuma dam was launched in 2013 and was scheduled for completion within six years, in December, last year.

However, the completion date was extended to January 2020, and again to December, 2020.

Uganda's installed power generation capacity was targeted to increase to over 2,000MW with the planned commissioning of the 600MW Karuma Dam in December.

The increased power generation and supply is planned to boost industrialisation, increase employment, reduce power tariffs and also increase power use by households.

Civil society organisations have warned Government of the increasing public debt stock with the accompanying debt servicing. Uganda's interest payments on loans rose from sh1.7 trillion in the financial 2016/17 to sh4.1 trillion in the financial year 2020/21.

According to Bank of Uganda's report on the performance of the economy, September 2020, Uganda's public debt grew by 22.4% (sh10.33 trillion) from sh46.20 trillion in June 2019 to sh56.53 trillion by June 2020.

These figures exclude the latest borrowings, which will be released in January/February 2021.

Experts say incurring debt is not bad, but its use and outcomes are of major concerns.