KAMPALA, April 15 (Reuters) – Uganda will use tax payments by UK oil explorer Tullow Oil (Stuttgart: 591219 – news) to finance construction of the Karuma dam, a ministry of finance official said on Friday, to provide the hydro-power needed for industrial growth.

Last week Tullow paid Uganda $327.5 million in capital gains tax from the $2.9 billion it earned on the sale of stakes in Ugandan exploration properties to France’s Total (Euronext: FP.NX – news) and China National Offshore Oil Corporation, CNOOC (HKSE: 0883.HK – news) .

The government has said the power project will cost $2.2 billion, up from an initial estimate of $900 million.

“The current government position is that the Tullow money that has just come in will be used to build Karuma dam,” Keith Muhakanizi, deputy secretary to treasury told reporters.

The east African country discovered oil in the west along its border with the Democratic Republic of Congo in 2006, and commercial production is expected to start early next year.

The hydro-power dam, Uganda’s largest ever infrastructure project, is expected to generate 700 megawatts. Construction is expected to start early next year.

Uganda has enjoyed a decade of vigorous economic growth on the back of its service, construction and retail sectors, bolstered by stable economic policies, but insufficient power supplies have stifled industrial growth.

(Reporting by Elias Biryabarema, editing by Jane Baird)

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