Issue 113 • 4 May 2007

After years of delay the World Bank backs costly Bujagali HDP, but fails to quiet the protests

By mobilising support from several agencies, the World Bank has made a strong gesture of support for Uganda’s long-delayed HDP dam project – which has not been welcomed by Bujagali’s critics. But while the project remains mired in controversy, there is no doubt that Uganda needs more power, writes Thalia Griffiths.

The World Bank Group (WBG) has agreed $360m-worth of loans and guarantees for the controversial Bujagali dam, whose estimated cost is now put at $799m (AE 111/6).

The WBG’s support includes $130m in loans from its private sector arm, the International Finance Corporation, to developer Bujagali Energy Ltd (BEL) – a consortium of the Agha Khan’s Industrial Promotion Services and US-based Sithe Global.

The WBG also committed a partial risk guarantee of up to $115m from its soft-lending International Development Association, to support the participation of commercial lenders, and an investment guarantee of up to $115m from political risk mitigator, the Multilateral Investment Guarantee Agency. The guarantees substantially reduce the risk to banks lending to the project, meaning tight bidding for mandates is expected.

The project has been controversial because of the amount of water being drained from Lake Victoria by the existing Kiira and Nalubaale dams, which are producing just 120MW compared to their installed capacity of 380MW.

The government says building the Bujagali dam downstream from Kiira and Nalubaale will alleviate the problem by allowing Nalubaale to operate as a peaking plant with Kiira and Bujagali as baseload plants. Industry sources say that the lake drop is partly due to drought and partly to Uganda taking too much water in a short-term bid to keep Kiira and Nalubaale going.

While Bujagali will not increase the outflow from the lake, as it will use the same water as the dams upstream, the lower water levels will mean Bujagali will produce less power than originally planned: it will probably produce no more than 175MW.

The World Bank said electricity from Bujagali would increase the supply to the national grid at the lowest cost compared to other generation expansion options under Uganda’s energy sector strategy. “Uganda’s workforce is expected to double over the next 15 years, making the creation of jobs through expanded industry, tourism and commercial services critical,” said country director Judy O’Connor. “These sectors are energy intensive and will therefore rely on consistent, affordable, and expanding power supply. Bujagali is an important step towards realising the needed level and quality of supply.”

Italy’s Salini Costruttori has been selected for the engineering, procurement and construction contract to build the dam.

The prospect of work starting comes after a long series of controversies that have dogged Bujagali.

AES Corporation agreed in 1996 to develop Bujagali, but pulled out in 2003 as part of a wider pullback from international operations (AE 66/8). At this stage the dam’s cost was put at $550m. The project had been delayed by a World Bank Inspection Panel report, and then by an investigation into claims, unrelated to Bujagali, that the main construction contractor, Norway’s Veidekke, had allegedly bribed a government official before becoming involved in the project (AE 53/9).

Some critics say the project is just too expensive. AES priced the dam at about $580m, but since then the costs of construction inputs such as steel, civil works and cement have risen sharply on world markets.

Industry sources commented that Bujagali Energy had sought to place a lot of the project risk on the construction contractor, so bidding was restricted to a limited number of players prepared to accept that level of risk.

Salini’s winning bid was said to be by far the cheapest.

However, sources added, even with cost working out at around $0.09/kWh, Bujagali still represents the most viable long-term solution for Uganda’s power needs.

Stopgap facility

The WBG is providing a range of support, for Uganda and within the regional Nile Basin Initiative framework.

The World Bank also approved a $300m power sector development operation, providing funding for investments and policy measures designed to reduce the supply-demand gap until Bujagali comes into service in 2011.

In addition to this the WBG is funding three existing projects:

• Power IV investment ($62m) – supporting improved power supply and government capacity to manage sector reform;

• Energy for Rural Transformation ($50m) – supporting the development of rural areas’ access to renewable electricity; and

• Distribution guarantees ($40m) – investment guarantees for the Umeme electricity distribution company.

The government is also keen to push ahead with the proposed Karuma dam project in Masindi district, and is in talks with a Norwegian consortium.

Environmental concerns

Environmentalists say that the World Bank ignored the potential impact of global warming on the Nile River’s flows in its analysis of the project, though studies have predicted that climate change will worsen droughts in East Africa.
“The Bank has approved a water-release policy for Bujagali that would result in the largest freshwater lake in Africa being run as a reservoir,” said hydrologist Daniel Kull. “The new ‘Victoria Reservoir’ risks not fulfilling projected benefits, and further disturbing the hydrology of an already sick lake and its ecosystems.”

Kull prepared a report for US-based advocacy group International Rivers Network in early 2006 that analysed available data on lake levels and outflows and found that over-releases from the dams were a significant cause of the drop in water levels in Lake Victoria (AE 96/15).

And whilst conceding that only a tiny percentage of rural Ugandans have access to electricity, Bujagali’s critics argue that building big dams will do nothing to expand access.

Nikki Reisch of the Washington-based Bank Information Center said the Bujagali financial package dwarfed the amount the WBG had invested in energy for rural areas in Uganda. The decision “signals a continued commitment to investing big money in expensive power projects that serve industrial interests, rather than increasing support for alternatives which could provide more affordable electricity for the majority of Africans who live without it,” she said.

The Bank sees it differently, of course. A go-ahead for Bujagali is a further sign of the WBG’s renewed commitment to hydropower and other big ticket schemes. It is also a boost for the Nile Basin Initiative’s ambitious plans to develop regional interconnections, shown in the map below.

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Nile Basin Initiative electricity connections

Click for large map