World Bank postpones Uganda dam decision

Construction on the $550 million project was halted over repayment fears, writes Declan Walsh in Kenya

The fate of Uganda's controversial $550 million (€583 million) Bujagali hydroelectricity project hung in the balance yesterday after the World Bank postponed a decision on whether to fill a massive funding shortfall left by the withdrawal of sceptical financiers.

Construction of the 200 megawatt dam on the Victoria Nile - one of Africa's biggest private investments - was due to start early this year but was halted after Swedish, Norwegian and Finnish export credit agencies withdrew guarantees worth more than $200 million.

The Scandinavian agencies were apparently worried that the Ugandan government would be unable to repay the hefty project costs to AES Corp, the US power giant contracted to build the plant.

Local civic groups and international environmentalists are also concerned about the project, which they say is of questionable economic viability and could drive Uganda further into debt - just as it is starting to pull out of the vicious debt spiral.

The World Bank board was due to meet in Washington to approve a $215 million "political risk" guarantee to fill the funding shortfall. However, the meeting was cancelled at the last minute after the board examined a stinging report that raises "major questions" about the Bujagali project.

A World Bank spokesman said last night: "The board meeting has been postponed pending further discussion with the sponsors over the coming weeks."

The investigation, by the independent Inspection Panel, found that Bujagali breached five internal World Bank guidelines, lacked transparency and ignored potential risks that could result in electricity costs doubling in Uganda within seven years, "raising major questions".

The postponement was a victory for Ugandan civic groups and international environmentalists, who warn that the Bujagali project may contain hidden dangers for Uganda.

"They want to use it as a showcase of investment. But we shouldn't be used as guinea pigs. What if it goes wrong? It will be a very big problem for Ugandan taxpayers," said Mr Frank Muramuzi of the National Association of Professional Environmentalists.

According to Mr Peter Bosshard of the California-based lobby group International Rivers Network (IRN), AES can charge the Ugandan government a "near-usurious" interest rate of 13 per cent if it fails to meet its repayments under current conditions.

Last month the rock star turned campaigner Bono travelled to Uganda with the US Treasury Secretary Mr Paul O'Neill to see how the debt savings have resulted in better education and healthcare.

AES and the Ugandan government counter that Uganda desperately needs a fresh power supply for economic development, and that hydropower offers the most cost-effective solution.

The multi-billion dollar company - which has an interest in over 125 power plants around the world - is confident that the World Bank will eventually approve the missing $215 million.

"This is seen by the clear-minded as a very good project," said project manager Mr Christian Wright.

However, AES has been having financial difficulties of its own in the wake of the Enron crisis. Its share price almost completely collapsed in recent months due to investor worries about its complicated accounting system, as well as a general price slump in the electricity business.

Although AES has started to sell off $1 billion worth of assets to improve cash flow, there are "no concerns" about its ability to pay its share of the Bujagali project, said Mr Wright.

Large-scale infrastructure projects have also raised controversy in neighbouring Tanzania where President Benjamin Mpaka's government has clashed with British Development Secretary Ms Clare Short.

The Tanzanian government has insisted on buying a $40 million air traffic control system from British Aerospace that Ms Short and other donors say is far too expensive for Tanzania's needs.