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Uganda

Test case Bujagali: Export credit agencies have recognized that the Bujagali dam in Uganda does not make economic sense. Funding the project would undermine the credibility of Nordic development policies.

(The following op-ed piece appears in "Development Today", the Scandinavian journal on development policy, on 17 May 2002.)

Opinion - By Peter Bosshard

As "Development Today" reports, the Nordic export credit agencies (ECAs) have been shying away from the Bujagali hydropower project in Uganda. Sweden's EKN believes that the World Bank was too optimistic when appraising the project, and that Uganda might not be able to pay for the power the dam will produce. The World Bank and the African Development Bank approved credits and guarantees of $230 million for the private venture in December 2001. The Nordic ECAs have so far not approved their share of the financial package.

EKN has good reasons to be prudent. The World Bank's project appraisal is based on extremely optimistic growth forecasts and inflated figures for electricity demand. Bujagali still smacks of the "pervasive appraisal optimism" which the Wapenhans Report identified as the source of the Bank's portfolio problems in 1992. Just consider the following facts:

… The World Bank expects the rapid economic growth of Uganda's post-war reconstruction period to continue throughout the next decade. Unfortunately, this is not realistic. Coffee prices have plummeted, and the Bank has already downscaled Uganda's growth forecast since it approved Bujagali.

… In June 2001, the World Bank estimated the number of paying electricity consumers in Uganda to reach 264,000 by 2005, when Bujagali is supposed to go onstream. While ambitious, this figure would not be sufficient to absorb the power produced by the new dam. So in November 2001, the appraisal document for Bujagali inflated the number of paying consumers for 2005 to 396,000. If this level is not reached, the power from the new project - already more expensive than from existing sources - will become totally unaffordable.

… Scientists agree that climate change will make future water flows unpredictable. The Nile is considered to be particularly exposed to the risks of climate change. The Bank's appraisal does not consider this aspect at all. Under the proposed power purchase agreement, Uganda must make yearly payments of up to $110 million to the investor for 30 years even if water flows do not allow generation at full capacity, and if demand for the expensive power does not exist.

… The World Bank agrees that Uganda's geothermal potential is more than twice as large as Bujagali's capacity. Inexplicably, however, the Bank claims that "geothermal generation could not be commissioned
much before 2010". Experience indicates that geothermal plants can be developed more rapidly than dams. Yet as the World Commission on Dams points out, "overstating future demand (Š) has pushed decision-makers into adopting large-scale dam projects because they seem to be the only adequate response to the large gap between existing supply and forecast demand".

… Bujagali was not subject to international competitive bidding, and its power purchase agreement has never been made public. According to a 1999 evaluation by SIDA, "many high government officials [in Uganda] appear to have benefitted from the privatization process", and "investment projects involving construction allow officers to supplement their income".

Sweden and Norway have played a pioneering role in proposing solutions to Uganda's debt problem, and in raising issues of good governance. Support for the Bujagali project would directly undermine the positive role which Nordic governments have played in Uganda
since 1986.

In order not to repeat the errors of the past, the ECAs of OECD countries in July 2001 agreed on principles to avoid unproductive expenditures in HIPC countries. "Officially supported export credits have contributed to the debts of poor countries in the past", Birgitta Nygren, the Swedish Chair of OECD's Export Credit Group, argued when presenting the principles: "We do not want this to happen again once these countries return to creditworthiness." Given the high risk it will create unsustainable debt, Bujagali is a perfect case for putting this concern into practice. Indeed, several
financial institutions, including the US Overseas Private Investment Corporation and Britain's ECGD, have already declined to become involved in the dam project.

The World Bank Group is less inclined to learn from mistakes. MIGA is now considering extending a further guarantee for Bujagali, in order to accommodate the risk of non-payment for export credit agencies. MIGA's board is expected to decide in early June.

Given the prospect of a MIGA guarantee, the Nordic export credit agencies are reconsidering support for Bujagali. While MIGA's guarantee would provide added security to Nordic funders, it would not make the project any more viable, and would not alleviate the risk of further indebtedness for Uganda. EKN has acknowledged these problems, and so Bujagali continues to be a test case for the agency's commitment to the OECD principles on unproductive expenditure. Beyond EKN, Bujagali will test the credibility of Nordic governments, which have promoted debt relief and sensible development policies in Uganda for so many years.

Peter Bosshard is an advisor to International Rivers Network