The Economies of Large Scale Dams; Why Karuma Will Need More Money and More Time

By: Eshban Kwesiga

The 48 coun­tries of Sub-Sa­ha­ran Africa (with a com­bined pop­u­la­tion of 800 mil­lion) gen­er­ate roughly the same amount of power as Spain (with a pop­u­la­tion of 45 mil­lion). African gov­ern­ments have quickly paid at­ten­tion to the fact that their power in­fra­struc­ture de­liv­ers only a frac­tion of the ser­vice found else­where in the de­vel­op­ing world. Across the con­ti­nent sev­eral ma­jor en­ergy in­fra­struc­tural pro­jects are in the works, one of them be­ing the Karuma dam in Uganda.

On Wednes­day 25th March the Ugan­dan Par­lia­ment ap­proved a USD 1.435 bil­lion (UGX 4.289 tril­lion) loan from the Ex­port–Im­port (EXIM) Bank of China to fi­nance the con­struc­tion of Karuma Hy­dropower Plant, close to a year and half af­ter the Ugan­dan gov­ern­ment ini­ti­ated a process to bor­row money for the con­struc­tion of Karuma dam – a 600 megawatt hy­dropower plant. When com­pleted, it will be the largest power-gen­er­at­ing in­stal­la­tion in the coun­try.
Un­der the fi­nanc­ing deal the Chi­nese gov­ern­ment would raise 85% of the pro­ject cost as a loan ex­tended to Uganda through the Exim Bank. Of the USD 1.435 bil­lion, USD 789.3 mil­lion will be loaned at 2% per an­num, re­payable over 20 years, while USD 645.82 mil­lion will at­tract 4% in­ter­est, payable over 15 years. The clock starts tick­ing on the day the dam is fully com­mis­sioned.

This pro­ject comes af­ter a 2013 re­search study by  Ox­ford Uni­ver­sity ti­tled “Should we build more large dams? The ac­tual costs of hy­dropower megapro­ject de­vel­op­ment”. The peer re­view study that was con­ducted over a space of four years an­a­lyzed all large dams across the world built be­tween 1934 and 2007 for which re­li­able costs and sched­ule fig­ures are avail­able – 245 pro­jects in 65 coun­tries with a to­tal cost of USD 353 bil­lion (in 2010 prices) thus form­ing the most com­pre­hen­sive eco­nomic analy­sis of large dams ever un­der­taken.

The sci­en­tific study of­fers an un­flat­ter­ing ver­dict on the eco­nom­ics of large dams, with im­por­tant im­pli­ca­tions for fu­ture en­ergy sec­tor plan­ning pro­jects show­ing that large dams suf­fered av­er­age cost over­runs of 96% with the de­gree of cost over­runs tend­ing to in­crease with the size of pro­jects, im­ply­ing that on av­er­age large hy­dro power dams do not make eco­nomic sense.

It added that im­ple­men­ta­tions suf­fer an av­er­age de­lay of 44% and this does not in­clude the lengthy lead time re­quired to pre­pare pro­jects of this na­ture be­fore con­clud­ing that dam plan­ners needed to in­crease cost es­ti­mates by 99% & sched­ules by 66% to achieve 80% within the planned bud­gets and time­frames.

True to this, Bu­ja­gali En­ergy Lim­ited (BEL), the com­pany that built the Bu­ja­gali dam started out with a USD 580 mil­lion bud­get, but by the end of the pro­ject in 2012, the cost had shot up by 48%.

While dam builders and fi­nanciers have ac­knowl­edged the prob­lem and claim they have learned from their mis­takes, the study also shows that this is not the case. Go­ing by its find­ings, fore­casts of costs of hy­dro power dams be­ing made to­day are likely to be as wrong as they were be­tween 1934 & 2007.

If any con­sid­er­a­tion is made for the study, it would re­quire the Mu­sev­eni ad­min­is­tra­tion to re­think, re­draw and re­fi­nance its biggest and most ex­pen­sive en­ergy in­fra­struc­ture pro­ject to-date. Given that the gov­ern­ment has al­ready taken sig­nif­i­cant steps to­wards Karuma, it will pro­ceed with its prepa­ra­tions as planned but it’s also likely to re­turn to par­lia­ment ask­ing for more like Oliver Twist and his bowl.