In circumstances that mirror the procurement wrangles that characterised the award of the construction contract to Chinese civil contractor Sinohydro, the 600MW Karuma power project is once again embroiled in controversy, this time over an insurance contract.

The EastAfrican has learned that Sinohydro has failed to pay premiums to a consortium of 23 insurance and re-insurance companies, and is instead questioning the 2013 contract.

The contractor is uncomfortable with buying the Contractors All Risk (CAR) policy locally and has proposed to source it from China-Re or other insurers of global repute. 

The proposal goes against national policy that requires all national projects to be insured with Uganda–Re as a way of reducing capital flight and helping deepen the domestic financial system.

It is understood that the contractor, fearful that the local insurance industry may default in the event of a claim, has in verbal discussions with Ugandan officials asked the government to give a written commitment that it will assume the risk in the event of default.

The five-year policy, whose premiums amount to $11 million, was to hedge against damage to the tunnels during construction of the hydropower project.

The insurers in the consortium include UAP Uganda, Kenya and South Sudan; Swiss Re, American International Group, Jubilee and Goldstar insurance, Lion Assurance, Britam, Zep Re, East Africa Re, Africa Re and Uganda Re.

The EastAfrican has learnt that while construction of the power station and associated tunnelling works is going on, Sinohydro has not paid any premiums. The standoff means that component of the project is not insured and Uganda could lose in the event of a catastrophe.

In correspondence with the Insurance Regulatory Agency, Sinohydro first contests the methodology used by one of the brokers to arrive at the premium value and also expresses concern that it was neither consulted nor involved in any due diligence on the companies in the consortium that was awarded the policy.

On the other hand, the insurance companies are threatening litigation to force the contractor to pay the premiums, with Swiss Re threatening to pull out. 

Song Yijun, the project manager at Sinohydro, said he could not speak about the reasons for his company’s failure to pay premiums.

“I can’t disclose why. The Ministry of Energy and Mineral Development is best placed to explain,” he said.

Asked about the issues surrounding premiums, Paul Mubiru, the acting Permanent Secretary at the ministry, said he was too busy to find the information. 

But in a letter of April 10, to the regulator, Mr Song states that, while Sinohydro is an indispensable stakeholder in the project, the firm was only given copies of UAP’s correspondence to the regulator about the policy.

READ: Chinese firm to build Karuma plant

“First and foremost we want to state that the policy is to a large extent, solely and simply a proposal without our consent and further signature affixed from authorised power of attorney and company seal,” Mr Song said in the letter.

“Second, it is reiterated that Sinohydro was not appropriately and exhaustively consulted, let alone engaged, in the proposal making, structuring, placement and corresponding communication with IRA and officials from Ministry of Energy. It is a breach of procedural rules and regulations,” he adds.

Sinohydro goes on to say that UAP’s proposal was based on “scattered” information obtained by the insurer, owing to lack of active engagement with the  insured, leading to “falsehoods, excessive charges, unreasonable structuring and misinterpretation of our requirements.”

Referring to the premium breakdown of the schedule, Sinohydro said a 10 per cent provision for material damage escalation was quoted at $185,7256,417, at a rate of 0.475 per cent, which it found excessive since the insured contract value already included the 10 per cent escalation. Also a sum of $563,122 was charged for withholding tax without specifying the rate.

Withholding tax

The firm also states that, as the insured party, Sinohydro should not be liable for withholding tax. Additionally, while the replacement value of plant and construction equipment is covered, the list of insured machinery and the corresponding value is not attached.

UAP also allotted $40 million as the value of the risk associated with delayed start-up and calculated a premium at the rate of two per cent but did not involve the contractor in the assessment of various components that go into this, he stated.

Furthermore, the transmission line and the power station were treated as one project by the insurer and subjected to a standard rate of 0.475 per cent. The contractor contests as two different projects with varying scope of work and risk.

“This increases the cost of premium and has a domino effect on the contract price and loan agreement for the project,” Mr Song warns.

Mr Song also said Sinohydro was not informed of any due diligence undertaken or “any report therewith to assess and validate the underwriting capabilities and credit ratings of the co-insurers and facultative reinsurers,” leaving Sinohydro exposed to unknown risk once claims arise.

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While Sinohydro refused to comment on the contents of its correspondence with the regulator, sources who knows about the controversy said the firm’s position is informed by the experience of a contractor in Ethiopia who had trouble collecting compensation when part of a hydropower station and construction collapsed.

In Uganda, a similar scenario played out in the 1990s when local insurers Pan World insurance went under after Chinese firm Sietco, which had been awarded the $73 million contract for the civil works of the 200MW Owen Falls Extension Project, abandoned the site without completing the job.

Profits without service

But industry sources said continued refusal by Sinohydro to pay up is likely to set the stage for insurance companies to profit from this deal, without ever providing the service for which they were contracted.

A marketing manager at one of the 23 insurance companies told The EastAfrican, that whatever happens, they expect the Sinohydro to pay the premium, since the cover is a contract that was signed between all the parties involved. The official also pointed out that this is a government project and litigation can be an option, if payment of premiums is not effected as was agreed.

Kadunabi Lubega, chief executive of the Insurance Regulatory Authority said failure to pay premiums is good grounds for insurance companies not pay for the losses. 

The procurement of Karuma hydropower project attracted controversy after the two companies involved in the bidding process accused each of corruption. 

Corruption charges around insurance have already surfaced, with some companies alleging conflict of interest against one insurance broker.