World Bank Inspection Panel Report reinforces criticism of the controversial Bujagali Hydropower Pro

11 June 2002

The World Bank Executive Board has delayed the decision over a political risk guarantee of $250m for the Bujagali Dam Project until June 18. This will allow them to review a report submitted on May 30 by the Bank’s Inspection Panel, its independent investigative body. This report has net yet been officially released to the public but it is known to contain strong criticism of how World Bank staff have approached the project.

The main conclusion of the report is that the planned dam violates the World Bank’s policies on involuntary resettlement, environmental assessment, natural habitats, disclosure of information, and the economic evaluation of investment operations.

The announcement to delay the decision also transpires three weeks after the publication of a report by IRN (International Rivers Network) Pervasive Appraisal Optimism that denounces Bank management for misleading Executive Directors with inaccurate economic feasibility studies in order to secure funding for the project. Citing a World Bank study, Peter Bosshard author of the report writes, “The World Bank’s approach seems to illustrate the “pervasive appraisal optimism” which the Wapenhans Report identified as the key reason for the Bank’s decreasing portfolio quality in 1992.”

The Bujagali Project, a 200MW hydropower dam located on the River Nile in Uganda is being built and operated by AES corporation, whose shares have recently crashed by 40%, thought to be a result of a decline in “investor confidence” following the bankruptcy of Enron Corporation. As a result AES Corporation needs to look for an investor partner in the project and this buys time for the implementation of the measures suggested by the Inspection Panel report.

The project was first proposed in December 1991, and was supported by the African Development Bank from the start. The World Bank Group got involved in 1997 with the IDA (International Development Agency), followed by the International Finance Corporation IFC in 1999 with respect to funding a hydropower project as part of Uganda’s power sector reform. In December 2001, the World Bank approved IFC and IDA funding of up to $225m for the Bujagali project, based on an options assessment submitted in July 2001.

Many bilateral export credit agencies have been dissuaded from involvement with the project, as a result of the controversy that surrounds it. There has been new support however, most recently Norwegian Credit Agencies (GIEK) have taken over responsibility for the environmental impacts of the project from the WB and IFC as of May 16.

Pressure to reconsider the project has mounted from a consortium of northern and southern NGOs from across the globe, culminating in a series of meetings with Executive Directors held in Washington on the 28-31 May. Attending these discussions were Afuna Adula and Frank Muramuzi, members of Uganda’s Association of Professional Environmentalists and Martin Musumba, deputy Prime Minister of Busoga Kingdom. “AES is guaranteed to earn money. MIGA is guaranteed to get its money back. It is only the consumer and the Ugandan tax payer who are not sure how much they will loose,” said Mr Muramuzi. However, some Ugandans are convinced that the Bujagali project offers them the chance for real progress, the local councils of Malindi and Naminya villages have written letters of support to James Wolfensohn.

The conclusions of the Inspection Panel Report echo the findings of the IRN report published on May 14 that focuses on two central issues:

  • Options assessment documents didn’t mention earlier World Bank-backed reports which showed that a combined-cycle plant and geothermal energy would be the most cost-effective source of power for Uganda, following Bank supported development of geothermal projects in neighbouring Kenya and Nicaragua.
  • Economic projections were highly distorted, for example a World Bank projection of 1998 suggested that the demand for power in Uganda would rise by 5.5% in the 200-2020 period. The new reports predicted an 8.3% increase without discussing why. The earlier projections would make the Bujagali project uneconomic.

The Panel report is equally critical of the economic and financial analysis of the project. Even if the optimistic assessments of the demand forecast were realized, the power tariff would increase to an exorbitant 14 cents/kWh due to the costs of Bujagali, if it debt relief was not implemented. A mild annual depreciation of Uganda’s currency would drastically increase the power tariffs. This is a feasible scenario and could easy combine with factors such as a further delay of privatisation and continued macroeconomic problems to compound the problem of unaffordable power.

There are some positive findings of the report. Compensation packages for people affected by the project were generally adequate; The Environmental Impact Assessment was generally of high quality and the Ugandan project sponsor acted in good faith in attempting to mitigate the cultural consequences of losing the Bujagali falls

The Panel makes a number of recommendations in the report that should be applied before the Bank approves the guarantee, these include:

  • The need for Sectoral Environmental Impact Assessment
  • A thorough review of economic viability and risks of the project
  • Amendment to the Power Purchase Agreement, which is currently unfavourable to the Ugandans and requires further risk mitigation measures
  • Further investigation of the potential of geothermal energy
  • Public release of the Economic Review of the Bujagali Project to allow for informed debate about the projects impacts.

The World Bank’s Board reaction to these reports will be seen by many as a litmus test of the Bank’s attempts to move away from being an organisation emphasising new lending at the expense of objective assessment of the likely impacts of that project.

Useful links:

IRN report on Bujagali

Financial Times article on Inspection Panel Report

Observer Online article: the World Bank’s next White Elephant

Comments of Frank Muramuzi

Oneworld Coverage of the situation