Subprime Deal for Bujagali Dam

Bujagali Affected Community

The World Bank has presented the Bujagali Dam on the Nile in Uganda as a model of its promotion of hydropower in Africa for almost ten years. The communities affected by the project don’t share the Bank’s optimism. When I visited their resettlement sites six years ago, affected people almost beat me up because they mistook me for the project’s manager, with whom I share my first name.

A new report by the Inspection Panel finds that the World Bank has still not learned from its past mistakes in the Bujagali Project. Because of wishful thinking regarding the dam’s risks and benefits, the Bank’s investigative body finds, the project may well fail to fulfill the “broad objective of sustainable development and poverty reduction embodied in Bank policy”. The report will be discussed by the Bank’s Board of Directors tomorrow.

The proposed project would dam the White Nile near its source at the outflow of Lake Victoria and would generate electricity at a capacity of 250 megawatts. The reservoir would drown the spiritually important Bujagali Falls, and with its long transmission lines, affect thousands of people.

The World Bank approved funding for the Bujagali Dam in 2001, but the project collapsed two years later when the private investor withdrew because of financial troubles and a corruption investigation. Last year, the World Bank, the African Development Bank and the European Investment Bank approved another $605 million in funding for the dam. The most important private investors in the project’s latest incarnation are the Aga Khan Foundation and the Blackstone Group.

Bujagali Falls

NAPE, a group of brave environmental activists in Uganda, filed a complaint regarding the project with the World Bank’s Inspection Panel in 2007. Given the project’s controversial history, the findings of the investigation are shocking. The Panel found that in preparing the project, the Bank’s management was again over-optimistic in assessing the dam’s risks and the affordability of its electricity for Ugandan consumers. Like in a subprime mortgage, the project’s financial, economic and hydrological risks were securitized in a complex contract, but can't be wished away and will be offloaded from the private investor to the Ugandan public.

The Panel found: “The high allocation of risk [to the Government of Uganda] increases the possibility that the project may not achieve the broad objective of sustainable development and poverty reduction embodied in Bank Operational Policies and Procedures. (…) The Panel did not find evidence (…) of any estimates of the economic impact of the Project on low-income households. (…) It might be argued that a smaller, lower-risk infrastructure project would have been a better place to start.” The Panel’s economic advisor commented that “the greatest share of economic risks lies with the power purchaser. (…) In effect, the lenders especially but also the investors are held harmless against all or most eventualities.”

The Panel report also expressed serious concerns regarding the social, environmental and cultural impacts of the project. We have made the full report available to the public and summarized its findings on our website.

Wishful thinking regarding project benefits and negligence regarding the risks has been a recurrent theme in the World Bank’s approach to Uganda’s power sector. The Bank continuously overestimated the future water flows in the Nile, and the capacity of hydropower projects to generate electricity from it. In June 2008, a report by the Bank’s Independent Evaluation Group about past projects found: “The project appraisal had identified the criticality of the hydrological risk related to the water level in Lake Victoria, but concluded that the likelihood of this risk was less than one percent. This risk has now been realized.”

In 2002, an earlier investigation by the Inspection Panel found that the economic and financial analysis of the first Bujagali Project was seriously deficient. In preparing the project, the World Bank was overoptimistic regarding the future demand for electricity, the reduction of losses in Uganda’s power sector, and the impacts of privatizing the power distribution system. In contrast, the Bank was overly pessimistic in assessing the alternatives to the project. As a consequence, the Panel found, Bujagali risked turning into “very substantial stranded costs against the [power purchase agreement] obligations”.

Mural in Kampala

In spite of the notorious corruption risks in Uganda and in international infrastructure projects more generally, the World Bank did not insist on an international competitive bidding for the first Bujagali Dam. The project's main civil engineering contractor was later found to have paid a substantial bribe to the country’s energy minister, and the project collapsed in scandal. Several hundred people had already been displaced, but after the end of the project, the private investor, the government and the World Bank all tried to escape the responsibility for their rehabilitation. (This is when I risked my neck by visiting the resettlement sites in spite of my conspicuous first name.)

The current project is based on international competitive bidding. Yet its price tag increased by no less than 28% from February to December 2007, and the power purchase agreement appears to allow further price increases. According to the Panel's economic advisor, allowing bid prices to increase contradicts "international best practice". Such price increases are often a sign of corrupt collusion between a contractor and its client.

Responding to the Inspection Panel’s new report, Frank Muramuzi of NAPE said that the “agreement between our government and the project developer will drain the national treasury and take away important resources for other social and economic services”. My colleague Lori Pottinger added that Bujagali was “a bit like the recent bailout for Wall Street – golden parachutes for the dam developers while Ugandan taxpayers will have to shoulder the costs for the problem it causes”. Frank Muramuzi proposed to present NAPE’s concerns to the Bank’s Board of Directors via video-link from Uganda, but the directors rejected his offer.

In a paper on the global financial crisis, the World Bank offered to quickly increase its lending and make commitments of up to $100 billion in the next three years. National governments would have to underwrite such a massive expansion of the Bank’s lending. As the Board of Directors is about to discuss the problems of the Bujagali Dam, the interested public should watch closely how the Bank is dealing with the impacts and risks of its current projects.

Peter Bosshard is the policy director of International Rivers. His blog, Wet, Wild and Wonky, appears at www.internationalrivers.org/en/blog/peter-bosshard