Bujagali Dam Seriously Flawed, Say African Bank Inspectors

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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.

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.”


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