The government has said it is seeking new funders to finance the construction of Muzizi Hydropower Dam following the cancellation of a contract agreement with the German Development Bank, KfW.
In 2016, the government signed two separate financing agreements with the African Development Fund (ADF) and KfW to fund the construction of the plant.
Aimed at supporting rural electrification with a focus on reducing environmental degradation by the locals in the sub-region, the plant was estimated to cost about €90.3 million (Shs353 billion).
The project, initially meant to last three years, sits on River Muzizi that snakes through the districts of Mubende, Kyegegwa, Kibaale, Kagadi, Kyenjojo and Ntoroko before it empties into Lake Albert.
On February 22, 2022, the government cancelled the agreement with the two firms over a concessional loan to build the dam.
Monitor has seen a copy of a letter written by the Finance ministry and addressed to KfW, seeking to cancel the loan agreement about the construction of the power plant.
The Uganda Electricity Generation Company Ltd (UEGCL), the state agency that owns the project, said on Friday that it had embarked on seeking alternative funders to build the dam following the cancellation.
In an interview, Mr Enock Kusasira, the UEGCL spokesperson, said—without stating a timeline—that they were hoping to secure a new financier. Asked why the government decided to cancel the deal, Mr Kusasira said after carrying out revisions, state actors discovered that the country could not pool enough money to pay back the loan.
“It is not that the terms for the loan were unfavourable,” Mr Kusasira clarified, adding, “The government did not have enough money, so it decided to look for another funding model, which process is ongoing now.”
When asked whether a new financier for the project had been secured, Mr Kusasira said that they were still undertaking the process.
“This is a government programme. It will only depend on how quickly the government can secure the funding. That project has never been terminated. We don’t have any excuse not to go ahead and build the Muzizi Hydropower Dam. The people in the region badly need electricity,” he added.
Colossal loss
Meanwhile, the cancellation of the KfW deal now means that the government must lose at least Shs8.63 billion in payment to KfW. According to sources at the Finance ministry, the parties agreed and cancelled the loan in which the government had already incurred Shs3.97 billion in commitment fees to secure the funding, before a contractor to build the hydropower plant could be identified.
“That was a loss to the government. Remember, billions had been paid in commitment and now they have to settle KfW with another Shs4.2 billion as fees for cancelling the concessional loan,” a source, who requested not to be named due to the sensitivity of the matter, said.
In his 2019/2020 and 2020/2021 reports, Auditor General John Muwanga detailed the risks the government could shoulder in associated losses for failing to absorb the loan for the project. Considering that the funds were paid for no particular gain over the project, Mr Muwanga, in his 2021/2022 report, pointed out that this was a disturbing loss.
“Shs3.97b had been incurred as commitment fees to secure the loan. Another Shs4.66b (€1.2m) is payable by the government as cancellation fees. Failure to implement the project meant that the intended economic and social benefits were not achieved,” Mr Muwanga stated, adding, “I advised the Permanent Secretary [of the Finance ministry] to ensure projects are subjected to a comprehensive appraisal by the development committee before committing government.”
At the time of the cancellation of the loan agreement, no disbursement had been made.
According to UEGCL, the Resettlement Action Plan Implementation (RAP) Consultant (Newplan Consulting Engineers and Planners) has completed the survey and valuation of the project land.
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