Multi-billion Isimba and Karuma hydropower dams: How Chinese loan ‘spillovers’ are creating new growth opportunities in Uganda

By Isaac Khisa, first published in The Independent. The Ugandan government has in the past years faced harsh criticism over regular borrowings from the China Import Export Bank to facilitate development of infrastructure projects including hydropower dams, roads and possibly soon the planned Standard Gauge Railway. But the Chinese loans have also had a fair share of positive aspects to the population.

Little more than five years ago, Busana and Nazigo sub-counties in Kayunga District, located approximately 85km east of Uganda’s capital, Kampala, were typical ‘African backwaters.’ Residents here struggled to survive as subsistence farmers; fetched water from the River Nile for domestic purposes including drinking and cooking food.

They also had to cope with the narrow and dusty access roads, some only good for pedestrians.

A similar state played out in the adjacent sub counties on the eastern banks of the Nile in Kamuli District which shares the dam.

Kamuli is where the former Speaker of Parliament, longest serving and most powerful parliamentarian and now the First Deputy Prime Minister and Minister for East African Community Affairs, Rebecca Alitwala Kadaga, comes from.

But the people’s fortunes on either side of the Nile have changed considerably. The construction of the Chinese-funded 183MW Isimba Hydropower Dam across the Nile at a cost of US$568million with the China Exim Bank providing 85% of the funds as a loan, has seen the government ramp-up infrastructure developments in both districts, a development that wouldn’t have happened without the new dam.

The situation is similar for residents in the districts hosting the 600MW Karuma Hydropower Power Dam further downstream on the Nile, located in Kiryandongo District in northern Uganda, 110km downstream of Lake Kyoga and 270km from Kampala.

Isimba Hydropower Dam’s construction started in 2013 and was commissioned in 2018, while Karuma Hydropower Dam is expected to be commissioned in June 2022. These developments have been described as a ‘game changer’ in the country’s energy sector and a big boost to the industrialization as well as promotion of the East African Community (EAC) as more electricity will now be exported to the neighbouring Kenya and South Sudan.

Economic dividends

However, these investments have also resulted in new developments riding on the dams’ construction. More than seven learning institutions – primary, secondary and technical schools – now have new classrooms, dormitories and sanitary facilities, or have had their old infrastructure refurbished. Health centres, too, have received a fair share of this so-called transformation though are still plagued by inadequacies in essential drugs and human resources.

The only main road that links Kayunga and Kamuli districts now has some patches of tarmac as construction work is ongoing. The residents in the two districts also have a bridge that has replaced the outdated and unreliable ferry facility popularly known by the locals as Nabukeera.

From the dam’s construction site towards Busana Town Council, about 2 kilometres away, there is clear evidence that the dam has had an economic windfall.

Mawa Barasa, a hardware operator at Busana Town Council said the new dam sparked off the development of improved housing units and businesses.

“We no longer have dust here. We also have new investments in housing and so the demand for cement is high,” he told The Independent in an interview. “The majority of us now have electricity and this would not have been possible without the construction of Isimba Dam.”

Mawa added that it is now easier to travel between Kamuli and Kampala via Kayunga due to the improved road network and the new bridge. He, however, says the new developments have also come with their own challenges.

“Prices of some products that we used to get from Busoga sub-region (which includes Kamuli District) via the ferry like maize flour and sugar have gone up. This is because traders now prefer to sell their products to us at ‘Kampala prices’ which are slightly higher compared to periods before the construction of the dam,” Barasa said, adding that the current good road network is to blame.

Simon Anguyo, a taxi driver plying the Kayunga-Kamuli Road says whereas the road network connecting the two districts has improved and thus eased their movement, new taxis have also joined the route increasing the competition.

“We no longer inhale the dust as we used to be before. The travel time has also been reduced by more than 50% and this is good for us and the passengers,” he said.

Further downstream on the Nile in northern Uganda, the areas hosting Karuma Hydropower Dam have also recorded similar developments.

Jacob Ateenyi, a Member of Parliament for Kibanda South County in Kiryandongo District which hosts the dam besides Oyam and Nwoya Districts, confirmed that indeed the social-economic status of some people there has improved.

“Karuma trading centre wasn’t like this. There’s a lot of businesses now, new towns have come up and even grown faster than the older ones, and I am sure that when the dam is completed and people have economic power, they will develop much faster,” he said.

“We are sure these [houses] are going to host a number of people when the dam is commissioned, and obviously will come with some money which will boost the economic status of this place. Some of them [workers] will remain, buy land and invest here.”

Ateenyi said some of their children have been employed in the dam construction and the lucky ones have been able to build houses and improve their lives.

Francis Okello, a businessman at Karuma town dealing in beverage products reiterated that Karuma trading centre has had tremendous transformation since the construction of the dam began eight years ago.

“There was a lot of money here especially every end of the month,” he said, adding that he was able to buy a plot of land and build his home using proceeds from the booming business at the time.

A truck crossing the newly constructed Isimba Bridge connecting Kayunga and Kamuli Districts on Oct. 13 (INDEPENDENT/ISAAC KHISA).

These developments have also prompted the country’s tourism agency to start planning on how to reap some fortunes around the dam.

Lilly Ajarova, the Chief Executive Officer at the Uganda Tourism Board (UTB) recently revealed that her organisation has since signed a memorandum with the Uganda Electricity Generation Company Limited (UEGCL), the government agency responsible for construction and management of the power dams, to transform the two dams into infrastructure tourism destinations.

“The successful development of Karuma and Isimba dams into tourism sites will further diversify our tourism portfolio and, therefore contribute to our core objectives like sustainably increasing the volume and value of tourism to Uganda,” she said last month.

Dams trigger development

Commenting on the new developments, Irene Batebe, the Permanent Secretary in the Ministry of Energy and Mineral Development told The Independent that the government is now focusing on utilizing the borrowed funds especially from China to develop the country holistically.

“The infrastructure we are setting up here will precipitate development,” she told The Independent in an interview during a recent site visit at Karuma Hydropower Dam. “If it is a road in the community, it is going to precipitate development like the local population’s accessing markets.”

“So, there’s that ripple effect coming from these projects. We should look at these developments in a holistic manner. If it is a hospital, we are improving the health care of the people in these areas.”

Batebe said the critics of Uganda’s acquisition of the China’s Exim Bank loan should look at the social economic benefits over and above the country’s interest rates and debt repayment.

Paul Lakuma, a research fellow at the Economic Policy Research Centre based at Makerere University reiterated that, in fact, debts aren’t bad for any country but it depends on how it is utilized.

He said there’s only need for the government to balance its investment in infrastructure and improving people’s livelihoods. This, he said, is because return on investment in infrastructure projects is very low in the initial years.

“We must have a mix of projects; some with short term returns and others with long term returns,” he said.

“We tend to enjoy a basket of goods. We enjoy when our health is good, when our children can go to school and there are textbooks and desks and we also like seeing good roads.”

Lakuma said good health and education will enable the population to prosper and therefore be in position to repay the borrowed funds.

“However, this does not mean that we should stop investing in infrastructure. We need to continue because other countries around us are investing in infrastructure and we risk being behind although we now need to empower people economically as well,” he said.

Research carried out by political economists, Tom Ogwang and Frank Vanclay, dubbed ‘Resource-Financed Infrastructure: Thoughts on Four Chinese-Financed Projects in Uganda’ published this year states that ‘there is little truth and much myth-making and fear mongering’ in the allegations of Uganda’s China debt sustainability.

The research quoting the Ministry of Finance’s ‘Report on Public Debt, Guarantees, Other Financial Liabilities and Grants for Financial Year 2018/19,’ states that China isn’t the country’s biggest lender; instead, the International Development Association (IDA) which includes the World Bank, accounts for the lion’s share, 40% of the country’s debt followed by China at 22% and the African Development Bank at 17%.

With the anecdotes of Isimba and Karuma hydropower dams, Entebbe-Kampala Expressway and the planned Standard Gauge Railway, the research notes that many commentators have raised concerns about China’s expanding economic presence in Uganda and Africa.

“They have warned about a lack of transparency, the hiring of Chinese instead of local workers, the creation of unsustainable debt, the promotion of China’s commercial interests ahead of the borrowing country’s needs, and a lack of good governance,” the researcher notes.

More myth trap than debt trap

“Nevertheless, we conclude that Uganda and other developing countries have generally benefited from Chinese-funded infrastructure, and there is more myth trap than debt trap.”

The research, however, says that to ensure positive development outcomes, governments and construction companies should ensure compliance with international standards, especially relating to environmental and social impact assessment; human rights; benefit-sharing arrangements; livelihood restoration; and project-induced displacement and resettlement.

The research also notes that there’s certainly no evidence of any overly zealous attempt by Chinese companies or banks to push unwanted projects onto Uganda or other African countries.

“…it is not possible to conclude that China is actively promoting inappropriate borrowing, instead it is likely that the increase in Chinese lending is demand-driven” the research reads in part, adding that although the China Exim Bank is unlikely to fund any manifestly ludicrous project, it is the responsibility of the borrower (specifically the Parliament of any country) to ensure that there is a sound justification for any project.

The research adds that while it is true that increasing national debt might cause social unrest, especially if a government would spend more on debt servicing than on other budget items, the lack of infrastructure is also a social and human rights issue, especially regarding essential public services like water and electricity.

Hannah Ryder, the chief executive officer of Development Reimagined, a pioneering African-led international development consultancy based in China, meanwhile, blames the global banks, the International Monetary Fund and World Bank, on their rating of debt sustainability in Africa (DSA) arguing that it is incomplete and flawed.

She says debts spend either on recurrent or development budgets can have “spillovers” which create new growth that would not have been there otherwise.

For instance, Ryder, says education financed through debt can translate into an increase in human capital and innovation, while a new railway project can cut travel costs and create new markets, which translates into higher productivity.  Yet none of this examination of the potential new “goods” or “assets” created by debt incurred are included in the DSA, she said.

“The DSA process feeds the notion that debt is always “bad,” rather than an investment in the future, again implying that any lower income country that needs debt is always a “lemon,” Ryder said, adding that a great deal of public investment (and often debt) will be needed in infrastructure and human capital in the future to meet Africa’s development goals.

China’s take on emerging developments

Jiang Jiqing, the Economic and Commercial Counsellor at the Chinese Embassy in Kampala told The Independent that China is excited about the emerging developments riding on the construction of the two Chinese-funded dams.

“While investments in the dams were to generate electricity to the population, we are also extremely excited that the lives of the local people living close to those dams have been elevated and their social-economic wellbeing improved,” she said adding that the emerging developments means that indeed the China-Uganda collaboration is having a positive impact to the people in both countries.

Jiang said China will continue to collaborate with the various African countries including Uganda to improve the lives of the population.

Jiang revealed that a new development blue print between China and African countries will be unveiled during the Forum on China-Africa Cooperation (FOCAC) slated to take place in Dakar, Senegal, next month (November 2021).

“Our next focus will not only be in relation to improving infrastructure (in Uganda and Africa) but also improving people’s livelihoods. We shall focus on improving education, health, agriculture, information and communication technology including digital economy,” she said.

Going forward

Newly refurbished infrastructure at St. Andrew Primary School, Kiyunga (INDEPENDENT/ISAAC KHISA).

For now, Ogwang and Vanclay says given the high demand for infrastructure in Sub-Saharan Africa, the availability of Chinese finance, and China’s desire to support its companies to access markets around the world, it is likely that China will continue to invest in worthy projects in Africa and elsewhere in the world.

“China’s development cooperation is motivated by a wide range of economic and diplomatic interests, including securing vital resources, opening up new markets, widening investment opportunities, and forging new political alliances. These interests are essentially the same as those of traditional western lenders,” the duo said.

Some of the dams’ beneficiary health centres and schools

Health centres Learning institutions
Busaana Health Centre IIINakakandwa Primary School
Bukamba Health Centre IIINakatooke Primary School
Namusala Health Centre IIBusaana Secondary School
Nankandulo Health Centre IVNankandulo Primary School
Mbulamuti Health Centre IVLwanyama Technical Institute
Buluya Health Centre IISt. Andrew’s Primary School
Kiyunga Health Centre IIAmaji Primary School
Construction of a General Hospital at DiiCwuinyi village in Oyam DistrictOther services included: Boreholes; Latrines in trading centres
Masindi Military Barracks Hospital in Masindi District