Bujagali Dam Seriously Flawed, Say African Bank Inspectors

Wednesday, July 9, 2008

First investigation by African Development Bank panel finds dam studies minimized climate change risks, impacts to Lake Victoria, resettlement costs, affordability concerns

The Bujagali Dam, now under construction on the Nile River in Uganda, racked up at least 22 violations of key African Development Bank (AfDB) policies, according to a new report by the Bank's internal investigative panel.

The report is the first by the Bank's new Compliance Review and Mediation Unit (CRMU), and was undertaken in response to a claim by project-affected people and the National Association of Professional Environmentalists (NAPE), a Ugandan nongovernmental organization. A similar claim was filed with the World Bank Inspection Panel, whose report is expected shortly.

The Panel found the project to violate AfDB policies on resettlement, poverty reduction, environment, participation, gender, and others. The panel also found Bank policies to be inadequate for analyzing project alternatives, dam safety and climate change.

Significantly, the Panel found that:

  • The hydrological risk of climate change was not accounted for, and no attempt was made to assess how this risk could affect the dam's economic viability. [1]
  • The project's contract creates incentives to maintain constant flows from Lake Victoria even during droughts, bringing greater risk that Bujagali could contribute to an ongoing drop in the lake's levels. The lake's level has dropped in recent years in part because of poor management of existing dams. [2]
  • Energy alternatives to the dam were poorly analyzed. Combined with concerns about the project's rising cost, the CRMU states: "The Bank failed to comply with the applicable policies which require Bank staff to provide full explanations and justifications in the Bank’s appraisal documents for the selection of Bujagali." [3]
  • Project costs for resettlement and biodiversity losses were not fully accounted for, nor are plans in place to ensure that mitigation of these impacts will be achieved.
  • The cumulative impacts from this and previous dams have not been addressed. [4]
  • The project will not meet the energy needs of 95% of Uganda's population, and therefore fails to meet the Bank's mandate on poverty alleviation. [5]

Rising Costs
Concern over the project's affordability is growing, as the cost of the dam has climbed more than 20% in just two years (the latest estimate is US$860 million), and even more for its transmission lines (now expected to cost $74.7 million). The report states: "The Panel is concerned about the different costs used [in project documents], and finds it unsatisfactory that the project documents presented to the Boards of Directors … neither comment on the differential in capital costs … nor provides any explanations on how these differences could affect the result of the financial and economic analysis." [6]

In addition to rising costs, the Panel found a host of unresolved issues that could affect the project's economic viability, including inadequate information on economic impacts related to hydrological risks, discrepancies in interpretations between international agreements dealing with water releases from Lake Victoria, a lack of accounting for social and environmental damages, and the risk that the project's high costs will result in affordability problems for local people and affect the utility's ability to collect tariffs. [7]

Villagers affected by Bujagali
Villagers affected by Bujagali
Terri Hathaway
People Left Behind
The panel devoted a lengthy section of its report to the legacy of the project's poorly handled resettlement that began seven years ago, when the dam was originally being developed by another company. In 2001, 8,700 people were either resettled or lost assets to the project by the US company AES, which then pulled out of the project and left Uganda. The panel notes that Bank staff failed to ensure all legacy issues were resolved before the new project got underway, putting the AfDB in violation of its resettlement policy. Resettlers have seen reductions in the range of cash crops they can grow at the new site, reduced access to roads, markets, adequate schools and medical care, problems with securing land titles, and other problems.

Said Frank Muramuzi of NAPE:
"The problems raised by the panel confirm what we have been saying for years. This project will not bring energy to the people, has great economic risks from a changing climate and the dam's own rising costs, and is merely a political project that will only benefit the politicians in power and those who service them. We call on AfDB and other financiers to immediately suspend all financing for the Bujagali until the issues raised in the report are effectively addressed."

The CRMU's report also reveals weaknesses in the AfDB policies that must be resolved. The Panel noted that the Bank has inadequate safeguard policies for addressing climate change, dam safety, cumulative impacts and analysis of alternatives.

The Panel found that other policies may have been adequate to the task but that the task itself is questionable. For example, the "profound and complex" loss of culturally and spiritually significant Bujagali Falls "raises concerns about the appropriateness of the Bank's intervention in the internal cultural and religious affairs of its borrowers."

Said International Rivers' Lori Pottinger:
"The AfDB Panel is to be commended for its thorough report, but the litany of problems it raises is proof that high-risk dams cannot realistically be done in a pro-poor way in today's Africa. There aren't enough good policies in place, and the ones that do exist can't promise compliance. What Uganda needs now is a transparent review of its sustainable energy options, with an emphasis on meeting local needs. More broadly, international financiers must move away from destructive big dams in Africa, and help build momentum and feasibility for pro-poor, low-risk energy alternatives."

Excerpts from "Independent Review Panel's Compliance Review Report on the Bujagali Hydropower and Interconnection Projects," CRMU, June 20, 2008

1. "There is limited consideration of the economic impact of hydrological risk associated with this project in the Bank's own appraisal documents. The BHP-IP [project investment proposal] ... deals with the hydrological risk as a financial matter that can be mitigated with the force majeure clause of the Power Purchase Agreement. But it does not consider the potential developmental impacts on the project and the affected people and communities. Neither the BHP-IP nor the Bank's ESIA discuss the possibility of climate change and its possible effects on the water level of Lake Victoria. The Panel's view is that the Management should have ensured that the economic consequences of a prolonged period of drought were addressed in the BHP-IP... The unusually unfavorable hydrological conditions that prevailed in the 2000-2005 period and the increasing global evidence of climate change impacts on water resources should have led Management to devote special attention to investigating hydrological risks related to climate change and to reflecting the results of such assessment in the Project Appraisal."

2. The CRMU notes that project documents give conflicting information on which hydrological regime will be followed with Bujagali: the current standard known as "the Agreed Curve" or a new hydrological plan devised to maximize power output called the "Constant release" curve. The CRMU notes this change to an untried hydrology puts the lake at risk, and may violate international law: "the Panel is of the view that the new dam will increase the incentive for GOU to extract more water to generate as much power as possible. This is because the BHP is governed by a capacity-based power purchase agreement, and the only way for GOU to avoid paying for electricity not generated is to ensure that as much water as needed is made available to the dam, including in driest years."

3. "The BHP-IP does not contain a detailed analysis of project alternatives. The PPA Study [http://tinyurl.com/5bwqwz] does not raise or discuss other renewable energy sources such as municipal solid waste, solar or wind. The fact that oil was discovered in Western Uganda (Lake Albert) in 2006 and could be a potential resource for power production is not mentioned by the PPA Study or in the Bank’s project documents. The Panel believes that more detailed analysis of the potential alternatives could have been made in the Bank’s project appraisal document, as well as in the PPA Study. However, the Panel does not find that the Bank staff have failed to comply with OM600 or any other policy because the Bank’s policies and procedures do not provide detailed guidance to the staff on how economic analysis of alternatives should be done."

4. "The Panel therefore finds that the cumulative effects of the cascade of dams of which Bujagali project will be part have not been adequately addressed in the project’s SEA. However, it also finds that the Bank’s Environmental Procedures for Private Sector do not address cumulative impacts and that the Bank’s only formal policy which does deal explicitly with project-level cumulative impacts … is not applicable to the BHP, which the Bank has treated as a private sector project. The SIAG deals only with cumulative impact assessment at the sector/regional level (instead of project level). … Consequently, the Panel does not find the failure to study cumulative impacts to be an instance of non-compliance, although it believes that analysis of cumulative impacts is a best practice in environmental risk management."

5. "The Panel agrees with both the Requesters and the Management that the Bujagali projects cannot solve the energy needs of the majority of Ugandans, especially those living in rural areas. It is evident from the Panel investigations that a significant portion of the benefits from Bujagali, especially in the early years, are likely to go to better-off urban households and particularly to the industrial and commercial sectors. Even after completion of the project, electricity will still be very costly for poorer households and beyond the reach of many Ugandans. The Panel has found very little discussion of the economic impact of the project on low income households in both the Bank’s projects documents and in the PPA Study in spite of the fact that the terms of reference of the PPA Study states that the consultants should 'identify the direct impact of the project on poverty alleviation by estimating the economic impact of the project on low income households.' The only references in the PPA Study are to the likely direct economic impact of the project on the incomes to a limited number of local workers during construction and operation of the power plant, and the indirect economic impact on affiliated business opportunities in the project area. The Panel concludes that the Bank’s appraisals of the projects do not comply with OM600 and the Policy on Poverty Reduction which respectively require particular attention to poverty, gender, population and participation and adequate analysis of the projects’ impact on poverty reduction in the appraisal documents."

6. "The Panel is concerned about the different costs used in the Bank’s appraisal documents and the PPA Study, and finds it unsatisfactory that the project documents presented to the Boards of Directors some months after the completion of the PPA Study neither comment on the differential in capital costs between the PPA Study and the project appraisal documents, nor provides any explanations on how these differences could affect the result of the financial and economic analysis. This would in particular have been appropriate given the views in Uganda regarding the selection of the Bujagali over the Karuma site."

7. "The Panel has been made aware of other project risks associated with the tariff structure. These risks include the ability of the distributor (UMEME) to maintain high collection rates and to reduce the technical and commercial losses, which were estimated at 39% (20% technical and 19% commercial) in 2006. In this regard, it should be noted that UMEME collection rates declined from 92% in 2005 to 80% in 2006. The PPA Study forecasts that by 2012 UMEME will have reduced its technical losses to 16% and its commercial losses to 5%. The combination of a low collection rate and technical and commercial losses indicates that only half of the electricity production is paid for, which should be a concern for the Bank with respect to the borrower’s (i.e. UETCL) ability to fully cover the costs of new energy investments through the tariff system. Of all the Bank related project documents, only the PPA Study addresses this risk. The BIP appraisal document merely expresses confidence in UETCL’s ability to meet its obligations towards BEL, and the BHP-IP only focuses on securing future payments to BEL. This confidence appears to be based on the terms of the Power Purchase Agreement. Pursuant to this agreement, UETCL (or its successor company) is required to purchase the full capacity made available by BEL, and the GOU guarantees these payments by UETCL. The Requestors expressed concern during the Panel’s visit to Uganda about the ability of the BHP to produce at full capacity when the current production at the existing Nalubaale and Kiira power station is only 140MW out of the installed capacity of 380MW. Under the Power Purchase Agreement, UETCL is also obliged to fund a Liquidity Facility Agreement as additional security for these payments. Finally, the Power Purchase Agreement transfers the hydrological risk, defined as resulting from the occurrence of a low water level for 30 consecutive months, to UETCL. Should this occur, BEL will have the right to sell the plant to UETCL for a price that includes the outstanding principal and interest of the senior debt. In the Panel’s opinion the Bank should have varied the assumption of technical and commercial losses and the collection ratio, as part of the sensitivity testing of the capacity of the system to generate sufficient income to pay for the power supplied by BEL, or to reduce the Government subsidies to the energy sector. The Panel concludes that the Bank’s failure to include such an exercise in its sensitivity analysis amounts to non-compliance with OM600 Paragraph 34 on Project Sustainability and Paragraphs 31 and 32 on Risk and Sensitivity Analysis."