THE INSPECTION PANEL 39749 OFFICE MEMORANDUM

DATE: May 3,2007

TO: Mr. Paatii Ofosu-Amaah, Vice President and Corporate Secretary, SECVP Public Disclosure Authorized FROM: Peter L. Lallas, Executive Secretary, IPNq-

EXTENSION: 39732

SUBJECT: Request for Inspection UGANDA: Private Power Generation Project (Proposed) Report and Recommendation

Attached for distribution to the Executive Directors and Alternates, please find herewith a copy ofthe Inspection Panel’s Report and Recommendation entitled Public Disclosure Authorized “Request for Inspection - UGANDA: Private Power Generation Project (Proposed), ” dated May 3, 2007. This report was also delivered today to the President ofthe International Development Association.

Enclosure Public Disclosure Authorized Public Disclosure Authorized

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION THE INSPECTION PANEL 1818 H Street,N.W. Telephone: (202) 458-5200 Washington, D.C. 20433 Fa: (202) 522-0916 U.S.A. Email: [email protected]

Edith Brown Weiss Chairperson

IPN REQUEST RQ07/01

May 3,2007

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND ALTERNATES OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION

Request for Inspection UGANDA: Private Power Generation Project (Proposed) Report and Recommendation

In accordance with paragraph 19 of IDA Resolution No. 93-6 establishing the Inspection Panel, please find attached the Report and Recommendation ofthe Inspection Panel concerning the above-referenced Request for Inspection.

Enclosure

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION THE INSPECTION PANEL 1818 H Street,N.W. Telephone: (202) 458-5200 Washington, D.C. 20433 Fax (202) 522-0916 U.S.A. Email: [email protected]

Edith Brown Weiss Chairperson

IPN REQUEST RQ07/01

May 3,2007

MEMORANDUM TO THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION

Request for Inspection UGANDA: Private Power Generation Project (Proposed) Report and Recommendation

In accordance with paragraph 19 of IDA Resolution No. 93-6 establishing the Inspection Panel, please find attached the Report and Recommendation of the Inspection Panel concerning the above-referenced Request for Inspection.

Enclosure

Report No. 39646-UG \

The Inspection Panel

Report and Recommendation

Request for Inspection Uganda: Private Power Generation Project (Proposed)

May 3,2007

The Inspection Panel

Report and Recommendation on Request for Inspection

Re: Request for Inspection UGANDA: Private Power Generation Project (Proposed)

1. On March 5, 2007, the Inspection Panel (the “Panel”) received a Request for Inspection (the “Request”) dated March 1, 2007 related to the proposed Uganda: Private Power Generation Project (the “Project”). The Ugandan National Association of Professional Environmentalists (NAPE) and other local organizations and individuals (the “Requesters”) submitted the Request to the Panel.

A. The Project

2 According to the Project Appraisal Document (PAD),’ the proposed Project provides for the construction of the Bujagali hydropower plant with an installed capacity of 250MW, on Dumbbell Island on the Nile River, about 8km downstream from the existing Nalubaale and Kiira Hydropower Plants. The Nile River has its headwaters in Lake Victoria. Under the Project, an intake powerhouse complex and a rock filled dam with a maximum height of about 30 meters with spillway and other associated works will also be developed. The plant’s reservoir is to have an estimated surface area of 388 hectares (ha). The proposed Project requires 238 ha of land take to construct project facilities. Of the 238 ha, 80 ha would be for inundating new areas adjacent to the Nile River and 113ha for temporary and ancillary facilities.* Located downstream from the Nalubaale and Kiira plants, the proposed Bujagali Dam is to use water released from the Lake that passes through the other hydropower plants. According to Project documents, the efficiency of water use is expected to reduce pressure for releasing water from the Lake above the Agreed Curve, which is calculated to

’ Project Appraisal Document [PAD] on a Proposed International Development Association Partial Risk Guarantee in the amount of up to US$l15 Million for a Syndicated Commercial Bank Loan and on a Proposed International Finance Corporation Financing consisting of an “A” Loan in the amount of up to US$lOO Million and a “C” Loan in the amount of up to US$30 Million, and on a Proposed MIGA Guarantee in the amount of up to US$l15 Million for Sponsor’s Equity to Bujagali Energy Limited for the Private Power Generation (Bujagali) Project in The Republic Of Uganda, April 2, 2007, p. 9. PAD, p. 9. Transmission lines (lOOkm), substations and related works are also to be constructed as part of the so-called Interconnection Project, which is separate from but associated with the proposed Project.

1 ensure that the volume of water released remains consistent with what would have occurred under natural conditions with no changes in downstream di~charge.~

3. A private sector company (Bujagali Energy Ltd. - BEL) is to develop the Project. BEL is to be responsible for financing, constructing and operating “on a Build- Own-Operate-Transfer basis.” The PAD also states that BEL is to sell electricity to the Uganda Electricity Transmission Company (UETCL) under a 30-year Power Purchase Agreement (PPA) signed on December 13,2005.

4. The total Project cost is estimated to be around US$750 million. The International Development Association (IDA)’ is to support the proposed Project through a guarantee of up to US$115 million for payment of interest and repayment of the principal amount of a loan to BEL (the IDA Guarantee). The Project is also to be financed through, inter alia, an International Financial Corporation (IFC) loan and a Multilateral Investment Guarantee Agency (MIGA) Guarantee. In total, the World Bank Group’s financial support to the Bujagali Project is to be up to US$360 million. IDA’SBoard of Executive Directors approved the proposed IDA Guarantee on April 26, 2007.

B. The Request

5. The Requesters state that the proposed Project is based on “jlawed assumptions and data that have little or no bearing to the current situation” and are thus inadequateq6They raise various sets of concerns related to hydrological risks, climate change, and cumulative impact assessment; Kalagala Falls “offsets”; economic analysis, options, and affordability assessment; information disclosure, transparency and openness regarding the Project; dam safety; indigenous peoples, cultural and spiritual issues; compensation, resettlement and consultations; and terrestrial and aquatic fauna. According to the Requesters, the claims they present in the Request constitute a violation of Bank operational policies and procedures, including OP/BP 4.0 1 (Environmental Assessment), OP/BP 4.04 (Natural Habitats), OP/BP 4.02 (Environmental Action Plans), OP 4.07 (Water Resource Management), OP/BP 4.10 (Indigenous Peoples), OP/BP 4.1 1 (Physical Cultural Resources), OP/BP 4.12 (Involuntary Resettlement), OP/BP 4.37 (Safety of Dams), OP/BP 7.50 (Projects on International Waterways), OP/BP (Economic Evaluations of Investment Operations), OP 1.OO (Poverty Reduction), and World Bank Policy on Disclosure of Information.

The Agreed Curve is further defined in footnote 37, infra. PAD, p. 19. In this Report, the terms “IDA” and “the Bank” are used interchangeably. Request for Inspection Re: Lodging a Claim on the Proposed Bujagali Hydropower Dam and Interconnection Projects in Uganda, March 1, 2007, p.3.

2 6. In December 2001, the Board of Executive Directors approved an IDA Guarantee to support an earlier proposal for the Bujagali Hydropower Project, involving the construction of the Bujagali power plant. Before Board approval, NAPE had submitted in July 2001 a Request for Inspection to the Inspection Panel in relation to this previous Bujagali proposal. After authorization of the Board of Executive Directors, the Panel conducted an investigation of the issues raised in the 2001 Reque~t.~

7. The Bank subsequently cancelled the IDA Guarantee. According to the Requesters, this was cancelled because of “performance shortfalls, controversies related to social, economic and environmental aspects, [and] evidence of corruption associated with the [private company] AES Nile Power’s (AESNP) Bujagali dam project,”’ among other things. The Requesters claim that, because of high electricity demand and the inability of the Nalubaale and Kiira power plants to generate sufficient electricity, the Government of Uganda (GoU) has now developed a proposal for a Bujagali project with different “proponents,” i.e. different actors implementing it. They add, however, that “many shortcuts [are] being taken to ensure that the project is approved as fast as possible, ignoring outstanding and new concerns raised on the project.” A summary of the Requesters’ concerns about the new proposed project is set forth below.

8. Hydrological Risks, Climate Change and Cumulative Impact Assessment. The Requesters claim that the social and environmental assessment studies (SEA) that BEL prepared do not adequately address the issues of “hydrological changes on power production” at the Nalubaale, Kiira and the proposed Bujagali dams, especially considering that the Lake Victoria waters have declined. According to the Requesters, hydrology is a “major limitation” for the Pr~ject.~The proposed Bujagali dam will be highly dependent on the upstream power plants, Nalubaale and Kiira, but the Requesters claim that BEL cannot control the outflow of water from these plants and has not secured the commitment of the GoU to ensure sufficient outflow rates. Thus, they question whether Bujagali will be able to have enough water to generate the projected capacity. They believe that Lake Victoria will not provide sufficient water, although BEL foresees otherwise. The Requesters argue that the Bujagali dam’s designed capacity of 234-290MW is not feasible under the current hydrological conditions. The studies also do not adequately address the issue ofthe Lake’s long-term health.

9. The Requesters claim that the SEA did not address climate change impacts on power production, which may cause lower lake levels and lower downstream river flows. These issues were raised in a 2005 report commissioned by the Uganda Ministry of Energy and Mineral Development and prepared by Water Resources and Energy Management International, Inc (WREM), a US consultancy firm. The

Inspection Panel Investigation Report, UGANDA: Third Power Project (Credit No. 2268-UG), Fourth Power Project (Credit No.3545-UG), and Bujagali Hydropower Project (PRG B 003-UG), May 23,2002. 8 Request for Inspection, p. 2. 9 Request for Inspection, p. 3.

3 Requesters state that BEL also ignored a technical report by the GoU’s Directorate of Water Development (DWD) on climate change effects. They contend that BEL did not analyze the Project’s cumulative effects and that there are “no Cumulative Impact Studies on Building a Cascade of Dams along the River Nile.”” According to the Requesters, there are hydrological risks, which may cause environmental damage and disruptions in the livelihoods of lakeside dwellers and businesses, which are not analyzed in the Project’s economic analysis.

10. Kalagala Falls “Offset.” The Requesters state that the commitment of the GoU to establish the Kalagala Falls as an offset for the development of the Bujagali Falls is not binding. They cite the following paragraph from the previous Indemnity Agreement signed between the World Bank and the GoU on December 20, 2001 in the context of the financing of the Bujagali hydroelectric dam: “Government of Uganda undertakes that any future proposals which contemplates a hydropower development at Kalagala will be conditional upon satisfactory EIA being carried out which will meet the World Bank Safeguard Policies as complied with in the Bujagali project.”” The Requesters state, that therefore there is no guarantee that the Falls will never be developed for hydropower.

11. Economic Analysis, Options, and Affordability Assessment. The Requesters state that there is no evidence that a comprehensive economic analysis of the Project was carried out, because the study published on the World Bank website cannot be considered “comprehensive” and a basis for determining the economic viability of the Project. In addition, the Requesters argue that the economic analysis does not include an adequate assessment of the Project’s economic alternatives to support the statement that the Bujagali dam is the least costly option. Alternative energy options were not adequately considered. The Request describes eleven alternatives to the proposed Project that were allegedly dismissed because of their costs and the “difficulty to connect to the national grid.” According to the Requesters, the economic analysis does not provide costs, cost- benefit or opportunity cost-scenarios, or calculations for developing these alternatives and for deciding to reject them in favor of the Bujagali option. The Requesters also state that, in deciding on the best option, important factors were not discussed and that the Bank and the GoU have “skewed research efforts to consistently promote Bujagali above other options.” In addition, in the Requesters’ view, “the idea of dismissing energy alternatives, because they cannot easily be connected to the national grid .,, is erroneous.” Other options that would “help reduce the burden on existing national grid-based hydropower at competitive costs” were not addressed. l2

IO Request for Inspection, p.4. II Request for Inspection, p. 5, referring to the Indemnity Agreement dated December 20,2001 12 Request for Inspection, pp. 7-8.

4 12. The Requesters further argue that the Project is “economically riskyJ” especially in view of the changing hydrology, and that concerns such as the citizens’ ability to afford it, the Project’s high costs and the country’s indebtedness have become contentious issues. The Requesters state that from an original estimate of US$430 million, the Project cost has now jumped up to US$735 million. NAPE states that, on February 28, 2007, it met with World Bank officials who acknowledged that the cost increase has been 30%. The Requesters believe that because of this cost increase it is becoming clear that the majority of Ugandans, who live in rural areas far from the national grid, will not be able to afford unsubsidized electricity from the Bujagali dam. Furthermore, the high Project costs will limit the funds for rural electrification and will likely lead to reducing subsidies for grid-connected users. The Requesters claim that the Project will “negate the country’s economic development and efforts for poverty eradication.” l3

13, Information Disclosure and Transparency. According to the Requesters, the Bank refuses to make public the information on the Nile hydrology and the Lake Victoria’s hydrological conditions, such as information contained in a Bank- funded Independent Hydrological Review. The Requesters call for more transparency and openness from the Bank and believe that all studies on economic viability and evaluation of options should be released in a timely manner, to allow time for their review before decisions are made. The Requesters particularly complain that while the Power Purchase Agreement (PPA), which is a key Project document, was recently released, only one photocopy is available for consultation, with no signing dates and no serialized pages. It can be read only during working hours at the Uganda Electricity Regulatory Authority (ERA). They also claim that this copy is incomplete - e.g. does not include Project costs - and that, in reality, this is not the actual PPA used to negotiate the loans with the World Bank. According to the Requesters, Ugandan laws require that the Parliament approve the State’s obligations under the PPA but “there is no evidence that BEL’S PPA has been debated and approved by Uganda’s Parliament ...”‘4 The Requesters also note that the Project’s SEA has been signed by the Government in 2005. This means, in the Requesters’ opinion, that the PPA was signed in violation of Ugandan laws and without taking into account the costs of the Project studies and compensation and resettlement issues, which will nevertheless bear on the ultimate tariff for electricity.

14. Dam Safety Issues. The Request reports that the safety issues regarding the Nalubaale dam at the Owen Falls are not taken into consideration in the Bujagali dam design. The Requesters raise the issue ofwhether the Bujagali dam would be able to survive a failure of the Owen Falls dam. The Requesters do not consider sufficient the proposal to form a dam safety panel, because they believe a comprehensive plan and strategies to address these issues should be integrated into the Project design. They argue that these strategies are very important, since

l3Request for Inspection, pp. 8-9. 14 Request for Inspection, p. 10.

5 there was no Environmental Impact Assessment for the Kiira Dam or a post- construction audit for the Nalubaale dam.

15. Indigenous Peoples, Cultural and Spiritual Issues. The Requesters state that the Basoga people living in the Project area are not considered as indigenous peoples in the SEA, which contradicts the fact that they are considered indigenous peoples under the Constitution ofUganda. They add that the ‘yailure ofthe World Bank to respect the Constitution of the Republic of Uganda as regards indigenous peoples is a violation of World Bank Policy on Indigenous Peoples (OP/BP 4.10).”’5 In addition, they observe that the SEA addresses cultural and spiritual issues inadequately.

16. Compensation, Resettlement and Consultations. The Requesters state that the existing compensation and resettlement framework is outdated and does not reflect the current economic conditions. They believe that the social costs and benefits of the compensation and resettlement program should be re-assessed in line with current and future realities. The Requesters also include a letter from people displaced as a consequence of the preparation of the earlier proposal for Bujagali. With respect to consultation with affected people, the Requesters note that there is evidence of consultation, but also claim that BEL “confuse consultation with true participation in a decision-making process.”16 In addition, they contend that there was no consultation with 240 clans ofthe Basoga and 53 ofthe Busanga indigenous peoples.

17. Old Data and Issues Related to Fauna. According to the Requesters, the social and environmental studies are based on outdated data, e.g. on water quality, climate and air-borne particulate. They claim that some sections ofthe SEA were prepared almost ten years ago and do not reflect the current environmental realities. In addition, the studies on the terrestrial and aquatic fauna were carried out only for a very short period of time and do not provide variations of species distribution and diversity, which normally occur in a period of one year.

18. Concerns Raised with World Bank. The Requesters state that they expressed their concerns in a letter sent to the Bank. They further note that they invited the Bank’s Country Office in Kampala to attend public meetings, held in August and October 2006, on Lake Victoria and the role of dams in draining the Lake, but received no response from the Bank. In addition, the Requesters state that they recently met with Bank officials in Kampala to reiterate their worries, but claim that the Bank has not adequately addressed their concerns. They believe that the actions described in the Request are contrary to the World Bank policies and procedures and have materially and adversely affected the Requesters’ rights and interests. They ask the Panel to recommend that an investigation of the issues raised in the Request be carried out.

IS Request for Inspection, p. 1 1. l6Request for Inspection, p. 12.

6 19. The above claims may constitute non-compliance by the Bank with various provisions of its operational Policies and Procedures, including the following:

OP/BP 4.01 Environmental Assessment OP/BP 4.02 Environmental Action Plans OP/BP 4.04 Natural Habitats OP 4.07 Water Resource Management OP/BP 4.10 Indigenous Peoples OP/BP 4.1 1 Physical Cultural Resources OP/BP 4.12 Involuntary Resettlement OP/BP 4.37 Safety ofDams OP/BP 7.50 Project on International Waterways OP/BP 10.04 Economic Evaluations of Investment Operations OP 1.00 Poverty Reduction World Bank Policy on Disclosure of Information

C. Management Response

20. On April 5, 2007, Management submitted its Response to the Request for Inspection.17 The Response addresses key issues raised by the Requesters and the proposed Project’s background, context, benefits and future. A detailed Response to all the Requester’s claims is included as Annex 1,

21. The Response states that in the past three years Uganda has been suffering severe power shortages. The reasons include delays in developing additional generation capacity, prolonged drought in the region, about an eight percent increase in the annual electricity demand, and technical losses in the distribution system. This electricity crisis, with service cuts for hours and, at times, days, has strained the country’s growth by affecting small and large businesses - particularly manufacturing, high-value agriculture and processing industries - as well as consumers. As a result, the proposed Project is being developed to provide the needed ca acity in a “least-cost and environmentally and socially sustainable manner.”“Management asserts that the proposed Project is expected to eliminate the power shortages by 20 11, when the Bujagali power plant is anticipated to be in service, because it will provide an increase of 250MW of generation capacity in the national grid.

22. In its Response, Management also refers to a previously developed Bujagali Hydropower Project (for which an IDA Guarantee of US$115 million was approved by the Board of Executive Directors in December 2001) and other energy projects in Uganda. Management states that on July 25, 2001, the Panel had received a Request for Inspection related to the previously proposed project, which was submitted by NAPE and other local institutions and individuals. l7Bank Management Response to Request For Inspection Panel Review of the Uganda: Private Power Generation Project (Proposed), April 5,2007. l8Management Response, T[ 6.

7 Management further notes that, upon Board authorization, the Panel had conducted an investigation of the issues raised in that Request. According to Management, the “key Jndings” of the Panel’s 2002 investigation focused, inter alia, on disclosure of information about the Bujagali Project, preparation of the Sectoral Environmental Assessment, assessment of the cumulative impacts of building multiple dams on the Nile River, economic evaluation and analysis of alternatives, and the agreement to use the Kalagala Falls as an environmental offset. Management notes that, in response to the Panel’s findings, it prepared a “nine-point action plan”, which was approved by the Board on July 17, 2002. Management Response contains a matrix describing the 2002 Panel’s investigation findings and the status of implementation of Management’s action plan approved in 2002. l9

23. With respect to this earlier Bujagali Project, Management states that the private company that was to develop it, AES Corporation, withdrew from the Project. Uganda then terminated that Project in 2003, and started seeking new sponsors. As a result, the feasibility of a new Bujagali project was assessed and, according to Management, “extensive national and regional analyses” of the new proposed Project’s environmental, social and economic impacts and detailed evaluation of alternatives have been conducted. Management also claims that there has been public consultation and disclosure of Project documents.

24. The Response contains an analysis of “Special Issues”: Current Context and Future Vision; Issues Raised by the Requesters; Project Preparation: Key Issues; Project Benefits and Next Steps.

25. Current Context and Future Vision. Management reiterates that the power crisis has harmed industrial production in Uganda, which has paid a high price for failing to develop the earlier Bujagali Project. According to Management, if the Bujagali plant had been constructed and operated in the first attempt, the reduction in Lake Victoria water levels due to over-abstraction “may not have occurred”. Power would have been produced at a lower cost so that the price Uganda is currently paying for the supply from thermal plants which run on imported fuel would be significantly less. Management maintains that when the Bujagali hydropower plant becomes operational in 201 1, it will generate 60% more annual energy than with all the thermal plants in 2010.

26. Management states that the Government of Uganda (GoU) has learned “valuable lessons” from the previous experience, which have shaped “the current proposed project” and that the World Bank Group has been able to “evaluate lessons of experience, including the outcomes and recommendations of the Inspection Panel review, and better understand and appreciate the various concerns of the stakeholders within and outside Uganda.”2Q

l9 See Management Response, pp. 6-8. *’Management Response, 7 22.

8 27. According to the Response, in selecting the Project’s private sponsors, the GoU has 'yellowed a transparent and open, competitive process.” 21 The Government has also been committed to and implemented a “stronger program of public disclosure”, in which the Power Purchase and Implementation Agreement were disclosed along with several environmental, economic and social documents. Management adds that “proactive consultations and dissemination events” were conducted to make this information “widely available”.22

28. Response to Issues Raised by Requesters. With respect to the Kalagala Falls, Management claims that the GoU “has reiterated the commitment to the Kalagala offset” made under the earlier Bujagali project. The proposed Project’s social and environmental assessment reviewed by the Bank also recommends such a commitment. Management states that this commitment will be included as a Government obligation in the Project’s IDA Indemnity Agreement. It also notes, however, that while it will be binding “throughout the life of the Indemnity”, the Bank’s legal recourse to enforce the Government obligation will not be available after the termination of the Agreement. As a result, the Indemnity Agreement also includes a provision that prior to termination, the Bank and the GoU will “pursue discussions to identi& mechanisms or instruments to enable the continuation of the GoU obligation to set aside the Kalagala Falls site.”23

29. Dam safety concerns are also addressed. According to the Response, a Dam Safety Panel (DSP) has been created to provide advice on the design, construction, initial filling and the start-up of the dam, to ensure consistency of the Project with Bank policies. Furthermore, the Project’s legal agreements will require the preparation of an Emergency Preparedness and Response Plan (EPRP) including failure scenarios for Nalubaale, Kiira and Bujagali dams.

3 0. Management acknowledges the Requesters’ concerns that past resettlement was not completed. In this regard, the Assessment of Past Resettlement Activities and Action Plan (APRAP) and Community Development Action Plans (CDAP) assess the current conditions. Management also states that BEL and the Bujagali Implementation Unit (BIU) “are now resolving all outstanding issues” and are committed, inter alia, to completing the titling process, upgrading the Naminya School, improving ’ health services, evaluating sanitation conditions and addressing outstanding problems, and implementing longer-term community development programs. 24 The resettlement that will take place under the Interconnection Project is also addressed in a Resettlement Action Plan (RAP), which was not yet finalized when Management Response was submitted.25

21 Management Response, 7 23. See also paragraph 23 for a detailed description ofthe four criteria on which the GOU based the selection of the Project’s private sponsors. 22 Management Response, 7 24. 23 Management Response, 7 28. 24 Management Response, 7 30. 25 Management Response, 7 3 1. According to the Response, the draft RAP was disclosed on December 2 1, 2006, and land evaluations were completed in early 2007.

9 3 1. In response to the claim that the Basoga people should be considered indigenous peoples under OPBP 4.10 because the Constitution of Uganda considers them as such, Management claims that “all natural-born citizens of Uganda are indigenous peoples under the constitution”, including the Basoga and 55 other groups in Uganda.26 Management thus considers that the policy on indigenous peoples “is not triggered by this Project.” In Management’s view, there is a “clear demarcation line” between the Basoga and other African ethnic groups that the Bank has defined as indigenous peoples, and considering the Basoga as indigenous “would defeat the intended objectives of OP 4. IO.” There are not only criteria such as ancient origin, self-definition and land to define whether the peoples in question are indigenous, but also mariinalization and vulnerability. Management claims that the Basoga “are a large and influential group in Ug~nda.”~’

32. Regarding Project preparation, Management states that “seasoned, experienced World Bank Group sta$” and “high caliber consultants’’ have worked in the preparation ofthis Project. This has led to analyses of the Project’s merits which provide “solid underpinnings” and which incorporate the views of “key project stakeholders.”2a Management believes that “the economic, financial, safeguard, technical, governance, and other required analyses to date are compliant with relevant World Bank Group policies and were undertaken to high professional standard^."^^ In addition, Management claims that the Project preparation followed best practice and took into account the findings of the Inspection Panel investigation of the issues raised in the Request for Inspection submitted to the Panel in 2001,

33. According to the Response, the Project analyses considered a wide range of supply options and a wide range of demand scenarios based on the most recent data on the Ugandan economy and the electricity sub-sector, and assessed the impacts of both low and high hydrology scenarios. According to the analysis, climate change is not expected to have a negative impact on water availability. Management believes that environmental and social work carried out thus far has appropriately considered both those issues that emerged in the earlier Bujagali Project and new issues, through, inter alia, a new Social and Environmental Assessment, assessment of the status of the resettlement actions, assessment of the cumulative impacts ofmultiple dams on the River Nile, and consultations with affected communities.

34. Management states that on December 21, 2006, the environmental and social documents were disclosed, as well as the economic and financial analysis in its entirety. Management indicates that these documents were provided to the

26 Management Response, Annex 1, p. 36. ” Management Response, Annex 1, p. 37. 28 Management Response, fi 32. 29 Management Response, 7 33.

10 Requesters a day before they filed the Request. The GoU has also disclosed the PPA for an open-ended period oftime.

35. Project Benefits. Among the Project benefits, Management notes that providing reliable least-cost power is expected to increase the number of connections of residential users to the national grid, including in rural areas, and will allow industrial and commercial users to increase output, efficiency and thus profits. Management further indicates that employment opportunities are expected to be available for 600-1500 Ugandan nationals (1 0% from local communities) during the Project’s construction phase. Employment opportunities will also be available in the tourism sector because of the Kalagala Offset, and economic activities are expected to increase in and around the Project site.

36. According to Management, the proposed Project will also have environmental benefits. Since the Bujagali dam will use the same water already released through the NalubaaleKiira dams, the pressure to over-extract water from Lake Victoria will be reduced. This will help preserve the Lake.

37. The Government will benefit from net tax revenues from the Project and from not having to provide a general subsidy for electricity tariffs. These funds may be used for social and poverty alleviation programs. Management further maintains that the Project will provide economic and commercial benefits to Uganda, will facilitate foreign investments, and will “have important demonstration effects” in Sub-Saharan Africa. On the other hand, Management believes that a failure would be very costly for the country and could send a negative signal to other countries in the region.

38. Next Steps. According to the Management Response, after the Board approves the IDA Guarantee, there are key issues that must be closely followed in supervision. These include the environmental and social mitigation plans and the continuation ofthe Dam Safety Panel’s assignment.

39. Conclusion. According to Management, the World Bank Group’s support for the Project “is pivotal to its success” because its involvement gives confidence to the private sector and to lenders. Management also states that it “takes seriously the Requesters ’ concerns” and believes “that the project adheres closely to Bank policies and more importantly, that the project developers and financiers have been conscientious in ursuing the welfare of project affected persons as well as Uganda as a wh01e.”~8

30 Management Response, T[ 47.

11 D. Eligibility

40. The Panel must determine whether the Request satisfies the eligibility criteria for an Inspection, as set forth in the 1993 Resolution establishing the Panel and the 1999 clarification^,^^ and recommend whether the matter alleged in the Request should be investigated.

41 The Panel has reviewed the Request and Management’s Response. The Panel Chairperson, Edith Brown Weiss, together with Executive Secretary Peter Lallas and expert consultant Eduardo Abbott, visited Uganda from April 18 to April 25, 2007. During their visit, the Panel Team met with the Requesters, other members of civil society and locally affected communities, Bank staff, national and local authorities, Project authorities, members ofParliament and others.

42. The Panel wishes to thank all those who facilitated the Panel’s visit, especially the National Association of Professional Environmentalists (NAPE), the Ministry of Energy and Mineral Development, the Bujagali Energy Limited (BEL), and the World Bank Country Office.

43. The Panel wishes to emphasize that it recognizes the immediate importance of developing sources ofelectricity for Uganda, and the potential ofhydropower as a source of energy. It notes Management’s explanation as to how the proposed Project addresses this need.

44. Based on the reasons set forth below, the Panel is satisfied that the Request meets all of the eligibility criteria provided in the 1993 Resolution and Paragraph 9 of the 1999 Clarifications.

45. During the visit, the Panel confirmed that the Requesters are legitimate parties under the Resolution to submit a Request for Inspection to the Inspection Panel. The persons who signed the Request have common interests and concerns, and reside in the Borrower’s territory, as required by Paragraph 9(a).

46. The Panel notes that the Request “assert[s] in substance that a serious violation by the Bank of its operational policies and procedures has or is likely to have a material adverse effect upon the requesters” as required by Paragraph 9(b).

47. The Panel has reviewed the claims and the Management Response carefully in relation to this criterion. The Panel also gathered relevant information during its eligibility visit to Uganda, particularly through its visit to the Project area and its meetings with Requesters, other members of civil society and locally affected communities, who reiterated the claims of non-compliance by the Bank with its own operational policies and procedures, and actual and potential harm.

31 Conclusions ofthe Board’s Second Review of the Inspection Panel (the “1 999 Clarifications”), April 1999:

12 48. The Panel notes the substantial amount ofdocumentation prepared for the Project, including the Social and Environmental Assessment of December 2006. It appreciates the explanations ofManagement and Project authorities relating to the Project and its rationale, and their efforts to demonstrate that the Project is following Bank policies and addressing issues ofharm that have arisen over time and might yet arise. The Panel also received information from the Ministry of Finance, Ministry ofEnergy and Mineral Development, and BEL.

49. The Panel also notes Management’s claims that the Project preparation followed best practice and took into account the findings of the Inspection Panel investigation of the issues raised in the Request for Inspection submitted to the Panel in 2001.

50. The Panel considers, at the same time, that the Requesters and local people raise a number of significant concerns about this documentation and related explanations. The Panel heard concerns that the Project evaluation has failed adequately to consider alternative sources of electricity generation, and that the Project will not meet its promises of electricity generation. At the same time, there are concerns that it may cause significant harm to affected people, their livelihoods and the environment and ecology of the River Nile and Lake Victoria. These harms, they contend, could be both local and, more broadly, affect the ecology of Lake Victoria and, potentially, the countries and people downstream along the course of the Nile. Some ofthese concerns are similar to those raised in connection with the previously proposed project.

51. The Panel highlights below several of the issues and concerns raised by the Requesters and local people.

52. Inundation of Bujagali Falls and the Kalagala Falls Offset. The Project documents note that the dam, if built, would inundate Bujagali Falls. These Falls are a valuable stretch of the River Nile from an ecological and natural habitat per~pective,~~for their spiritual values to the local people, and for tourism uses and value. People interviewed by the Panel during its eligibility visit reiterated that the inundation of Bujagali Falls would be a great loss locally and to the country, with highly adverse ecological, cultural, social and economic impacts. The loss of Bujagali Falls also would follow the previous inundation of Ripon Falls just a few kilometers upstream at the source of the Nile due to the construction many years ago ofthe Nalubaale Dam.

53. The Management Response and the PAD indicate that the Kalagala Falls and adjacent areas will be an offset for the loss ofBujagali Falls. The Kalagala Falls,

32 The Project SEA notes that they are in the Jinja Wildlife Sanctuary. It adds that “[wJhile the Sanctuary was established in 1953, development along the river has not been restricted and there is no management plan or management activities associated with the Sanctuary. Proposals which may result in the destruction of habitat within a wildlife sanctuary must incorporate suitable mitigation measures, and this principal (sic) has been adopted for the [Project/.” Executive Summary, ES-19.

13 some kilometers downstream from Bujagali Falls, are another beautiful and highly important stretch of the Nile from a cultural, ecological and economic perspective.

54. Specifically, Management indicates in its Response that the Government of Uganda “has reiterated its commitment to the Kalagala offset that it made under the previous effort to develop Bujagali, as presented in the Management Report and Recommendation in response to the Inspection Panel s investigation of Power III, Power IK and the Bujagali Hydropower projects. . . The offset provision for Kalagala Falls and the adjacent natural habitat will be included as a GoU [Government of Uganda] obligation in IDA Indemnity Agreement for the Bujagali project, and will be binding throughout the life of the Indemnity Agreement. . . ’Y33 The Panel notes that this commitment is presented as one of the main measures in the Project in offsetting harms.

55. A similar issue involving an offset for Kalagala Falls arose in the course of its 2001/2002 investigation of the previously proposed project. At that time, the Panel requested a legal opinion about the terms of the Indemnity Agreement entered into between IDA and the Republic of Uganda on December 20, 2001 , and supplemental letters sent by Uganda to the Bank, with regard to the Kalagala offset.

56. The then General Counsel of the Bank stated that the Indemnity Agreement and the supplemental letters contained “legally valid, binding and enforceable obligations of Uganda (with correlative rights of the Association)” with regard to the Kalagala Falls and some related areas. The legal opinion added, however, that in spite of Management’s assertions at the time, these documents also contained “a provision that expressly recognizes the possibility that Uganda may develop Kalagala Falls”34(emphasis added).

57. This raises a question about whether the Board, in connection with the present proposed Project, received accurate and complete information about the Kalagala offset, as a necessary element to inform its decision-making,

58. As it was developing the present Report, the Panel received copies of two letters from the Government to the Bank which contain conflicting statements about the Country’s commitment to maintain the Kalagala Offset. The first letter, dated April 13th, 2007, states that “any future proposals which contemplate hydropower

33 According to Annex 15 of the PAD for the Project, Management expects a commitment from the Govemme’nt to set aside the Kalagala Falls and related portions of the Mabira Forest for the life of the IDA Agreement. Also, the Executive Summary ofthe SEA explains that the possibility of a Kalagala hydropower scheme is not included in its analysis of cumulative effects “as the Kalagala offset agreed by the Government of Uganda to offset the residual impacts of the Bujagali project precludes such development there.” (emphasis added) 34 Memorandum from KO-Yung Tung, Vice President and General Counsel to Edward S. Ayensu, Chair, Inspection Panel, March 5,2002, entitled “Third and Fourth Power Projects and the Bujagali Hydropower Project in the Republic of Uganda: Legal Advice in Response to Request by Inspection Panel.”

14 development [in the Kalagala Falls] will be conditional upon a satisfactory Environmental Impact Assessment (EIA)”. In other words, as with the prior proposed project, it does not preclude future hydropower development at this site. The second letter, sent shortly thereafter on April 16, 2007, refers to “recent media reports of concerns over requests of private investors to the Ugandan Government to utilize a portion of the Mabira Forest for agricultural and industrial development” and seems to focus on the Government’s commitment to conserve the Mabira Forest.35

59. In this context, the Panel notes that the provisions of the IDA Indemnity Agreement, to be entered into between the Uganda and IDA, are key to understanding the commitment of the Government with respect to the proposed Kalagala offset. This is particularly important because the text of the two recent letters, noted above, is unclear, and because the statements in the PAD and the SEA, referred to above, are not legally binding.

60. Management has informed the Panel that the specific covenant in the new IDA Indemnity Agreement relating to the Kalagala Offset is still under negotiation. Management furnished a copy of the new Agreement to the Panel with the specific proviso that the document “is a draft subject to change , .[and] will become a public document only after execution at financial close. ” The Panel notes that if the new Agreement contains a covenant that provides that Uganda will not develop the hydropower potential of the Kalagala Falls without IDA’S concurrence, this could be consistent with Management’s statements in its Response to the Request for In~pection~~,but also could, with IDA’Sapproval, permit the development of Kalagala Falls. The same covenant could provide that after the termination of the Indemnity Agreement, Uganda will discuss with IDA an extension of this set aside of the Kalagala Falls Site and its undertakings in connection with the Mabira Forest Reserve. In line with Bank policy, the Panel expects Management to provide the Members of the Board of Executive Directors with accurate and complete information about this matter once the negotiations have concluded.

61. Economic Projections and Analysis of Alternatives. The Panel notes conflicting statements regarding the costs of the Project, output and affordability of electricity, and analysis of alternative energy sources.

3J The letter states that its purpose is to “reaffirm the Government’s continued commitment to these obligations as described in Annex 15 of the Bank’s Project Appraisal Document, ,.,” with respect to Kalagala Falls and Mabira Forest. The letter subsequently, however, focuses more narrowly on a commitment in Annex D. 1 of the SEA in relation to “the Mabira Forest Reserve and those portions of the Mabira Forest Reserve on both banks of Kalagala Falls that have been de-gazetted.” The letter concludes with a Government commitment to adopt “a Sustainable Management Program for Mabira Forest Reserve which is mutually agreeable to both the Government and the Bank.” 36 “The offset provision for Kalagala Falls and the adjacent natural habitat will be included as a GoU obligation in the IDA Indemnity Agreement for the Bujagaliproject, and will be binding throughout the life of the Indemnity.” Management Response p. 22,17.

15 62. The Requesters claim that the projections of electricity output and costs developed under the Project are incomplete and very likely misleading and inaccurate. The Requesters also contend that Project documents fail adequately to describe alternative approaches that could and should be pursued to meet the needs of electricity generation that would be less costly and harmful.

63. The Panel observes that significant new conditions and circumstances may have arisen since the previously proposed project at Bujagali Falls. These include the situation relating to costs for construction and for electricity, issues of power production and capacity in light of water flows (see also below), and the emergence of alternative potential sources of power generation. The Requesters claim that these new conditions and circumstances are not adequately addressed in Project documents, as required by Bank policies.

64. During its eligibility visit, Requesters and others also expressed concern that local people have not been given adequate information regarding the costs and pricing arrangements under the proposed Project, and that these arrangements might result in less electricity at higher cost than they have been led to believe. They stated that the Project economic analysis is faulty and conveys overly optimistic projections of benefits of the proposed project when compared to other alternatives and ofelectricity generation in general.

65. The Panel notes that Bujagali Falls is an extremely valuable natural site, which is important to both present and future generations. The Bank’s processes for conducting economic evaluation of projects and programs, or their implementation, may not fully capture the value of such unique sites, since the benefits are difficult to quantify and may be discounted to zero, although they may not be zero. While access to electricity is critical to reducing poverty today, economic calculations of the cost and benefits of various options for producing electricity that do not fully consider the value of unique natural sites to present and future generations may be distorted.

66. Hydrology and Water Flow. The Panel notes that there are differing views about the effect ofthe proposed dam on water flows in the River Nile and on the water levels in Lake Victoria.

16 67. The Requesters contend that the Project documents and explanations by Management do not accurately reflect the significant risks relating to water flows and the lower levels of Lake Victoria posed by the proposed Bujagali hydropower project. In this regard, they contend that important new data on Lake levels, and the potential implications of climate change on temperature (and hence on water evaporation) and on precipitation rates in the region, have not been adequately taken into account in assessments of the proposed new Pr~ject.~’

68. The Panel also notes that new information exists from independent sources regarding the effects of the existing upstream dams on water levels in Lake Victoria. The effect of water flows on Lake Victoria may raise significant questions about the impact of the Project on the health of the Lake Victoria basin ecosystem.

69. The SEA and other Project documents state that BEL “adopted the Agreed Curve” for its design and implementation of the Bujagali Hydropower facilities.” The Panel notes that the Agreed Curve3* affects not only the local water situation but also areas and countries downstream of Bujagali Falls, and relates to an existing international agreement between countries. The Requesters claim that there are indications of new approaches that may affect this critical issue regarding water

70. There is also conflicting evidence regarding the issue of whether multiple dams on the River will have cumulative effects. The Requesters claim that there could be significant cumulative impacts and that this issue needs to be thoroughly addressed in a transparent and participatory way. Management’s Response indicates that “developing Bujagali and other sites in the Victoria Nile Basin (excludin9 Kalagala) will not have signijkant cumulative environmental impacts.” O

71. The Panel also notes conflicting views regarding the effects of the dam on fisheries in the Project area. The Requesters claim that the effects on fisheries in

~~ ~

37 During discussions in the field, it was noted that Working Group I1of the Intergovernmental Panel on Climate Change (IPCC) is issuing its Contribution to the Fourth Assessment Report (Working Group 11: Impacts, Adaptation and Vulnerability), which addresses regional impacts of climate change, particularly with regard to temperature and precipitation. 38 The Agreed Curve, as described in the Management Response and SEA, is a long-established formula designed to ensure that water flows downstream remain consistent with what would have occurred under natural conditions without the existing dams. As stated in the Management Response, it “jiunctions as the operating rule of water discharges through the Nalubaale and Kiira dam complex, in which the volume of water released remains consistent with what would have occurred under natural conditions, thereby ensuring no change in downstream discharge (water releases are a function of the lake level at any given time).” Management Response, p. 4 at note 4. 39 They cite, for example, the Terms of Reference for the Economic and Financial Evaluation Study, Bujagali 11, dated February 2007, which state that 9he ‘Agreed Curve’ should no longer be strictly followed, but should be considered as a guiding element in the operation policy. . .” Appendix, p. 42. 40 Management Response, p. 20, Annex 1 at note 4.

17 the River and in Lake Victoria need to be analyzed and addressed, while Project officials have indicated to the Panel that they believe there will be no effects.

72. Resettlement. The Requesters claim, and Management to some degree acknowledges, that certain problems exist in relation to the resettlement of local people arising from the previously proposed project. Local affected people interviewed by the Panel reiterated and elaborated on their concerns set forth in the Request for Inspection. During its visit, the Panel was able to verify some of the problems faced by them.

73. In its Response, Management states that BEL has prepared an Assessment of Past Resettlement Activities and has prepared an Action Plan (APRAP) to complete the resettlement started under the earlier Bujagali project and that it will implement Community Development Action Plans (CDAP). In addition BEL and the BIU have committed to a series of actions summarized in the Management Response, paragraph 30. The Response does not say specifically whether Management considers that these actions by BEL and BIU are sufficient to address the Requesters’ concerns and to implement properly the Bank resettlement policy. The Panel notes these initiatives, but in the light of past experience considers that the claims of Requesters raise issues as to compliance and harm to local people that need to be examined.

74. Other Issues. During its eligibility mission, the Panel was also presented with assertions and questions that elaborated upon compliance and harm issues raised in the Request. They relate to Bank policies on Indigenous Peoples, Cultural Property, Natural Habitat (including impacts on Bujagali Falls and riverine fish species), Dam Safety and International Waterways. The Panel also noted questions of compliance and harm involving the link between the proposed Project and the Mabira Forest, namely the course of the transmission lines of the proposed Project through this Forest and alleged linkage between the Forest and the Kalagala Offset.

75. The Panel notes that the Request “does assert that the subject matter has been brought to ManagementS attention and that, in the Requesters’ view, Management has failed to respond adequately demonstrating that it has followed or is taking steps to follow the Bank’s policies and procedures. ’’ Hence, the Request meets the requirement ofParagraph 9(c) ofthe 1999 Clarifications.

76. As noted above, the Requesters state that they expressed their concerns in a letter sent to the Bank. They further note that they invited the Bank’s Country Office in Kampala to attend public meetings, held in August and October 2006, regarding Lake Victoria and the role ofdams in draining the Lake, but received no response from the Bank. In addition, the Requesters state that they recently met with Bank officials in Kampala to reiterate their worries, but claim that the Bank has not adequately addressed their concerns. They believe that the actions described in the Request are contrary to the World Bank policies and procedures and will

18 materially and adversely affect their rights and interests. They ask the Panel to recommend that an investigation ofthe issues raised in the Request be carried out.

77. The Panel notes that the subject matter of the Request “is not related to procurement”, as required by Paragraph 9(d) ofthe 1999 Clarifications.

78. The Request satisfies the requirement in Paragraph 9(e) ofthe 1999 Clarifications. On April 26, 20007, the Board of Executive Directors approved the IDA Guarantee as part ofthe financial package supporting this Project.

79. With respect to Paragraph 9(f) of the 1999 Clarification, Management notes in its Response that the “proposed Private Power Generation (Bujagali) Project is a new operation. As such there has been a fresh assessment of the social and environmental aspects of the project, which has also required drawing upon former studies, where rele~ant.”~~

80. In addition, as noted above, the Request asserts that there is new evidence and circumstances not know at the time of the prior Request. The Request notes, for example, important new information and realities relating to a decline in lake and river water levels, climate change, increased silting, and other factors relevant to hydropower production. It also refers to new circumstances and concerns relating to resettlement arising from the earlier proposed project. The Panel also has received claims allegedly based on important new information on the relationship between water levels in Lake Victoria and the existing dams, as well as regarding possible alternative sources of electricity generation. Therefore, the Request satisfies Paragraph 9(f) ofthe 1999 Clarifications.

E. Additional Considerations

81. The Panel wishes to draw the attention of the Board to some disturbing information, which could affect the integrity ofthe Panel process.

82. The Panel heard testimony that some resettled people who submitted the letter of complaint have been subjected to pressure to refrain from complaining about the proposed Project. Individuals indicated to the Panel that they were, on other occasions, threatened for wanting to speak out about their concerns. Some indicated that while they have not refused the dam, they joined the letter stating their concerns regarding their resettlement and are fearful ofthe consequences.

83. Separately during its visit, the Project authorities provided the Panel with copies of two additional documents, which suggest possible conflicts in the area of influence of the proposed Project. One is a document of minutes from a meeting involving area leaders and the affected people, which illustrates some of the apparent problems. According to the minutes, the leaders of the area to which people had been resettled, stated that they were not happy with the residents

41 Management Response, Annex 1, p. 22.

19 voicing their concerns in writing without going through them. In the meeting, the leaders characterized as “exaggerated” some of the peoples’ concerns, and presented a point-by-point response to their main concerns, including representations that the new sponsor will deal with the problems.

84. The other document is a letter from area leaders entitled “Appeal to Bujagali Hydro Power Project Lenders”, which ends with an appeal to the lenders “to approve the Bujagali Hydro Power Project so that construction can start immediately to end the suffering that we have had to endure.’y42

85. Also, the Panel was informed that the day before the Panel visited the resettlement area and Project site, Project officials, together with a number of other people, including foreign officials and one of the consultants for the social and environmental impact assessment, visited the area and met with the area leaders, but reportedly not directly with affected people signatory to the Request.

86. The Panel is concerned by the reports ofpressure and fear among at least some of the affected people who signed the Request to the Panel. The Panel trusts that the Bank will take appropriate steps to ensure that the concerns turn out to be not well-founded.

F. Conclusions

87. For reasons set forth above, the Panel believes that the conflicting claims and assertions noted above merit independent review and investigation, in accordance with the terms and criteria set forth in the Resolution of the Panel and its Clarifications.

88. The Panel notes that an investigation might conclude that some or all of the claims regarding non-compliance and potential harm are being adequately addressed under the Project or are without merit. But it might also find otherwise. The Panel notes that Requesters and other local people recognize the urgent need for electricity in Uganda. However, they all stated a strong desire for the best information available to understand their concerns and the potential impacts and benefits ofthe proposed Project.

89. The Panel therefore recommends that an investigation be carried out into the matters raised by the Request.

90. Because of the substantial information gathered in connection with the previously proposed Bujagali dam project, the Panel considers that it would be able to carry out an investigation expeditiously.

42 The letter describes their views ofthe benefits of the Project, but does not elaborate on the “suffering” to which it refers.

20 0.1-MAR-2007 18:29 B IRUNG1 , TEDDY 256 41 535540 P, 01 I pl! 9 NATIOHAL A4Sa IATION OF PROFESSIONAL ENVIRONMENTALISTS (LTD).

Tburrdry, March 01,2007

All98 cc8tive semt.ry ion Pmel Bank Gmap It. Nw Wsrbiogton DC USA Iz - 522 - W16

GACLAIM ON THE BUJA- P ttached is our claim to the Inspection Psncl

ed is a letter of complaints regarding the problems of tht resettled to the project.

I that we have sent these documents by fax, courier and through the k Country office, Kampala, Uganda.

iowledge receipt.

,.. , r itmuzi Dimtor

1

ENVJRONMENT IS LIFE USE IT SUSTAINABLY

. 'I 1 1y.' 01-MAR-2007 18:30 BIRUNGI, TEDDY 256 41 535540 P, 02 L r-., 1 ENVIRONMENTALISTS (LTD). NATIONAL AS&dh+'IlON OF PROFESSIONAL P.O. BOX 29919, KAMPALA ms34453 rn/PM: SSolSl Ed.-mg nnuw.nrryror.ag PLOT 951 I952 WANDEGEYA -Ku)Im BOMB0 - BWAISE RD

REQUEST FOR INSPECTION

March 1,2007

PROPOSED BUJAGALIHYDROPOWER DAM CTS IN UGANDA.

to the Inspection Panel concerning the Kiira (Owen Fails alls) and the proposed Bujagali Power stations in Uganda, 1 (www.worldbank.orn/ insuedion-panel)

on of the Inspection Panel and coupled with the performance elated to social, economic and environmental aspects, evidence with the AES Nile Power's (AESNP) BujagaJi darn project and ial closure at the World Bank, the company, AESNP, pulled aut equently stalkd the project.

Due to the ever-mal demand and the inability of Nalubaabk and Kiira ctricity to meet the country's demand, is in the process of fast-tracking the Bujagali proponents, locally registered as Bujagali t is currently being considered for financial support by the s resulted m ntimy shortcuts being taken to ensure that the t. as possible, ignoring outstanding and new concerns raised on 256 41 535540

I I ing by the World Bank Croup, BEL has submitted in nk Group the social and environmental @t~ssmmt I m and Interconnection praieC@. Association of Professional Envimmmdaiists (NAPE) and the I Is, nereby'file a claim on the pdBujagali cts that is bemg considered for funding by the I b'* AESNP care, BEL'SBujagali hydropower dam project is based on little or no bearing to the curmt situation and I adequate basis for approval of the proicCt The f&dg iup isrWS

I d Cumulative Impact Aweaement6 oes not adequately address the outstanding question? about I ges on power production at the Nalubeale, Kiita and the propxed especially now when Lake Victoria water levels have &lined. t, Kiira has contributed substantially to the over-draining of Lake I c 1088 to Uganda and neighboring sed in the documents we have sa. ntrd an the mnnner m which 1 be operated by Government of Uganda (GoU) (HPP Main 1 and therefore cannot under the circumstances dictate the er stations to ensure sufficient water for I that Bujagali's operation will .be highly erations of Kiira and Nalubeale. Novy that BEL cannot control I stream and did not obtain commitment through Nalubaable and Kiira, what EL have that the project will have enough water and generate the issue is a lynchpin in the project's economic viability. tely projects Lake Victoria as being capablc of pwidiq project even in its current diminished hydrological state, . Where is the additional water going to come from? It is eer ELimu Esimu of Eskom that "crurently the facilities not running at full capacity, becauee of limitatiom from to maintain live storage"(reJ Phase 2 Consultation Muterial gy is still a major limitation. It is now clear and the Victoria Nile flow regime rm energy output assessment for xperts reported that although Bujagali ity, this is not possible under the current Independent experts projected the output to be a mLIximtlm d verall issue of Lake Victoria's long-hm assert that Bujagali Dam could lead to more sustainable flows P, 01 01-MAR-2007 18:39 BIRUNGI,TEDDY 256 41 535540 - b: I

x * I

: t will "m&e use of the same water" released by the existing dams. I or the documents it is based on explore the opposite scenario (ie. ill provide more incentive to release higher flows, in order to I

ritical for Bujagali dam. BEL does not address this

orts do not address dimate change and its pomible impact on 1 urrent and future climate models indicate hotter, I

ur in the next few years or in the next 100 years. A 206 report2 by and Energy Management International Inc., a US mmultancy I 1 I

irectorate of Water Development (DWD), a I s could pmbatdy lddrere the issues of levels in Ink Victoria and River Nile. I I I 0 I I u

3 1 I 256 41 535540 P, 02 01-MAR-2007 lei41 BIRUNG1,TEDDY 'I

! .. I 1 I as. Even the recently (26th 'I ecommic analysis does not adequately adhew the on to hydroIogical risks, It is rife with flawed assumptims yses for an analysis of these disruption to the livelihoods of Meside al to invdve stdke!hok from other caused by the over-

te change on Uganda's energy sector d its economy d publicly released.

government of Uganda is not binding. It does not completely a future dam site. Legal interpretation of the agreement by the o confirmed that there was no guarantee far Kalagala as an offset pction Panel Report, 2002).

's Policies 011 Environmental Assessment (OP 4.01), (OP 4.02), Natural Habitats (OP 4.04) and Water Resaurces e believe that the absence (inadequacy) ab thb critical y affect the well being of Ugandan society, in particuk and *

ce in the SEA report that a comprehensive economic andysis done. What has been released on the World Bank Website

,although again mwirnpomtly shhe

4 4 256 41 535540 P, 03 01-MAR-2007 18:42 BIRUNGI,TEDDY ' It I I I I I I

'I1

lost-out over economics. Later, Karonub poi- over4 that the emnomc artaly~bused iuatily greatly Mated costs for building K~WURM.'

Extension and BuJ@i." 256 41 535540 P, 04 A 01-MAR-2007 18:44 BIRUNG1,TEDDY -- I

rl: Uganda has significant potential, with estimates ranging up I ehind hydroelectric analysis. Although tional Ltd. states that only 45 MW is seems premature and pessimistic as sqne of the sibthey refer 1 hance of commercial development are sdbeing e talked with who are working directly on such t the potential for specific sites is much greater than the project I

to: Uganda has an estimated 10-30 MW ,potential. East Afncan recently reported: "The gmem~t'splan to me power during peak hours uwng sdar photbboltaic adsofur water d estimated that a total 4 100,OOO grid V systems untf use sok lighting instad used for water heating is a significant unting for almost !jOMW. Experts estimate that odd be saved immediately (and mow in future) with ected custom^^^. Lighting The bulk of Uganda's peak demand is used for according to a World Bank study. If t light bulbs, the count~y'speak be atto below 20~w.9 aion Losaes: According to the 2006 Bujagali EIA by Bumoide Ltd., "Another option to reduce demand is to ndua teclmicnl losses, 99) estimated that improvements to fructure, could eliminate as much QS 30 MW er 2006, the East Ahcan reported that i applying for a US$180 million loan from the WorM Blnk to !ty of investments in the energy sector; only US10 million from 5 expected to go toward demand-side management and energy ?asuxes.10 bwer potential needs further expIoratian, as wind speeds have :orded at low heights, not the 10 meters that is stendaud forr wind sis.11 d, efficient stoves and biogae diptera would be key to aner energy to the rural poor, and reduce deforestation from VVOOd. I xhnocrats have dismissed the contribution of wse alternative on their development costs and difficulty to COMect to the national grid. S does not give cost, cost-benefit and opportunity-cost scenarios - dstoried2006 IO100044.html ISC energy saving bulbs," New Vision, January 22,2007. entidcd preliminmy needs to improve cfticimcy. includiigcducatioarl pwmto y Coruavdon md Cfficimcy; a program to reduce the wst of rlliciant lighting; I efficient technologies; a national building debwcd on mgy efficiency concepts ICC): and r host ofOmn important needs. fgy Sector," hrtp://w\ww.ugandainvest.cMn/energy.pdf

6

I " P. 05 256 41 535540 __,.. 01-MAR-2007 18:46 BlRUNG1,TEDDY I

d development of these alternative energy options as the least-cost option The idea of dknidng energy easily be COMK~~~bo the national grid (BEL's HPP 71) is erroneous. What should be assessed is rather whether options will help reduce the burden on existing national grid- 91 es) than 0th- options by taking away areas eloped as independent grids rather than ty to the national grid. These independent grids al to the majority of the people and the current rural promoted by government. It therefore becomes clear that been assessed in either a coanprehensive or leading up to Buj8gaI.i. The East African ke Victoria's water lev&*, stated tkt: duce dependency on hydrop4wer By dadoping wind, solar, tircrmul and natural gas within 5 e project developer and the World Bank are ption, yet this has been effectively disputed.

to the decision-making process about %est optiom", for example, jwill cripple the economy have not been adequately assessed It is World Bank's "Independent Hydrological Review" of the Victoria released and debated in time for an informed decision-making k Group, like the Ugandan government, haw skewed its mearch romote Bujagali above other apticyns. In tb poieCU, first data was manipulated to justlry hjagali as the "lea6t-c0&" its consultants pointed to other projects as cheaper. While the praisal of the Bujagaii prqect was over-optimistic in many If altematives to the project was consistently pessimi+ic. This is new BEL Bujagali project. Going back even further, the World rtimistic hydrologiCa1data on the Kiira project, and clainied there the optinustic figures (even though most experts at the time is has resulted in drastic draining of Lake Victoria to low levels A comprehensive, independently facilitated and pxtiCipatar]r cess is needed for future energy planning in UgLtpda espcclayl rights and risk analysis. More importantly, there needs. to be ?lopthese resources.

f

nomically risky project, a risk worsened by changing hydrology. Uganda has long been a contentious hue, and questions have ns' ability to afford its tariffs, the high cost of the project, which 1, and issues of indebtedness. At one time, the cat of Byagali o be US430 million, then US550 million and then US580

1 I *7 I 'I 256 41 535540 P, 06 01-MAR-2007 18:47 BIRUNG1,TEDDY 1 II

I

than US20 million in excessive paymerib each yea. In a meeting ank and NAPE held on the 28* February 2007 in Kampala, World 1 of Bujagali project hrd incre#ed 90%. It is, ar that Bujagali Dam will not meet tho basic energy who are now without power and live far from the I

ly a fraction of the populaw can afford ujagali will feed into a very limited national grid, its power I a, jinja, Entebbe and other urban centers. Therefom, we are overs the whole Qc Uganda, electricity from the The high cost of the project will further limit I rural electrification and is expected to lead to reductims in rubsidies I i e absence of an adequate and comprehensive econoa\ic and assessment of the Bujagali dam Roject violates the World Bank's I 11 I evidence that the Bujagali dam project was I ing the Bujagali Dam I formation an the Nile of Lake Victooizl, as D). The Bank hrs I f the Lake Victoria hydmtogiral dtuationu,ht it is dab they are based on) wili be made public. I opths have been should telease all documents on the project's I I

8 I n I __ 1 I' P. 07 256 41 535540 . .- 18:4Q 01-MAR-2007 , I, BIRUNCI, TEDDY I I

taken on Bujagali. The only document relead for review Was I not address the overall issue of Lake ViWia'S lo%-- health, I Bujagdi Lkun will be designed based on the "AgedCurve.'' igns economic risks, the Power Purchase Agrewrent (PPA), 8, m7) releafed for public scrutiny at the Uganda #ec*itY I A) Office in Kampala. It is a phcrocopy, wipthout drks for its has excerpts d AESNPL4, there are refers to (is it UETCLlS, AESJP, IPS16 - I ali dam project, it does not apportion parties regardmg the dam project and g table in ERA'Slibrary. One is not allowed to obtain an I People are required to read it only during working hours. ent, it is difficulty for two or more people b read it at the 1 believe that this is not the actual PA AESNF' was first kept secret, until after the High Court of Uganda I that should be made public. Thif was also the , which stated that "It semeuident Htatfull is to place the public in a position to analyze, infinned discussion about viability ofthe Project and its impact oj Ugandans." When the AESNP PPA was finally released, it Ugandan government, consumers arliament must appmve the state's obligations o evidence that BE'SPPA has been debated and apedby it is reported in Bn's SEA to have been signed way back in 's SEA was therefore signed without incorporethg the casts of studies, construction and compensation and, r4-t issue^, be reflected in the tariff of electricity from the Bajagpli project.

wonCompany (UETC) Ltd

as 1. special purpose company ' 18 Greenwatch vs Go nf. HCT-00.CV.MC-0139 OF 2001

9 01-MAR-2007 18:51 El IRUNG I,TEDDY 256 41 535540 P. 08 I I II I 1 1

I concrete steps to decommission the old Nalubaable and disastex isms and associated costs. Such strategies are vary important; was no EIA done for Kiira dam and no poetconstruction audit I . In a meeting between NAPE and Racheal Kyte of the World on the 20th February 2007, the Bank acknowklged that the

I SEA violates World I ,OP 7.50, to mention I

nda (thirdschedule) consjders Basoga an hrdigonosl, peuple. I titution of Uganda changed?Or is the Cortsthtion of Ugda(1995) the Bujagali project? The failure of the World &nk bo rnpect the the Republic of Uganda as regards indigenous peoples is a violation li Policy on Indigenous Peoples (OP/BP 4.10). 1 spiritual issues in the Bujagali project area were irwrdequately EA. It is assumed in the SEA to have addressed cultural and spiritual I cted community. ills for an effective consultation process involving all clans that are I iritually attached to Bujagali Falls followed by a public, hearing. I Resettlement

I tates that AESNP, the previous pwject proponem$ mmplcted land ?ttlement and relocation of all dents fdylocated in the ind compensated land owners and other project afkcted people. 1 o and fdities provided to the resettled communitiesby AESNP are I less than five years after construction, implying that the structures structed and would probably soon crumble. I compensation and resettlement framavarks are out-dated and do nt economic situations. led by the Bujagali Interconnection Project were mer compeMat.ed I It is therefore important that comperrratiasr and of people is based on updated compensation and resettlement Ireflect current economic realities. , I wever, no clear commitment on the part of BEL to complete the nd resettlement exercise in a manne that reflecta current realities. wive been a re-assessment of social costs and benefits of the I id resettlement exerck to reflect the current and hture realities. 1

I 10 I I I I II DIRUtIOI, TCDDY P50 41 535540 r, OD I 1 I

I ple who were moved in 2002 were not @en land tlthr to aheir new aused great uncertainty. Problems tht arose with he ded rere left unresolved for years after ttPe Orid pnOieCt spaWor I loned the prqect. It took strenuous lobbying on their behalf by OW 3 get the government to respond to sdme of the prahlam~LAttached stter addressing the problems faced by the community nsettled in I ? dam developers and GoU. led compensation and community development action plan in BEL's 1 I of World Bank's Policy on Infomtion disclosure, Involuntary /BP 4.12), Piloting the use of Brnnower system, to addmr 1 Social Safeguard Issues in Bank-Supported prcrjscls (OF/BP 4.w, Lion Plans (OP/BP 4-02), Indigenous Peoples (OP/BP 4.10), (Projects I (OP/BP 7.6.0), among others. I rems Ldence of consultations in BEL's SEA, project ppcments confuse true participation in a decisionmaking process. consdtrtions with I rsoga and 52 clans of Buganda were not done at all. In addition, the iicate how each of the stakeholders' concerns raWd during tk ss are going to be addressed. The failure b dddagl\crms raised 1 ients during the consultation process by the dam devrlopcr ies on Environment Action Plan OP/BP 4.01, Social Assessment I iical Cultural Resources (UP/ BP 4.11) ent Data

I hvirenmental Studies (SEA) are based on old data that has Meor no bearkg to drri I situation. For example, sections 7.4.1.3 m6, water quality data, cldte, air-born mrticulate data, among others were cione rknost ten years ago and do I ent environmental realities e.g. declining lake and rivm wrler lcvelr *lands and forests, increased silting, climate &age, e.ehat have merproduction. Fish species that were found to be endemic in the 'I tudies were mysteriously not discovered in BEL'S SEA, raising doubt . in BEL's studies. Was it a deliberate arteinpt on the put of the 'I upulate information?Or is that now the endemic fidr species have , I j k Aquatic) ;I *, an animals, birds and aquatic life were canied aut Lor very short months that do not give the variations in specier -WOE MCt II lyoccur over a period of one year. The hilure to decpately collduct sessments violates the World Bank policies om Enviroplmcntal IP 4.01), Natural Habitats (OP/BD 4.W), Environmehkl Action Plans I ?r Resources Management (OP/BP 4.07), OP/BP 4.a0, e(c. .I .I

.L :? . L I I1 256 41 535540 P, 01 01-MAR-2007 18:55 BIRUNG1,TEDDY B 1 I I Purchase Agreement (PA), a canpehmsioe economic I 1

Wictoria and the role of the dams hr draining Lake Wknh (Idin I er 20061, an8 got no response. The only dgwe had on 28* l with Racheal Kyte of the World Bank Headquarters, Washington adequately address our concerns, because she stated that her I I was not to resolve issues concerning the project, but to appraise

I that the above actions, which are contrary to Wmld Bad Policies, Ed our rights and interests and are lilrely to jeopardize our future wironmental security. We request the Panel to meropnmend to the I Bank’s Execudv ctors that an investigation of these matters be dwtedin order versies. As we have always stated there can be no sustainable I ”truth-telling and truth-seeking in development” . bur response. I I 1 1. ,

12 1 01-MAR-2007 19:05 BIRUNGI, TEDDY 256 41 535540 P, 02

!* I I' t w NAMINYA RESETTLEMENT AREAS WAKISI SUB-COUNTY MUKONO DISTRICT I 18 February 2007

gy Limited (BEL) 1:

b 61Cigaali dam nroiect an8 Problems Maminva Resettlement area. 'were displaced by the proposed Bujagali dam and t Resettlement area are writing to you to express the 1619 In this area since we were resettled. dtied, we were promised many things, but up to now, t of those things have never been fulfilled or provided 3 problems:

lat all the resettled people would be given plots of Few people have so far received land titles for their Ig and protests to government. Many of us are mot we shall be able to get land titles for aur plots of uncertainty to whether the land we have belongs to holding the land title, who can easi\y evict us. We hat the land we have belongs to Madhvani

V Pt'imaty School for our children, but tpday, our I and the children do not have any primary school to rovlsed by using one of the vacant houses in the a nursery and primary 1 to 4 classes. 5ut, we are to vacate the premises and take our children 311 we take our children for schooling' The available and our young children find it difficult to go there. i a misslonary and private sch&l and the owners lren to go to attend in that school.

Health Centre I11 with maternity ward, laboratory, tnt wards, but today what we have is a madel house innel which operates 5 days a week and only 3 haurs ;Wty was a very long struggle with the help of some

r 1 CT get the type of health facility that was promised”?

hem are not functioning The available 3 functional ere provided by an NGO hole in the community that can not serve the whole , It Is not centrally located and not easily accessible e resettled people. ‘1

ere provided with are sub-standard and incomplete.

providad were too small in size and shallow (less henever It rains, they are filled with water that be danger to our health.

during the resettlement, some settlers were given ave of the high voltage transmission *line that frqm Jinja to Kampala. Later on, these people are Cannot use these plots and yet they are not given

)me and food We, we carried out fishing and farming as sources rts we were given in the resettlement area are not loreover, we no longer have access to the river to e river has been fenced-off by the dam developers. ffected our sources of income and food. The fish W to us have never been put iqglace. Ikurbance package resettlement disturbance package for a period of low, we have never received anything, htw We were prtornise a :Ommunity centre, but up to now, rt has never been put in place P

2

.? I 01-MAR-2007 19:08 BIRUNCI.TEDDY 256 41 535540 P. 04

LI I pa;+p1f r 11. Market 11I i a nearby, but Up to now the market has never

gS to plant in our compounds and the p to now we have never received any seedlings, yet i slope is bear without trees. I a and I

s once Construction of Buja,gali dam starts. But we hall get those jobs when Consruction of lcularly we want to know hoiv n5any of ourpeople will

nance of access roads and other

utine maintenance of our access roads, but up to sneverbeen done nd consultations by World Bank, Government

ank, Government and the Bujagrli dam s through without talking to us. They and leave. Even when they want to lve us ample time for us to prepare lement remove our respect of being

answers to our problems.

a Resettlement area I ttlgrs. .I - Y, /ci inergy neral Development ands ,oca1 Government

4ukono Wakisi Naminya lsmllyanqo ..

.. 01-MAR-2007 19:09 BIRUNGI, TEDDY 256 41 535540 P. 05

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I I 01-MAR-2007 19:lO BIRUNCI, TEDDY 256 41 535540 P. 06

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BANK MANAGEMENT RESPONSE TO REQUEST FOR INSPECTION PANEL REVIEW OF THE UGANDA: PRIVATE POWER GENERATION PROJECT (PROPOSED)

Management has reviewed the Request for Inspection of the proposed Uganda: Private Power Generation (Bujagali) Project (FY07), received by the Inspection Panel on March 5, 2007 and registered on March 7, 2007 (RQ07/1). Management has prepared the fol- lowing response.

CONTENTS Abbreviations and Acronyms ...... iv I. INTRODUCTION ...... 1 11. THE REQUEST...... 1 111. PROJECT BACKGROUND ...... 2 IV. SPECIAL ISSUES ...... 8 V. CONCLUSION ...... 14

Annexes

Annex 1. Claims and Responses Annex 2. Bujagali I1- Economic and Financial Evaluation Study - Summary Annex 3. Lake Victoria Hydrology Annex 4. Consultations to Date on the Private Power Generation (Bujagali) Project Annex 5. Issues Identified during Consultations for the Private Power Generation (Bujagali) Project Annex 6. Review of Geothermal Prospects, Executive Summary of Appendix D of the Economic Study Annex 7. Photographs of Resettlement Community Annex 8. Public Notice by the ERA concerning the Bujagali Project

Map Map 1. IBRD No. 35423, Uganda: Private Power Generation (Bujagali) Project Map 2. IBRD No. 35424, Uganda: Private Power Development Project

iii ABBREVIATIONS AND ACRONYMS

ADO Automotive Diesel Oil AfDB African Development Bank APL Adaptable Program Loan APRAP Assessment of Past Resettlement Activities and Action Plan BEL Bujagali Energy Limited BIU Bujagali Implementation Unit BP Bank Procedures CDAP Community Development Action Plan CFL Compact Fluorescent Light DSP Dam Safety Panel DWD Directorate of Water Development EA Environmental Assessment EAP Environmental Action Plan EIB European Investment Bank ERR Economic Internal Rate of Return EPC Engineering, Procurement and Construction EPRP Emergency Preparedness and Response Plan ERA Electricity Regulatory Authority ERT Energy for Rural Transformation FIRRI Fisheries Resources Research Institute GCM General Circulation Models GoU Government of Uganda GWh Gigawatt hour HFO Heavy Fuel Oil IDA International Development Association IFC International Finance Corporation IPN Inspection Panel kWh Kilowatt hour MIGA Multilateral Investment Guarantee Agency MSW Municipal Solid Waste MW Megawatt NAFIRRI National Fisheries Resources Research Institute NAPE National Association of Professional Environmentalists NBI Nile Basin Initiative NELSAP Nile Equatorial Lakes Subsidiary Action Program NGO Nongovernmental organization NPV Net Present Value OP Operational Policy PCDP Public Consultation and Disclosure Plan PEAP Poverty Eradication Action Plan PPA Power Planning Associates RAP Resettlement Action Plan RCDAP Resettlement and Community Development Action Plan SEA Social and Environmental Assessment SEAP Social and Environmental Action Plan SSEA Strategic/Sectoral Social and Environmental Assessment TOR Terms of Reference UETCL Uganda Electricity Transmission Company Limited

iv UJAS Uganda Joint Assistance Strategy UMEME Electricity distribution company WASP Wien Automatic System Planning

Currency Equivalents (Exchange Rate Effective (March 19,2007) Currency Unit = Uganda Shilling (USh) 1,759 = US$1

V

Proposed Private Power Generation

I. INTRODUCTION

1. On March 7, 2007, the Inspection Panel registered a Request for Inspection, IPN Request RQ 07/01 (hereafter referred to as the “Request”), concerning the proposed Uganda: Private Power Generation (Bujagali) Project for which the International Devel- opment Association (IDA) is providing a Partial Risk Guarantee, the International Fi- nance Corporation (IFC) is providing loans, and the Multilateral Investment Guarantee Agency (MIGA) is providing a guarantee. The project is scheduled for presentation to the Executive Directors on April 26,2007.

2. Structure ofthe Text. This document is the Management Response to the Request for Inspection, and it contains the following sections: Section Iis the introduction; Sec- tion I1 outlines the Request for Inspection; Section I11 provides sector and project back- ground; Section IV discusses special issues, and Section V contains the conclusion. An- nex 1 presents the Requesters’ claims, together with Management’s detailed responses, in table format. Annexes 2 to 8 include additional supporting documents on the Economic and Financial Evaluation Study, public consultations, a review of geothermal prospects, photographs, and a current notice about the Bujagali project.

11. THE REQUEST

3. The Request for Inspection was submitted by the Ugandan National Association of Professional Environmentalists (NAPE) and other local organizations and individuals (hereafter referred to as the “Requestors”).

4. Attached to the Request is a letter from the resettlers of the Naminya Resettlement Area. No further materials were received by Management in support of the Request.

5. The Request contains claims that the Panel has indicated may constitute violations by the Bank of various provisions of its policies and procedures, including the following:

OP/BP 4.01 Environmental Assessment, January 1999 (revised August 2004) OP/BP 4.02 Environmental Action Plans, February 2000 OPBP 4.04 Natural Habitats, June 2001 (revised August 2004) OP 4.07 Water Resources Management, February 2000 OP/BP 4.10 Indigenous Peoples, July 2005 OP/BP 4.1 1 Physical Cultural Resources, July 2006 OPBP 4.12 Involuntary Resettlement, December 200 1 (revised August 2004) e OP/BP 4.37 Safety of Dams, October 200 1 e OP/BP 7.50 Project on International Waterways, June 200 1 (revised August 2004)

I Uganda

OP/BP 10.04 Economic Evaluation of Investment Operations, Septem- bedApril 1994 . OP 1.00 Poverty Reduction, August 2004 World Bank Policy on Disclosure of Information, June 2002 (revised March 2005)

111. PROJECT BACKGROUND

6. Over the last three years, Uganda has suffered serious power shortages’ arising from a combination of: (a) delays in developing additional generation capacity, particu- larly the World Bank Group supported Bujagali private hydroelectric plant, which was to have been in service by now, but is currently expected to be in service in 201 1; (b) a pro- longed drought in the region, which has, in turn, reduced the generation output of the ex- isting hydropower plants (Le., Nalubaale and Kiira); (c) the high level of technical losses in the distribution system; and (d) annual demand growth of about 8 percent, which has put additional pressure on the power system. The proposed Bujagali project is aimed at providing the capacity needed to overcome the supply constraints in a least-cost and envi- ronmentally and socially sustainable manner.

7. Uganda’s Poverty Eradication Action Plan (PEAP). Uganda’s development objectives are articulated in the 2004 PEAP, the third version of its poverty eradication action plan. The 2004 PEAP restates the country’s ambitions of eradicating mass pov- erty and of becoming a middle income country in the next twenty years. It promotes a shift of policy focus from recovery to sustainable growth and structural transformation. The PEAP presents specific policies and measures to achieve its objectives, grouped under five pillars: (a) economic management; (b) enhanced competitiveness, production and incomes; (c) security, conflict resolution, and disaster management; (d) govern- ance; and (e) human resources development.

8. Uganda Joint Assistance Strategy (UJAS). The UJAS was approved by IDA’S Board of Executive Directors in January 2006 as the country assistance strategy, which was jointly prepared with seven other development partners. The UJAS lays out the strategy for supporting the implementation of the third PEAP and achievement of the Millennium Development Goals. It promotes strong collaboration and harmonization among development partners and with the Government, as well as a stronger focus on results and outcomes. As part of the UJAS harmonization agenda, an exercise to ensure effective division of labor among development partners has been launched.

9. Power Crisis Impacts on Economic Growth. Although economic growth and Uganda’s external position were largely consistent with the Government’s program for 2005/2006, the ongoing electricity crisis has placed a significant strain on growth over the medium term. In particular, businesses and consumers have been forced to endure

The amount ofload shed in 2006 is estimated at 364 Gigawatt hours (GWh) compared to 98 GWh in 2005.

2 Proposed Private Power Generation service cuts extending over hours or even days, with some shifting production to times when power is available, and many larger businesses relying on high-cost back up gen- erators. Manufacturing, high-value agriculture (e.g., flowers), and processing industries (e.g., fish) are most affected by power cuts, and profits in these industries are being squeezed. Other macroeconomic consequences from the current power crisis are infla- tion of about 0.5% above projections through September 2006 due to higher energy costs, a widening trade deficit due to higher oil prices, and increases in diesel fuel im- port volumes for thermal power plants that have been installed to partially fill the sup- ply gap left by the reduced hydropower production. The country loses about $6 million with each month of delay beyond the commissioning date of the first effort to develop the Bujagali project. The present situation, with extensive load-shedding blackouts, is not sustainable and further delays in augmenting Uganda’s electricity generation capac- ity could undermine the economy. The economic cost of unserved energy in 2006 is estimated at about US#39.4ikWh.

10. Power Sector Strategy. The power sector strategy of the Government of Uganda (GoU) has been to: (a) maintain the legal, regulatory and structural sector reforms that are in place; (b) leverage the role of the private sector in investment operations and future sector development; (c) provide adequate, reliable and least-cost power generation with the goal to meet urban and industrial demand and increase access; and (d) scale up rural access to underpin broad based development.

11. Since 1999, the GoU has implemented a comprehensive power sector reform program and enacted a new Electricity Act; established an independent Electricity Regulatory Authority (ERA); and unbundled the State-owned Uganda Electricity Board into separate entities responsible for generation, transmission and distribution. The GoU has promoted the efficient operation of the power sector, in part by increasing the role of the private sector through offers of concessions for generation and distribution facilities. The number of urban and rural households with direct access to electricity has grown and the GoU is addressing the need to provide adequate, reliable and least-cost power genera- tion capacity to meet demand and pursuing regional power interconnections with the countries of the East African Community.

12. Uganda’s bold reforms notwithstanding, it has been challenged by power short- ages, as stated above. The increased cost of shifting from a primarily hydro-based system in 2005, to a situation in which 45 percent of generation is being supplied through expensive thermal plants in 2007, has been met through a combination of higher tar- iffs and subsidies. The hope for the country is that the Bujagali project once com- missioned, will provide longer term, lower cost power supply, mitigating the present crisis.

Source: “Bujagali I1- Economic and Financial Evaluation Study” (hereafter called the Economic Study), Power Planning Associates Ltd., February 2007. The cost of unserved energy is estimated based on the cost ofself-generation using diesel generators (for commercial and industrial customers) and the consumer ‘willingness to pay’ for residential customers.

3 Uganda

13. Project Objectives. The project’s main objective is to provide least-cost power generation capacity that is expected to eliminate power shortages in 201 1 when the plant is commissioned. The proposed project would represent an increase of 250MW of gen- eration capacity on the national grid. In addition to mobilizing private investment and commercial bank lending, World Bank Group involvement in the proposed project is ex- pected to provide: (a) comfort to first-time investors in the sector (including sponsors, commercial lenders and development finance institutions); (b) access to long term financ- ing, leading to more affordable tariffs for the proposed project; and (c) project structuring advice, based on international experience, to ensure project bankability.

14. Project Description. The proposed Private Power Generation (Bujagali) Project is a 250MW run ofthe river power plant with an adequate reservoir for daily storage, an in- take powerhouse complex, and an earth filled dam with a maximum height of about 30 meters, together with spillway and other associated works. The proposed project will be constructed on the Nile River, approximately 8 kilometers north ofthe existing Nalubaale and Kiira power plants3. The powerhouse will be constructed to house 5x50MW Kaplan turbines. The small reservoir will have an estimated surface area of 388 hectares, extend- ing back to the tailrace areas ofthe Nalubaale and Kiira dam complex. The proposed pro- ject will require 238 hectares of land take for the project facilities, of which 80 hectares will be for new inundated areas adjacent to the Nile River. The land take includes 113 hectares for temporary and ancillary facilities, including temporary haul roads, coffer dams, storage and quarries. The proposed project will require the construction of about 100 kilometers of transmission line, as well as the construction of a substation at Ka- Wanda, and extension of the Mutundwe substation (these activities are grouped under a separate Interconnection Project). The proposed project is located downstream of the NalubaaleKiira dam complex, and therefore would re-use water released from the lake. The improved efficiency of water use would reduce pressure for releasing water above the Agreed Curve4. The proposed project is structured as an independent power producer which will sell electricity to the Uganda Electricity Transmission Company Ltd. (UETCL) under a 30-year Power Purchase Agreement, signed on December 13, 2005. The proposed World Bank Group support consists of: an IDA Partial Risk Guarantee of up to US$115 million, IFC ‘A’ and ‘Cy Loans of up to US$130 million, and a MIGA po- litical risk Guarantee ofup to US$115 million.

15. Previous Bujagali and Other Energy Projects and the 2001/2002 Inspection Panel Investigation. On August 7, 2001, the Inspection Panel registered for inspection IPN Request RQ01/3 concerning the SDR 86.9 million (US$125 million) Third Power Project (Power 111) financed by IDA, the SDR 24 million (US$33 million) Supplemental Credit for Power 111, the SDR 48 million (US$62 million) Fourth Power Project (Power IV), and the proposed Bujagali Hydropower Project for which IDA was providing a US$115 million Partial Risk Guarantee. The Request was submitted by NAPE, the same

~ ~~ See maps provided after the Annexes. The Agreed Curve functions as an operating rule for water discharges through the Nalubaale and Kiira dam complex, in which the volume of water released remains consistent with what would have occurred under natural conditions, thereby ensuring no change in downstream discharge (water releases are a func- tion of the lake level at any given time).

4 Proposed Private Power Generation

group that has submitted the current Request, as well as another group, Uganda Save Bu- jagali Crusade, and other local institutions and individuals.

16. At that time, the Requesters stated that the failures and omissions of IDA in the design, appraisal, and implementation of the above-referenced projects materially af- fected the rights and interests of the Requesters and were likely to jeopardize their future social, cultural, and environmental security. More specifically, the Requesters stated that the Owen Falls Dam Extension’ and the construction of the proposed Bujagali Hydro- power Project had resulted, or could have resulted, in social, economic and environ- mental harm to the local population. The Requesters also stated that they had been harmed or were likely to be harmed as a result of failure to undertake an Environmental Assessment (EA) of the Owen Falls Extension; the lack of a cumulative environmental assessment related to the dams already built, under construction and in the final stages of design; inadequate involuntary resettlement (including compensation arrangements); in- adequate consultation, participation and disclosure of information; and lack of economic and technical analysis, including lack of alternative economic analysis, especially in the case of the Owen Falls Extension.

17. The Inspection Panel recommended to the Board in October 2001 that it investi- gate the Request and the Board authorized the investigation. The Panel’s findings were sent to the Board on May 23, 2002. Key findings focused on the Bujagali Project and concerned: disclosure of information about the project; preparation of a Sectoral Envi- ronmental Assessment; an assessment of the cumulative impacts of constructing multiple dams on the Nile River in Uganda; use and adequacy of an environmental offset (at Ka- lagala Falls); economic evaluation (including demand forecast and institutional, tariff and affordability risks); examination of power generation alternatives; issues surrounding the power purchase agreement (ie., transmission, strategic risks, and affordability); social compliance (use of socio-economic surveys, community development action plans, com- pensation), and management of cultural property.

18. In its June 1,2002 document entitled “Management Report and Recommendation in Response to the Inspection Panel Investigation report (Uganda - Third Power Project, Fourth Power Project and Bujagali Hydropower Project),” Management recommended a nine-point action plan, which was endorsed by the Board of Executive Directors on June 17, 2002. Below is a list that includes the nine points noted in Management’s Action Plan, along with an additional point regarding disclosure issues in the Power IV project; this list explains how the various issues raised by the Inspection Panel are being ad- dressed in the context of the design of any new hydropower project at the Bujagali site involving the World Bank Group.

I Inspection Panel Findings I Status

’ The Owen Falls Dam, financed by the United Kingdom and constructed in the 1950s, is now called Nalu- baale, and the Owen Falls Extension is now called Kiira. IDA financed emergency repairs to the Nalubaale Dam in the early 1980s and the construction of Kiira in 1991. The 2001 Power IV Project provided financ- ing for Units 14 and 15 at the Kiira powerhouse.

5 Uganda

Inspection Panel Findings Status

Disclosure ofInforma- Full and comprehensive discussions ofthe Power I11 and Power IV Projects and tion: Environment their relationship to the reconfigured Bujagali Hydropower Project have been undertaken in connection with the design ofthe new project. The Government has been actively involved with the East African Community in discussions surrounding Lake Victoria, as well as current and future hydropower generation prospects. Moreover, stakeholder consultations concerning the proposed Private Power Generation (Bujagali) Project have encompassed such topics as hydrol- ogy, hydropower shortages from the existing Ugandan hydropower plants, the leasing ofemergency thermal power generation, as well as other generation expansion projects, including,geothermal, bagasse based cogeneration, and oth- er hvdro and thermal or,tions.

1. Sectoral EA As an element ofthe work program for the Nile Basin Initiative (NBI), an in- clusive, participatory and riparian-owned Strategic/Sectoral Social and Envi- ronmental Assessment (SSEA) has been completed, with IDA’Sinvolvement in the Nile Equatorial Lakes Subsidiary Action Program (NELSAP). The SSEA evaluates power generation options and associated transmission interconnec- tions to meet the following multiple objectives: transboundary, economic and political cooperation; sub-regional integration; poverty reduction; dispute reso- lution; environmental sustainability; energy substitutions to reduce depletion of forestry resources; and sharing of mutual benefits in the context of multi- purpose projects. The outcome ofthe process features a power strategy that describes the power options, including their economic and engineering feasibil- ity as well as environmental and social impacts, to facilitate informed and trans- parent decision-making in the selection ofpower investments by the Nile Basin riparian countries. The final SSEA report was disclosed in the InfoShop on Feb- ruary 23.2007. 2. Cumulative Impacts The NBI has made considerable progress in bringing the Nile riparian countries together to identify potential power investments as well as investments in water resources management, agriculture, fisheries, and water hyacinth control. This initiative recognizes the need for early and upstream consideration ofenviron- mental and social impacts and public involvement in a program of collaborative action to promote cooperative management ofthe Nile River Basin. This in- cludes a participatory SSEA, discussed above, which was supported as part of the strategic planning for the NELSAP. The SSEA analyzes and ranks potential future power options, based upon multiple criteria. These are: assessment of direct, indirecdinduced and cumulative impacts of multiple activities; additional costs and benefits through multi-purpose use of storage reservoirs; risk of rain- fall variability; and sharing ofbenefits at the local and regional level. The stud- ies previously performed in order to make the decision in December 200 1 to proceed with the Bujagali Hydropower Project served as part ofthe information base for the SSEA. Cumulative impacts ofthe currently proposed Bujagali project are also ad- dressed as part ofthe project’s Social and Environmental Assessment (SEA), disclosed in the InfoShor, and in-country in December 2006. 3. Kalagala Offset The GoU has indicated that it will continue to honor its agreement to set aside the Kalagala Falls site exclusively to protect its natural habitat and environ- mental and spiritual values and to develop tourism, and will not develop the site for power generation. For more information, see Item 7 ofAnnex 1. 4. Load Forecast Scenarios Three load forecasts were prepared for the current project, taking into account actual data over the past several years and the comments made by the Inspec-

6 Proposed Private Power Generation

Inspection Panel Findings Status tion Panel with regard to ensuring an adequate range between the high and low load forecasts (see the Economic Study). By 201 1, the base case generation requirement for the domestic market would be 2,208 GWh, with a spread around the base case of about 14 percent above (high case) and 18 percent be- low (low case). By 2015, the base case demand would be 2,959 GWh, with a spread around the base case of about 24 percent above (high case) and 30 per- cent below (low case). rInstitutional, Tariff These risks have been reassessed for the current project. In particular, it was 5. and Affordability Risks estimated that despite higher tariff levels, electricity expenditures will be 5-6 percent oftotal household expenditures in 201 1, which is within the affordable range. The concessioning ofUganda’s distribution facilities to a private opera- tor, and a strong track record ofthe Electricity Regulatory Authority (ERA) are helping to mitigate what had hitherto been perceived as public sector institu- tional, efficiency and performance risks. (See the Economic Study) 6. Examination ofPower The Economic Study reviews all power generation options, including alterna- Generation Alternatives tive hydropower, oil-based thermal power, small-scale renewable energy, and geothermal potential. Since other sources of finding for geothermal exploration and drilling have not been forthcoming, at the request ofthe GoU, IDA in- cluded additional studies and shallow drilling under the ongoing Power IV Pro- ject. These studies will assist the GoU to assess geothermal prospects at several sites in Western Uganda. A key conclusion ofthe Economic Study is that, based on available analytical data, geothermal potential in Uganda for commercial development is about 40MW, far less than the previously estimated potential of 450MW. (See the Economic Study) 7. Social Compliance The proposed project incorporates the recommendations ofthe Inspection Panel (RAP-Socio-economic investigation report with regard to the design, implementation and monitoring Survey) of relevant components ofthe Community Development Action Plan (CDAP). IDA supervision missions will closely monitor project implementation. 8. Social Compliance The new project sponsors have reassessed the CDAPs in the context ofthe (CDAP) Bank’s safeguard policies and progress that has been made on the ground, and have prepared an Assessment ofPast Resettlement Activities and Action Plan (APRAP). In addition, a new CDAP has been prepared which focuses on “sup- porting communities’ needs based on culturally appropriate means ofconsulta- tions.” This document contains provisions to address the measures required under the APRAP and to address impacts on the eight project-affected commu- nities, but also goes beyond these requirements to provide other benefits. Ac-

I cording to the APRAP, US$497,000 will be needed to finance the programs to complete resettlement and income restoration. Bujagali Energy Limited (BEL), the project developer, is committed to providing US$2.4 million for community development over a five-year period following the start ofconstruction. These commitments cover health care facilities; employment opportunities; water supply and sanitation; fisheries; education; small-scale tourism; training and financial services. 9. Compensation for The SEA for the Bujagali project discusses the potential impacts on tourism, Tourism recreational activities, and the mitigation measures in detail. As part ofthe sep- arate Tourism Impact Study that was undertaken by BEL, key affected busi- nesses were consulted through individual interviews. Subsequent discussions between the tourist operators, employees, and BEL regarding mitiga- tiodcompensation measures have also been carried out. Compensation meas- ures were proposed, including measures such as offering to assist the companies in moving their operations farther down river to Kalagala Falls. To assist the local villages that will be affected by the relocation ofthe rafting enterprises, BEL is proposing to develop a cultural center near the site ofthe Bujagali Falls,

7 Uganda

Inspection Panel Findings Status as well as a visitor center at the dam. These centers will provide opportunities for small businesses similar to those near the current Bujagali Falls site. The tourism and services related operators noted in the consultations that they are satisfied with the proposed alternative of moving their businesses downstream

19. The World Bank and IFC’s Board of Directors approved the Bujagali project be- ing developed by AES Corporation, a United States power company, on December 18, 2001. Delays in the implementation ofthe project and AES’ weakening financial position as the result ofa downturn in the United States market eventually led to AES’ withdrawal from the previous project and to a termination by the GoU in September 2003. The GoU then initiated a transparent bidding process in adherence with the Government’s pro- curement guidelines, to seek a new project sponsor to develop the Bujagali project.

20. In September 2003, the GoU began to pursue selection of new sponsors for the development ofthe hydropower project at Buj agali, with private sector participation and World Bank Group support. The feasibility of the proposed new power sector operation has been reassessed in the context ofUganda’s power needs and its alternatives for power supply. There have been extensive national and regional analyses of the project’s envi- ronmental, social, and economic impact, and a detailed examination of generation alter- natives, accompanied by numerous public consultations and disclosure of project docu- ments. Bujagali will be the largest private investment in Uganda and among the largest in the power sector in Sub-Saharan Africa, with potential long-term benefits for future pri- vate sector investment as well as economic development in the country. It can also serve to establish a standard that can be replicated by other countries and investors in the re- gion.

IV. SPECIAL ISSUES

Current Context and Future Vision

2 1. Uganda’s power supply situation has deteriorated significantly in recent years. The power crisis has slowed industrial production. The failure of the previous effort to develop Bujagali has exacted a very high price from the country. It is noteworthy that if the previous Bujagali project had been successfully financed in 2002, Uganda would have been able to avoid, or, at the very least, minimize the high cost of thermal genera- tion and load shedding. Moreover, the reductions in Lake Victoria water levels from over-abstraction for hydropower production may not have occurred. This is because the Bujagali project is downstream of the current NalubaaleKiira dam complex, and would have re-used the upstream water releases. If commissioned, the project would have pro- duced power at a significantly lower cost than what Uganda is now paying for the supply from thermal power plants running on imported fuel. Indeed, repeated extensive eco- nomic analysis has verified that the Bujagali project remains the least-cost supply option for Uganda.

8 Proposed Private Power Generation

22. The failure of the first attempt at developing the Bujagali project, while unfortu- nate, did provide valuable lessons to the GoU in shaping the current proposed project. It also afforded an opportunity for institutions such as the World Bank Group to evaluate lessons of experience, including the outcomes and recommendations of the Inspection Panel review, and better understand and appreciate the various concerns of the stake- holders within and outside Uganda.

23. The GoU has carefully followed a transparent and open, competitive process for the selection ofthe project’s private sector sponsors. The selection was based on four cri- teria: (a) the internal rate ofreturn on the equity to be invested by the sponsor in the pro- ject; (b) a cap on the development costs that the sponsor would be allowed to include in the project tariff; (c) sponsor acceptance of responsibility for the UETCL transmission line construction management; and (d) the monthly operation and maintenance fee that the project company (to be formed by the selected sponsor) will earn as part ofthe project tariff, to the extent the plant’s target availability is achieved. Furthermore, the selected project sponsors have conducted an open and competitive selection process for the pro- ject’s engineering, procurement, and construction (EPC) contractors, in compliance with European Investment Bank (EIB) procurement rules.

24. Learning from the past, the GoU committed to and implemented a stronger pro- gram of public disclosure. This project’s Power Purchase and Implementation Agree- ments have been disclosed by the GoU, and the World Bank Group has disclosed the pro- ject’s Economic Study, BEL’S SEA, the NELSAP Strategic/Sectoral Social and Environmental Assessment (SSEA), and other environmental and social documents. Tools and means for outreach have included internet websites (where the public can read the Social and Environmental Assessment and the Economic Study, for example), in- country disclosure (advertised in local media), proactive consultations, and dissemination events to ensure that this information is widely available. Many of the information- related questions of the current Request are addressed within the body ofinformation and analysis made available to the public.

25. The economic cost of the delayed development of the Bujagali hydropower pro- ject is conservatively estimated during 2006-2010 to be at least US$700 million. When the proposed Bujagali project is commissioned in 2011, it will generate at least 60 per- cent more annual energy than the thermal (diesel) plants would produce in 2010. This is an indication of the economic penalty that the long delay ofthe proposed project imple- mentation will have imposed on Uganda. Furthermore, the environmental toll, nationally and globally, from oil-based thermal generation (i.e., increased carbon and other pollut- ants), as well as the less efficient use ofthe Nile River waters, is significant. Most impor- tantly, continued uncertainty about the project affects economic expectations and thus deters investments across the spectrum of Uganda’s industrial, commercial and agricul- tural sub-sectors. The result is a lowering of standards of living for all citizens, particu- larly the poor, and loss ofjob and wealth creation.

9 Uganda

Issues Raised by the Requesters

26. Management shares some of the Requesters’ concerns, which largely stem from the project’s earlier cancellation. Going forward with this new project, these issues are being addressed in several ways, as discussed in the following paragraphs.

27. Kulugulu ODep. The GoU has reiterated the commitment to the Kalagala offset that it made under the previous effort to develop Bujagali, as presented in the Manage- ment Report and Recommendation in response to the Inspection Panel’s investigation of Power 111, Power IVYand the Bujagali Hydropower projects. This offset commitment is consistent with the mitigation provision for Kalagala Falls, and also recommended in the BEL Social and Environmental Assessment (SEA) Report that has been reviewed and disclosed by the World Bank. As well, the commitment to maintain the Kalagala Offset is strengthened in practice, not only by GoU’s commitment to identify sustainable invest- ment programs to facilitate tourism, with appropriate mitigation measures, but also by the enhanced role that Kalagala Falls will play, as (a) rafting companies, once relocated, will locate some of their facilities around the offset area, and (b) other tourism operators, such as small arts and crafts shops, restaurants, four wheeler rentals, and locally owned enter- prises are also expected to move their businesses nearer to Kalagala Falls.

28. The offset provision for Kalagala Falls and the adjacent natural habitat will be included as a GoU obligation in the IDA Indemnity Agreement for the Bujagali project, and will be binding throughout the life of the Indemnity. Management notes that the Bank’s legal recourse to enforce Government’s commitment to maintain the Kalagala Falls offset will not be available after the termination of the Indemnity Agreement. Hence, the draft Indemnity Agreement, discussed with the GoU, includes a provision that, prior to the termination of the Indemnity Agreement, the World Bank and the GoU will pursue discussions to identify mechanisms or instruments to enable the continuation of the GoU obligation to set aside the Kalagala Falls site.

29. Safety of Dum. Management agrees that dam safety concerns are an integral part of the review of any hydropower development. A Dam Safety Panel (DSP) has been es- tablished, which includes two of the three members of the previous panel set up under the earlier effort to develop the Bujagali project. The DSP will provide advice through final design, construction, initial filling, and the start-up of the dam, including any design or operational precautions, to ensure that the project is consistent with Bank policies. The financing agreements also require the preparation of an Emergency Preparedness and Re- sponse Plan (EPRP) that includes failure scenarios for both NalubaaleKiira and Bujagali. Recent assessment of the NalubaaleKira dam complex (financed under the Power IV Project) has confirmed their structural integrity.

3 0. Bujuguli Resettlement. Management agrees with the Requesters’ contention that past resettlement is incomplete. This is largely because the project was terminated in 2003 and the sponsor responsible for resettlement withdrew. The new conditions are ad-

See Map 35423 inset for location of Kalagala falls.

10 Proposed Private Power Generation dressed in the Assessment of Past Resettlement Activities and Action Plan (APRAP) and Community Development Action Plans (CDAP). BEL and the Bujagali Implementation Unit (BIU)’ are now resolving all outstanding issues, and have committed to:

0 Completing the process oftitling;

0 Upgrading the existing Naminya School, and building a kindergarten (nurs- ery) ;

Improving health services at the Wakisi and Bodondo Health Centers;

0 Restoring boreholes already drilled, drilling ten more, replacing taps, and pro- viding maintenance training;

Evaluating sanitation conditions and addressing outstanding problems;

0 Conducting a feasibility study for electrical distribution to the resettlement community; and

Implementing longer-term community development programs.

3 1. Interconnection Project Resettlement. Although their displacement has not yet occurred, Management notes that people who will be affected by the transmission line- part of the project’s associated Interconnection Project that is expected to be financed by the African Development Bank (AfDB)-must be compensated and resettled satisfacto- rily. The draft Resettlement Action Plan (RAP) for the Interconnection Project was dis- closed in the InfoShop and in-country on December 21,2006 and land evaluations for the line were completed in early 2007. These will form the basis for the final RAP.

Project Preparation: Key Issues

32. Management is acutely aware of the importance of this project not only in the Ugandan economic, social, and environmental context, but also as an example ofthe re- sult of a successful implementation ofpower sector reforms. Therefore, Management has been diligent in committing seasoned, experienced World Bank Group staff, as well as high caliber consultants to work with the GoU, stakeholders, and the project sponsor in preparing the project. Management believes that this has resulted in analyses of the pro- ject’s merits which provide solid underpinnings that incorporate views of key project stakeholders.

’The BIU was established in Jinja in 1999, to collaborate with the villagers concerning the status ofthe project. The BIU strengthened relations with affected groups through community development activities undertaken by the previous sponsor. Following the departure ofthe previous sponsor, the GoU maintained the BIU, which continued to,liaise with the project affected people. These ongoing consultations by the BIU have proven to be critical for strengthening the villagers’ trust, especially during the transition period with BEL. BIU staff also completed surveys ofhouseholds affected by the associated Interconnection Pro- ject.

11 Uganda

33. In particular, Management considers that the economic, financial, safeguard, technical, governance, and other required analyses to date are compliant with relevant World Bank Group policies and were undertaken to high professional standards. More- over, the overall project due diligence adequately accounts for best practice as well as the findings of the previous Bujagali Inspection Panel report. In this regard, Management notes that the analyses:

Assessed a wide range ofsupply options, including alternative hydropower sources, such as geothermal power and thermal power (e.g., oil based); small- scale renewable options (e.g., mini-hydro and biomass); oil imports; and other supply options;

0 Tested a wide range of demand scenarios derived using the most recent data on the Ugandan economy and the electricity sub-sector, including a low- growth scenario which reflects minimal economic growth; and

Assessed the impacts of both low and high hydrology scenarios, and sepa- rately determined that climate change is not predicted to have a negative im- pact on water availability.

34. The economic and hydrological work and preliminary results were discussed and agreed with the GoU and other industry stakeholders at participatory workshops in Janu- ary and March 2006, as well as during a review of the pre-final results in Kampala in January 2007.

35. Management is aware of the financial and economic penalties that Uganda has endured due to the previous sponsor’s inability to mobilize financing for the former Bu- jagali project. Management also is mindful of the higher cost ofthis proposed project. For this reason, the World Bank Group is supporting the GoU and the project sponsors to proceed as quickly as possible, while at the same time ensuring compliance with World Bank Group requirements. The project sponsor and the EPC contractor were both se- lected through a transparent and competitive process.

36. Management believes that the environmental and social preparation work to date has appropriately accounted for the legacy issues from the previous project as well as new issues, and that it takes appropriate account of World Bank Group policies. In par- ticular:

A new Social and Environmental Assessment was prepared which is compli- ant with IFC, MIGA, and IDA policies;

An assessment ofthe status ofthe resettlement actions under the previous pro- ject, and a plan for remediation and completion were prepared and disclosed;

The Government has re-committed to offsetting ofthe Kalagala Falls site in compensation for inundation of Bujagali Falls;

12 Proposed Private Power Generation

Consultations with affected communities have been undertaken and their con- cerns have been integrated into the planning; and

Assessment ofcumulative impacts has been undertaken.

37. Finally, Management would like to highlight the disclosure of information under- taken during the preparation ofthe project. Not only were the standard environmental and social documents publicly disclosed on December 21, 2006, but the World Bank Group has also disclosed the economic and financial analysis in its entirety (February 26, 2007). This document was provided to the Requesters on February 28, 2007, the day before the Request was submitted to the Inspection Panel. For its part, the Government has publicly disclosed the full text of both the Power Purchase Agreement and the Implementation Agreement not just for the legally required 30 day period, but for an open-ended period oftime. This is highly unusual for a private sector transaction ofthis nature.

Project Benefits

38. The project will: (a) displace about 738 GWh of expensive fossil thermal produc- tion (about 35 percent ofUganda’s total 20 10 generation needs) when it is commissioned in 201 1; (b) relieve any residual load shedding; and .(c) meet incremental base load de- mand with least-cost power generation. This should lead to a decrease ofup to 10 percent in end user tariffs (in 2006 real terms). Also, in view of the current very low 5% access rate, the provision of adequate, reliable least-cost power is expected to facilitate a sub- stantial increase in the number of connections of residential users per year to the power grid, including in rural areas. It will also allow industrial and commercial users to in- crease their output and efficiency, and therefore their profits, thereby enhancing eco- nomic growth. Availability of cost effective electricity could also increase the attractive- ness of Uganda as an investment destination.’ These developments are expected to have positive impacts on poverty alleviation in Uganda, directly through the availability of power to newly connected households and indirectly through employment creation. The proposed project will also have a positive impact on Uganda’s balance ofpayments situa- tion.

39. Public Finance. The Government will be relieved of the necessity to provide a general subsidy for electricity tariffs and will benefit from net tax revenues from the pro- ject that can be diverted to social programs. The fact that the project is financed through the private sector will enable the Government to focus its scarce financial resources on other priority sectors in the fight against poverty.

40. The Environment. Since the project is located downstream from the Nalu- baaleKiira dam complex, it will use the same water that has already been released through NalubaaleKiira and, given the project’s higher head, will allow Uganda’s gen- eration output to more than double without any additional release ofwater. Therefore, the project is expected to reduce the pressure to over-abstract water from Lake Victoria, the- reby helping to preserve lake levels and facilitate the GoU’s compliance with the Agreed Curve. Through the displacement of oil-based thermal power that would otherwise be needed, the project will also reduce carbon and other pollutant emissions.

13 Uganda

41. Employment and Local Communities. During the construction phase ofthe dam, the project is expected to create 600-1,500 temporary jobs for Ugandan nationals, 10 per- cent of whom are likely to be hired from local communities. As mentioned earlier, the Kalagala offset will also provide opportunities for employment in the tourism sector. Fi- nally, during operation of the dam, project affected people under the hydropower plant and associated Interconnection Project will benefit through the CDAPs from increased economic activities in and around the site (e.g. dam maintenance and tourism). The CDAPs will also provide employment enhancing measures indirectly through improved educational and health services, provision of clean water, and renewable energy systems, all of which improve the country’s progress toward achieving the Millennium Develop- ment Goals.

42. Demonstration Effects. The project will be Uganda’s first large scale Independ- ent Power Producer project and one of the largest mobilizations of private financing for such a project in Sub-Saharan Africa. As stated earlier, the project will provide economic and commercial benefits to Uganda, drawing from a comprehensive set of reforms in the power sector, which started in 1999 with support from the World Bank Group. As such, it will faditate further private sector investment in Uganda and have important demonstra- tion effects in the region. On the other hand, failure to implement the project would be very costly for the country, as power sector reforms may be jeopardized; it could also send a negative signal to other countries in the region regarding the effectiveness ofpow- er sector reforms.

Next Steps

43. Looking forward, the project is scheduled for Board presentation on April 26, 2007. Other financiers also are seeking approval from their boards in the AprilMay time- frame, and financial closure is expected in mid-2007. Beyond Board presentation, key issues that Management will emphasize during the supervision phase, are: (a) follow- through on environment and social mitigation plans; and (b) continuation of the DSP’s ongoing assignment as well as engineering oversight by World Bank Group staff, assisted by the Lenders’ Engineer.

V. CONCLUSION

44. The Bujagali project is the least-cost expansion option for Uganda, where the on- going deterioration in power supply has already slowed development (see paragraph 25) and contributed to the lower water levels in Lake Victoria. The project’s benefits can also be seen with a more human face: Uganda’s young population, and high population growth point to the fundamental importance of off-farm, energy intensive economic ex- pansion to absorb the building wave of new workers. While short-term financing of this key infrastructure sector is critical to maintain its stability, Government funding to this otherwise commercial sector diverts funds from other high priority, non-revenue- generating budget areas.

14 Proposed Private Power Generation

45. The Bujagali project is overdue, and Uganda continues to pay a high price for the delay imposed by the failure of the first attempt. This price can be counted in economic terms: Uganda has lost about US$6 million with each month of delay beyond the com- missioning date of the first project, while the current unreliable power supply undermines economic growth.

46. The World Bank Group’s support to this project is pivotal to its success: IDA’s long-term advisory and assistance role in the power sector gives confidence to the private sector and lenders; IDA and IFC have taken a leadership role in the project’s due dili- gence, particularly on economic, environmental, and social issues; the proposed IDA Par- tial Risk Guarantee will provide the backing required for commercial lenders to fill the remaining financing gap; and MIGA’s political risk insurance provides the backing needed for the participation of an experienced power developer as one of the project sponsors.

47. Recognizing the importance of the project, and the critical nature of IDA’s par- ticipation, Management takes seriously the Requesters’ concerns. Management firmly believes that the project adheres closely to Bank policies and more importantly, that the project developers and financiers have been conscientious in pursuing the welfare of pro- ject affected persons as well as Uganda as a whole.

48. The Request identifies project risks, including climate change and affordability. Management agrees with the Requesters that these must be addressed. Management be- lieves these aspects have been studied carefully and thoroughly and properly addressed, not only in accordance with Bank policies, but also in light of the previous Inspection Panel review as well as international best practice. The Request also questions the ade- quacy of analysis, including hydrology, economics, financial issues, environmental and social impact, and engineering. Management considers that the analysis was undertaken to high professional standards, accounts for a broad range of alternatives, and adopts a conservative demand growth and base case for hydrology and the other factors. Based on these, the project has acceptable rates of return overall.

49. The Request expresses concerns regarding transparency. Management considers that the level of public disclosure meets, and even extends beyond Bank requirements. In addition to the disclosure of the environmental and social safeguard documents, the full economic analysis, including the hydrology analysis, has been disclosed by the Bank. Moreover, a SSEA has also been disclosed, which views the project in a regional context, and the GoU has publicly disclosed both the Power Purchase Agreement and the Imple- mentation Agreement, a commendable and unusual step for a private sector transaction.

50. Management shares the Requesters’ concerns about resettlement to date. The pre- vious project sponsor’s withdrawal left some of the social aspects unfinished, although the BIU has maintained an active presence on the ground. In addition, the time lag before entry of the new project sponsor has tested the patience of local populations. The RAPS prepared by the new sponsor are designed to ensure that local populations are fairly treated and their livelihoods improved.

15 Uganda

5 1. In summary, Management firmly believes that this project has been well prepared in accordance with Bank policies, and that it will significantly benefit Uganda’s devel- opment and drive for poverty alleviation.

16 Proposed Private Power Generation

ANNEX1 CLAIMS AN[:

Hydrological Risk. BEL’s SEA does not adequately BEL’s SEA,’ which focuses on the social and envi- address the outstanding questions about hydrologi- ronmental aspects of the project, states that the proposed cal changes on power production at the Nalubaale, 250MW project is not expected to significantly alter or Kiira and the proposed Bujagali facilities, especially affect the hydrology of Lake Victoria or the Victoria Nile. now when Lake Victoria water levels have declined. The quantity of water released from Lake Victoria as well Without doubt, Kiira has contributed substantially as the timing of releases will continue to be controlled by to the over-draining of Lake Victoria, causing a lot of the operation of the Nalubaale and Kiira facilities. The misery and economic loss to Uganda and neighbor- proposed project‘s energy output is based on the flow ing countries. This has not been properly addressed released from Lake Victoria through the NalubaalelKiira in the documents we have seen. dam complex and power stations, in accordance with the :cording to the SEA, BEL has little or no control on Agreed Curve.* The reservoir for the proposed project is the manner in which Nalubaale and Kiira will be op- small and can only hold back a few hours of flow; this erated by Government of Uganda (GoU) . . . and means that it will essentially pass through whatever flows therefore cannot under the circumstances dictate the are released by Nalubaale and Kiira. outflow rates through upstream power stations to Given the importance of understanding Lake Victo- ensure sufficient water for Bujagali’s power produc- ria’s hydrology-as suggested in the Requesters’ ques- tion, implying that Bujagali’s operation will be highly tion-a comprehensive analysis of the lake’s hydrology dependent on the operations of Kiira and Nalubaale. and its impact on power generation at Nalubaale, Kiira Now that BEL cannot control the outflow of water and Bujagali is included in the study prepared by Power from power stations upstream and did not obtain Planning Associates Ltd. (PPA), “Bujagali II - Economic commitment from GoU to ensure sufficient outflow and Financial Evaluation Study” (Section 2: Hydrology rates through Nalubaable and Kiira, what guarantees and Energy Generation of Hydropower Plants), hereafter does BEL have that the projects will have enough called the Economic Study. (See Annex 2, Summary of water and generate the projected capacity? This is- the Economic Study) This analysis complements the sue is a lynchpin in the project‘s economic viability. SEA. It was carried out by experts from Coyne et Bellier, Lake Victoria Levels. BEL’s SEA deliberately as part of the PPA team and peer reviewed by an inde- projects Lake Victoria as being capable of providing pendent hydrologist, Professor Juan Valdes of the Uni- adequate water for the project even in its current versity of Arizona. The study was made public on Febru- diminished hydrological state, which is not possible. ary 26, 2007 at www.worldbank.orq/Buiaqali. (See Annex Where is the additional water going to come from? It 3, Lake Victoria Hydrology). is acknowledged by Engineer Elimu Esimu of Eskom The hydrology of the Victoria Nile is complex due to that “currently the facilities (Nalubaale 8, Kiira) are meteorological influences, the rainfall-runoff process, the not running at full capacity, because of limitations scale of the evaporation losses, and the interaction be- from tail water and the need to main live storage” , . . , tween rainfall and evaporation within the watershed. The implying hydrology is still a major limitation. It is now available reservoir inflow record comprises 106 years of clear that the Agreed Curve is no longer being re- data. It includes several significant hydrological cycles, spected and the Victoria Nile flow regime has among which the seasonal and ten year cycles are the changed; consequently the original long-term energy most apparent. Given the length of the hydrological re- output assessment for Bujagali is no longer valid ... . cord at this site and studies on climate impacts, the hy- Experts reported that although Bujagali dam was drological risk for energy generation is considered to be designed for 234-290MW, in reality, this is not pos- definable from the available data set. Based on these da- sible under the current hydrological regime. Inde- ta, the Economic Study estimated the probability of a low

’ Bujagali Hydropower Project, Uganda; Social and Environmental Assessment; prepared for BEL by R.J. Burnside International Limited; December 2006. The Agreed Curve functions as an operating rule for water discharges through the Nalubaale and Kiira dam complex, in which the volume of water released remains consistent with what would have occurred under natural conditions, thereby ensuring no change in downstream discharge (water releases are a func- tion of the lake level at any given time).

17 Uganda

No Claimllssue Response pendent experts projected the output to be a maxi- flow regime (or a firm release of 687m3/s) occurring dur- mum of 172MW. BEL'S SEA does not address the ing Bujagali's first 20 years of operation at about 79% and overall issue of Lake Victoria's long-term health, a high flow regime (or about 1,245m3/s)at about 21%. other than to assert that Bujagali Dam could lead to This is a conservative projection of water flows and, more sustainable flows out of the lake as it will hence, energy output from the Bujagali Dam. "make use of the same water" released by the exist- Management acknowledges that because of the re- ing dams. Neither the SEA nor the documents it is gional drought over the past several years, coupled with based on explore the opposite scenario (Le. that a the lack of needed generation investments and a growth new dam will provide more incentive to release in demand of about 8%, since 2003 the GoU over- higher flows, in order to maximize electricity sales). abstracted water for power generation. An analysis of Lake Victoria water levels during the 2003-2005 period concluded that the main origin of the drop in the lake level during this timeframe is an exceptionally dry pe- riod, during which the mean net inflow was only 46% of the long term average net inflow, and only 60% of the mean net inflow of the low hydrology scenario. The con- sequence of this low inflow, combined with the over- release of water for power generation, exacerbated the reduction in Lake Victoria's water levels. Since the end of 2005, the GoU has steadily decreased hydropower generation in an effort to return to the Agreed Curve op- erating regime. Water flows for power production are being scheduled so as to return to the Agreed Curve as soon as reasonably possible. Were the Bujagali power plant currently in operation, the consequence of this exceptionally dry period, in terms of over-abstraction for power generation, could have been substantially eliminated: the Bujagali site is located down- stream of the existing Nalubaale and Kiira dam complex, and the same water release could have been used a sec- ond time at Bujagali and would have generated 1.2 times the power already generated by the turbines of Na- lubaale/Kiira (the ratio is 1.2 due to the higher head avail- able at Bujagali). Hence, with the joint operation of the existing hydropower and the proposed project, generation of the same energy output as currently generated by Na- lubaale and Kiira would only require 45% of the current I water release from Lake Victoria. Management acknowl- edges that BEL will not control the release of water from Lake Victoria, but is of the view that it is in the interest of the GoU to ensure that Bujagali and the Nalubaale/Kiira dams are operated efficiently. Bujagali is downstream of the Nalubaale/Kiira dam complex. There is no feasible scenario where water available will not be used for power generation at NalubaalelKiira, thus ensuring water re- leases for the proposed project. Finally, since the UETCL has to pay BEL a capacity charge whenever the Bujagali plant is available to generate power (based on the pro- ject's contractual capacity), there should be no incentive for the GoU to withhold water. The impact of hydrological flow rates on the planned the IFC and the World Bank Inspection Panel Bujagali dam has been addressed extensively in the Eco- stressed the need to address the hydrological flow nomic Study. As noted in Item 1 above, the Bujagali dam and its energy output are based on water releases from

18 Proposed Private Power Generation

Claimllssue Response they considered hydrology critical for Bujagali dam. Lake Victoria consistent with the Agreed Curve and on BEL does not address this concern. the assumption of a low flow regime occurring during the first 20 years of the powerhouse’s operation. Climate Change. BEL’s SEA reports do not ad- The SEA addressed social and environmental issues dress climate change and its possible impact on related to the project; the broader climate change (and power production at Bujagali. Current and future cli- hydrology) aspects were addressed in different studies mate models indicate hotter, drier conditions, lower which have also been publicly disclosed. lake levels and lower downstream river flows ... It is The SSEA analyzed in detail the impacts of climate unknown whether Lake Victoria will recharge to the change on power development options in the Nile Equato- high levels and outflow experienced during the 1961- rial Region, including Bujagali. The analysis, using the 2000 period. It is also not known whether such a best available General Circulation Models (GCM), exam- recharge will occur in the next few years or in the ined the impacts of a range of changes in temperature on next 100 years. A 2005 report . . . predicts that cli- precipitation and, in turn, on runoff and net water yield in mate change could dramatically reduce the lake’s Eastern Africa in 2050 and 2100 relative to 2000. The levels and therefore outflow to the Nile. results, based on 16 GCMs that best simulate East Afri- can climate, show that with rising temperatures, precipita- tion and net runoff will both increase, as will the losses due to evaporation and evapotranspiration. In addition, seasonal variability in runoff will also increase, with the wet seasons providing most of the increased runoff. By contract, dry seasons are likely to be less affected. In the northern and central west regions covered by the study, which include Bujagali, there is a high probabil- ity of increasing runoff and, hence, a higher potential for power generation than in the past.3 Taking into account the uncertainties associated with such forecasts, Man- agement considers the analysis to be satisfactory. Technical Report A recent (2006) technical report Management believes that the technical report refer- of Directorate of Water Development (DWD), a lead enced here is the Technical Note entitled “Dropping Wa- agency, is missing in BEL’s SEA. This could proba- ter Levels of Lake Victoria,” which was produced for DWD bly address the issues of hydrology, climate change, in 2005. The objectives of the study that led to the report declining water levels in Lake Victoria and River were: “(i) to establish and highlight the causes of lake Nile. No study released to date analyses the risks to drop; and (ii) to identify policy implications of the lake drop Bujagali performance from climate change-induced and determine remedial action for the future management drought and other hydrological changes. of Lake Victoria.” The study noted that the NalubaalelKiira operation contributed to the current lake level drop, and concluded that, “in the short term, it is in the interests of the Lake Victoria stakeholders that the release operations at Nalubaale/Kiira are gradually trimmed to eventually restore the natural regime of the lake.” It also recom- mends that an Integrated Water Resources Management Planning approach be adopted for Lake Victoria Water- shed management, and that Uganda install thermal power generation to reduce reliance on the lake for power pro- duction. Management notes that Uganda is adopting these recommendations, and is fully supportive of its efforts. Moreover, these actions (return to Agreed Curve opera- tion and installation of thermal power) are consistent with

Nonetheless, the consultants, following a conservative approach, did not incorporate this potential upside as part of the base case for the Economic Study.

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Claimllssue Response the analysis carried in the Economic Study. In fact, the data (Le., the hydrological record) used for the DWD re- port is the same as was used by the Economic Study team in analyzing the hydrology for the purposes of pro- ject analysis. Please see Item 3 for a discussion of incor- poration of climate change. Cumulative Effects. The last Inspection Panel re- The 2002 reports of the Panel and Management dis- port stated: “The Panel consequently concludes that cussed in detail the issue of cumulative impacts and a the issue of cumulative effects, addressed by Man- suitable scope and level of analysis required to address agement and raised by the Requesters, is of real the concern that additional dams along the Nile River significance and is deserving of greater attention.” could have unacceptable social and environmental con- Although much time has passed s‘ince the Bujagali sequences. In this regard, Management takes note of the project was first proposed at the World Bank, to date Panel’s recommendation that “To be consistent with IDA the cumulative impacts issue remains unresolved. policies, a further assessment of the cumulative effects of There was no deliberate attempt by BEL to identify existing and potential hydropower development on the cumulative impacts. There are no Cumulative Impact Victoria Nile as a freestanding Sectoral Environmental studies on Building a Cascade of Dams along the Assessment, or as an important component of the Re- river Nile, including Bujagali. The SEA also does not gional Management Plan for the Upper Nile Basin, may discuss what changes to the existing dam complex need to be undertaken.“ would be required to begin to restore the Lake’s lev- The SSEA for the Nile Equatorial Lakes (see Item 3 el, and how such changes would affect Bujagali. The above) describes the criteria for assessing the social and World Bank and IFC also echoed that lack of a com- environmental appropriateness of future hydropower de- prehensive management plan gives rise to long-term velopments on the Nile River in Uganda and in the entire management challenges of the river Nile. It remains East Africa region. Section 14 of the SSEA analyzes the to be seen if other analyses for the project will prop- cumulative impacts of several hydropower development erly address these concerns. Generally, the ongoing alternatives under differing scenarios of regional grid inte- debate over the existing dams’ role in the draining of gration. It concludes that developing Bujagali and other Lake Victoria should be settled in a transparent, par- sites in the Victoria Nile Basin (excluding Kalagala) will ticipatory way. This requires the timely release of not have significant cumulative environmental impacts. relevant data about releases through the dams, in- BEL’s SEA examines the cumulative impacts of Buja- formation about hydrological assumptions and com- gali, the hydropower plants at Nalubaale, Kiira and Ka- mitments from the Government on future dam opera- ruma along with the transmission facilities therewith on tion and water releases.. . There is need in the the Victoria Nile in Uganda. It focuses specifically on the economic analyses for an analysis of these dams’ reach of the river between Lake Victoria and Lake Albert legacy of environmental damage and disruption to and takes into account other initiatives such as environ- the livelihoods of lakeside dwellers and businesses. mental offsets, natural areas, parks, reserves etc (Sec- It is also critical to involve stakeholders from other tions 7.6 and 7.7 of the SEA). The potential cumulative countries sharing Lake Victoria in addressing the environmental impacts examined include: possible problems caused by the over-releases of water, and changes in flow regime, likelihood of sedimentation, ero- to come up with workable solutions for the long-term. sion and degradation of water quality; possible prolifera- An analysis of the risks of climate change on Ugan- tion of invasive aquatic vegetation; and loss of natural da’s energy sector and its economy should also be habitats and resources. Although not required, BEL’s SEA undertaken and publicly released. takes the two existing dams-Nalubaale/Kiira-and the proposed Bujagali plant as the baseline and compares this to the baseline that predates the construction of the N/K complex to analyze the cumulative impacts (Section 7.7.2). The SEA concludes that the socioeconomic impacts of Bujagali, generally, would be local because the existing Nalubaale/Kiira power plants and Bujagali are separated by Lake Kyoga from Karuma Falls and other potential hy- dropower sites downstream on the Nile River. Lake Albert is located downstream of any identified hydropower op- tions in Uganda and, therefore, will minimize the impact of

20 Proposed Private Power Generation

Claim/lssue Response any changes in flow regimes at the border with Sudan. The impacts of Bujagali’s daily peaking are likely to be minimal, especially 5 kilometers downstream of the Buja- gali tailrace. The sediment load in the Victoria Nile River is limited, as most sediment is retained upstream in Lake Victoria. Water hyacinths are trapped upstream from Na- lubaale dam in Lake Victoria and will not create cumula- tive impacts downstream. However, there is the risk that changes in urban population densities and in agricultural practices in the Lake Victoria Basin could have an impact on the quality of the water flowing into the Victoria Nile which, together with effects induced by the power plants could lead to possible cumulative impacts. The development of Kalagala, located downstream of Bujagali on the same stretch of the river, could have an adverse impact on aesthetic value of the Kalagala Falls, existing and potential tourism and biodiversity as well as on people who would have to be resettled. For these rea- sons, long term protection of Kalagala Falls by ensuring that its hydropower potential is not exploited is a neces- sary condition of World Bank Group participation in the Bujagali project. Legacy issues stemming from the development of the N/K dam complex and the earlier attempt to develop Bu- jagali are not the responsibility of BEL. Nevertheless, any issues identified during consultations for Bujagali were considered by BEL in preparing the Bujagali project’s community development program. The program is de- signed to meet the needs of the eight communities af- fected by the Bujagali project through culturally appropri- ate means, including consultations. Specifically, it provides for health care facilities, employment opportuni- ties, water supply and sanitation, fisheries, education, small-scale tourism, training and financial services. Issues related to the operation of the Nalubaale/Kiira dam complex and its effect on Lake Victoria levels, and the means to develop a comprehensive management plan for the Lake and the Nile River are addressed in re- sponses to Items 1 and 2 above. The effects of climate change are addressed in the response to Item 3 above. Kalagala Offset. Paragraph 1 of the agreement be- The pertinent provisions related to the offsets are con- tween World Bank and GoU states that “Government tained in the safeguard policy, OP 4.04, on Natural Habi- of Uganda undertakes that any future proposal tats. The policy states that: “If the environmental assess- which contemplates a hydropower development at ment indicates that a project would significantly convert or Kalagala will be conditional upon satisfactory EIA degrade natural habitats, the project includes mitigation being carried out which will meet the World Bank measures acceptable to the Bank. Such mitigation meas- Safeguard Policies as complied with in the Bujagali ures include, ... establishing and maintaining an ecologi- project. Government and the World Bank will jointly cally similar protected area.” review and jointly clear such an EIA.” This, however, To conform with this requirement, the GoU has is not a guarantee that Kalagala Falls would never agreed to reconfirm its commitment to the Kalagala offset be developed for hydropower. The commitment on that it made under the previous effort to develop the Bu- Kalagala Falls as an “Off-set” by GoU is not binding. jagali project, per the terms reflected in the “Management It does not completely remove Kalagala as a future Report and Recommendation in Response to the Inspec- dam site. Legal interpretation of the agreement by tion Panel Investigation ReDort (Uganda: Third Power

21 Uganda

No Claimllssue Response I I the Inspection Panel also confirmed that there was Project, Fourth Power Project, and Bujagali Hydropower Project).” This offset commitment is consistent with the mitigation provision for Kalagala Falls, and also recom- mended in BEL’s SEA Report. As well, the commitment to maintain the Kalagala Off- set is strengthened in practice, not only by GoU’s com- mitment to identify sustainable investment programs to facilitate tourism, with appropriate mitigation measures, but also by the enhanced role that Kalagala Falls will play, as (a) rafting companies, once relocated, will locate some of their facilities around the offset area, and (b) other tour- ism operators, such as small arts and crafts shops, res- taurants, four wheeler rentals, and locally owned enter- prises are also expected to move their businesses nearer to Kalagala Falls. The offset provision for Kalagala Falls and the adja- cent natural habitat will be included as a GoU obligation in the IDA Indemnity Agreement for the Bujagali project, and will be binding throughout the life of the Indemnity. Man- agement notes that the Bank’s legal recourse to enforce Government‘s commitment to maintain the Kalagala Falls offset will not be available after the termination of the In- demnity Agreement. Hence, the draft Indemnity Agree- ment, discussed with the GoU, includes a provision that, prior to the termination of the Indemnity Agreement, the World Bank and the GoU will pursue discussions to iden- tify mechanisms or instruments to enable the continuation of the GoU obligation to set aside the Kalagala Falls site. Old and lnconsistent Data. BEL’s Social and Envi- The proposed Private Power Generation (Bujagali) ronmental Studies (SEA) are based on old data that Project is a new operation. As such, there has been a has little or no bearing to current situation. For ex- fresh assessment of the social and environmental aspects ample, sections 7.4.1.3 p336, water quality data, of the project, which has also required drawing upon for- climate, air-borne particulate data, among others mer studies, where relevant. BEL conducted consulta- were done almost ten years ago and do not reflect tions in January, March and May 2006 related to devel- the current environmental realities, e.g., declining opment of the Terms of Reference (TOR) for the Bujagali lake and river water levels degradation of wetlands project‘s social and environmental analysis. Participants and forests, increased silting, climate change, etc. included government agencies (several with technical that have impacts of hydropower production. Fish input to the SEA scope), other stakeholders, such as tour- species that were found to be endemic in the previ- ism operators and local businesses, and NGOs, including ous AESNP studies were mysteriously not discov- NAPE and Save the Bujagali Crusade. These consulta- ered in BEL’s SEA, raising doubt on the fish report in tion efforts resulted in the final TOR of June 2006. (See BEL’s studies. Was it a deliberate attempt on the Annexes 4 and 5 that, respectively, list the public consul- part of the consultants to manipulate information? Or tations and the issues raised in the consultations) is it that now the endemic fish species have become The proposed project benefits from the significant extinct? social and environmental due diligence that had been per- formed for the previous project under AES. The current project has also retained its original environmental foot- print. Building on the relevant work conducted to date, BEL’s consultants conducted further field studies and analyses where the need for updated information had been identified, such as water quality, fisheries, terrestrial ecology, resettlement and compensation, and cultural resources. Other recent information compiled by other specialists on hydrology and river flow was incorporated

22 Proposed Private Power Generation

Claimllssue Response in the December 2006 SEA. Existing baseline information in such areas as climate, ambient noise, and air-borne particulates is not expected to have changed significantly, and those data are considered representative of current conditions. The Fisheries Resources Research Institute (FIRRI) completed four quarterly surveys during 2000 for AES, to assess seasonal conditions during Uganda’s short and long rainy seasons, and the short and long dry seasons. Additional fisheries studies for the project were conducted for BEL by the National Fisheries Resources Research Institute (NAFIRRI), based in Jinja, Uganda. The same institute, then called FIRRI, also conducted the studies for AES. For both studies, NAFIRRI/FIRRl’s scope of work consisted of compiling baseline data of the water quality and ecology (invertebrate, fish, and macrophyte surveys) of the reach of the Nile River that includes the proposed hydropower plant. NAFIRRl’s survey for BEL in April 2006 corresponds seasonally to the survey conducted for AES and was conducted at the same locations. In its 2000 surveys, FlRRl concluded that there are six keystone species of importance to fisheries; the same keystone species were found by NAFlRRl in the 2006 survey. A total of 35 fish species were found in the study area during the four surveys in 2000, and 21 were found in the second quarter 2000 survey. The April 2006 survey conducted for BEL found 18 species. Such a level of vari- ability (18 vs. 21) is to be expected and is not necessarily indicative of species loss or extinction, but rather varia- tions in data collection, migration and location of species, etc. The reach of the Victoria Nile that will be affected by Bujagali is not considered to be critical habitat for any fish species of conservation importance. Fauna (Terrestrial & Aquatic). BEL’S EIA studies As noted in Item 7 above, the Bujagali project benefits on animals, birds and aquatic life were carried out from the considerable baseline social and environmental for very short periods of 1 to 2 months that do not data gathering for the previous project under AES. Work give the variations in species distribution and diver- conducted for BEL was designed to build upon those data sity that usually occur over a period of one year. The and additional studies were undertaken as needed, to failure to adequately conduct environmental as- confirm or update that baseline. For example, the Terres- sessments violates the World Bank Policies on Envi- trial Ecological Assessment (Plants, Birds and Mammals) ronmental Assessment (OP/BP 4.01), Natural Habi- was prepared by Makerere University Institute of Envi- tats (OPAP 4.04), Environmental Action Plans ronment and Natural Resources in May 2006, based on (OPAP 4.02), Water Resources Management fieldwork conducted during March 2006. The earlier work (OPAP 4.07), OP/BP 4.00, etc. for AES was conducted in July and August of 1998. The survey of aquatic life was conducted by NAFlRRl in April 2006 and complements the four quarterly surveys during 2000. The extent and duration of baseline sampling is de- termined by specialists and can range from a one-time survey to multi-season or multi-year studies. Management considers that the baseline data gathering was satisfac- tory. Policies. The lack of up-to-date and adequate in- Management considers that the World Bank Group’s

23 Uganda

No Claimllssue Response formation on hydrology, climate change, cumulative analysis of the Bujagali hydropower project is in full com- impacts assessments and commitment on Kalagala pliance with relevant OPs. In particular: “Off Set“ in BEL’S SEA violates the World Bank’s OP 4.07 - This OP states that: “The Bankrequires Policies on Environmental Assessment (OP 4.Ol), environmental assessment (EA) of projects proposed Environmental Action Plans (OP 4.02), Natural Habi- for Bank financing to help ensure that they are envi- tats (OP 4.04) and Water Resources Management ronmentally sound and sustainable, and thus to im- (OP 4.07). prove decision making.” The World Bank Group has reviewed and is satisfied with the EA conducted for this project. With regard to the Requesters’ particular concerns, Management would like to point out that the project analysis accounts for the complete avail- able 106 year hydrological record. Thus, a fully ade- quate hydrological information base was used. Cli- mate change predictions given in the SSEA indicate a likelihood of hotter weather (greater evaporation) but also more rainfall (greater inflows to the lake). Thus, climate change is not predicted to result in lower net basin supply of water in the future. Bujagali’s location - upstream from Lake Kyoga - and its run-of-river design, mean that its contribution to cumulative im- pacts is limited and is restricted to the stretch of water between Bujagali and Lake Kyoga. OP 4.02 - This OP states that “The Bank encourages and supports the efforts of borrowing governments to prepare and implement an appropriate Environmental Action Plan (EAP) and to revise it periodically as nec- essary. Although the Bank may provide advice, re- sponsibility for preparing and implementing the EAP rests with the Borrower, and the EAP is the country’s plan.” The World Bank Group has reviewed the Social and Environmental Actions Plans (SEAPs) provided for the project, as well as for the associated Intercon- nection Project, and found that they meet World Bank Group requirements. The SEAPs were publicly dis- closed in late December 2006. OP5.04 - This OP states that: “If the environmental assessment indicates that a project would signifi- cantly convert or degrade natural habitats, the project includes mitigation measures acceptable to the Bank. Such mitigation measures include, ... establishing and maintaining an ecologically similar protected area.” To conform with this requirement, the GoU has agreed to reconfirm its commitment to the Kalagala offset which it made under the previous attempt to develop the Bu- jagali project (and included in the Management Re- port and Recommendation in response to the Inspec- tion Panel Investigation). The World Bank Group is seeking ways to strengthen that commitment. (See Item 6.) OP 4.07 - This OP states that “Bank involvement in water resources management entails support for pro- viding potable water, sanitation facilities, flood control, and water for Droductive activities in a manner that is economically viable, environmentally sustainable, and

24 Proposed Private Power Generation

Claimllssue Response sociallv eauitable.” Management considers that the proposed project meets tKe requirements of this OP. Economic, Comprehensive Options and Afforda- bility Assessment Economic Analysis. The Bank assesses the ro- The Economic Study, rather than the SEA, addresses bustness of the project with respect to economic, the economic viability and risk analysis of the Bujagali financial, institutional and environmental risks. “The project. The Economic Study was made public on Febru- Bank’s economic evaluation considers the sources, ary 26, 2007 (on www.worldbank.ora/Buiaaali) and a copy magnitude and effects of the risk associated with the was handed over to NAPE on February 28,2007. The key project, by taking into account the possible range in elements assessed in the economic analysis include: (i) values of the basic variables and assessing the ro- the impact of the current power crisis conditions on the bustness of the project’s outcome with respect to sector and the need for emergency thermal power; (ii) the changes in these values.” There is sufficient evi- demand forecast, which is mainly influenced by new cus- dence that the Bujagali dam project was not subject tomer connection programs, commercial and industrial to this kind of analysis at the World Bank Group. GDP growth, loss reduction and the tightening of com- There is no evidence in the SEA report that a mercial discipline over billings and collections; (iii) the comprehensive economic analysis for Bujagali HPP level of electricity tariffs; (iv) the hydrology of Lake Victo- was done. What has been released on the World ria and its impact on hydropower generation; (v) the sup- Bank website ... is not comprehensive and therefore ply alternatives and their costs; (vi) the environmental and cannot be used as a basis for determining the eco- social costs of Bujagali and its main alternative; and (vii) nomic viability of the project. Therefore, it is difficult the economic value of electricity to consumers, the end- to determine the economic viability of the project. user tariff path and its affordability. Risks arising from Both the World Bank Inspection Panel and IFC varying degrees of future uncertainty regarding these Compliance Advisor/Ombudsman echoed similar variables have also been evaluated. The Economic Study concerns in the previous AESNP Bujagali dam pro- projects three electricity demand scenarios in Uganda ject. The Inspection Panel recommended that com- (base, low and high), two hydrology scenarios (low and prehensive assessments be carried out before any high) as described in Item 1 above, three oil price scenar- further damming of the Nile could be done. ios (base, low and high) and three project cost scenarios (base, low and high). Economic evaluation of Bujagali takes into considera- tion environmental and social costs associated with the project. The largest such cost is for implementation of the resettlement and community development action plans related to the dam and the associated Interconnection Project. The Economic Study also analyses the financial sustainability of the power sector after Bujagali’s commis- sioning. Using WASP4 software, the Economic Study derives a set of 54 least-cost expansion plans for Uganda, includ- ing Bujagali and other generation options as candidates, using all the permutations of the scenarios described above. It also derives a set of 18 alternative expansion plans excluding Bujagali, but including all other candidate plants. Expansion plans that include Bujagali are compared to their counterpart “without Bujagali” and found to be less costly on a net present value (NPV) basis. The only ex- ceptions are cases where low electricity demand is com- bined with high hydrology. Under those cases, which

4 Wien Automatic System Planning (WASP) Package, Version IV, for carrying out power generation expan- sion planning, developed by the International Atomic Energy Agency.

25 Uganda

Claimllssue have a total probability of occurrence of 6%, Bujagali is not needed in period 201 1-2020. On a probability weighted average basis, generation expansion plans in- cluding Bujagali commissioning in 201 1, compared to al- ternatives, represent an economic gain of US$184 million on an NPV basis. Another 13 expansion plans are derived to test for the impact of delaying Bujagali construction to 2012, lowering Bujagali’s capacity to 200MW, building Karuma before Bujagali, and excluding both Bujagali and Karuma from Uganda’s least-cost expansion plan. In all cases, the cor- responding expansion plan with Bujagali in 201 1 and with 250MW capacity is found to be less costly. The project Economic Internal Rate of Return (EIRR) is calculated at 22% for the base case; it is also calcu- lated for other combinations of scenarios described above and remains in all cases above 12.5%. In addition, a probabilistic analysis of ERR value was conducted using a Monte Carlo simulation ~oftware,~subjecting key project parameters to a probabilistic range of outcomes. This fur- ther confirmed the robustness of the project: there is a 50% probability that the ERR is greater than 22.7% and a 100% probability that the ERR is above 11.7%. Energy Alternatives. BEL’s SEA report . . . states Management is firmly convinced of the appropriate- that “if Bujagali were not to be built, then either lack ness and breadth of analysis undertaken to identify and of electricity will persist or more expensive alterna- assess alternatives for expansion of Uganda’s power sec- tives will be needed to be built. ” Yet, alternative en- tor. The overall scope, analytical rigor, quality control and ergy options have not been adequately studied to review of these analyses is described in Sections Ill and provide evidence that Bujagali dam project is the IV of the main text. least-cost option. Again, the recently released eco- The primary vehicle for assessing alternatives is the nomic analysis does not adequately,address the is- Economic Study. OP/BP 10.04 requires that the eco- sues of assessing the alternatives. In recent years, nomic analysis explore alternative, mutually exclusive, various efforts to analyze Uganda’s renewable en- designs to ensure that the project maximizes expected ergy potential have been discussed or begun. There NPV, subject to financial, institutional, and other con- is therefore evidence that energy alternatives were straints. , not adequately addressed in BEL’s SEA. In addition, The economic analyses considered options that had efforts to implement these alternatives have not realistic potential for availability in a timeframe similar to been taken seriously by government. For instance: the Bujagali project, and which, therefore, could be con- sidered as alternatives. All options that could compete with the proposed Bujagali project in providing power to the main grid network were considered. However, Ugan- da’s Renewable Energy Policy and Plan6 provides for “off-grid” electricity options such as solar PV and micro- hydro, as well as biofuels for cooking and industrial appli- cations. The Bank and other donors are actively support- ing these programs as well. In keeping with this requirement, the short-term op- tions considered were: 150MW of diesel generation, fired with relatively ex- pensive, but readily available Automotive Diesel Oil

Crystal Ball risk analysis software, developed by Decisioneering, Inc. MEMD, 2001

26 Proposed Private Power Generation

laim/lss (ADO), based on a short-term Power Purchase Agreement,’ 100MW of which is currently in opera- tion, and the 50MW balance of which is in advanced stages of procurement. 50MW of diesel generation, fired with more cost effec- tive Heavy Fuel Oil (HFO), which requires a longer lead-time than an ADO plant in order to develop sup- ply logistics, based on a longer-term Power Purchase Agreement. Mini-hydro power stations currently under active de- velopment (see below). Bagasse-based cogeneration which will provide 15MW of power to the national grid (see below). Options included in the analysis with longer lead- times were: Geothermal, for which an assessment of current ex- ploration concluded that the potential of the resource may be much lower than previously estimated - 40MW instead of the previous estimate of 450MW (see below). Karuma Falls hydropower station, which is considered to be the most promising large-hydro alternative to the Bujagali project (and the only other large hydro- power project in Uganda currently studied beyond its feasibility stage). The Economic Study included an updated cost estimate for Karuma based on the most recent unit costs for Bujagali, since the Bujagali costs were the result of an international competitive bidding process. This analysis concluded that Bujagali costs are lower than those for Karuma (see below). Additional fossil-fueled thermal power stations (HFO fueled medium- and low-speed diesels, simple and combined cycle gas turbines using ADO, steam plants fired either by HFO or coal). The options analysis utilized the WASP model, as explained in Item 10 above. In determining the options to include in the Economic Study, the most recent information on the various domes- tic and imported power generation sources was consid- ered, including the projects below: Energy for Rural Transformation (ERT) Project (FYOZ) is designed as a IO-year, 3-phase Adaptable Program Loan (APL) (US$49 million for Phase 1, and US$165 million for the full program).The program has supported preparation of a renewable enerqy re- source database and capacity building plan . ERT is also supporting investments in renewable energy ...... ,,...., ......

7 A Power Purchase Agreement defines the terms of sale between a power producer and a purchaser. In this case, the Power Purchase Agreement is between an Independent Power Producer and the Uganda Electricity Transmission Company Limited. a Most recent report: Fourth Interim Report for Renewable Energy Resource Information Development and Capacity Building Assessment, Kamfor Company Ltd. April 2006.

21 Uganda

Claimllssue Response power generation, including bagasse based cogene- ration, mini-hydro, and micro-hydro. Fourth Power Project (FY08) is supporting geother- mal exploration in western Uganda (Kibiro and Katwe), including shallow-well drilling which is re- quired to assess the resource. ARGEO Project (FY08), this proposed GEF- supported regional project will support participating countries, including Uganda, in developing commer- ...... cial geothermal power generation plants. .." ...... Bagasse: Although it has been discussed for Bagasse is the biomass which remains after sugar years, the country has developed only a few cane is crushed to extract its juice. It is standard sugar megawatts of its currently estimated 40MW po- industry practice to burn the bagasse to produce electric- tential. ity for the sugar mill, and also to produce steam for the thermal processes in the mill. This dual use of the energy is termed cogeneration. Uganda has three sugar mills, two of which have ex- pressed interest in expanding their existing bagasse based cogeneration system in order to export power to the national grid. With support from the ERT Project, Ka- kira Sugar Works is in the process of expanding its ba- gasse cogeneration in connection with an overall sugar mill expansion program. Kakira has signed a Power Pur- chase Agreement with UETCL to export 6MW of power to the grid during peak load periods. This does not represent the full power available for the proposed power station design. Moreover, the power station itself was not at the time designed to utilize the full bagasse stock available. However, in view of the increasing power shortages in Uganda, the GoU sought to extend the power purchase arrangements with Kakira to more fully utilize the bagasse resource. These negotiations are not yet concluded. At the time of economic modeling, negotiations centered around a revised agreement that would provide 12MW to the national grid. Hence the WASP model runs provided for a firm 12MW from Kakira beginning in June 2007. The other sugar mill, SCOUL, is also developing plans for selling 3MW of power under an arrangement similar to Kakira's. The details of the transaction have not been concluded. However the WASP model runs as- sumed a firm 3MW addition in January 2009. The third mill, Kinyara, has no firm plans for a similar Power Purchase Agreement. ~ .....~ ...." ...... " 0 Small hydro (less than 7OMW): Of at least The Bank is providing considerable support to Ugan- 46MW at I6sites that has been identified, only da in development of its hydropower potential. This in- 13MW have been developed. cludes large-scale hydro (for example, through the ongo- 0 Micro-hydro (less than 700 kilowatts): A lim- ing Fourth Power Project and the proposed Private Power ited number of sites have been developed, de- Generation Project (Bujagali)) and also through the ongo- spite there being at least 40MW of potential. ing ERT Project, which is supporting mini-hydro develop- ment for grid-connected and off-grid applications. In any case, whether on-grid or off-grid, each such investment is evaluated on its merits with reaard to economic and other factors, and includes an assessment__ of alternatives.

28 Proposed Private Power Generation

Clairnllssue

jects that are either currently providing power to the grid, or suitable for grid connection and which are actively un- der development and thus suitable for consideration in the planning timeframe. The mini-hydro sites considered were: Kilembe Mines (3MW), Bugoye (13MW), Waki (6MW), Buseruka (9MW), Kikagat (IOMW), and lshasa (5.5MW). None of these options are in the ”micro-hydro’’ range as defined by the Requesters. The primary reason for this is that micro-hydro systems are generally “off-grid’’ and therefore not “alternative” to Bujagali. All mini-hydro sites were considered as “committed” options in the anal- ysis, which means that WASP always included them in the generation plan. It is noteworthy that the Renewable Energy Assess- ment and Capacity Building Program recently estimated the construction costs of micro-hydropower development at US$3,000 per installed kilowatt, plus another US$2,500 per kilowatt for the associated transmission linesgThis does not account for financing costs. The comparable costs for Bujagali are about US$2,044 per installed kilo- watt, plus about $200 per kilowatt for the associated transmission line.’’ This simple comparison suggests the reason why such micro-hydro applications are typically not considered suitable for grid connection. However, de- spite these costs, in off-grid situations where diesel power is frequently the next best option, such micro-hydro plants can be the least-cost option. ~ ”,.,,.., “I ~ ”” .. - . . ”_ . _” Karuma Dam (750MW) is considered to be less The proposed hydropower project at Karuma is the socially and environmentally destructive than most likely alternative to the proposed Bujagali project. Bujagali (and in fact than all currently proposed Karuma is therefore included as a candidate in all the large dams in Uganda). It would have the added WASP model scenarios for both the “with” and “without” benefit of bringing electricity to the northern part Bujagali case. The description of the various components of the country, whose development has been of the Karuma Falls Hydropower Project is available in the marred by continued rebel conflict. It was previ- Project Definition Report (March 1999) issued by Norpak. ously compared directly to Bujagali, but lost-out The scheme is a run-of-the-river type, with no active stor- over economics. Later, Karuma’s project spon- age, using the natural head created by the Karuma Falls sors in Norway discovered that the economic and adjacent rapids, immediately upstream of the bridge analysis used to justify Bujagali was based on across the Victoria Nile. The developer of Karuma HPP, greatly inflated costs for building Karuma. Norpak, was invited to negotiate a Power Purchase Agreement by the GoU in 2004. Norpak has been promot- ing the project since the 1990s and recently confirmed to the GoU its interest in developing the project. Norpak’s initial proposal was to implement the project with an in- stalled capacity of either 150 or 200MW, generated by 3 or 4 units of 50MW capacity each. As 3 units would be able to use only about 600 m3/s from the inflow of the Vic- toria Nile system planning studies will most probably show that at least 4 units should be installed. The desian

See Fourth Interim Report for Renewable Energy Resource Information Development and Capacity Build- 1;g Assessment, Kamfor Company Ltd., April 2006, page 31. With financing costs included, the cost is US$3,200 per installed kilowatt.

29 Uganda

Claimllssue

but also calls for a large volume of underground excava- tion. This includes, for each of the four units, one surge chamber approximately 500 m long, and one tailrace tun- nel approximately 2 km long. The costs of the Karuma project were estimated based on the March 1999 Project Definition Report, with additional information provided by Norpak showing the main volumes of works, and using the unit cost estimates provided in the competitively tendered Bujagali EPCl1 contract. In this manner the Karurna costs were updated to current market conditions. Construction costs for the 200MW Karuma plant were estimated at US$588 million compared to the Bujagali construction costs of US$491 million for a 200MW design and US$511 million for a 250MW design. This analysis shows that Bujagali has a lower construction cost, which has resulted in its being the least-cost option when the two plants are compared in ASP analysis..." Geothermal: Uganda has significant potential, Geothermal development requires a multi-year pro- with estimates ranging up to 450MW, but studies gram, which begins with surface assessments of resource have lagged behind hydroelectric analysis. Al- potential, then moves progressively to shallow well ex- though the Bujagali EIA by Burnside Interna- ploratory drilling and finally to deep well drilling. In view of tional Itd. states that only 45MW is feasible, this the expense of deep well drilling" - estimated at US$9 seems premature and pessimistic as some of million - it is important to ensure that the previous studies the sites they refer to as having a poor chance of show a strong likelihood of proving an exploitable reserve. commercial development are still being studied. The initial shallow well drilling is ongoing, with financing Experts we have talked with who are working di- from the Fourth Power Project (US$510,000). rectly on such studies say that the potential for A detailed review of geothermal prospects was c;n- specific sites is much greater than the project ducted as part of the project analysis of alternatives. SEA indicates. (See Annex 6, Review of Geothermal Prospects, Execu- tive Summary of Appendix D of the Economic Study.) The analysis concludes that historical estimates of the geo- thermal potential of Uganda being as much as 450MW are substantially over-stated. The true potential is likely to be in the order of only 10% of this figure. The key findings of the review are summarized below. These findings led to the inclusion of a 40MW geothermal power plant, to be commissioned in mid-2011, in the least-cost analysis. There are three principal geothermal resource areas in Uganda. Two of these, at Katwe and Buranga, are low grade resources with reservoir temperatures of only some 100°C and consequently with nil potential for commercial scale power generation. The third prospect, at Kibiro, is more promising and appears to be a medium grade geo- thermal resource with reservoir temperatures of about 220OC. Kibiro is therefore considered to be the only geo- thermal resource in Uganda with clear potential for power deVelODment. The size of a aeothermal Dower plant that

" Engineering, Procurement and Construction. '' Specifically, the cost of bringing in the specialized drilling rigs, drilling and lining the holes, etc. l3See PPA Report, Appendix D.

30 Proposed Private Power Generation

Clalmllssue Response could be developed at Kibiro will depend on actual re- source conditions that have yet to be proven by explora- tion drilling. Nonetheless, deep geothermal resource con- ditions can be inferred from the results of surface exploration surveys undertaken to date. By this means, it is assessed that the Kibiro resource may prove to be suit- able for the future development of either a 20MW con- densing steam power plant or a 40MW organic Rankin cycle binary plant, both with an operational life of at least 25 vears. e Municipal Solid Waste: Uganda has an esti- The Bank’s Carbon Finance Unit is currently assisting mated 10-30MW potential. the Kampala City Council in assessing the prospects for methane production from Kampala’s municipal solid waste (MSW). While the assessment is not complete, cur- rent indications are that the available methane is very modest, and may not be sufficient for the purposes of power generation. The other alternative under considera- tion for methane destruction is flaring. Power production may also be possible through gasi- fication or combustion of Kampala’s municipal solid waste. However, there are considerable hurdles which must be overcome to realize such a project. These in- clude the rather formjdable requirement for Kampala to establish an organized refuse collection program to en- sure that an MSW-fueled power plant has a reliable fuel source. There are no firm proposals for MSW-fueled facili- ties. Therefore, this alternative was not considered in the oDtions analvsis. Solar: . . . Energy used for water heating is a sig- Management agrees that energy efficiency in gen- nificant contributor to the electricity demand, ac- eral, and demand side management in particular, are im- counting for almost 50MW. Experts estimate that portant tools in improving the efficiency of energy distribu- 10MW of peak power could be saved immedi- tion and consumption in Uganda. The World Bank Group ately (and more in future) with solar water heat- is fully supportive of programs in this area. This support ers for grid-connected customers. includes: Efficient Lighting: The bulk of Uganda’s peak UMEME -The Bank has supported Uganda in re- demand is used for lighting, which consumes up structuring the power sector, including unbundling to 92MW, according tot a World Bank study. If all the former Uganda Electricity Board into generation, lights were replaced with energy-efficient light transmission, and distribution companies. From the bulbs, the country’s peak demand could be cut perspective of energy efficiency, the key actor in to below 20MW. Uganda is now UMEME, the private electricity distri- Transmission Losses: According to the 2006 bution concessionaire. Bujagali EIA by Burnside International Ltd., “An- With respect to distribution losses (which NAPE has other option to reduce demand is to reduce referred to as transmission losses), over the past technical losses, which for Uganda is high at year, system technical and non-technical losses 21 %. Acres (1999) estimated that improvements have been reduced by UMEME, to about 34% (from to the country’s failing distribution infrastructure 38%) and the billing collection ratio has improved to could eliminate as much as 30MW of losses about 92% (from 80%), although the rate dropped from the grid.” On 3 October 2006, the East Afri- again to 82% in December 2006 following the June can reported that Uganda was applying for a and November tariff increases. UMEME’s invest- US$180 million loan from the World Bank to ments to the end of 2006 were US$13.6 million, and cover a variety of investments in the energy sec- there are plans to invest a further US$65 million by tor; only US$10 million from the project is ex- 201 1. In addition, IDA is providing US$12 million pected to go toward demand-side management (through Power IV) for new poles and transformers, ...... ”......

31 Uganda

Claimllssue Response and energy efficiency measures. and for 13,500 new customer connections. These in- vestments will help reduce technical losses signifi- cantly over the medium term. In parallel, the Bank-supported ERT Project has identified a number of measures that could have an immediate positive effect (“quick win”) on demand side management which has identified a set of measures in the following order, the first of which is a component of the ERT Project: o Compact fluorescent lights (CFLs) - to reduce evening peak demand, which is heavily influ- enced by lighting. CFLs consume about 75% less energy than conventional incandescent lights. The ERT Project is financing procurement of an initial 800,000 CFLs, which would be distributed free to UMEME customers in order to gain imme- diate demand reductions. Thereafter, a commer- cial CFL market would be promoted. Other elements of the demand side management program will be supported by the proposed Power Sector Development Project (FY07), as well as the next phase of the ERT Project: o Capacitors for power factor correction -to im- prove the efficiency of the distribution network o Streetlighting program - to replace conventional streetlights with energy efficient bulbs o Solar water heating program -to replace electric water heaters with solar water heaters, and thus reduce electricity load o Long-term energy efficientldemand side man- agement strategy - which would set out a long term plan for improving energy efficiency, target- ing both existing and new users...... ” ...... Wind power potential needs further exploration, The recent Renewable Energy Assessment states as wind speeds have been recorded at low that “due to its geographical location, Uganda does not heights, not the 10 meters that is standard for seem to benefit from good wind resources with most ar- wind power analysis. eas having wind speeds of less than 3.0 m/~.”’~However, the assessment points out that a full assessment of wind resources has not yet been concluded for Uganda, and there may be isolated sites, such as in Karamoja, which show promise. The Bank-supported ERT Project is sup- porting a broad program of renewable energy develop- ment, which seeks to prioritize the assessment, develop- ment, and investment in the most promising renewable energy areas. In comparison to other renewable re- sources with which Uganda is richly endowed such as minVmicro-hydro and biomass, wind power is not consid- ered to be a promising option within the timeframe of the Buianali economic analysis.

14 Page 36. Also, it should be noted that sustained wind speeds of 5-6 mls are needed to consider wind for grid-connected power applications.

32 Proposed Private Power Generation

Claimllssue Response Improved, efficient stoves and biogas digest- Management agrees that improved efficiency in tradi- ers would be key to bringing cleaner energy to tional fuel use will have important environmental benefits the rural poor, and reduce deforestation from for Uganda. However, as noted in Item 11, these cannot cutting fuel wood. be considered as "alternatives" in the economic assess- ment of the Bujagali hydropower plant. Nevertheless, it should be noted that GoU, with the support of GTZ (Germany), is promoting use of biomass technologies developed to improve energy efficiency for household, institutional and industrial practices. These include the domestic and institutional firewood stoves and the firewood baking oven. In addition, the Bank, under the ongoing ERT Project, in order to facilitate expanded use of renewable energy power generation based on biomass, is supporting the installation of demonstration biogas digesters in Uganda at the three institutions of Kyambogo, Nyabyeya Forest Reserve and Buddo. The objectives of this activity are to: (i) demonstrate the feasibility of biomass gasification for electricity generation and thermal productive uses; (ii) explore the possibility to use a variation of biomass fuel stocks; (iii) train engineers and raise awareness of bio- mass gasification as a low cost renewable energy option for rural electrification and productive thermal uses; and (iv) use gasification producer gas to improve energy effi- ciency. However, biomass gasification is not sufficiently advanced in Uganda to consider it as a commercial option today. It was therefore not proposed as an alternative to Bujagali in the WASP analysis...... I)...... "...... " " ...... The SEA does not give cost, cost-benefit and op- The Requesters are correct in that the SEA does not portunity-cost scenarios and calculations for installa- give costing and other engineering information on the al- tion and development of these alternative energy ternatives considered. However, complete information in options as basis for determining Bujagali as the this regard is found in the PPA Ltd. Economic Study, least-cost option. The idea of dismissing energy al- which has been publicly disclosed, and which was pro- ternatives, because they cannot easily be connected vided to the Requesters in a meeting with IFC officials on to the national grid ...is erroneous. What should be February 28, 2007. assessed is rather whether alternative electricity op- With regard to the support for independent grid net- tions will help reduce the burden on existing national works, Management also agrees that they form an impor- grid-based hydropower at competitive costs (prices) tant element of Uganda's electrification program. This is than other options by taking away areas where other especially true in light of the extremely low electrification energy options could be developed as independent rate (5%) in Uganda. Therefore, when undertaking an grids rather than emphasizing the need for connec- assessment of a particular electrification site, the option of tivity to the national grid. These independent grids whether it should be grid-connected or "off-grid" is always could prove more beneficial to the majority of the considered. It should be noted that the "dis-economies" of people and the current rural electrification scheme scale of smaller power generators usually result in a deci- being promoted by government. It therefore be- sion for grid connection in cases where the community is comes clear that the various energy options have relatively close to the national grid. However, in regions not been assessed in either a comprehensive or ba- such as West Nile (northwestern Uganda) and Kisiizi lanced way as part of the evaluation leading up to (southwestern Uganda) the analysis demonstrated that Bujagali. off-grid systems were preferable. Both are being sup- The East African commission, in a report on the de- ported by the ERT Project. cline of Lake Victoria's water levels, stated that: Nevertheless, expansion of the national grid network "Partner states should make deliberate efforts to remains the least-cost means of connecting most Ugan- reduce dependency on hydropower by develop- dan customers. ing alternative sources of energy like geother- ...... "...... "......

33 Uganda

Response developer and the World Bank are proceeding with Bujagali as the least-cost option, yet this has been effectively disputed. ”” . _. - .. . . . 0 Other factors critical to the decision-makina As stated throughout this Annex, the economic and process about “best options,” for example, t‘;e hydrological analyses conducted for the Bujagali project risk that drought will cripple the economy, have were undertaken by qualified consultants (PPA, in asso- not been adequately assessed. It is not clear ciation with Coyne et Bellier and ECON of Norway). This whether the World Bank’s “Independent Hydro- work has been thorough, has utilized appropriate data logical Review” of the Victoria Nile will be pub- and analytical methods, has incorporated suitable alterna- licly released and debated in time for an in- tives, and has selected a base case hydrology which is formed decision-making process. The World conservative (Le., the “low hydrology” case) and based its Bank Group, like the Ugandan government, has analysis on the full available 106 year hydrological record. skewed its research efforts to consistently pro- The analytical work has been closely monitored by World mote Bujagali above other options. In the pro- Bank Group task team members and reviewed by Gov- ject‘s first incarnation at the Bank, data was ma- ernment and industry stakeholders, an independent hy- nipulated to justify Bujagali as the “least-cost“ drologist, and Bank peer reviewers. The analyses, con- option for Uganda after its consultants pointed to tained in the Economic Study, were made public on other projects as cheaper. February 26,2006. (See Items 1 and 2 above). While the World Bank’s 2002 appraisal of the The Bujagali project‘s economic viability was ap- Bujagali project was over-optimistic in many in- praised using conservative assumptions for the base case stances, the analysis of alternatives to the pro- against a wide range of alternative power generation op- ject was consistently pessimistic. This is still a tions. A comprehensive risk analysis for main project de- problem with the new BEL Bujagali project. terminants was conducted (see Items l,IO, and ll Going back even further, the World Bank used above) , unusually optimistic hydrological data on the Kii- The cost estimate of the main hydropower alternative ra project, and claimed there was little risk to us- to Bujagali, Karuma, was conducted after consultation ing the optimistic figures (even though most ex- with Karuma’s sponsors and using the same methodology perts at the time believed otherwise). This has as for Bujagali. Karuma was found to be more expensive resulted in drastic draining of Lake Victoria to than Bujagali; in addition, the earliest commissioning date low levels close to those in 1924. for Karuma would be 2012, about one year later than Bu- A comprehensive, independently facilitated and jagali. participatory options assessment process is The generation expansion plan developed by PPA Ltd needed for future energy planning in Uganda, also finds that Bujagali is the least-cost option; this con- especially one that incorporates a rights and risk clusion is robust to risk analysis of the main variables. analysis. More importantly, there needs to be As mentioned in Item 1 above, the Lake Victoria hy- concerted action to develop these resources. drological record shows a period of high hydrology span- ning forty years, from the 1960s to 2000. Based on the 106 year historical record of the hydrological system, there are possibilities of IO-year hydrological cycles that will cause significant changes in available water flows. Lake Victoria levels, and thus the flow of the Nile River, will also continue to fluctuate seasonally, as experienced in the past. Future high flow seasons are also possible, along with the prospects for low flow periods. The Power Ill Project-which funded Kiira construction-was ap- proved late in this period. The Kiira dam was designed both to improve the overall safety of Nalubaale and also to add new generation capacity to take advantage of high water flows. It was also expected that the Kiira units would ultimately replace the old and inefficient units at Nalubaale. Use of the Kiira units for base-load has im- proved water usage owing to the greater efficiency of

34 Proposed Private Power Generation

ClaimAssue Response these units A ffordability. Bujagal i remai ns an economically The latest project cost estimate is U$799 million, in- risky project, a risk worsened by changing hydrol- cluding US$511 for the EPC cost. This compares to an ogy. The cost of Bujagali to Uganda has long been a expected EPC cost of US$315 million in 2000 during the contentious issue, and questions have been raised first attempt to develop the project. The main reasons for about citizens’ ability to afford its tariffs, the high cost this increase in EPC cost by approximately 65% are: (i) of the project, which has grown considerably, and increase in the cost of metals by an estimated 90% over issues of indebtedness. At one time, the cost of the the last 5 years (metals account for about 40-60% of Bujagali project was reported to be US$430 million, power generation equipment); (ii) increase in the cost of then US$550 million and then US$580 million. Now, oil (140% between 2000 and 2006), which raises the cost it has risen to US$735 million. The Prayas report of of transporting equipment to Uganda over more than 2002 indicated that the project had been over-priced 1,000 km from the nearest port in Kenya; (iii) a tighter by more than double the actual costs, which could market for power generation equipment: higher global lead to a national loss of more than US$20 million in demand combined with consolidation among manufactur- excessive payments each year. In a meeting be- ers has resulted in higher prices. tween the World Bank and NAPE held on the 28‘h The World Bank Group and other lenders have taken February 2007 in Kampala, World Bank acknowl- several steps to ensure that costs of Bujagali reflect cur- edged that the cost of Bujagali project had increased rent market conditions. BEL conducted its procurement of by 30%. the EPC contractor under the supervision of the EIB. In It is, therefore, increasingly becoming clear that Bu- addition to the review of bid prices conducted by BEL’S jagali Dam will not meet the basic energy needs of Owner’s Engineer, the EPC contract price and conditions the majority of Ugandans who are now without pow- will be reviewed by the lenders with the assistance of their er and live far from the national grid. Biomass (burn- Independent Engineer before finalization. ing wood) continues to account for more than 90% of Average end-user tariffs in Uganda almost doubled in the nation’s primary energy use, and only a fraction 2006 and have reached around US$l7.2/kWh (excluding of the population can afford unsubsidized electricity. VAT). This is due to the rising proportion of currently ex- Bujagali will feed into a very limited national grid, its pensive thermal power. The increased price still does not power bound mainly for Kampala, Jinja, Entebbe fully cover the cost of generation, transmission and distri- and other urban centers. Therefore, we are con- bution, estimated at US$25/kW,h, requiring government vinced that, even if the national grid covers the subsidies for the difference. (This would not have been whole of Uganda, electricity from the Bujagali project necessary had Bujagali been commissioned by the end of would not be affordable. The high cost of the project 2005, as originally envisaged.) will further limit funds available for rural electrification The levelized wholesale tariff of Bujagali power is and is expected to lead to reductions in subsidies for US$9.7/kWh under the low hydrology scenario (or electricity tariffs for grid-connected users. Uganda already has the most expensive power in the region US$5,7/kWh under the high hydrology scenario) in 2006 and tariffs have more than doubled in recent months, real terms. According to the Economic Study, Bujagali’s thus pushing more people out of the already limited commissioning in 201 1 would enable the cost of power to market for electricity. This will therefore negate the end-users to fall to US$l6/kWh in 2006 money. This country’s economic development and efforts for po- would improve the affordability of power to end users. The verty eradication. alternative sources of power for residential consumers who are not connected to the grid are significantly more expensive: the Economic Study estimates this cost at US$l26/kWh on average. PPA Ltd estimated that expen- diture on electricity by grid-connected residential con- sumers would not exceed 5.2% of household income on average in 201 1, which is considered to be an affordable proportion. Affordability will improve further with time as per capita incomes rise. Management acknowledges that this project cannot meet the needs of the remaining 95% of Ugandan house- holds. Other efforts are needed and are underway, such as the ERT Project. As well, the impacts of electricity pro- grams and pricing will be evaluated through a poverty and

35 Uganda

Claimllssue Response social impact analysis that will focus on issues of afforda- sility and willingness-to-pay. Policies. We believe that the absence of an ade- Management believes that the alternatives considered quate and comprehensive economic and alternative for the economic analysis were complete and appropriate, (options) assessment of the Bujagali dam Project and in compliance with OP 10.04 (see Item 10 above.) violates the World Bank’s Policies on Economic Nith regard to OP I.OO, Management notes that the OP Evaluation of Investment Operations (OP 10.04), focuses on the Bank’s mission of “sustainable poverty Poverty Reduction (OP/BP 7.00), among others, reduction” and explicitly highlights that, “the Banks sup- which requires the evaluation of projects to ensure port for poverty reduction is focused on actions, consis- that they meet development goals. tent with its mandate, to increase opportunity, enhance empowerment, and strengthen security.” Within this broad framework, a critical priority is promoting broad based growth, given its proven importance in reducing poverty. Management views the Bujagali hydropower plant as an important element of the infrastructure backbone needed For Uganda to continue its broad based growth in support of poverty reduction.

Basoga. BEL‘S SEA considers the project area as It is important to distinguish between the Ugandan not inhabited by indigenous people. It therefore con- constitution’s definition of indigenous people and the siders Basoga as not being indigenous, yet the Con- Bank’s Operational Policy on Indigenous Peoples. Never- stitution of the Republic of Uganda (third Schedule) theless, the project has separate programs for addressing considers Basoga as an indigenous people. the needs of ethnically differentiated communities and Has the constitution of Uganda changed? Or is the other vulnerable groups (e.g. women, youth, disabled Constitution of Uganda (1995) not relevant to the persons). Bujagali project? According to the Constitution of Uganda (Article 10 and Schedule 3), one must belong to one of the ”indige- nous communities” (or have a parent or grandparent who does) in order to be considered a Ugandan by birth. The Basoga are part of this list, but so are the 55 other groups of Uganda, including the Baganda who mainly live on the other side of the river. Thus, all natural-born citizens of Uganda are indigenous under the constitution. The Basoga are ”indigenous” as opposed to foreign in origin; that is, they are autochthonous to Uganda, of as much antiquity, as the other groups. The Baganda, Bany- oro, Bakiga, Banyankole, Batoro and others have exactly the same origins and antiquity, and all are farming peo- ples, together making up the vast majority of Uganda’s population. The Bank does not dispute the Ugandan constitu- tion’s delimitation of who the indigenous ethnic groups of Uganda are. The Bank’s OP on Indigenous Peoples spe- cifies criteria that define Indigenous Peoples as follows: (i) self identification as members of a distinct indigenous CUI- tural group and recognition of this identity by others; (ii) collective attachment to geographically distinct habitats or ancestral territories in the project area and to the natural habitats and territories: (iii) customary, cultural, economic social, or political institutions that are separate from those of the dominant society; and (iv) an indigenous language, often different from the official language of the country or

36 Proposed Private Power Generation

Claimllssue Response region. In examining the claim that the Basoga meet the re- quirements of the Banks Indigenous Peoples' policy, Management considers that a clear demarcation line ex- ists between the Basoga and ethnic groups in other Afri- can countries that the Bank has defined as indigenous - such as under-representation in the politics and in the economy of the country, social discrimination and the need for affirmative recognition to ensure survival. The Basoga are a large and influential group within Uganda. Considering the Basoga and all other Ugandan groups as indigenous peoples would defeat the intended objectives of OP 4.10, which are to respect "the dignity, human rights, economies, and cultures of Indigenous Peoples who, ... as social groups with identities that are often dis- tinct from dominant groups in their national societies, ... are frequently among the most marginalized and vul- nerable segments of the population. As a result, their economic, social, and legal status often limits their capac- ity to defend their interests in and rights to lands, territo- ries, and other productive resources, and/or restricts their ability to participate in and benefit from development.". As with all Operational Policies, Bank staff are re- sponsible for applying the policies in accordance with the applicable criteria. Thus, based on these criteria, the defi- nition of Indigenous Peoples for the purposes of the World Bank policy must take into account everything that is known about, and all consultations with, African people and governments. The Africa Region, aligning itself with other World Bank Regions looks beyond the facts of an- cient origin, land, and self-definition as "indigenous," and has come to treat some, but not all, peoples of Africa as Indigenous Peoples based on the fact that they are mar- ginalized and vulnerable. In general it follows the delib- erations of the African Union's Commission on Human and Peoples' Rights (CHPR -Working Group on Indige- nous Populations/Communities) and the traditions that have been established at the UN Permanent Forum on Indigenous Peoples (the "Forum") and the Indigenous Peoples of Africa Coordinating Committee (IPACC), all of which operate with broad governmental support through their respective international bodies. Finally, it should be further noted that the Inspection Panel investigation report on the first Bujagali project (page 77) agreed that the Indigenous Peoples' policy should not have been triggered: "There are no minorities involved; thus there is no evidence that the Bank's policy on Indigenous People (OD 4.20, issued in September 1991) is applicable to this Project." Management consid- ers that as there are no changes since that time, the Bu- jagali project does not affect Indigenous Peoples as de- fined by the Bank's policy and specific regional considerations. BEL is committed to complying with World Bank

31 Uganda

Claimllssue issues in the Bujagali project area were inadequately covered in the SEA. It is assumed in the SEA to nity concerns in relation to these issues have been dis- have addressed cultural and spiritual issues of the cussed regularly in public consultations, including ex- affected community. panding consultations to the Buganda and Basoga This, then calls for an effective consultation process Kingdoms, who are culturally responsible for villages liv- involving all clans that are culturally and spiritually ing on the west and east banks, respectively, since the attached to Bujagali Falls followed by a public hear- project preparation began in 2000, under the original de- ing. veloper AES and, subsequently, BEL. The management of cultural and spiritual issues is part of the overall social management plan (part of the SEAP), which will be implemented throughout the life of the project. Implementation will be monitoredlsupervised by the World Bank Group throughout the loan/contract periods. A Ugandan NGO, “Interaid,” was contracted to carry out independent monitoring during AES implemen- tation of its RAP. BEL has committed to independent monitoring, also through Interaid, of all aspects of the pro- ject, including those related to cultural heritage. There have been extensive consultations on various social aspects of the project, including spiritual and CUI- tural issues. Appendix H of the Hydropower SEA report provides information on the consultations. (See Annex 4.) Policies. The failure of the World Bank to respect See response to Item 14. the Constitution of the Republic of Uganda as re- gards indigenous peoples is a violation of World Bank‘s Policy on Indigenous Peoples (OP/BP 4. IO).

AESNP Resettlement. BEL’S SEA states that The SEA Report states that AES would assume re- AESNP, the previous project proponent, completed sponsibility for resettling project affected people, not that land acquisition, resettlement and relocation of all the resettlement program was completed. Implementation residents formerly located in the reservoir area and of the resettlement plan started under AES. Approxi- compensated land owners and other project affected mately 4,600 stakeholder contracts have been compen- people. However, houses and facilities provided to sated. Resettlementkompensation could not be fully the resettled communities by AESNP are now dilapi- completed because the project was terminated in 2003. dated less than five years after construction, imply- The BIU, which was left in charge by the GoU of ing that the structures were poorly constructed and community relations until a new developer could be identi- would probably soon crumble. fied, was constrained by limited resources. BEL became involved in the resettlement process in 2006 and con- ducted the APRAP, which identified legacy issues and actions that need to be undertaken for the project, in compliance with World Bank Group resettlement policies. BEL is also committed to implementing the CDAPs. Re- cent supervision missions have confirmed that the quality of resident houses is still adequate (see Annex 7, with photographs of the resettlement houses/community that were constructed at the time of the previous effort to de- velop the Bujagali project (circa 2001)). The outstanding claims under the resettlement grievance mechanism, do not include any complaints concerning housing quality. Any future claims will be addressed through the grievance mechanism. Compensation and Resettlement Frameworks. In 2000, AES prepared and disclosed RAPS for the The existing compensation and resettlement frame- hydropower project and also for the transmission line.

38 Proposed Private Power Generation

Claimllssue Response works are out-dated and do not reflect current eco- Only implementation of the RAP for the hydropower pro- nomic situations. ject and the Kawanda substation (as part of the transmis- sion line) had been initiated in 2001. BEL has carried out a stocktaking assessment of the past resettlement (Le., the APRAP) for its Hydropower Project and for the Kawanda substation, which is posted at the World Bank website (www.worldbank.ora/Buiaaali) and at the Infoshop. With respect to the transmission line (part of the Interconnection Project) that will be owned by UETCL and is expected to be financed by the AfDB (and would thus be considered an associated facility by the World Bank), a new Resettlement and Community Devel- opment Action Plan (RCDAP) has been disclosed at the above-mentioned website and Infoshop. Both the APRAP and the RAP for the transmission line have taken into account new conditions. For example, the APRAP determined that past resettlement did not provide for vulnerable people and has recommended ac- tions to ensure that these people’s needs are addressed going forward. Bujagali Interconnection Project, People affected The transmission line RAP prepared by the previous by the Bujagali Interconnection Project were never developer, AES, was not implemented because the spon- compensated and resettled. It is therefore important sor withdrew and the project was terminated. that compensation and resettlement of project- The SEA prepared by BEL for UETCL’s Interconnec- affected people is based on updated compensation tion Project includes a clear commitment to resettle ade- and resettlement frameworks that reflect current quately any project affected persons in the transmission economic realities. line area. Land evaluations for the Interconnection Project lere is, however, no clear commitment on the part of were completed in late 2006 and early 2007 and formed BEL to complete the compensation and resettlement the basis for compensation in the new RCDAP. exercise in a manner that reflects current realities. There should have been a re-assessment of social costs and benefits of the compensation and reset- tlement exercise to reflect the current and future re- alities. Policies. The lack of a detailed compensation and Management considers that BEL has carried out so- community development action plan in BEL’s SEA is cial and environmental evaluations and documentation a violation of World Bank’s Policy on Information that are in full compliance with World Bank policies. The disclosure, Involuntary Resettlement (OPBP 4.12), social and environmental assessments were disclosed in Piloting the use of Borrower systems to address En- the Infoshop and at locations in Uganda. These can also vironmental and Social Safeguard Issues in Bank- be obtained from World Bank website dedicated to the Supported Projects (OP/BP 4.00), Environmental project (www.worldbank.ora/Buiaaali). Action Plans (OPAP 4.02), Indigenous Peoples As explained in Item 15, Management considers that (OPBP 4. IO), Projects in Disputed Areas (OP/BP OP/BP 4.10, Indigenous Peoples, is not triggered by this 7.60), among others. project. This project does not pilot the Use of Country Systems, and thus does not trigger OP/BP 4.00. OP/BP 7.60, Projects in Disputed Areas, is not triggered, as this project is not being implemented in a disputed territory. Consultation Concerns. While there is evidence of The SEA includes an annex listing issues and con- consultations in BEL’s SEA, project proponents con- cerns raised in each of the public consultations. There is fuse consultation with true participation in a decision- also a Public Consultation and Disclosure Plan (PCDP) making process. Consultations with the 240 clans in discussing past and planned consultation activities. Both Busoga and 52 clans of Buganda were not done at the SEA and PCDP are posted at the website: all. In addition, the SEA does not indicate how each www.worldbank.ora/Buiaqali and are also available at the

39 Uganda

Claimllssue of the stakeholders’ concerns raised during the con- Infoshop. sultation process are going to be addressed. The The consultation process includes continuous con- failure to address concerns raised and obtain sultations with representatives from communities and agreements during the consultation process by the clans. While it would be impossible to address “each of dam developer violates World Bank Policies on Envi- the stakeholders”’ concerns, at all meetings with stake- ronment Action Plan OP/BP 4.01, Social Assess- holders, the developer has invited community representa- ment (OP/BP 4.10), and Physical Cultural Re- tives and community members to raise issues with regard sources (OP/BP 4.1 1). to their involvement in the project. For example, at com- munity meetings held on October 5 and 6, 2006, commu- nity members made comments with regard to public ser- vices and job opportunities, among others. Naminya Community. Most of the people who were Supervisionlpreparation missions observed in 2006 moved in 2002 were not given land titles to their new that 34 of the 50 homes in Naminya were occupied. To lands, which caused great uncertainty. Problems date, 28 of the 34 households have already received their that arose with the resettled communities were left land titles, with the remainder to be settled (see sub-item unresolved for years after the original project spon- on Land Titles below). sor (AESNP) abandoned the project. It took strenu- ous lobbying on their behalf by our organizations to get the government to respond to some of the prob- lems. [See below for more detail]. Land Titles. We were promised that all the re- This issue was addressed in the APRAP. As ex- settled people would be given plots of land with plained above, 28 of the 34 households have received land titles. Few people have so far received land title in Naminya, of which 19 titles have been processed. titles for their plots after long waiting and pro- One title is awaiting selection of a guardian for a minor; tests to government. Many of us are not sure another is in probate. Four remain to be settled because whether or not we shall be able to get land titles of discrepancies in the original land survey. The BIU is for our plots of land. This has caused uncertainty working to resolve these discrepancies. BEL is working to whether that land we have belongs to us or with the BIU and local authorities to speed up the proc- another person holding the land title, who can ess. Any land not titled is owned by the Uganda Land easily evict us. We have heard rumours that the Commission; no third parties are involved. This situation land we have belongs to Madhavani. was clarified with the community on March 1, 2007. School. We were promised a Primary School for The resettlement program included provisions for im- our children, but today, our families are increas- provement of educational facilities within the project area. ing and the children do not have any primary This included five schools that were selected for im- school to go to. We have improvised by using provement of existing structures, construction of new one of the vacant houses in the resettlement structures, provision of equipment and improvement of area as a nursery and primary 1 to 4 classes. existing sanitation facilities. Because AES withdrew in But, we are continuously warned to vacate the 2003, only a few of the planned improvements were im- premises and take our children elsewhere. plemented at Budundo and Kyabirwa Primary Schools. Where shall we take our children for schooling? BEL has recognized this gap and lack of implementation The available schools are far away and our in the APRAP, and has included specific actions to be young children find it difficult to go there. The taken in the SEAP and the CDAP. In particular, the Na- nearby school is a missionary and private school minya Primary School, St. Stevens Secondary School and the owners have refused our children to go and Nile Vocational School never benefited from the to attend in that school. community developmenthesettlement programs. The APRAP identified this issue as one of legitimate concern, although the original commitment was for the school in Naminya to be refurbished in order to accom- modate the additional pupils from the resettlement village. Local educational authorities consider that the resettle- ment village still has too few students to justify its own primary school. Thus, BEL has recommitted to upgrading the existina Naminva school. but also recentlv committed

40 Proposed Private Power Generation

Claimllssue to building a kindergarten (nurserv). ~~ ~ ~~ Health centre. We were promised a Health The resettlers at Naminya were promised a health Centre Ill with maternity ward, laboratory, minor center but not a level Ill one (i.e., with maternity ward, theatre, inpatient wards, but today what we have laboratory, etc.). There is an existing level Ill health center is a model house with two health personnel at Wakisi (about 7 km to the north of the resettlement which operates 5 days a week and only 3 hours site), and the local authorities say that they do not have a day. To get this facility was a very long strug- the resources to support another one. BEL is committed gle with the help of some NGOs that linked us to to further upgrades to the existing health services as part Mukono District Local Government. The ques- of the CDAP. tion is, “When shall we ever get the type of One of the structures built as a house in Naminya health facility that was promised”? village is now used as a health center, and medicine is available. This existing health center was equipped by the Ministry of Health at the Naminya resettlement community and is an interim solution until BEL begins implementing the Bujagali project, when the health program under the project also will begin. In the pre-construction phase of the project, BEL will convert two vacant houses into ac- commodations for the health center staff who now com- mute from Jinja. This will allow operating hours to be in- creased. BEL’S program also includes improvements of Wakisi and Bodondo Health Centers on the west and east banks respectively, a program for HIV/AIDS/STD control and mitigation, as well as a program for vector-borne dis- eases. BEL recognizes the gap in health services and lack of implementation of the health program in the APRAP, and has included specific actions to be taken in the SEAP and the CDAP. Water. We were promised water tanks for har- This issue.is addressed in the APRAP. AES installed vesting rain water on every house, but after us- a drilled well at the entrance of the Naminya site near the ing those tanks for less than one year, they health center. AES also built an improved spring catch- started leaking and now majority of them are not ment in the middle of the site. A pre-existing drilled well is functioning. The available 3 functional plastics available to the resettlers at the other end of the site. AES water tanks were provided by an NGO. also installed rain harvesters, and there are currently 51 There is only one borehole in the community that rain harvesters at Naminya. The well, spring, and rain can not serve the whole community. Even then, harvesters lack maintenance. For example, small parts it is not centrally located and not easily accessi- are not replaced, etc. ble by the majority of the resettled people. BEL has recognized the gap in water provision and lack of implementation of the water program, especially the fact that the communities need training in mainte- nance of small technical works. The APRAP identified the gaps and the CDAP has included specific actions to be taken. For example, recent visits to the community have found that the problems appear to be related to the taps in the rainwater tanks. Maintenance of the tanks is the responsibility of the resettlers. However, BEL has commit- ted to replacing the taps and training people in maintain- ing the tanks. BEL has also upgraded the pump in the well installed by AES. Overall, access to water is above the level found in surrounding communities as well as in planning guidelines for communities in rural Uganda. Housing. The houses that were provided with Bank missions have observed and concluded that the

41 Uganda

Claimllssue Response are sub-standard and incomplete. By the time, standard of housing is satisfactory. Cooking is an outdoor people were resettled; the houses did not have function in rural Uganda. The RAP provided for kitchens kitchens, were not plastered and lacked ceilings. to be built outside the main houses, by the owners them- The houses are too small to cater for our fami- selves, following African tradition. The sizes of the houses lies, especially those of us with two wives and were calculated based on average family size and are of many children. To make the matters worse, the better quality than the original houses. The new houses houses are now cracked and we fear that they are of permanent character and are of a design that was will fall on us. developed with full participation of the project affected households. Post-resettlement expanding families are responsible for providing adequate housing for their family members. 0 Latrines. The latrines that were provided were This issue is addressed in the APRAP and concerns too small in size and shallow (less than 8 ft six specific latrines. All the existing pit latrines were con- deep) and whenever it rains, they are filled with structed according to good practice designs at the time. water that floods which could pose danger to our Latrines at six houses were later found to be adversely health. affected by water inflow, and a different model was in- stalled at these locations. The current conditions of all the latrines will be evaluated during the pre-construction phase, and BEL will consider next steps for addressing any outstanding issues or problems. BEL will also build latrines at the construction site, thus improving sanitation for the proiect affected people. Electricity. We were promised electricity, but up BEL, together with UMEME, is exploring possibilities to now, we have never been given electricity. for the provision of electricity. BEL will also finance a fea- Moreover, during the resettlement, some settlers sibility study for electrical distribution to the resettlement were given plots in the way-leave of the high vol- community, which may convince UMEME to provide a tage transmission lines that evacuates electricity supply. Any future scheme that seeks to respond to the from Jinja to Kampala. Later on, these people demand for electricity and preferential rates has to take are being told that they cannot use these plots into account the challenge that, BEL, as a producer of and yet they are not given alternative plots. electricity, is not allowed to distribute it. In addition, elec- tricity needed in the project impact area for domestic con- sumption has to be low voltage, whereas the electricity produced by the hydropower project will be high voltage. 0 Sources of income and food. Where we origi- Changes in income and livelihoods of project affected nally were, we carried out fishing and farming as people are being monitored through BEL'S bi-monthly site sources of income, but the plots we were given visits to resettled families in Naminya and surrounding in the resettlement area are not enough for farm- villages. Project affected people were provided with the ing. Moreover, we no longer have access to the necessary information to make informed choices with re- river to do fishing, because the river has been gard to resettlement packages. The 34 households at fenced-off by the dam developers. This has ne- Naminya chose to be resettled there and receive a house gatively affected our sources of income and on one acre of land, in addition to two more acres for food. The fish ponds that were promised to us farming. Naminya is farther away from the river, but peo- have never been put in place. ple in the area are nevertheless combining fishing with farming . The APRAP identified income replacement programs as necessary for the project to meet World Bank Group resettlement standards. These programs are planned over several years following the project's financial clo- sure. Land is extremely limited in the area, so BEL has committed to implement a program of intensified agricul- ture for increasing yields on available lands and develop- ing markets for produce, including assistance in establish- ina small business and Drovidina micro-credit.

42 Proposed Private Power Generation

Claimllssue Response BEL is committed to honoring all the promises made by the previous developer; however, the construction of a fish pond was not included as part of the resettlement package. With regard to access to the river, the west bank of the river is fenced, but gates are temporarily kept unlocked in order for the population to reach the river on that side. BEL will work with local communities to ensure that access to the river is provided during construction and operation for fishing and other water-dependent uses. BEL will collaborate with NAFFIRI, the Uganda national fisheries institute in Jinja, to develop the fisheries pro- gram. Resettlement disturbance package. We were Each affected household received and agreed to a re- promised a resettlement disturbance package settlementlcompensation package. This included a one for a period of fiver years, but up to now, we time disturbance allowance/resettlement assistance com- have never received anything. pensation. A RAP does not normally include a five year resettlement disturbance package. Longer term monitor- ing and income restoration activities that were planned by AES over a period of several years ceased or were cur- tailed when AES withdrew. Continuation or completion of these activities, updated to reflect current conditions, is planned by BEL and is addressed in the APRAP and CDAP. Community centre. We were promised a com- Insofar as can be determined, no formal or other munity centre, but up to now, it has never been commitment to construct a community center was made put in place. by AES. The APRAP does document that a local political leader made a recommendation for such a center during the 2006 consultations. Market. We were promised a market nearby, but Provisions for new markets and marketing are pro- up to now the market has never been con- vided for in the new CDAP, Section 5.3. structed. Environment protection. We were promised Each household received five tree seedlings as part of tree seedlings to plant in our compounds and the its package. Most houses at the resettlement site are sur- settlement area, but up to now we have never rounded by trees. BIU provided additional seedlings as received any seedlings, yet the resettlement is recently as 2005. The prior sponsor did have an agro- on a slope and is bare, without trees. forestry program for farmer groups and schools. BEL, as part of its agricultural extension program will provide addi- tional technical advice and assistance for agro-forestry, among other land-based income-generating activities. ~~ Employment. We were promised jobs once BEL has publicly declared that recruitment offices will construction of Bujagali dam starts. But we need be opened on the east and west banks. An EPC contrac- written assurance that we shall get those jobs tor will manage the entire construction, and the contract when construction of the dam starts, particularly between the EPC and BEL stipulates that priority will be we want to know how many of our people will be given to qualified local people. During construction, employed. around 600 to 1500 workers will be needed. Only about 10% of these jobs, however, will be for unskilled labor and realistically open to local labor. Vocational training, in col- laboration with the existing technical schools in the area, will be provided, but this training may not add substan- tially to the number of local people who can be employed. Realizing the gap between local expectations and likely local recruitment, BEL has recently committed to develop-

43 Uganda

Claimllssue Response ing additional job opportunities, including a project to plant trees in a 140 meter belt around the new reservoir and between the Bujagali hydropower facility and Kalagala Falls. International labor and employment rules (Le., the World Bank Group) as well as local Ugandan rules and company standards will apply. Routine maintenance of access roads and Again, BEL has recognized the gap in road services other infrastructure. We were promised routine and lack of implementation of the road program in the maintenance of our access roads, but up to now, APRAP, and has included specific actions to be taken in maintenance has never been done. the SEAP and the CDAP. The resettlement community was also educated on taking responsibility for road main- tenance, as was originally planned. Each household is supposed to maintain the portion of the road adjacent to its plot. Further education may be needed on this issue with the support of the local authorities. Visitations and consultations by World Bank, The social scientists who have participated in mis- Government and the dam developer. Why is it sions, starting in 2000 and continuing to the present have that whenever World Bank, Government and the all spent much of their time visiting project affected people Bujagali dam developers visit us, they just pass in the field, including visits to the Naminya resettlement through without talking to us. They just discuss site. There have been extensive consultations with pro- among themselves and leave. Even when they ject-affected persons, and ample disclosure of the project want to discuss with us, they do not give us am- documents. BIU has also acted as a liaison to the com- ple time for us to prepare ourselves. Does being munity. Appendix H of the Hydropower SEA report, the in a settlement remove our respect of being citi- PCDP, provides information on the consultations. (See zens of this country? also Annex 4.)

Nile Hydrology and Lake Victoria. The World Bank As described in Item 1 above, a thorough hydrological has also recently refused to publicly release informa- analysis was undertaken as part of the due diligence for tion on the Nile hydrology and the impacts of Kiira the project. This analysis underwent extensive internal dam’s operations on the levels of Lake Victoria, as reviews and also was discussed in a series of meetings has the Ministry of Energy and Mineral Development with Ugandan power sector stakeholders. Following the (MEMD). The Bank has commissioned new analysis final stakeholder consultation in January 2007 regarding of the Lake Victoria hydrological situation, but it is the Economic Study, the conclusions regarding hydrology unclear if these studies (and the data they are based were publicly disclosed on February 26, 2007. A copy of on) will be made public. this report was provided by IFC staff to the Requesters on ore transparency and openness is needed on how February 28, 2007. various options have been evaluated. At least, pro- ject proponents should release all documents on the project‘s economic viability, including all studies on the Lake Victoria/Nile hydrology, the Power Pur- chase Agreement, and options analysis. The infor- mation must be released with adequate time to re- view before further action is taken on Bujagali. The only document released for review was BEL’S SEA, which does not address the overall issue of Lake Victoria’s long-term health, other than to assert that Bujagali Dam will be designed based on the “Agreed Curve.” Power Purchase Agreement. The key document Copies of the Power Purchase Agreement and Imple- that assigns economic risks, the Power Purchase mentation Agreement were made publicly available at the Agreement, was only recently (January 8, 2007) re- ERA offices for a 30 day period starting on March 6, 2006

44 Proposed Private Power Generation

Clairn/lssue Response leased for public scrutiny at the Uganda Electricity (see Annex 8, Public Notice by the ERA concerning the Regulatory Authority’s (ERA) Office in Kampala. It is Bujagali project). Management has been informed by a photocopy, without dates for its signifying, the ERA that this disclosure satisfied the requirements result- pages are not serialized, it has excerpts of AESNP, ing from the High Court ruling: Greenwatch (U) Ltd. vs. there are inconsistencies in what the term “the com- A. G & Uganda Electricity Transmission Company Ltd. pany” refers to (is it UETCL, AESNP, IPS or BEL?), HCCT-00-CV-MC-0139 of 2001 to which Management it does not include the costs of Bujagali dam project, believes the Requesters refer. However, in the interests it does not apportion responsibilities, risks and guar- of greater transparency, ERA has again made the Power antees between the parties regarding the dam pro- Purchase Agreement and Implementation Agreement ject and it is tied by strings to a reading table in publicly available for an open-ended period, starting on ERAs library. One is not allowed to obtain an origi- January 8, 2007. ERAs disclosure of commercial docu- nal copy (photocopy). People are required to read it ments of this nature is a departure from standard industry only during working hours. Since it is only one doc- practice, since such documents are frequently considered ument, it is difficulty for two or more people to read it to be sensitive and confidential. It is understandable that at the same time, thus limiting public participation. ERA may wish to retain a measure of control over the We believe that this is not the actual Power Pur- circulation of the documents. ERA maintains a log of visi- chase Agreement being used to negotiate loans tors who have reviewed these documents. When IFC staff from the World Bank. visited ERA in late February 2007, there were four entries The previous Power Purchase Agreement for in this log. AESNP was first kept secret, until after the High Management further has been informed by the regula- court of Uganda ruled that it is a public document tor that the Power Purchase Agreement, available at its that should be made public. This was also the posi- office, is a copy of the documents signed by BEL and tion of the Inspection Panel in 2002, which stated UETCL, the transmission company and power purchaser, that “It seems evident that full disclosure of the on the basis of which lenders are currently negotiating the [Power Purchase Agreement] is vital, if the intent is project financing package. The Power Purchase Agree- to place the public in a position to analyze, under- ment, in combination with the Implementation Agreement stand, and participate in informed discussion about (also disclosed), provides a detailed allocation of respon- viability of the Project and its impact on the economy sibilities among BEL, UETCL, and the GoU. The Agree- and well-being of Ugandans.” When the AESNP ments have been reviewed by the World Bank Group and Power Purchase Agreement was finally released, it are consistent in form and substance with international was revealed that it posed unjustifiable risks to the standards. Uganda and government, consumers and taxpayers. While Management acknowledges that’the disclosure Uganda laws require that Parliament must approve of the Power Purchase Agreement is limited to the prem- the state’s obligations under the Power Purchase ises of the regulator’s office, it wishes to highlight that Agreement. There is no evidence that BEL’s Power such disclosure in itself is highly unusual. In this context, Purchase Agreement has been debated and ap- the Inspection Panel investigation report highlighted that proved by Uganda’s Parliament, yet it is reported in “the Panel finds that according to IDAs policy, there is no BEL’s SEA to have been signed way back in 2005 specific requirement to disclose contracts to which IDA is by government. BEL’s SEA was therefore signed not a party. Therefore, in not requiring that the Power without incorporating the costs of the project related Purchase Agreement be disclosed, Management‘s ac- to studies, construction and compensation and re- tions have been consistent with IDAs Disclosure Policy.” settlement issues, which will definitely be reflected in With regard to the final tariff, the GoU has followed a the tariff of electricity from the Bujagali project. This two step process for the project wherein the sponsor was is not proper. selected based on a competitive and transparent process. The sponsor was then required to select the EPC contrac- tor through a competitive process. This process has now been undertaken by the sponsor, and the EPC contractor has been selected. Annex D of the Power Purchase Agreement spells out the methodology for tariff calcula- tion, including the methodology for incorporating the EPC and other project related costs that are considered in cal- culation of the tariff. In accordance with normal practice, the actual tariff will be determined at the commissioning of the Dlant.

45 Uganda

Claimllssue Response The GoU will be required to seek all approvals under local laws, prior to the lenders (including the Bank Group) providing any financing for the project. Policies. We believe that the discrepancies in the The World Bank Group Policy on Disclosure does Power Purchase Agreement pose a great threat to not require the Power Purchase Agreement or other such the Ugandan society and economy and are a con- commercial documents to be publicly disclosed, espe- travention of the law of Uganda and violate the cially those to which the Bank is not a party. However, the World Bank’s Policy on Information Disclosure, Ac- World Bank Group encourages private companies and countability, Economic Evaluation of Investment Op- governments to disclose the maximum information. In erations (OP 10.04), Poverty Reduction (OP/BP response to World Bank Group requests, the sponsor and 1.00), etc. the government decided on an exceptional basis to make the Power Purchase Agreement publicly available at the ERAS office. World Bank Group consultants carried out economic evaluation of the project required for investment opera- tions. The report, ”Bujagali II - Economic and Financial Evaluation Study” (Le., the Economic Study) prepared by PPA Ltd., is publicly available as noted above in Item 1. As explained in Item 13 above, Management considers that it has properly applied OP/BP 1.00, Poverty Reduc- tion in preparing this project. Safety of Dams Bujagali dam design does not adequately consider Management agrees that dam safety concerns are an the safety problems regarding the old Owen Falls integral part of the review of any hydropower develop- (Nalubaale dam), especially now when the power- ment. Dam safety analyses are normally conducted as house and bridge have large cracks. BEL’S SEA part of feasibility studies and later as part of detailed de- states that a Bujagali Dam Safety Panel (BDSP) sign. For large dams an expert panel is normally estab- shall be formed. Just forming a dam safety panel is lished to advise on the dam’s design, construction, and not enough. There should have been an integral operation. Periodic monitoring of dam operation, including comprehensive plan and strategies for addressing safety, is normally conducted by independent specialists. dam safety issues, such strategies should have in- This work is conducted separately from a project‘s social cluded concrete steps to decommission the old Na- and environmental studies, and any recommendations lubaale and disaster preparedness mechanisms and are reflected in the SEAPs. associated costs. Such strategies are very impor- The existing Nalubaale dam and powerhouse were tant; especially since there was no EIA done for Kiira constructed in the 1950s and unexpected and significant dam and no post-construction audit don for Nalu- deterioration subsequently occurred due to the effect of baale dam. In a meeting between NAPE and Rachel the alkali-silica reaction between the aggregates and the Kyte of the World Bank held in Kampala on the 28‘h cement in the concrete. The GoU, with the assistance of February 2007, the Bank acknowledged that the ab- IDA under the Third Power Project, engaged consultants sence of EIA for Kiira and post-construction audit for to review the safety of the dam structure (Le., a post- Nalubaale was an omission. The issue of whether construction audit) and to devise a plan and strategy for Bujagali Dam would be able to survive a failure of remedial works to correct deficiencies. These remedial the Owen Falls Dam is still a major concern. works were concluded under the oversight of an interna- tional expert panel. At the time of the appraisal of Bujagali by AES, the Lenders’ Independent Engineer (Harza Engineering, USA) reviewed the reports of the panel of experts for the remedial works of Nalubaale and concluded in its April 2001 report that the structures do not pose an unusual risk to the Bujagali project. The panel advised on the need to continue regular monitoring and dam safety re- views of Nalubaale in a manner consistent with good in- ternational practice. The DSP appointed by AES con-

46 Proposed Private Power Generation

Claimllssue Response ducted an independent review of Nalubaale remedial works and concluded that ”the remedial and strengthen- ing works for the Owen Falls main dam satisfactory as they were planned and will increase the factor of safety to comply with current standards.” The current Lenders’ In- dependent Engineer (Colenco International Power, Swit- zerland) has endorsed the above recommendations of Harza in regards to Nalubaale (Owen Falls). Monitoring of the Nalubaale structures is also being addressed through the Fourth Power Project. According to the latest Annual Inspection Report (Year 2005), pre- pared by Lahmeyer International, there is no present risk in the condition and stability of the main dam, but the sit- uation is more serious for the intake structure, the head- race bridge and the powerhouse structure. Lahmeyer concludes that “a long term safe operation of the turbines can not be guaranteed.” In 2005, ESKOM (Uganda) Ltd. was awarded the long-term concession for operating the Nalubaale/Kiira facility. This includes obligations to en- sure availability and safety. ESKOM (Uganda) has since taken over the annual inspection duties, and has also ini- tiated remedial works for the intake structures, most re- cently for unit 8. The Inspection Panel, in its Investigation Report of Uganda’s Third and Fourth Power projects, and Bujagali Hydropower Project of May 23,2002, found Management in compliance with OP 4.37. Management considers the current project in compliance with the OP. It is accepted practice to assess the consequences of failure of large dams and to use the results of the analysis in the formula- tion of emergency preparedness and response plans. An EPRP that includes failure scenarios for N/K and Bujagali is not yet available for Bujagali, but BEL is responsible to the World Bank Group through its SEAPs, which include provision for an EPRP, and compliance with such plans will be part of the financing agreements. The design of the Bujagali dam has been reviewed by the technical advisors of the GoU, the current Owners’ Engineer (Montgomery Watson Harza) and the Lenders’ Engineer (Colenco Power International). The preliminary dam design, including the selection of the site, seismic design requirements, the general arrangement of the site, the location of the main structures, and the scheme for diversion of the river during construction, is considered appropriate for the site and its construction feasible. This review has also included the evaluation of flood risks and their incorporation in the design of Bujagali and is consid- ered to be consistent with industry design practice. Finally, Management wishes to state that the represen- tation of the meeting between NAPE and Ms. Rachel Kyte on February 28, 2007 is not correct. See Item 30 below. Policies. Failure to address dam safety issues in the The World Bank’s Operational Policy 4.37 requires a SEA violates World Bank Policies on Safety of Dams DSP to be appointed to review and advise BEL on mat- (OP 4.37), OP/BP 4.01, OP/BP 4.04, OP 7.50, to ters relative to dam design and safety as part of the im-

47 Uganda

lai Response mention but a few. plementation of any dam greater than 15 m in height. BEL has established a DSP with TOR and staffing satisfactory to the World Bank Group. The TOR considers the exami- nation of any safety issues posed by Nalubaale and its impact on Bujagali as well as extensive participation on all technical matters associated with Bujagali. The DSP will provide advice through final design, construction, initial filling, and start-up of the dam, including any design or operational precautions to ensure that the project is con- sistent with OP 4.01, Environmental Assessment and OP 4.04, Natural Habitats. The project is proceeding in a manner consistent with OP 4.37. The Nile River is an in- ternational waterway, and thus the Bank's OP 7.50, Pro- jects on International Waterways has been triggered. In accordance with the policy, the GoU notified all nine up- stream and downstream riparian states in 2000 and in 2006, and recently (March 2007) issued a new letter noti- fying governments of additional information regarding the uroiect, which has been publicly disclosed. Communications with the Bank We have taken the following actions to try to resolve A communications strategy focusing on outreach, the above mentioned issues, but in vain: message mitigation, and information sharing has been Requested for the Power Purchase Agreement, a devised and is currently being implemented. This includes comprehensive economic and options assessment a project dedicated website of the Bujagali Dam project from World Bank, Ugan- (www.worldbank.ora/Buianali). da government and the developer (BEL), but, what is Disclosure was a key request by the NGO community now available as Power Purchase Agreement, eco- on this project. At the request of the World Bank Group, nomic and options analyses do not address our out- the project sponsor and GoU have disclosed the Power standing concerns. Purchase Agreement and Implementation Agreement at the Electricity Regulatory Agency's office in Kampala. The We have sent our outstanding concerns to the World project economic due diligence (including a detailed re- Bank (available at view of the project's hydrology) conducted by independ- httu://www.irn.ora/Droarams/buiasali/index.DhD?id=O ent consultants (PPA Ltd., in coordination with Coyne et 612041etter.html). Bellier) at the request of the World Bank Group, was also publicly disclosed in its entirety on the dedicated project website on February 26, 2007. Frequently asked ques- tions and responses are also posted at the project web- site. IFC officials met NAPE on many occasions during the previous and current efforts to develop the Bujagali pro- ject. Most recently, IFC met with NAPE on February 28, 2007. NAPE staff was under the impression that the World Bank Group had done a hydrological study of Lake Victoria separate from the Nile Basin study. They had not read the Economic Study at that time. IFC provided a hard copy of the Economic Study to NAPE. All of the data and studies that NAPE has requested to be publicly re- leased have been released, although these may not be organized in exactly the way NAPE describes them. For instance, the Economic Study also contains information on hydrology. The Economic Study, also disclosed at the Banks website for the uroiect, uresents: (i) Electricitv demand

48 Proposed Private Power Generation

Claimllssue Response forecast; (ii) Hydrology scenarios and power generation; (iii) Least cost expansion plan; (iv) Economic gains from Bujagali; (v) Economic rate of return; (vi) Impact on elec- tricity tariffs; and (vii) Macroeconomic impact. As explained in Item 20, the documentation was also dis- closed in the Infoshop and at locations in Uganda. A list can be obtained from www.worldbank.ora/Buiaaali.

We invited the World Bank Country Office in Kam- The country office in Kampala did receive one of the pala to attend our public meetings on Lake Victoria two invitations mentioned by NAPE - the invitation for the and the role of the dams in draining Lake Victoria August 15, 2006 Stakeholder Workshop on the decline of (held in August and October 2006), and ot no re- water levels in Lake Victoria. Unfortunately, staff was un- sponse. The only meeting we had on 28w February able to attend this meeting due to other previously sched- 2007 was with Rachel Kyte of the World Bank uled commitments. NAPE provided a copy of the recom- Headquarters, Washington D.C. that did not ade- mendations following the consultations (dated November quately address our concerns, because she state 3, 2006), confirming that the meeting focused on Lake that her mission to Uganda was not to resolve issues Victoria's declining water levels, and not on the Bujagali concerning the project, but to appraise the project. project. The country office does not have any record of having received the October 2006 invitation. The country office had held earlier meetings with NAPE in 2004 (one meeting was held in the country office and chaired by the Country Manager and a second meet- ing took place in the NAPE office), in which the country team and NAPE agreed to contact each other on any Bu- jagali-related concerns and/or questions. NAPE has cop- ied the country office on its letters to GoU on various is- sues, including Lake Victoria and the proposed Bujagali project. However, the country office had not received any formal communication raising concerns about the project prior to the Request for Inspection submitted to the In- spection Panel. Rachel Kyte, Director, Environment and Social De- velopment, IFC, asked for a meeting with NAPE when in Uganda at the end of February, 2007. NAPE had com- municated their comments on disclosed documentation to Ms. Kyte directly. Subsequent to requesting the meeting, NAPE wrote with concerns regarding people resettled to the project team. Rachel Kyte and Nick Flanders, a senior environmental specialist at IFC, met NAPE staff for a courtesy breakfast on February 28, 2007; they also dis- cussed the concerns raised in comments and in the letter. Public consultation is an ongoing process; World Bank Group disclosure principles require public consulta- tions to continue throughout the project design and im- plementation phases. The PCDP that was disclosed to- gether with the rest of the project documents in December 2006 outlines stakeholder engagement activities already undertaken during the preparation of the SEA, as well as planned future activities. Since the new project developer, BEL, became in- volved in the project, public consultations have continued throughout 2006 and 2007, and most recently on March 1 and 2, 2007. In addition to project affected communities, interested NGOs were invited to the meetings. The wit-

49 Uganda

No Claimllssue Response ness NGO was also present during public meetings. As also explained above there is a project dedicated website (www.worldbank.ora/Buiaaali), with frequently asked questions and answers posted there. The availabil- ity of this website was announced on the Bank’s general website, as well as through e-mail notifications targeted to NGOs and other stakeholders.

50 ANNEX2. BUJAGALI11 - ECONOMICAND FINANCIALEVALUATION STUDY - SUMMARY

Bujagali I1- Economic and Financial Evaluation Study

Final Report

Executive Summary

February 2007

International Finance Corporation Bujagali 11: Economic and Financial Evaluation Study Final Report 1 February 2007 26/02/2007-20224

Executive Summary Power Planning Associates was appointed by the IFC in January 2006 to carry out an economic and financial evaluation study of the 250 MW Bujagali I1 hydropower project in Uganda. The TORfor the assignment are reproduced in Appendix A. The purpose ofthis study is to evaluate the economic viability of the Bujagali I1 project taking into account economic, financial, social and environmental aspects.

An Interim Report was submitted in February 2006; the report was presented to the Government of Uganda (GoU) and other stakeholders in Kampala in March 2006. Work was then held up for a number of months whilst the World Bank carried out an independent review of the analysis of the hydrology presented in the Interim Report. The demand forecast was also reviewed and amended to include updated GDP estimates and a detailed assessment of the assumptions of future levels of technical and commercial losses. The revised forecast was presented to GoU and other stakeholders in Kampala in September 2006.

The Draft Final Report was submitted to IFC in December 2006 and presented to the government and other stakeholders in Kampala in mid-January 2007. The report was also presented to the Bujagali lenders in London at the end of January.

We now present a brief synopsis of the results and conclusions of the study following the order of the sections in the Main Text of the Report. The Main Text volume is supported by Appendices which are included in a separate volume.

Background

The economic and financial analysis of the Bujagali project in this study includes an update for the hydrology of the lake and development of potential future hydrological scenarios, both for the short and medium term. Had the Bujagali project been commissioned in 2005/06, as envisaged back in 2000, the current problems would not have arisen, or at least not to the same extent. In the intervening years there has been continuing demand growth, coupled with severe supply constraints that would have been alleviated had Bujagali come into service in 2005. The experience has demonstrated the high cost penalties of long term delays in the Bujagali project that was needed to meet the growing electricity demand of Uganda.

International Finance Corporation Bujagali 11: Economic and Financial Evaluation Study Final Report 2 February 2007 26/02/2007-20224 Electricity Demand Forecast for the Uganda System

A demand forecast for the Ugandan grid has been derived using the most recent data on the economy and the electricity sub-sector’. The forecast is predicated on assumptions for the growth of the economy, connection of new consumers, and the reduction of system losses, in particular commercial losses. The base case forecast is summarised in the table below.

Peak Demand Generation Sales Year (GWh net) (GWh)

2005 (actual) 3 54 1921 1131

2010 375 2208 1521

2015 545 2959 2361

2020 789 4287 342 1

High and low sensitivity forecasts have also been derived based on alternative economic growth and consumer connection assumptions. The base, high and low forecasts are predicated on forecast tariffs during the period up to 2011 when Bujagali is expected to come into service. The tariff projections are based on the financial requirements of the short-term emergency thermal power generation programme and the estimated generation availability from Nalubaale - Kiira.

The 2007 to 2011 tariff assumptions have been derived from the detailed financial analysis of an independent consultant contracted by the World Bank as part of the appraisal of the emergency thermal power project, for which GoU is seeking IDA funding. The tariff assumptions are for increases in real tariffs of 37% in 2006, 45% in 20072 and 15% in 2008. A reduction of 15% is assumed in 201 I, when the commissioning of Bujagali should reduce thermal generation substantially. The demand forecast, least cost planning studies and associated financialhariff analysis were carried out on the basis of the above tariff assumptions. The resulting cost of supply and imputed tariffs were then checked against the original tariff assumptions to ensure that the price

’ Note: data collection for the demand forecast was carried out in January 2006.

* Tariffs were in fact increased by approximately 42% in November 2006, which was not known when the load forecast was finalized. This increase will have its full impact on 2007 demand, almost in line with the Consultant’s assumption.

International Finance Corporation Bujagali 11: Economic and Financial Evaluation Study Final Report 3 February 2007 26/02/2007-20224 elasticity effect which has been factored into the demand forecast remained valid. It was found that the assumed tariffs were above the cost of supply, post-20 11, by approximately 1.2 US$/kWh (7%). Even if the tariff were to drop in line with cost of supply, the positive impact on the demand forecast would be minimal.

Hydrology and Energy Outputs of Hydro Plants

A detailed review has been carried out of the hydrology of Lake Victoria. Our conclusion is that the whole period of record from 1900 should be used to determine the future dependable flow for power generation at hydro power stations on the Victoria Nile.

Significantly contrasting values of Net Basin Inflows (NBI) have been observed between the periods 1900 to 1960 and 1961 to 2000, and the low inflow situation observed since 1999. The approach to hydrological risk has been to adopt two separate hydrological flow release scenarios for the 20 year period after 20 10 over which the evaluation is being conducted, corresponding to a low hydrology scenario and a high hydrology scenario. The high hydrology scenario is based on the period 1961 to 2000 and the low hydrology scenario on the period 1900 to 1960. The likelihood of the low hydrology occurring has been assessed substantially higher than the high hydrology. The relative probabilities have been calculated at 79%/2 1% for the lowhigh hydrology scenarios.

Low High Hydrology Hydrology Qmax Mean Energy Mean Energy Hydro plants Units m3/s GWh/yr GWh/yr Bujagali Units 1 to 5 1240 1165 1991 Karuma Units 1 to 4 792 1324 1609

Interim Generation Programme

In order to meet the short term generation shortfall, GoU has contracted 100 MWof leased high speed diesel plant burning distillate fuel (AGO), and is planning a further 50 MW supported by IDA. This has been done to relieve the load shedding that has been exacerbated by the regional drought, and to allow Uganda to adhere to the agreement to restrict releases from Lake

International Finance Corporation Bujagali 11: Economic and Financial Evaluation Study Final Report 4 February 2007 26/02/2007-20224 Victoria to the “Agreed Curveyy3.A further 50 MW of medium speed diesel plants burning heavy fuel oil (HFO) is expected to be installed as an Independent Power Project (IPP). The emergency thermal plant is intended to fill the generation capacity gap until 201 1 when Bujagali is expected to enter service. The thermal plant will be supplemented by several small hydro projects to be developed as IPPs. In addition, UETCL has negotiated contracts with two sugar producers for 15 MW of power produced from bagasse (sugar cane residue).

Geothermal Potential

We have made a detailed review of the geothermal potential of Uganda and conclude that the resource may be substantially lower than previously estimated. It is considered that only approximately 40 MW of geothermal power generating capacity may be developed economically on the basis of present knowledge, as discussed in detail in Appendix D.

Bujagali and Karuma Cost Estimates

A detailed review and update of the cost estimates for Bujagali and Karuma has been carried out. These are considered to be the only two major hydro plant options for the medium term. These estimates take into consideration the information received from the Bujagali sponsor on the EPC contract negotiations and on development costs relating to Bujagali.

The total economic cost estimates for Bujagali and Karuma resulting from our review are as follows (in constant 2006 US$)4:

The “Agreed Curve” represents the allowable outflow from Lake Victoria into the Nile, corresponding to the flow that would have occurred in the absence of man-made intervention, e.g. the dam at Nalubaale-Kiira.

Just after this report was completed, BEL informed PPA and the Bank Group of the most recent results of on-going negotiations with the EPC contractor, indicating the addition of a $20 to $ 30 million risk premium in exchange for a comprehensive turnkey contract, plus another $ 5 to $10 million for improvements to the electro-mechanical works, bringing the total EPC cost increase into a range of $30 to $35 millions, nominal and undiscounted. At the same time, BEL and the contractor are negotiating an incentive scheme to accelerate commissioning by 3 to 4 months, which would create for Uganda a real economic cost saving on thermal plant operation estimated at $30 to $40 million (in dollars of 2006). The net impact of these proposed changes on the project’s economic viability is judged to be minimal.

International Finance Corporation Bujagali 11: Economic and Financial Evaluation Study Final Report 5 February 2007 26/02/2007-20224 ITEM Bujagali 5 units Karuma 4 units (US%million) (US% million)

Direct construction costs: - Civil works 227 315 - Equipment 187 117 Connection to the grid 28 79

Engineering and coordination 28 33 I Environmental and Social Impacts I 26 I 15 I Development Costs 25 29

Total ImplementationCost 52 1 588 (excluding Interest During Construction)

Environmental and Social Costs of Bujagali and Karuma

The Consultant undertook a field mission to Uganda in July 2006 to collect data on the E&S costs of the Bujagali and Karuma projects. Moreover, Burnside, who prepared the Bujagali Social and Environmental Assessment reports, estimated the project’s environmental and social impact cost based on substantial and detailed field investigations and compilation of new cost data. We have reviewed and commented on the Burnside figures and have used them for the economic analysis of Bujagali. We have also prepared E&S cost estimates for Karuma based on the existing ESIA, which was undertaken in 1999. The cost estimates adopted for Karuma take cognisance of the higher unit cost rates derived from the Burnside studies. The total incremental E&S expenditures for Bujagali and Karuma are shown in the cost table above.

Least Cost Generation Expansion Plans

Detailed least cost generation expansion plans were developed for the Ugandan system for the period from 2010 to 2020 using the WASP IV system expansion program. The analysis was undertaken for base, high and low demand forecasts; low hydrology and high hydrology scenarios; base, low and high fuel price projections; and base, low and high Bujagali cost estimates. Alternative least cost sequences were determined for both the ‘with Bujagali’ and ‘without Bujagali’ cases. Karuma was retained as a candidate plant in both the ‘with Bujagali’ and ‘without Bujagali’ cases. A total of72 cases were evaluated to cover the full risk analysis, and 13 further cases were considered for additional sensitivity analysis. The main results showed that Bujagali commissioned in 2011 was part of the least cost programme under all demand forecast scenarios with the low hydrology, and also for the high and base

International Finance Corporation Bujagali 11: Economic and Financial Evaluation Study Final Report 6 February 2007 26/02/2007-20224 demand with high hydrology. In the high hydrology, low demand cases, the least cost expansion plan comprises only new thermal plant up to 2020, i.e. neither Bujagali nor Karuma could be justified. However, the total probability of occurrence of these cases is low, estimated at 5.5%, and the maximum probability ofany one case occurring is only 1.5%.

Sensitivity studies were carried out to confirm the optimum timing of Bujagali, by delaying commissioning from 201 1 to 2012 for the base demand. This leads to higher present worth (PW) costs for the low hydrology and marginally higher costs for the high hydrology. The analysis also showed that a 4-unit Bujagali design was less attractive economically than the 5-unit reference design. A further sensitivity study confirmed that Karuma commissioned before Bujagali (by forcing Karuma in 20 12) leads to higher PW costs, and that the cost of Bujagali would need to increase by 49%5 to justify the commissioning ofKaruma as the next plant before Bujagali.

A full risk analysis was made for the ‘with Bujagali’ and ‘without Bujagali’ cases, with the following probabilities assigned to the key variables:

Demand forecast: basehighllow - 40%/30%/30% Hydrology: highllow - 21%/79%

Fuel Prices basellowhigh - 40%/30%/30%

Bujagali Cost baseflowhigh - 60%/20%/20%

Assigning the probability weightings to the PW costs resulted in a total net present value (NPV) advantage of US$ 184.0 million (in 2006 US$ with discounting to 2006) in favour of the ‘with Bujagali’ cases. The NPV value is robust in respect of the assumption on hydrology. For example, if 100% probability is assigned to either the low or the high hydrology scenarios, the NPVs, representing the differences between the ‘with Bujagali’ and ‘without Bujagali’ programmes, are: Low hydrology US$202 million, and High hydrology US$ 116 million in favour of the ‘with Bujagali’ cases.

This result was obtained by progressively increasing the cost of Bujagali in the simulation analysis until the WASP program no longer selected Bujagali as the next major plant. In this case the least cost sequence included Karuma in 2012.

International Finance Corporation Bujagali 11: Economic and Financial Evaluation Study Final Report 7 February 2007 26/02/2007-20224 Bujagali Economic Internal Rate of Return (EIRR)

The EIRR for the Bujagali project was estimated by evaluating the cost and benefits of the project in terms of the capital and operating costs of Bujagali and the incremental transmission and distribution capital and operating costs associated with meeting the increment of demand supplied by the project. The benefits were measured in terms of the displacement of costly thermal power and incremental demand of the various categories of consumer, that is met by Bujagali, valued at their respective willingness to pay.

The EIRR values for the references cases obtained are summarised in the table below.

High hydrology Low Hydrology 1 EIRR I 21.7% I 22.0% 1

When the benefits of avoided greenhouses cases are included the EIRRs increase to 22.0% for the high hydrology and 22.9% for the low hydrology.

Sensitivity studies indicate that the project EIRR is robust against all key risk factors, including: hydrology, demand forecast, fbel prices and the capital cost of the project. The demand scenario has the greatest impact on EIRR, but in the most adverse combination of scenarios using the low demand case the resulting EIRR value of 12.5% remains comfortably greater than the 10% benchmark discount rate for World Bank Group-supported projects.

In addition to the sensitivity studies, a probabilistic risk analysis was undertaken on the EIRR value using the Crystal Ball software package with the following parameters subject to a probabilistic range of outcomes: demand forecast, crude oil price, Bujagali capital cost, T&D capital costs, willingness- to-pay of newly-connected customers, and hydrology. The following chart presents the Cumulative Probability Distribution of EIRR forecasts including the impact of greenhouse gas credits to the project. This chart shows there is a 100% probability of the EIRR being above the 10% benchmark discount rate, and a 100% probability of an EIRR greater than 11.7%. The same cumulative probability distribution can be used to show that there is a 50% probability of the EIRR being above 22.7%.

International Finance Corporation Bujagali 11: Economic and Financial Evaluation Study Final Report 8 February 2007 26/02/2007-20224 The Cumulative Probability Distribution of EIRR forecasts without greenhouse gas benefits is very similar. There is also a 100% probability of the EIRR being above the 10% test discount rate, and a 100% probability of an EIRR greater than 11 -5%. There is a 50% probability of the EIRR being above 21.9%. The greenhouse gas benefits are therefore not significant in the economic justification of the project.

Financial Analysis

The financial analysis evaluated the cost of supply for the reference (least- cost) expansion plan with Bujagali commissioned in 2011 - base demand forecast and low hydrology - over the period to 2020. The components of the costs and the resulting cost of supply/tariff assumptions are shown in the following chart.

International Finance Corporation Bujagali 11: Economic and Financial Evaluation Study Final Report 9 February 2007 26/02/2007-20224 Bad debts Urnerne UETCL 0 Embedded renewables OTherrnal Karurna W Bujagali Eskorn

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

The chart below compares the average cost of supply with the assumed average tariff over the period to 2020. In the period up to 2008, the assumed tariffs are below the calculated unsubsidized average cost of supply - largely due to the high costs of thermal generation. The IDA credit to assist Uganda in overcoming the consequences of the emergency thermal programme should be more than sufficient to offset the estimated subsidies required to bring average tariffs down to 17 US$/kWh over the period 2007 to 2010.

High costs due to short-term thermal supplies

25 __ -%-/------1 -Assumed tariff ______

Available subsidies of $243m applied from 2007 to 201 0 will reduce tariffs to around 17clkWh

Over the period 2009-201 1, the assumed tariffs and the calculated tariffs are close, although it is possible that tariffs could come down faster than assumed. The analysis was continued beyond 2012 to examine the impact of additional

International Finance Corporation Bujagali 11: Economic and Financial Evaluation Study Final Report 10 February 2007 26/02/2007-20224 capacity requirements in the expansion plan, including the tariff impact of the Karuma plant. After 2012, the average tariff is approximately 1.2 US$/kWh lower than the assumed constant tariff level of 17.2 US$/kWh.

Macro-economic Impact

A macro-economic analysis was undertaken to evaluate the impact of Bujagali on the Ugandan economy. Overall, the impact of Bujagali relative to the next best option without Bujagali (which includes Karuma in 2012) is relatively small, and positive. There will be an immediate positive impact from Bujagali in 2011 resulting from the balancing of supply and demand, and therefore an end to load shedding. The main macro-economic impacts will be provided through power sector investments, which will add a maximum of 0.3 percent to GDP in 2009. In the longer term, the ‘with Bujagali’ expansion plan should afford 5 percent lower electricity tariffs than the ‘without Bujagali’ plan.

International Finance Corporation Bujagali 11: Economic and Financial Evaluation Study Final Report 11 February 2007 26/02/2007-20224 ANNEX3. LAKEVICTORIA HYDROLOGY

ANNEX 3. LAKE VICTORIA HYDROLOGY'

1. Summary on Hydrological Performance of Lake Victoria. The period of time after commissioning of Bujagali when the energy generation represents most of the benefits of the project is approximately 20 years. This is the consequence of the discounting process in the economic evaluation of the project. Therefore, the hydrological scenarios considered for the calculation of energy generation and economic evaluation should be selected for being most representative ofperiods of20 years duration that are likely to occur again in the future.

2. In the 1900 - 2005 historical series ofthe net inflow into the lake, also called Net Basin Supply (NBS = Run-off + Direct Lake Rainfall - Lake Evaporation), three homogeneous periods can be observed:

- 1900 - 1959: average net inflow = 662 m3/s - 1960 - 1999: average net inflow = 1206 m3/s - 2000 - 2005: average net inflow = 659 m3/s

3. Both periods 1900 - 1959 (60 year-duration) and 1960 - 1999 (40-year duration) appear to be homogeneous enough to define the two hydrological series that are most representative of the future net inflow pattern that is likely to occur for a period of approximately 20 years after commissioning ofthe next major hydropower plant on the Nile.

Figure 1: Lake Victoria Net Basin Supply - 20-Year Moving Average NBS and Mean Yearly NBS of each Reference Period

3000

2500

$2000 E b 1500 3 VI .: .: 1000 d Y g 500

0 I

-500 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Years -m- Yearly NBS - -Mean 1900-2005 20-Year moving average -o- 1900 - 1959 mean NBS -c 1960 - 1999 mean NBS -

I An assessment ofthe hydrology ofLake Victoria undertaken for the proposed project was carried out by Power Planning Associates (UK) in consultation with Coyne et Bellier (France), and ECON (Norway).

1 4. A scenario that would consider the whole period 1900 - 2005, leading to a long term average of 867 m3/s, is found not to be representative enough of20-year periods, as shown by the 20-year moving average curve in the above figure, in which the Net Basin Supply is for most of the time clearly above or clearly below the long term average value. On the other hand, as no reason can be produced to discard the possibility that a future 20-year period will be similar to those observed in the historical record, the following scenarios are defined:

Low Hydrology Scenario: the net inflow into the lake will be in broad agreement with what happened between 1900 and 1960, and again between 1998 and 2005, that is to say, annual variations around an average Net Basin Supply of 660 cubic meters per second(m3/s);

0 High Hydrology Scenario: the net inflow will be in accordance with the period that started with the exceptional inflows of 196 1- 1964 (average 2300 m3/s), followed by approximately 35 years of NBS averaging more than 1000 m3/s, with an average net inflow of 1200 m3/s during the whole period.

5. The reservoir operation studies performed on the basis of each of these two net inflow series produced the values ofconstant release that are guaranteed with 95% reliability:

Low Hydrology: the firm release is 687 m3/s

0 High Hydrology: the firm release is 1247 m3/s.

6. Based on a combination of analysis of dry sequences and mean values, the probabilities associated to each ofthe above hydrology scenarios occurring during the period 20 1 1 - 2030 are: 79% for the Low Hydrology and 21% for the High Hydrology. The possible influence of climatic changes was found not to be significant enough in the medium term (to 2030) to influence in one way or the other the hydrological scenarios.

7. Departure from the Agreed Curve and Recent Fall in the Level of Lake Victoria. The “Agreed Curve” is the relationship between the release at the Nalubaale hydropower facility and the level ofLake Victoria, for the release to follow’the “rating curve” that used to be imposed by the level of the lake outlet before the construction ofthe Nalubaale hydropower facility in the 1950s, based on the Jinja Gauge.

8. The consequence ofmeeting the Agreed Curve is that, the lower the lake level, the lower the release, and the higher the lake level, the higher the release. The two extreme situations that were experienced by the lake level are as follows:

- lake level = 1133.2 the release according to the Agreed Curve is: 400 m3/s - lake level = 1136.2 the release according to the Agreed Curve is: 1850 m3/s

9. This Agreed Curve therefore constitutes a “moving reference”. If during a long dry period, when net inflows are consistently lower than the long term average, releases are consistently higher than the net inflow, then the drop in lake level is accelerated and the departure of release from the Agreed Curve is amplified. This is precisely what occurred during the period 2003 - 2005, and is illustrated in Figure 2 below:

2 The net inflow of these 3 years was consistently below the long term average: 80% ofthe long term average net inflow in 2003,53% in 2004 and 3% in 2005.

During the same period, the power demand in Uganda required a sustained release that was above the net inflow, thus accelerating the drop in lake level, and automatically increasing the departure from the Agreed Curve.

10. A main cause of the drop in lake level in the past few years was the exceptionally dry period 2003 - 2005, when the mean net inflow was only 46% ofthe long term average net inflow, and only 60% of the mean net inflow of the Low Hydrology scenario. The consequence of this low inflow, combined with the release for power generation that was not reduced to the Agreed Curve level due to Uganda’s lack of sufficient alternative sources ofpower generation. resulted in a further drop in lake level.

11. Had the proposed project been in operation during the time, the consequence of this exceptionally dry period would have been much lower. Since the Bujagali site is downstream of the existing Nalubaale and Kiira plants, the same release could have been used a second time at Bujagali and would generate an additional 120% of the power already generated by the turbines ofNalubaale - Kiira (the ratio 1.2 is due to the higher head available at Bujagali). Therefore, with Bujagali in operation, the generation of the same total power and energy would require only 45% (=1/(1+1.2)~100) of the release from the lake as compared to the present situation without Bujagali.

Figure 2: Lake Victoria - Time Series of Outflows and Lake levels - 2000 to 2005 (the right scale applies to lake levels only)

-Q(Agreed Curve) - Qactual 0 Departure -Lake Levels

12. Lake Operation Modelling and Energy Generation Evaluation. Reservoir operation modelling was performed to calculate the firm release and the firm energy generation in each of the hydrology scenarios. The results are summarized as follows:

3 Table 1: Energy Generation Capability of Each Hydropower Plant

Low Release / Low Hydrology High Releasel High Hydrology Available Firm Energy Available Firm Energy Plants Units(2) 3: Capacity Generation Capacity Generation MW GWh/yr MW GWldyr Nalubaale - Kiira Units 1 to 15 2300 203 (1) 912 204 (1) 1740 Bujagali HPP Units 1 to 4 992 200 1198 200 1715 (candidate) Units 1 to 5 1240 250 1198 250 2 132 Karuma HPP Units 1 to 3 594 150 1295 150 1302 (candidate) Units 1 to 4 792 158 1 360 200 1722 Units 1 to 5 990 158 1360 250 2 141 Units 1 to 6 1188 158 1360 296 2 523

13. Before the above figures were used in the economic evaluation and expansion plan modelling, adjustments were made to account for the impact ofperiods when the generating units are under maintenance. The decrease in energy output ranges between 2% and 7% of the above energy generation figures.

4 ANNEX4. CONSULTATIONS TO DATE ON THE PRIVATE POWER GENERATION( BUJAGALI) PROJECT

ANNEX 4. CONSULTATIONS TO DATE ON THE BUJAGALI HYDROPOWERPROJECT rn January 2006 Initial consultations on the draft Social and Environmental Assessment (“SEA”) report terms of reference and the draft Public Consultation and Disclosure Plan (“PCDP”); government agencies in Kampala and Jinja. January 2006: Economic Study workshop with key stakeholders of Uganda’s power sector on electricity demand forecast; Kampala. March 2006: Consultations on draft SEA terms of reference with potential lenders; Washington, D.C. March 2006: Consultations on the draft SEA terms of reference, draft PCDP, and tourism study; government agencies and tourism operators in Kampala and Jinja. March 2006: Economic Study workshop with key stakeholders of Uganda’s power sector to present interim report; Kampala. March 2006: Meetingshterviews with project-affected people (“PAPs”) resettled by AES Nile Power (“AESNP”) as part of the Assessment of Past Resettlement Activities and Action Plan (“APRAP”) preparation; Hydropower Project site area. May 2006: Consultations on the draft SEA terms of reference and the draft PCDP; government agencies and Non-Governmental Organizations in Kampala. July 2006: Meetingshnterviews with PAPs resettled by AESNP as part of Assessment of Past Resettlement Activities and Action Plan (APRAP) preparation; Interconnection Project, Kawanda substation. August 2006: Public notice (newspapers, newspaper website) announcing the draft SEA terms of reference and the draft PCDP, Kampala. July/August 2006: Meetings with Non-Governmental Organizations and information package sent on the draft SEA terms of reference and the draft PCDP; Kampala. rn July/August 2006: Meetings by Sub-county Level (LC3) consultation committees with communities potentially affected by the proposed Bujagali project; Hydropower and Interconnection Project site areas. rn August 2006: Meetings with representatives of the Kingdoms of Busoga and Buganda on the draft SEA terms of reference and the draft PCDP; Hydropower Project site area. August-October 2006: Socio-economic survey of the Interconnection Project corridor; Interconnection Project site area. September 2006: Consultations on preliminary draft SEA report with potential lenders; Washington, D.C. September 2006 Presentation by the Bujagali Implementation Unit at the Nile Basin Discourse (NBD) Forum; Kampala.

1 . September 2006 Public notice (newspaper) and distribution of the SEA Consultation Summary Report; Kampala, Jinja, and hydropower and Interconnection Project site areas. . October 2006: Public meetings held with affected communities on the initial findings of the SEA; Budondo Sub-county and Wakisi Sub-County. . October 2006: Meeting with employees of whitewater rafting and tourism industries; Jinja. . October 2006: Meeting with Ugandan Non-Governmental Organization, the AIDS Support Organization (TASO); Kampala. January 2007: Economic Study workshop with key stakeholders of Uganda’s power sector to present draft final report; Kampala. . March 2007: Public meetings held with affected communities; Hydropower Project site area.

2 ANNEX5. ISSUES IDENTIFIED DURING CONSULTATIONS FOR THE PRIVATEPOWER GENERATION ( BUJAGALI) PROJECT

ANNEX 5 ISSUESIDENTIFIED DURING CONSULTATIONS FOR THE BUJAGALIHYDROPOWER PROJECT

Past resettlement activities and commitments of the previous project sponsor. Assessment of Past Resettlement Activities and Action Plan (“APRAP”) report outlines the concernshsues and proposed actions to be undertaken. The APRAP is Appendix Ito the December 2006 Hydropower Project Social and Environmental Assessment (“SEA”) report. . Bujagali Energy Limited (“BEL”) is committed to completing the required provisions of the original resettlement and community development program. These commitments were included in the new Social and Environmental Action Plan (“SEAP”) of December 2006 for the Bujagali project.

Community development opportunitiesfor local residents and governments. The Community Development Action Plan (“CDAP”) is Appendix J to the December 2006 Hydropower Project SEA. . BEL is committed to CDAP activities over a five-year period following the start of construction. . These commitments cover health care facilities; employment opportunities; water supply and sanitation; fisheries; education; small-scale tourism; training and financial services.

Completion of activities to mitigate spiritual and cultural impacts. . The previous project sponsor prepared a Cultural Property Management Plan that documented the surveys and studies of cultural issues and actions to be taken. Commitments that remain from the previous project were identified as part of the APRAP process. . BEL will complete all of these commitments, including a non-denominationalservice in remembrance of those buried in unmarked graves that will be inundated. . BEL is having on-going consultations with local traditional authorities and has committed to measures to ensure that these issues are properly addressed prior to and during construction.

Construction workforce impacts - social and health consequences of migrant workers coming into the communities. The Engineering-Procurement-Construction (“EPC”) contractor will encourage workers to seek housing in near-by Jinja, which can accommodate families and thus avoid a major risk factor for HIV/AIDS among the local communities. . The Ugandan AIDS/HIV Non-Governmental Organization TASO will assist the project in developing an education and health campaign to inform the local communities and workers about communicable diseases. Local community access to electricity as a community development initiative. . BEL is committed to conduct a feasibility study on the commercial viability of providing the communities with electricity in order to facilitate the process vis-84s UMEME, the current distribution private concessionaire.

Employment opportunities/training and priority in employment opportunities. . BEL and the EPC contractor will give priority to hiring qualified local people for dam, road, and other construction. The EPC contractor will also implement an apprenticeship program to build a local skills base. . BEL is identifying employment opportunities in addition to the income restoration programs of the CDAP. BEL is developing a tree planting program for both borders of the reservoir and the river banks between the hydropower project and the Kalagala Falls. This will provide additional local employment.

Consultation with communities and Non- Governmental Organizations in finalizing and implementing the CDAP. ’ . The CDAP focuses on “supporting communities’ needs based on culturally appropriate means of consultations.” . BEL is committed to undertake ongoing consultation activities with the local community to help prioritize community needs and to finalize the CDAP. A finalized plan will be a disbursement condition of the World Bank Group investment.

Potential for job loss by the tourism industry employees and by self-employed and informal workers in the tourism industry. . Tourism operators and workers will adjust to changes from the hydropower project by moving their businesses downriver. Other tourism operators, such as small arts and crafts shops, restaurants, four wheeler rentals, and locally owned enterprises are expected to move their businesses nearer to Kalagala Falls. . Consultation with the tourism company owners has not indicated that they expect to experience significant decreases in tourist numbers - in fact, many are anticipating growth. Actions are proposed as part of the CDAP, and developed in consultations with the communities, to increase opportunities for local people in the hydropower project area.

Safety issues from construction traffic along the west bank road, as the road is heavily used by pedestrians including school children. . The EPC contractor will implement a Construction Traffic Management Plan that addresses all construction-related traffic on both the east and west banks. BEL and the EPC contractor will consult with local community leaders in the development of this plan.

Local community benefits from the project. . The CDAP is based on ongoing consultation with the communities regarding their

2 future needs. . The proposed project employment benefits (direct and indirect) and induced economic benefits from the project are expected to be significant for these communities.

Concernsfrom the east bank communities that they will not benefit as much as the west bank communities (construction activities will be focused on the west bank). . BEL is committed to providing programs and opportunities to both east and west bank communities. . As part ofthe CDAP, resource centers will be developed on both banks ofthe river. Local institution interest in participating in the project, through assisting in the delivery of the CDAP and environmental monitoring of mitigatiodrestoration activities. . BEL will work with local institutions as part ofthe process to finalize the CDAP and develop other project implementation plans.

Loss of access to the river by fishermen once the construction period begins. . Although fencing along the west bank has been installed, access to the river has not been cut off and use ofthe river in the vicinity of the project for fishing access has continued. As detailed in the CDAP, once construction is initiated more formal facilities will be developed so as to allow access the river for fishing.

Impact of Bujagali on the low water levels in Lake Victoria and on the releasesfrom Lake Victoria. . Water levels in Lake Victoria will continue to be determined by rainfall, evaporation and rate of discharge at the NalubaaleKiira dam complex. . The Bujagali project will reuse water already released through the NalubaaleKiira dam complex upstream. . Through this water use efficiency, Bujagali will assist the Government in its commitment to using the water of Lake Victoria in a sustainable manner.

Safety issues associated with the aging Nalubaalefacilities. . The Government, with the assistance of IDA, has conducted remedial works to correct deficiencies at Nalubaale. These remedial works were concluded under the oversight of an international expert panel. . Monitoring of the affected structures is conducted annually by independent specialists, and corrective actions are implemented as needed. . BEL has formed the Dam Safety Panel (DSP) for Bujagali on March 27, 2007; safety risks from Nalubaale are part ofthis panel’s terms of reference.

3

ANNEX6. REVIEWOF GEOTHERMALPROSPECTS, EXECUTIVESUMMARY OF APPENDIXD OF THE ECONOMICSTUDY

D Appendix D - Geothermal

D.l Introduction

The western branch ofthe East African rift runs through Uganda (Figure D2- 1 and D2-2). The rift is the site of crustal thinning and extension that provides a high heat flow and creates permeable structures. As a result geothermal systems have formed, which is reflected in the abundance of hot springs in Uganda (Dixon and Morton, 1970). The widespread occurrence of thermal features in a favourable tectonic environment is possibly why an initial regional estimate for the potential of 450 MWe of geothermal electrical generation in Uganda was made (McNitt, 1982). Subsequent exploration has failed to confirm this estimate with only three potentially viable prospects identified. The degree of exploration ofthese prospects is sufficient to at least have confidence that their actual total generational capacity is much lower than 450 MWe, although the available data can only provide estimate of the prospect’s actual generational capacity.

Geothermal exploration and development experience elsewhere in Africa would suggest that the western branch of the East African rift is not as prospective as has been anticipated and that clear surficial indicators of rift systems viability for power generation that are present in the eastern branch are lacking in the geothermal systems of the western branch.

This report discusses the validity of the selection ofthe three prospects upon which exploration work has been focussed. It reviews the results of this exploration work in light of geothermal exploration and development elsewhere in Africa to provide a general estimate of geothermal electrical generation capacity for Uganda.

The potential of the three prospects is assessed and power cycle technologies for development are reviewed and costed and a development programme for one of the prospects is formulated.

D.2 Historical

The principal geothermal prospect areas in Uganda are located at Katwe, Buranga and Kibiro (Figure D2-2). These are all situated in the Albertine graben that runs along the border of Uganda with the Democratic Republic of Congo. The graben is part of the western branch of the East African Rift System commonly known as the Western Rift Valley.

There are also a number of areas of with lesser geothermal potential in Uganda. These are located in the vicinity ofthe rift valley in the SW and NW regions of Uganda and at a single isolated prospect area at Katabok in eastern Uganda, near the border with Kenya.

International Finance Corporation Bujagali 11: Economic and Financial Evaluation Study Final Report 214 February 2007 26.02.07-20224 The common features of the three main prospects is that they have the hottest surface features, have high flow rates and a wide distribution (Dixon and Morton, 1970). No other thermal areas in Uganda come close to these three prospects in terms of these criteria. The historical interest in focussing exploration efforts on these areas is therefore valid and in the absence of any further information, geothermal systems that can potentially be developed for power generation are likely to be restricted to these three areas.

The Buranga geothermal field has the most impressive set of thermal features of any field in Uganda with a surficial heat flow of 30MW (Hochstein, 2005), to the extent that a geothermal exploration drilling programme was initiated between 1953 and 1954 (Dixon and Morton, 1970: Gislason, 1994). This drilling did not lead to any development or provide sufficient information to write the system off as being unsuited to development, particularly since one of the exploration wells had a steam blow out (Dixon and Morton, 1970). Given that the first large scale successful exploitation of a hot water geothermal field didn’t take place until 1958 (at Wairakei in New Zealand) it is possible that this early programme in Uganda was premature in terms of technical knowledge and capabilities.

Further geothermal exploration in Uganda was unsuccessfully proposed in 1972 (McNitt, 1972), and the Katwe area identified as a prospect in a review that concluded that as much as 450 Mwe of geothermal power generation was available in Uganda (McNitt, 1982). The 1972 proposal and a later proposal (Jonatansson and Thorsteinson, 1989) led to the visit of Stefansson (1989) to Uganda and the recommendation for exploration work at three prospects: Katwe, Buranga and Kibiro (Armannsson, 1994).

International Finance Corporation Bujagali 11: Economic and Financial Evaluation Study Final Report 215 February 2007 26.02.07-20224 Figure D2-D- I ~o~a~ionof Uganda En relation to the East Africa Rift system (EARS)

Figure DZ-D-2 ~*ca~jo~iofthe miti~eo~her~~a~ prospects in ~~a~d~(from: Rahati, 2005).

3n spite uf the long history of interest in tlie ~o~e~~ialof the ~eo~~er~ia~ reso~irc~sUga~da for ~o~~~i~rc~alpower ~e~~~at~~~~ the e~plora~~onof these resources rc~i~ajn~even today at a pre-f~as~~ilit~level of in~esti~ation. Howrstr, there has been a c~n~~de~~bleincrease in ~rite~estand e~p~*rat~~~ activity over the past few years. Detailed surface g~*scirn~i~cs~~r~~~s werc ~o~~uc~edin 2004 at the two mast pro~~i~in~~ros~ec~s at Ka~~4~~~~i~oro~~~ ~~~~~~e~ and Kibiro, and similar surveys were ~~nde~a~~nat the ~~iran~a ~rQs~e~~in 2005.

take in tile further

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ANNEX7. PHOTOGRAPHS OF RESETTLEMENTCOMMUNITY

ANNEX8. PUBLIC NOTICEBY THE ERA CONCERNING THE BUJAGALIPROJECT

The New Vision, Monday, March 26, 2007

I I E rakF2EgAUTHORITY I ELECTRICITY REGULATORY AUTHORITY Plot 15 Shimoni Road, Kampala Tel: 256-41-341852, Fa: 256-41-341624

at bur offfces for stakeholders interested to examine and prove to tl~emselves.

the Elecbicity Act, advertised in the New V~ionfor the

display between 6th March and 4th April 2006. b) Several mini hydro schemes e.g fshasa River, Nobody made any comments on the documents. %era Rwer at wad, Mubuku II at Bugoye, Waki in Masindi, Buseruka in Hoima, Muyembe in Due to some negative public statements from some Sironko etc. /I .. The total of these is about MMW of individualslwganizations claiming to represent eledrkity when fully developed.

excephnal decish to wadvertise and display the should bring 12 W of electricity to the grkf by PPA on 8th January 2007. Ttiii document and the August 2007. Thi received major Government Implementation Agreement belween the Government financial and other support. and BEL have remained on public display since then

variws pre-feasibility stages in mini hydro bicxfud, We reassure the putdic that the documents on wastatoenergy systems and wind energy etc.

should not confuse the public. Uganda for generation ofc4ectkQ. Unfortunately the gestationperiodoftheserenewab3eenergyvWis bigand some mayaniveafterBujagaliwfik;hkat BcoI1oFI1Jc studies done by pmf&onals show that as

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