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AES Backs Out of Bujagali Dam Project

by Sasha LilleySpecial to CorpWatch
August 28th, 2003

Bujagali woman who would be affected by AES dam. Ventana Photos

The future of a World Bank-sponsored dam scheme at Bujagali Falls on the Victoria Nile in eastern Uganda has been thrown into question with the withdrawal of energy giant AES Corporation from the project.

Virginia-based AES, the world's largest independent energy producer, is currently under investigation by the Ugandan Inspectorate of Government and the US Justice Department for alleged bribery, in violation of the US Foreign Corrupt Practices Act. The company, which owns and operates power generation and distribution facilities in 28 countries, is currently pulling out of a number of its operations worldwide and plans to write off the $75 million it invested in the AES Nile Power Bujagali project.

Ugandan government officials have reacted with anger. Ndawula Kaweesi, chairman of the Parliament's Committee on Natural Resources, says the government would seize all AES assets in the country. "They have a financial bond that says that when a developer fails to reach financial closure, they lose that money," he said.

A White Elephant

The $530 million Bujagali dam project has been shadowed by controversy from its inception in the mid-1990s when AES won the contract from the Ugandan government without a competitive bidding process and the agreement between the two parties remained secret.

"It was a sweetheart deal for AES and a bad deal for the Ugandan government," says Lori Pottinger of the International Rivers Network. "AES maintained that Bujagali Dam would help pull Uganda out of poverty, but in reality it is a costly white elephant that would increase the nation's debt load, and produce electricity that few Ugandans could afford."

The deal started unraveling in June 2002, when the Inspection Panel, the World Bank's independent investigative unit, found that the Bujagali project violated five operational policies of the Bank. Then in November 2002, until the Ugandan High Court forced the government of Yoweri Museveni to disclose its terms.

A week later an independent review of the Power Purchase Agreement between AES and the Ugandan government, conducted by the Prayas Energy Group, concluded that dam was fundamentally misconceived: "The World Bank's Bujagali dam project in Uganda is excessively expensive. The Power Purchase Agreement of the private project is not in line with international standards, and entails massive extra cost for Uganda. The World Bank has given poor advice to the Ugandan government, and has misled the public about the cost of the project."

The review determined that the agreement would make the Ugandan people pay $20-40 million extra per year compared to similar hydroelectric projects in other parts of the world. However, the population of Uganda is among the poorest in the world. A recent report by the World Bank notes: "No more than 7% of [Uganda's] total population can afford unsubsidized electricity." In addition the government's finances are already stretched thin owing to the country's sizable foreign debt.

Energy Strategy Criticized

The World Bank in particular has drawn heavy fire for its backing of the Bujagali hydropower project. The dam has been the centerpiece of the Bank's plan for privatizing Uganda's energy sector and is part of a broad agenda by the World Bank to promote massive hydroelectric projects as a means of shifting energy production into the private sector in developing countries. Such ventures have been in line with the Bank's so-called high risk/high reward strategy.

Critics have pointed to a conflict of interest between the World Bank's public sector wing, which is trying to force Uganda to open up its state-owned energy sector to private investment, and its private sector lending arm, the International Finance Corporation, which loans money to private investors like AES Corporation, who may then directly benefit from such policies.

Such potential conflicts of interest can be seen in the close relationship AES has with the World Bank. AES has been one of the biggest recipients of funding from the Bank's International Finance Corporation. The private sector wing of the World Bank has supported AES to the tune of over $800 million since 1995.

IFC support was extended to the Bujagali project, with the World Bank agreeing to loan forty percent of the dams cost. "The World Bank has been a champion of the project to an almost ludicrous degree," according to IRN's Pottinger. "When outsiders were questioning corruption [by AES] they did nothing until they were forced to do something." Finally, in July 2002, Bank funding for the dam was suspended while allegations of corruption were being investigated.

Meanwhile AES was confronted with a great deal of pressure from non-governmental organizations both in Uganda and abroad that were concerned with the economic, social, and environmental problems posed by the dam. Ugandan NGOs have pointed out that the project is in violation of World Bank-mandated provisions for resettlement and the environment, among other policies.

Frank Muramuzi of the National Association of Professional Environmentalists (NAPE) has spearheaded the effort against the project. "The Bujagali dam is not in the best interest of the Ugandan people," he says.

Uncertain Future

Now that AES has pulled out of the Bujagali dam project, the hydroelectric projects future is in up in the air. The Ugandan government is scrambling for a replacement for the dam's primary developer and is said to be courting South Africa's state-owned power utility Eskom Ltd.

The World Bank has said that it continues to be committed to the project. "The World Bank Group and the Government of Uganda believe that Bujagali remains the long-term, least-cost electricity supply option for Uganda and that it is in the best interests of the country to develop the project at the earliest opportunity," according to a statement from the World Bank's International Finance Corporation following AES departure.

Yet the withdrawal of AES is a second major blow for the Bank's high risk/high returns dam strategy: just last month Electricité de France, the chief developer of the controversial Laotian dam project Nam Theun 2, which was backed by the Bank, decided to pull out. Given that there continues to be worldwide opposition to massive dam projects, other developers may think twice before investing in the both these dams.

Sasha Lilley is Research Coordinator at CorpWatch and a Producer for Pacifica Radio's KPFA.