report no. 24272 international bank for …...93-10 and ida resolution 93-6) attached for...

Report No. 24272

International Bank for Reconstruction and Development International Development Association

INSP/R2002-002/ 1

MANAGEMENT REPORT AND RECOMMENDATION

IN RESPONSE TO THE

INSPECTION PANEL INVESTIGATION REPORT

UGANDA:

THIRD POWER PROJECT (CREDIT NO. 226%UG),

FOURTH POWER PROJECT (CREDIT NO. 3545UG), AND

BUJAGALI HYDROPOWER PROJECT (PRG NO. B 003-UG)

June 7,2002

MANAGEMENT REPORT AND RECOMMENDATION IN RESPONSE TO THE

INSPECTION PANEL INVESTIGATION REPORT No. 23998

UGANDA: THIRD POWER PROJECT (CREDIT 226&UG), FOURTH POWER PROJECT (CREDIT 3545UG) AND THE BUJAGALI HYDROPOWER

PROJECT (PRG B 003-UG)

Pursuant to paragraph 23 of the Resolution Establishing the inspection Panel (IBRD Resolution 93-10 and IDA Resolution 93-6) attached for consideration by Executive Directors is Management’s Report and Recommendation in response to the findings set out in the Investigation Report No. 23998 dated May 23, 2002, of the Inspection Panel on the captioned Projects (Inspection Panel: Request for Inspection: Uganda: Third Power Proiect - Credit 2268- UC; Fourth Power Project - Credit 3545-UG and the Buiagali Hydropower Project - PRG No. B 003-UG, IPN Request RQO1/3 of August 7,200l).

MANAGEMENT REPORT AND RECOMMENDATION IN RESPONSE TO THE

INSPECTION PANEL INVESTIGATION REPORT No. 23998

UGANDA: THIRD POWER PROJECT (CREDIT 226%UG), FOURTH POWER PROJECT (CREDIT 3545UG) AND THE BUJAGALI HYDROPOWER

PROJECT (PRG B 003-UG)

CONTENTS

List of Acronyms and Abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv

List of Operational Policies, Operational Directives, Operational Manual Statements, and Operational Policy Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ., . . . . . . . . . . . . . . . . . . . . . . . . . . . v

I. Introduction... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. Status of the Power III, Power IV and Bujagali Hydropower Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

III. Appraisal Optimism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

IV. Public-Private Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

V. Disclosure Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

VI. Findings of the Panel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

VII. Management’s Action Plan in Response to the Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

VIII. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Annexes:

Annex 1. Inspection Panel Report on Uganda Power III, Power IV and Bujagali Hydropower Project: Findings, Comments and Actions

Annex 2. Kalagala Offset - Letter from Government of Uganda and Revised Text of Indemnity Agreement

Maps

Map 1. Third Power Project and Proposed Bujagali Hydropower Project - IBRD 3 1599

111

Uganda

LISTOFACRONYMSANDABBREVIATIONS

AES AESNP AfDB BP CDAP EA ECAs EDF EIA EIRR EPC ERA ERR ESMAP GEEP GoU IA IDA IFC kV kWh MIGA MOU MW NBI NELSAP NGO OD OPEC Fund OMS OP OPN PAD PAP PPA RAP SAR SEDD SSEE UEB UETC LTNDP USD USh WBG

The AES Corporation AES Nile Power Limited African Development Bank Bank Procedure Community Development Action Plan Environmental Assessment Export Credit Agencies Electricite de France Environmental Impact Assessment Economic Internal Rate of Return Engineering, Procurement and Construction Electricity Regulatory Authority of Uganda Economic Rate of Return Energy Sector Management and Assistance Program Geothermal Energy Exploration Project Government of Uganda Implementation Agreement International Development Association International Finance Corporation Kilovolt Kilowatt hour Multilateral Investment Guarantee Agency Memorandum of Understanding Megawatt Nile Basin Initiative Nile Equatorial Lakes Subsidiary Action Program Nongovernmental Organization Operational Directive Organization of Petroleum Exporting Countries Fund Operational Manual Statement Operational Policy Operational Policy Note Project Appraisal Document Project Affected Person Power Purchase Agreement Resettlement Action Plan Staff Appraisal Report Summary of Economic Due Diligence StrategicSectoral Social and Environmental Assessment Uganda Electricity Board Uganda Electricity Transmission Company United Nations Development Program US Dollar Ugandan Shilling World Bank Group

iV

LIST OF OPERATIONAL POIKIES, OPERATIONAL DIRECTIVES, OPERATIONAL MANUAI, STATEMENTS, ANI) OPERATIONAL POLICY NOTES

OMS 2.20 OMS 2.21 OMS 2.36 OD 4.00 OD 4.30 OD 13.05 OPN 11.03

OP/BP OP OP OP/BP OP OP/BP BP

4.01 4.04 4.37

10.00 10.04 13.05 17.50

Project Appraisal, January 1984 Economic Analysis of Projects, May 1980 Environmental Aspects of Bank Work, May 1984 Environmental Assessment, October 1989 Involuntary Resettlement, June 1990 Project Supervision, January 1996 Management of Cultural Property in Bank-Financed Projects, September 1986 Environmental Assessment, January 1999 Natural Habitats, June 200USeptembcr 1995 Safety of Dams, October 200 l/September 1996 Investment Lending: Identification to Board Presentation, June 1994 Economic Evaluation of Investment Operations, September 1994 Project Supervision, July 2001 Disclosure of Operational Information, September 1993

1. A Request for Inspection (Request) was submitted to the Inspection Panel (the Panel) on July 27, 2001 by the National Association of Professional Environmentalists of Kampala (NAPE), Uganda Save Bujagali Crusade (SBC) and other local institutions and individuals (the Requesters). The Requesters claimed that failures and omissions of the International Development Association (IDA) in the design, appraisal, and implementation of the Power III, Power IV and the Bujagali Hydropower Projects have materially affected their rights and interests and were likely to jeopardize their future social, cultural and environmental security. The Executive Directors and the President of IDA were notified by the Panel of receipt of the Request.

2. The Management responded to the claims in the Request on September 13, 200 1, noting that several current Bank polices and procedures were not applicable when the Power III Project was appraised in 1990. The appraisal of the Power III was robust, as was that for Power IV, and both were conducted in compliance with the relevant guidelines and policies in effect at the time. As for the Bujagali Hydropower Project, it was also in compliance with the relevant Bank policies and procedures.

3. In addition, Management acknowledged deficiencies in three areas not identified by the Request. First, the Staff Appraisal Report (SAR) and the Development Credit Agreement for the Power III Project were not fully consistent in their description of capacity expansion, due to ongoing modifications to the design of the Owen Falls Extension. Second, although not required by applicable directives and policies, the Government was to have produced a Sectoral Environmental Assessment (SEA) under the Power III Project, but did not do so and, instead, other studies were undertaken over time which yielded analyses that accomplished the objective of the SEA. Third, the Category “B” Environmental Assessment (EA) for the Power IV Project was sent to the Infoshop prior to appraisal, but was not disseminated in Uganda until after the appraisal.

4. The Panel in its Report to the Board found the Request eligible and recommended that the Executive Directors authorize an investigation. The investigation was authorized by the Executive Directors on October 10, 2001.

5. On May 23, 2002, the Panel issued its report outlining the findings of the investigation. At the outset, Management acknowledges the Panel’s extensive and in-depth analysis of compliance issues associated with the projects under review. This analysis has brought into focus key issues and provided valuable input for World Bank projects.

6. This report, responding to the findings of the Panel, is organized in eight sections. Section II below describes the status of the Projects under review. Section III addresses issues related to “appraisal optimism.” Section IV discusses Public-Private Partnerships, a new modality for World Bank Group (WBG) support. The disclosure requirements in private sector projects are discussed in Section V. Section VI summarizes the findings of the Panel. Section VII presents the Management’s Action Plan in response to the Panel’s findings, and Section VIII contains the conclusion. The Panel’s findings, along with the Management’s responses, are described in detail in Annex 1.

II. STATUS OF THE POWER III, POWER IV AND BUJAGALI HYDROPOWER PROJECTS

7. As a landlocked country, Uganda has continually suffered economic disadvantages because it imports its petroleum about 1,000 kilometers overland from Mombasa, Kenya or from Dar es Salaam, Tanzania. Uganda’s special advantage is considerable hydropower potential, primarily from the Victoria Nile, to meet its energy requirements.

8. IDA has assisted Uganda for over 20 years in developing this potential through several projects, beginning in 1980 with an emergency repair operation for the Owen Falls Dam - now called Nalubaale dam (originally financed by the United Kingdom). Along with the Owen Falls Extension (now called Kiira), this complex on the Nile River has been constructed and extended over a period of about 50 years. Other IDA financed projects include Power II in 1985 for the rehabilitation of the Owen Falls Dam, Power III in 1991 for the construction of the Owen Falls Extension, a Supplemental Credit to Power III in 2000, and the recently approved Power IV, Energy for Rural Transformation (ERT) and the Bujagali Hydropower Project.

9. The strategy underpinning IDA’s involvement in the power sector has evolved, reflecting the recognition that shortfalls in the performance of the sector were becoming a key constraint to sustaining the country’s growth momentum. The strategy is designed to assist the Government of Uganda to restructure the power sector, improve its overall efficiency and performance, promote the least-cost development of the sector, and meet the energy needs of unserved rural populations, so as to broaden the base of economic growth, improve living standards of the populations at large and reduce poverty in a sustainable manner. The three recently approved operations - Power IV Project, ERT and the Bujagali Hydropower Project - are all an integral part of this assistance strategy.

10. Power III Project (Credit 2268-U(;). IDA approved a Credit of USD 125 million equivalent on June 13, 1991, and a supplemental credit of USD 33 million equivalent on January 20, 2000 for the Power III Project. The main objectives of the Project were to develop Uganda’s hydropower resources and expand its transmission and distribution system to provide electricity at least cost to a greater portion of the population, and to improve the efficiency of the power sector. The Project included the construction of the Owen Falls Extension power house and installation of 2x40MW generating sets, remedial works at Owen Falls dam, as well as technical assistance to the Uganda Electricity Board (UEB) to improve its operational and financial performance and implement the Government’s power sector reform program. The Project was closed on December 3 1, 2001. The Implementation Completion Report is under preparation.

11. Power IV Project. IDA approved a credit of USD 62 million equivalent on July 3, 200 1 for the Power IV Project. The main objectives of the Project are to expand power supply to meet demand at least cost, and strengthen Uganda’s capabilities in managing the energy reform and privatization process. The Project includes the installation of between 40-80 MW of generating capacity at Owen Falls Extension and technical assistance for energy sector development and reform. The credit was declared effective on April 4, 2002, and Project implementation is proceeding satisfactorily.

12. Bujagali Hydropower Project. An IDA Partial Risk Guarantee of USD 115 million and IFC support of: (i) an “A” loan of up to USD 60 million; (ii) a “B” loan of up to USD 40 million; and (iii) a risk management instrument of up to USD 10 million for the Bujagali Hydropower Project were approved by a joint IDA/IFC Board on December 18, 2001. The Project involves the installation of a 200MW run-of-the-river power plant at Bujagali Falls as well as the construction of about 100 km of transmission lines and associated substations. The latest financing plan

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hfarlagctnerit Report ard Recomnzendatiorl

envisages that AES Corporation (AES), the private sponsor, will provide USD 111.3 million in equity for the Project. Other financiers include the African Development Bank (USD 55 million) and export credit agencies (ECAs) for USD 219.5 million. AES Nile Power (AESNP) will construct the hydropower plant on a build-own-operate-transfer basis. AESNP, a privately owned and operated project company, will sell electricity to the Uganda Electricity Transmission Company (UETC) under a 30-year Power Purchase Agreement (PPA).

13. Under the original financing plan, the ECAs were to jointly provide comprehensive insurance cover to Swedish Export Credit Corporation and Exportifinans who were financing the ECA tranche, then estimated at USD 234 million. In January 2002, the Swiss ECA approved its participation in the Project (USD 54 million). Also in late January 2002, the Swedish ECA decided not to participate in the Project because of the country risk and apparent exposure constraints. Similarly, the Norwegian and Finnish ECAs were concerned about the Ugandan country risk, and indicated that they would probably follow the Swedish ECA’s decision, which would have resulted in a total financing gap of about USD 180 million.

14. In February 2002, MIGA began actively discussing with the ECAs an option under which MIGA would provide political risk coverage to the lending institutions, and Swedish Export Credit Corporation and Exportifinans alongside the ECAs would provide commercial risk coverage. The Norwegian ECA approved its participation in the Project on May 16, 2002, and the Swedish and Finnish ECAs approved their participation in the Project on May 30, 2002. MlGA has circulated a Board paper to its Executive Directors seeking concurrence for aggregate MIGA guarantees of debt and equity of up to USD 250 million for Breach of Contract coverage, of which up to USD 100 million would be to MIGA’s net own account.

15. The Engineering, Procurement and Construction (EPC) contract expired at the end of December 2001. It is currently under re-negotiation. In addition to minor changes in its terms, a key change to the contract relates to the new price escalation clause, which has led to an increase in the value of the contract of about USD 0.8 million per month. The EPC contract price is also subject to adjustment for foreign exchange rate fluctuations until financial closure, which is scheduled for end June 2002.

III. APPRAISAL OPTIMISM

16. A persistent theme emerging from the debate concerning the Bujagali Hydropower Project has been “pervasive appraisal optimism” with respect to Uganda’s economic prospects and the demand forecast for power in the country. While Management agrees that the construction of a large infrastructure project in Uganda is subject to considerable risk, it should be recognized that project selection was made within the context of a reasonably well managed macro-economy and power sector, and a track record of adherence to reform dating back over a decade. As discussed in “Uganda: Country Assistance Strategy FY 2001-2003,” Uganda’s “record in maintaining macroeconomic stability and its demonstrated ability to live up to its commitments,” are the basis for the Bank considering a high case assistance program as realistic.

17. The experience of 2001 is worth mentioning. Notwithstanding continued adverse movements in the terms of trade, GDP growth was a robust 5%. The latest power sector data indicate electricity consumption increased by about 8.1% compared to 2000. This occurred within the context of a major mid-year electricity tariff increase, an ongoing power privatization program, a national election and the lowest coffee prices in decades.

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18. Notwithstanding this resilience, Management recognizes that the economy remains subject to considerable risk, as is the Bujagali Hydropower Project, a large and lumpy investment in a relatively small power system. However, electricity demand forecasts have been thoroughly analyzed under a variety of macro and sector conditions less favorable than the base case, and the Project remains financially and economically viable and affordable. This continues to be the judgment of the private sector investors as well. It should also be noted that while the Project does not depend on exports of electricity for its viability, this remains an option for Uganda in the unlikely event that domestic demand does not materialize on the scale envisaged in the PAD.

IV.PUBLIC-PRIVATEPARTNERSHIPS

19. The Bujagali Hydropower Project, representing a new modality of support for investments in infrastructure, involving the joint participation of IDA, IFC and potentially MIGA, is the first operation of its size to be implemented in Sub-Saharan Africa. Unlike public sector operations, which are the responsibility of governments, privately funded projects, like the Bujagali Hydropower Project, while achieving the same outcomes, are structured to mobilize private capital. In private sector operations, returns relative to risks must not only be ensured but be competitive with other investment opportunities. This need for rewards commensurate with risks is especially true for infrastructure projects with non-tradable outputs and in developing countries where the institutional, regulatory and legal framework is evolving. Thus, these projects differ in important ways from public financed projects. The salient features of these public- private partnerships are outlined below.

20. Potential Role of Private Sector in Uganda. The Bujagali Hydropower Project has been structured and developed as a private sector project. This approach would release resources for social sectors and harness the inherent benefits of private ownership. It is also consistent with the Bank Group’s Country Assistance Strategy and the World Bank Group’s objective of mobilizing private resources for infrastructure development.

21. Despite the tremendous strides made by Uganda and notwithstanding its considerable track record of policy reform, the country’s credit is rated low. Because this affects capital adequacy requirements and lenders’ provision for losses, poor creditworthiness severely constrains the ability of Uganda to mobilize significant private capital, and on terms (maturities and at interest rates) necessary for ensuring the financial viability of projects. In fact, the number of institutions willing to invest debt and equity in developing countries, such as Uganda, is extremely limited. However, even these lenders would provide long term financing only if the political risks, including credit risks of the Ugandan Government, arc fully mitigated. Risks have been allocated under the Bujagali Hydropower Project in a manner that reflects market perceptions of the country. The lenders’ perception of credit risks, particularly in frontier markets, has changed because of recent events in the United States, the global slowdown and the Enron collapse; these have all severely reduced the markets’ appetite for debt and equity financing in developing countries such as Uganda.

22. Risks and Rewards. Public projects depend upon sovereign borrowings and public revenues for financing as well as government guidance regarding the return to be generated on the resources invested. On the other hand, financing for private projects is mobilized from private equity and debt markets, which impose different market-based criteria of risk and return. These criteria are often more stringent than for public financing and are more effectively enforced by the market and commercial banking institutions whose profitability and future depend on their ability to generate competitive returns. Privately financed projects are predicated on risks being

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Manugement Report and Recornrnendation

allocated to the entity most capable of bearing them. In addition, in projects involving limited recourse financing, the private sector requires that the legal and regulatory regime be defined at the outset in order to ensure that adequate financial provisions can be made for fulfilling these obligations when the project is structured. The Project Finance Structure for the Bujagali Hydropower Project reflects these requirements.

V. DISCLOSURE REQUIREMENTS

23. Because private projects are structured in a competitive environment, analyses by the private sector concerning a project’s economic viability and agreements for transactions are normally proprietary in nature and include commercially valuable information. Release of such information can compromise the competitive advantage of private sponsors and the negotiating position of governments for subsequent transactions as they also need flexibility in structuring each transaction to the country’s advantage. Moreover, because of the complexity of documents, straightforward comparisons of project documentation/agreements across transactions may not be possible. Governments and private sponsors, therefore, follow a different approach to the release of project documentation in order to protect the interests of the parties. AES is unwilling (Letter of June 3, 2002) to release the PPA and the Acres economic analysis for proprietary reasons. Likewise, the Government of Uganda has advised that it is not Government policy to release public investment documents that contain sensitive commercial information. Under the Bank’s Disclosure Policy, “some documents and information are provided to the Bank on the explicit or implied understanding that they will not be disclosed outside the Bank.. . The Bank must treat such information accordingly. A related consideration is the obligation to respect property rights over documents held by the Bank but owned by, or jointly with, other parties. The Bank, as a legal matter, does not publish such documents, nor does it distribute them to the public without the permission of the owner of such documents.” The Inspection Panel Clarifications of 1996 recognized the differences between private and public projects.

VI. FINDINGS OF THE PANEL

24. Management is pleased to note the conclusions of the Panel’s Report that (i) the incremental approach to the extension of Owen Falls capacity . . was and is appropriate; that (ii) the economic appraisals of the Power III and Power IV Projects do not provide evidence to suggest that the evaluations were pessimistic and/or disadvantaged the Owen Falls Extension projects relative to the proposed Bujagali Hydropower Project, thereby advancing the latter; (iii) that Management is in compliance with the Operational Policy on Safety of Dams, with respect to the Power III, Power IV and the Bujagali Hydropower Projects.

25. With respect to the Power III Project, Management is also pleased to note the Panel Report’s conclusions that Management is in compliance with Operational Manual Statements on Project Appraisal (OMS 2.20) and Economic Analysis of Projects (OMS 2.21); and that no additional Environmental Assessment was required for the Supplemental Credit for the Power III Project. The Panel Report further concludes that, although the requirements of the Operational Directive (OD) 4.00 for categorization and involvement of affected groups and for use of an environmental advisory panel were applicable and were not met, the Panel was satisfied that the Power III Project was analyzed and found Management in partial compliance of this policy. The Panel Report, however, concludes that Management was not in compliance with OD 13.05 on Project Supervision insofar as the Sectoral Environmental Assessment was concerned? with OMS 2.2 1 as regards the treatment of externalities in the economic analysis of the Project, and with the

5

Uganda

requirements of OD 10.00 on Disclosure, as Management had already acknowledged in the Management Response dated September 10,200l.

26. The Panel Report accurately notes that the Power IV Project did not involve any new construction and, as such, no significant environmental impacts were envisaged. Management, therefore, was in compliance with the Operational Policy on Environmental Assessment (OPIBP 4.01) in assigning the Project to EA category “B” and also as regards the environmental analysis, environmental management plans, environmental monitoring and capacity enhancement. ,Managcment, however, was found to be not in compliance with the OP 4.01 on public consultations and disclosure.

27. On the Bujagali Hydropower Project, the Panel’s Report explicitly recognizes that extensive environmental studies have characterized the Bujagali EA process and that the EA procedures followed in the preparation of the Bujagali Hydropower Project are in compliance with the requirement ofthe OP/BP 4.01. It also concludes that Management is in compliance with OP/BP 4.01 with respect to: (i) the protection of rare fish species; (ii) evaluation of alternatives from an environmental perspective; (iii) public disclosure and consultation on environmental matters. Management’s decision not to disclose the PPA was also found to be consistent with IDA’s Disclosure Policy.

28. Management welcomes the Panel Report’s conclusion that the sponsor has allocated considerable time and resources to the problem of community spirits... and the Cultural Property Management Plan appears to meet applicable policies and its implementation to date is satisfactory. Equally welcome, is the Report’s conclusion that with few exceptions, most of the people resettled ended up not worse off but better off than they were prior to their physical relocation and, in this sense, the main objective of the OD 4.30 was achieved. The Resettlement Action Plan (RAP) component of the Rural Community Development Action Plan (CDAP) also was found to be formally in compliance with OD 4.30, though there were some requirements that still had to be met.

29. The Panel’s Report concludes that the socioeconomic survey requirements of OD 4.30 had been met in respect of process but not in respect of substance. Also, Management was found to be in partial compliance with OD 10.04 on the grounds that: (i) the institutional risk to sustainability through delayjed distribution, privatization, and/or underperformance, should have been more thoroughly explored; (ii) special attention was not accorded to addressing the dangers of a relatively narrow range between the high and low load forecasts, in view of the high risk/return nature of the Project; (iii) SEDD (Summary of Economic Due Diligence) should have presented the underlying assumptions relating to the estimation of costs associated loss of white water rafting (particularly those involved in the Monte Carlo analysis) and the findings in a transparent fashion; and (iv) the treatment of geothermal energy was inadequate in the development of counterfactual planning scenarios.

30. Findings of the Panel. According to the Panel’s Report, there are four operational policies and procedures with which Management has not complied in the Bujagali Hydropower Project. These are:

. OP 4.01 - a Sectoral Environmental Assessment and, related to it, a cumulative impact assessment, was not prepared.

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Munagernent Report and Recommendation

0 OD 4.04 - IDA failed to ensure the establishment and maintenance of the appropriate and technically justified mitigation measures to protect the natural habitats from the impacts of the Project.

. OD 4.30 - the Community Development Action Plan does not meet the requirements of the OD and the interests of people who will be affected as a result of the Project’s impacts on the tourism industry have not been fully addressed.

l BP 17.50 - IDA’s refusal to release the Acres report on Economic Review of the Bujagali Hydropower Project.

Each of the Panel’s findings, along with the Management’s response and proposed actions to be taken, is presented in detail in Annex 1.

VII. MANAGEMENT'SACTIONPLAN INRESPONSETO THEFINDINGS

31. Based upon Management’s technical and legal analysis of the Panel’s findings, Management proposes ten specific actions. These actions are outlined below.

Findings POWER III PROJECT

Actions to be Taken

1. Sectoral EA POWER IV PROJECT

See Bujagali, items I and 2.

1. Disclosure of Information: In order to remedy this lack of policy compliance, Management proposes to include full Environment and comprehensive discussions of the Power III and Power IV Projects and their

relationship to the Bujagali Hydropower Project. This would be accomplished through the stakeholder consultation strategy currently being designed (TORs have been drafted) in connection with the proposed Bujagali Technical Assistance Project (FY03). The consultation strategy would be implemented by the Ugandan National Environmental Management Agency.

BUJAGALI PROJECT 1. Scctoral EA Consistent with the proposal of the Panel, the governments taking part in the Nile Basin

Initiative (NBI) have rcquestcd, and IDA has agreed, to support the preparation of an inclusive, participatory and riparian-owned StrategiciSectoral Social and Environmental Assessment (SSEA) as an element of the work program for the Nile Basin Initiative (NBI). IDA will support this riparian-owned SSEA as part of the strategic planning for the Nile Equatorial Lakes Subsidiary Action Program (NELSAP). The SSEA will evaluate power generation options and associated transmission interconnections to meet these multiple objectives: transboundary, economic and political cooperation; sub- regional integration; poverty reduction; dispute resolution; environmental sustainability; energy substitutions to reduce depletion of forestry resources; and sharing of mutual benefits in the context of multi-purpose projects. The outcome of the process is anticipated to be a power strategy that will put forth the power options, including their economic and engineering feasibility as well as environmental and social impacts, to allow for informed and transparent decision-making in the selection of power investments by the Nile Basin riparian countries. The SSEA has an estimated cost of USD 1 .O million and would be an integral part of the NELSAP process. It also would be a prerequisite to IDA investments in selected power generation facilities under NELSAP.

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Findings 2. Cumulative Impacts

3. Kalagala Offset

4. Load Forecast Scenarios

5. institutional, Tariff and Affordability Risks

6. Examination of Power Generation Alternatives

Actions to be Taken The NBI has made considerable progress in bringing the Nile riparians 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 of environmental and social impacts and public involvement in a program of collaborative action to promote cooperative management of the Nile River Basin. A participatory SSEA will be supported as part of the strategic planning for the NELSAP. The SSEA would address future regional power

/ options, which will analyze and rank power options, based upon multiple criteria. These are: assessment of direct, indirect/induced and cumulative impacts of multiple activities; additional costs and benefits through multi-purpose use of storage reservoirs; risk of rainfall variability; and sharing of benefits at the local and regional level. The studies previously performed in order to make the decision to proceed with the Bujagali Hydropower Project will serve as part of the information base for the SSEA. The Government has furnished a clear commitment to abide by the provisions of the Indemnity Agreement, and further clarify the Government’s intention to set aside Kalagala entirely to protect its natural habitat. environmental and spiritual values, and for tourism development, and not use the site for hydropower development purposes. The letter is provided as Annex 2. It notes that: “I am writing to confirm the Government’s intentions with respect to the Kalagala Falls site. The Government will set aside Kalagala exclusively to protect its natural habitat, environmental and spiritual values and for tourism development. and not subject the site to hydropower development, as required by OPiBP 4.04 on Natural Habitats.” “To this end, we have established a task force of stakcholders to identify sustainable investment programs to facilitate tourism, with appropriate mitigation measures to protect the spiritual and natural habitat values. We have requested IDA financing to develop this plan further.” Annex 2 also provides the Government’s agreed revision to the text of the Indemnity Agreement. The revised text. in the replacement section 3.08a, reads: “Uganda will set aside the Kalagala Falls site exclusively to protect its natural habitat and environmental and spiritual values and to develop tourism, and will not develop the site for power generation, without the Agreement of the Association.” The Indemnity Agreement will be revised accordingly and signed as soon as possible. Management plans to closely monitor electricity demand growth, billing and collection management, and tariff levels under the ongoing supervision of the Bujagali Hydropower and Power IV Projects. In addition, the proposed Bujagali Technical Assistance Project (FY03) will include power sector financial and contractual advisory services to the Government as well as assistance in developing a contingent liabilities management program with particular emphasis on the Bujagali Hydropower Project. These actions will help to develop an early warning system on the Project and power sector such that financial and other issues can be identified at an early stage, and measures can be undertaken appropriate to the circumstances. Through IDA’s ongoing macro-economic dialogue, Management will monitor the exchange rate and the affordability of electricity. Similarly, through supervision of the Bujagali Hydropower and Power IV Projects and the proposed Bujagali Technical Assistance Project (FY03), the evolution of distribution system development, electricity consumption and tariff levels will be monitored at regular intervals to ascertain whether remedial measures are warranted. Finally, Management proposes to enhance the collection and analysis of household income and expenditure data vis a vis electricity consumption. Since other sources of fimding for geothermal exploration and drilling have not been forthcoming, IDA proposes to include a component in the proposed Bujagali Technical Assistance Project (FY03). to assist the Government with these activities in Western Uganda assuming that the ongoing technical and market studies financed by the AfDB determine that it is an economically and financially viable option for power.

8

Findings Actions to be Taken 7. Social Compliance (RAP- AESNP will be requested to carry out focused surveys, during the construction phase, to

Socio-economic Survey) support design, implementation and monitoring of relevant components of the CDAP. During IDA supervision, following financial close, IDA will revisit the crop payments with assistance from PAPS, PAP’s legal counsel, Witness NGO and local land commission authorities to identify and resolve any cases where legitimate, non- speculative crop payments were not made. IDA supervision showed that, as of April 2002. only 5 of about 4,000 compensation cases for the hydropower facility were disputed or outstanding. IDA will continue to monitor this issue and will inform the responsible parties of any problems identified.

8. Social Compliance IDA will continue supervision to ensure that required RAP actions are met and that the (CDAP) best practice objectives of the CDAP are achieved.

9. Compensation for IDA will verify that the five MOUs are signed with tourism operators and monitor Tourism implementation of the MOUs’ provisions. During supervision, IDA will work with IFC

to reiterate to the sponsor its commitment to proactively identify and give first priority for employment to people affected by Project-induced loss of income/employment. The sponsor will monitor, track and report on all cases where employment priority has been given to those economically displaced. IDA will also examine other measures that could be taken to address re-employment of Ugandan citizens affected by loss of tourism- related jobs.

VIII. CoNCLUsIoN

32. Management believes that the Action Plan addresses the concerns raised by the Panel.

Annex 1 INSPECTION PANEL REPORT ON UGANDA POWER III, POWER IV AND BUJAGALI HYDROPOWER

PROJECT: FINDINGS, COMMENTS AND ACTIONS

UGANDA POWER I11 PROJECT (CREDIT 2268~UG)

Project Status. IDA approved a Credit of USD 125 million equivalent on June 13, 1991, and a supplemental credit of USD 33 million equivalent on January 20, 2000 for the Third Power Project. The main objectives of the project were to expand Uganda’s hydropower resources and its transmission and distribution system to provide least-cost reliable electricity to a greater portion of the population, and to improve the efficiency of the power sector. The project included the construction of the Owen Falls Extension power house and installation of 2x40MW generating sets, remedial works at Owen Falls dam, as well as technical assistance to the Uganda Electricity Board, to improve its operational and financial performance and for implementation of the Government’s power sector reform program. The project was closed on December 31, 2001. The Implementation Completion Report is under preparation.

JGANDA: POWER Ill I POWER III SUPPLEMENTAL CREDIT

IO. Finding Set/ Pol- Comment I Action Para icy

‘-111.1. Power III Environmental Assessment: The envi- 3.2, OD Comment: Management, as indicated by the Inspection Panel, ronmental analvsis of the Power Ill Project thus 66-62 4.66 took steps to address environmental impacts as envisaged by largely accords with the requirements of OD OMS 2.36 and OD 4.00. Annex 17 of the Staff Appraisal Report 4.00 despite the fact that it was not formally as- provides an analysis of the environmental impacts. Management signed an evaluation category under this OD. But has explained that OD 4.00 was not applicable to the Power Ill the procedures envisaged for environmental Project, since the 1988 formal review of the Initial Executive Pro- evaluation by OD 4.00 were not complied with. ject Summary predates OD 4.00’s applicability date of October 15,

The Panel finds that the requirements of OD 1989.

4.00 for categorization and involvement of affected groups and for use of an environmental advisory Action: The Power Ill Project was closed on December 31,2000, panel were applicable to this Project and were not and no action is envisaged. met. The Panel is satisfied, however, that the Power Ill Project (Owen Falls Extension) was analyzed, if not reported, as envisaged by OD 4.00 Annex B 1, and therefore, finds Management in partial compliance with this policy.

‘-111.2. Supplemental Credit: The Panel concurs that no 3.3, OD Comment: Management notes the finding of compliance by the additional Environmental Assessment for the Sup- 163-65 4.66 Inspection Panel. plemental Credit for the Power Ill Project (Owen Falls Extension) was required and that, therefore, Management was in compliance with OD 4.00 as

Action: No action required.

regards this Credit.

‘-111.3. Sectoral EAlCumulative Impacts: Since the 3.6, OD See Sections 8.2 and B.3 below which discuss the issues of Sec- Bank’s safeguard policies or directives do not re- 62-66 13.06 toral Environmental Assessment and cumulative impacts analysis. quire a cumulative effects analysis, Managements actions in this respect are consistent with Bank’s policy. As noted above, however, Management not only recommended in the SAR that a Sectoral En- vironmental Assessment of hydropower be undertaken, it also produced draft terms of reference for an SEA. These terms of references reflect Bank policy which provides the following rationale for undertaking an SEA: “They are particularly suit- able for reviewing fd) the cumulative impacts of many relatively small, similar investments which do not merit individual project-specific EAs. ” Man- agement has conceded that its failure to ensure that an SEA was carried out reflected inadequate supervision.

Thus, the Panel finds that Management is not in compliance with OD 13.05 on Project Su- pervision with respect to the Sectoral Environ- mental Assessment required under the Power Ill Project that would address cumulative effects.

11

UGANDA: POWER ill/POWER Ill SUPPLEMENTAL CREDIT I

No. Finding / .%C/ ’ Pol- I Para icy

Comment I Action 1

P-111.4. Economic Analysis, Capacity of Power III: The Panel accepts that Owen Falls Extension has a potential capacity of 200MW and finds that confu- sion arose because of changes in project specifications that were not adequately represented in the documentation. Management has acknowledged that “there was not full and frank disclosure of this situation” to the Board of Executive Direc- tors. In this sense, the Board documents for the Power Ill Project do not meet the requirements of OD 10.00.

4.2, 98- 101

4.3, 102- 107

P-111.5. Economic Evaluation of Investment: The Panel accepts that OP 10.04 was not applicable in June/July 1990, as Management claims. It would observe, however, that Management also indicates that effective appraisal must have continued through 1991, as the Project’s specifications continued to evolve.

P-111.8. As regards externalities, however, the Panel 4.3, feels that there is an area of non-compliance in 107 relation to OMS 2.21. Management acknowledges that the economic appraisal of externalities was not carried out as it should have been because it excluded the estimated cost of resettlement and environmental mitigation measures from the calculation of the Project’s economic return. The Response argues that: “Since these costs were insignificant in comparison with the capital investment costs, their inclusion would not have affected the project’s viability.” Nevertheless, since the only way to confirm that the magnitudes of ex- ternality costs are significant or insignificant is to prepare and include the estimates, the Panel finds that required procedures were not observed in this case.

P-18.7. Hydrology Debate: In all documentation relating 3.5, Comment: Management notes the finding. to the Owen Falls projects (i.e., Power II, Power Ill 75-81

and Power IV), Management has drawn attention to the nature and seriousness of the hydrological


debate. It is most unlikely that additional environmental studies or documentation would resolve the dispute. Because of this uncertainty, a cautious and incremental approach to the extension of Owen Falls capacity has been adopted. The Panel concurs that this approach was and is appropri-

I ate.

Comment: Management admitted to this omission, It concurs with the Inspection Panel’s comment noted below in P.111.6, that “the economic analyses reported in the SAR were broadly in compliance with the provisions of OMS 2.20 and OMS 2.21” (Section 4.3, para. 106 of the Report), and the comment noted in P-IV.5 that because of the hydrology debate, “a cautious and incremental approach to the extension of Owen Falls capacity has been adopted (Section 3.5, para. 81). The Panel concurs that this approach was and is appropriate.”

Action: No action required. I

Comment: Management notes the finding of compliance by the Inspection Panel.

Action: No action required

/ Comment: In accordance with OMS 2.21, Management considered the cost of compensation as insignificant in comparison with the capital investment costs (amounting to about I%), and thus die not include the costs in the ERR calculation.

In the Panel’s view, the economic analyses reported in the SAR, and outlined in the previous paragraph, were broadly in compliance with the provisions of OMS 2.20 and OMS 2.21.

Acfion: Management has recalculated the ERR. The 1991 SAR ERR estimate was 16.5%, and would have been 16.2%, if the cost of resettlement had been included. Based on actual project cost and benefits at project completion (December 31, 2001) the ERR was 13.7%; and would have been 13.5% including the cost of resettlement.

P-111.8. ‘Safety of Dams: The Panel finds that Manage- 3.6, OP Comment: Management notes the finding of compliance by the ment is in compliance with OP 4.37 on Safety of ‘89-91 4.37 Inspection Panel. Dams.


12

UGANDA POWER IV PROJECT (CREDIT 3545UG)

Project Status. IDA approved a credit of USD 62 million equivalent on July 3, 2001 for the Fourth Power Project. The main objectives of the project are to expand power supply to meet demand on a least-cost basis, and to strengthen Uganda’s capabilities in managing the energy reform and privatization process. The project includes the installation of between 40-80 MW of generating capacity at Owen Falls Ex- tension and technical assistance for energy sector development and reform. The credit was declared effective on April 4, 2002, and project implementation is proceeding satisfactorily.

u

Nt

P-

P-

L--

P-

P-

%ANDA POWER IV

3. Finding Secl Poi- Comment I Action Para icy

tv.1. Environmental Category: [Tjhe Power IV Project 13.4.1, OF/B relates almost entirely to the installation of electri- cal generating units at locations already prepared

166-70 ,‘,, Comment: Management notes the finding of compliance by the Inspection Panel.

for them in the Owen Falls Extension Powerhouse. It does not require a new construction site and,


consequently, no significant environmental effects were envisaged. The Project was, therefore, deemed to warrant a “B” category Environmental Impact Assessment. The Panel concurs and finds Management in compliance with OPlBP 4.01 in / this respect.

Iv.2. Environmental Assessment: In terms of the in- X4.2, OR/B Comment: Management notes the finding of compliance by the struments used (i.e., environmental analysis, envi- 71-74 P Inspection Panel. ronmental management plans, environmental 4.01

monitoring, and capacity enhancement), the Panel finds the Power IV Project, which is financing


power generation Units 14 and 15 (the latter if i

economically viable), is in compliance with OPlBP 4.01.

Iv.3. Economic Analysis: The Panel finds that the 4.4, economic appraisals of the Power Ill and Power IV tO8- projects do not provide evidence to suggest that ,110

the evaluations were pessimistic and/or disadvantaged the Owen Falls Extension projects relative to the proposed Bujagali Project, thereby advancing the latter.

Comment: Management notes the finding.


Iv.4. Disclosure of Information - Environment: The 9.3.1, BP Comment: The EA was disclosed at the lnfoshop on October 1, Power IV Project Environmental Analysis is moot ,338-

342 17.50 2000 prior to the Power IV appraisal and in Uganda mid-January

on the question of public consultation. .The 2001, five and a half months prior to Board (July 3, 2001). This Panel therefore finds that the Power IV Project is was not in compliance with the requirements that the EA be dis- not in compliance with OP 4.01 with respect to closed in country prior to appraisal. As the Panel’s report also indi- (i) public consultation and (ii) disclosure. cates, the EA was available for nearly six months to all who may

have wished to comment on it. Consultations about the project were held with government agencies, including environmental agencies; labor unions; parliamentarians (including journalists and civil society), consumer representatives (Manufacturer’s Associa- tion and Chamber of Commerce) and other donors. Consultations specifically regarding the EA were not undertaken with local NGO2 and affected parties, largely as a result of the finding that there were no direct adverse environmental or social impacts expected from the installation of additional generating units within the exist-

/ ing, completed powerhouse at Owen Falls Extension which was financed under the Power Ill Project.

Action: In order to remedy this lack of policy compliance, Man- agement proposes to include full and comprehensive discussions of the Power Ill and Power IV Projects and their relationship to the Bujagali Hydropower Project. This would be accomplished through the stakeholder consultation strategy currently being designed (TORs have been drafted) in connection with the proposed Buja-

I3

gali Technical Assistance Project (FY03). The consultation strategy would be implemented by the Ugandan National Environ- mental Management Agency.

‘-IV.5. Hydrology Debate: In all documentation relating /35 to the Owen Falls projects (i.e., Power II, Power III ii%&

n/a Comment: Management notes the finding.

and Power IV), Management has drawn attention to the nature and seriousness of the hydrological


debate. It is most unlikely that additional environmental studies or documentation would resolve the dispute. Because of this uncertainty, a cautious / and incremental approach to the extension of Owen Falls capacity has been adopted. The Panel concurs that this approach was and is appropriate.

‘-IV&. Safety of Dams: The Panel finds that Manage- 3.6, OP Comment: Management notes the finding of compliance by the ment is in compliance with OP 4.37 on Safety of 89-91 4.37 Inspection Panel. Dams.


14

UGANDA - BUJAGALI HYDROPOWER PROJECT

Project Status. An IDA Partial Risk Guarantee of USD 115 million and IFC support of: (i) an “A” loan of up to USD 60 million; (ii) a “B” loan of up to USD 40 million; and (iii) a risk management instrument of up to USD 10 million for the Bujagali Hydropower Project were approved by a joint lDA/lFC Board on December 18, 2001. The project involves the installation of a 200MW run-of-the-river power plant at Bujagali Falls as well as the construction of about 100 km of transmission lines and associated substations. The latest financing plan envisages that AES Corporation, the private sponsor, will provide USD 111.3 million in equity for the project. Other financiers include the African Develop- ment Bank (USD 55 million) and USD 219.5 million from export credit agencies (ECAs). AES will construct the hydropower plant on a build- own-operate-transfer basis. AES Nile Power, the privately owned and operated project company, will sell electricity to the Uganda Electric- ity Transmission Company under a 30-year Power Purchase Agreement.

Under the original financing plan, the ECAs were jointly providing comprehensive insurance cover to Swedish Export Credit Corpora- tion and Exportifinans who were financing the ECA tranche then estimated at USD 234 million. In January 2002, the Swiss ECA approved its participation in the Project (USD 54 million). In late January 2002, the Swedish ECA decided not to participate in the project because of the country risk and as it apparently already had exposure constraints in Uganda. Similarly, the Norwegian and Finnish ECAs were concerned about the Ugandan country risk, and indicated that they would probably follow the Swedish ECA’s decision, which would have resulted in a financing gap of about USD 180 million.

In February 2002, MIGA began actively discussing with the ECAs an option under which MIGA would provide political risk coverage to the lending institutions, Swedish Export Credit Corporation and Exportifinans alongside the ECAs who would provide commercial risk coverage. On May 16, 2002, the Norwegian ECA approved its participation in the project, and on May 30, 2002 the Swedish and Finnish ECAs approved their participation in the project. MIGA has circulated a Board paper to its Executive Directors seeking concurrence for aggregate MIGA guarantees of debt of equity of up to USD 250 million for Breach of Contract coverage, of which up to USD 100 million would be to MtGA’s net own account.

The Engineering Procurement and Construction (EPC) contract expired at the end of December 2001. It is currently under re- negotiation. In addition to minor changes in its terms, a key change to the contract relates to the new price escalation clause, which has led to an increase of about USD 0.8 million per month in the value of the contract. The EPC contract price is also subject to adjustment for foreign exchange rate fluctuations until financial closure, which is scheduled for the end of June 2002.

JGANDA - BUJAGALI HYDROPOWER PROJECT

IO. Finding /

1.1.

-

1.2.

Environmental Assessment: .it is evident that extensive environmental studies have characterized the Bujagali EA process. The Panel finds that the EA procedures followed in the preparation of the Bujagali Project are in compliance with the requirements of OPlBP 4.01.

Sectoral Environmental Assessment: Thus, since no Sectoral Environmental Assessment has been undertaken, the Panel finds that Manage- ment is not in compliance with paragraph 7 of IDA OP 4.01 in this respect.

The Panel.. concludes that the issue of cumulative effects, addressed by Management and raised by the Requesters, is of real significance and is deserving of greater attention. To be consistent with IDA policies, a further assessment of the cumulative effects of existing and potential hydropower developments on the Victoria Nile as a freestanding Sectoral Environmental Assessment, or as an important component of the Regional Man- agement Plan for the Upper Nile Basin, may need to be undertaken.

-

l- I iecl

1 F ‘ara

i.2, 12- 21

i.3, 22- 24

rnd i.4, rara. 36

'Ol- Comment I Action :Y

)P Comment: Management notes the finding of compliance by the .Ol Inspection Panel.


1-

P ic

C 4

)P .Ol

Comment: In the context of lDA/lBRD OP 4.01, Annex A, para. 8, a Sectoral EA is “an instrument that examines environmental issues and impacts associated with a particular strategy, policy, plan, program, or with a series of projects for a specific sector (e.g., power, transport, or agriculture); evaluates and compares the impacts against those of alternative options; assesses legal and institutional aspects relevant to the issues and impacts; and recommends broad measures to strengthen environmental management in the sector.” As a prime objective, Sectoral EA “evaluates and compares the impacts against those of alternative options....”

IFC, which has a significant interest in the Bujagali Hydro- power Project, has no requirement for Sectoral EA in its version of OP 4.01. Nevertheless, in recognition of the importance of analyz- ing the comparative economic, environmental and social impacts of energy alternatives, IFC examined these issues. The “Assess- ment of Generation Alternatives -- Uganda Final Repot-t” (Acres In ternational, May 2000) addressed the environmental issues and impacts associated with power generation in Uganda to meet its growing need for electricity. The specific objective of the Acres In- ternational May 2000 study was “...to provide an assessment of the alternative electric generating projects in Uganda in order for the IFC to determine if such projects are appropriate for development...and are compliant with IFC environmental policies.” Other studies, such as the Hydropower Development Master Plan, No- vember 1997, by Kennedy & Donkin Power Limited, et. al. which


IO. Finding :Sec/ Pol- Comment I Action IPara icy

addressed environmental concerns, were used in this examination. Since the purposes and the resulting analyses of the IFC

study and other studies were the same as what one might have expected from a Sectoral EA, IDA Management believed that these studies were adequate to fulfill the objectives of Sectoral EA within IDAIIBRD’s OP 4.01, even if there was no particular document entitled “Sectoral EA.”

Action: Consistent with the proposal of the Panel, the governments taking part in the Nile Basin Initiative (NBI) have requested, and IDA has agreed, to support preparation of an inclusive, participatory and riparian-owned StrategiclSectoral Social and Environmental Assessment (SSEA) as an element of the work program for the Nile Basin Initiative (NBI). IDA will support this riparian-owned SSEA as part of the strategic planning for the Nile Equatorial Lakes Subsidiary Action Program (NELSAP). The SSEA will evaluate power generation options and associated transmission interconnections to meet these multiple objectives: transboundary, economic and political cooperation; sub-regional integration; poverty reduction; dispute resolution; environmental sustainability; energy substitutions to reduce depletion of forestry resources; and sharing of mutual benefits in the context of multi- purpose projects. The outcome of the process is anticipated to be a power strategy that will put forth the power options, including their economic and engineering feasibility as well as environmental and social impacts, to allow for informed and transparent decision- making in the selection of power investments by the Nile Basin riparian countries. The SSEA has an estimated cost of USD 1 .O million and would be an integral part of the NELSAP process. It also would be a prerequisite to IDA investments in selected power generation facilities under NELSAP.

i.3. Cumulative impacts: The Panel consequently 5.4, OP Comment: The “Assessment of Generation Alternatives -- concludes that the issue of cumulative effects, ad- it:- 4.01 Uganda Final Report” (Acres International, May 2000) included a dressed by Management and raised by the Re- cumulative impact assessment of existing and proposed hydro- questers, is of real significance and is deserving of , power projects for the Victoria Nile in Uganda, which also took into greater attention. To be consistent with IDA poli- account ancillary development and urbanization in the basin. This ties, a further assessment of the cumulative ef- cumulative impact assessment determined that the construction of fects of existing and potential hydropower devel- multiple dams on the Victoria Nile would have major negative cu- opments on the Victoria Nile as a freestanding mulative impacts. The Bujagali Hydropower Project EIA (March Sectoral Environmental Assessment, or as an im- 2001) which built upon the May 2000 assessment, concluded that portant component of the Regional Management the cumulative impacts of Owen Falls, Owen Falls Extension and Plan for the Upper Nile Basin, may need to be un- the Bujagali Hydropower Facility would be fewer than those of dertaken. other development scenarios.

Because Cumulative Impact Assessment is With respect to the river hydrology, the “Seventh Report of not a requirement of a project-specific EA, a find- the International Environmental and Social Panel of Experts,” ing of non-compliance cannot be made. But as in- reached an important conclusion for the combined development of dicated in Sections 3.6 and 5.3 of this Report, the Owen Falls, Owen Falls Extension and the Bujagali hydropower Panel finds that Management is not in compli- facilities (all run-of the river projects): “Because all the impounded ante with the OP 4.01 requirement for a Sec- water is live storage and because of the rapid throughput of im- toral Environmental Assessment, for which cu- pounded water, river flow downstream of the dam will be essen- mulative impact assessment would have been re- tially the same as if the dam were not there.” (p.9). Therefore, the quired. cumulative impacts on hydrology are not significant. Other studies,

such as that for suspended sediment during the construction phase presented in the Bujagali Hydropower EIA and the supplementary fisheries study (“Haplochromine Habitat Study,” Fisheries Resources Research Institute and WS Atkins October 2001) reached similar conclusions relating to cumulative sediment loads and fisheries impacts.

An indicator of the level of detail in the May 2000 cumulative impact assessment is this finding from the “Seventh Report of the International Environmental and Social Panel of Experts” -- “In as-

JGANDA - BlJJAGAtl HYDROPOWER PROJECT

IO. Finding I Secl Pal- Comment I Action : Para icy

sessment of the cumulative impacts of existing and proposed dams, evaluation of the combined operation of Bujagali dam, Owen Falls Dam, and the Owen Falls Extension showed that this would reduce the risk of malaria, bilharziasis and River Blindness. This is an unusual prediction for African dams, but it is supported by the POE and is an important health advantage of the proposed project at Bujagali” (~5).

Thus, IDA Management believes that the cumulative effects assessment conducted was both adequate and sufficiently detailed to form a basis for decision-making.

Action: The NBI has made considerable progress in bringing the Nile riparians 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 of environmental and social impacts and public involvement in a program of collaborative action to promote cooperative management of the Nile River Basin. A participatory SSEA will be supported as part of the strategic planning for the NELSAP. The SSEA would address future

! regional power options, which will analyze and rank power options, / I based upon multiple criteria. These are: assessment of direct, indi- , rect/induced and cumulative impacts of multiple activities; addi- ! ! tional costs and benefits through multi-purpose use of storage res-

ervoirs; risk of rainfall variability; and sharing of benefits at the local and regional level. The studies previously performed in order to make the decision to proceed with the Bujagali Hydropower Pro- ject will serve as part of the information base for the SSEA. See also response to 8.2.

1.4. Environmental Impacts on Fisheries and 15.5, OP Comment: Management notes the finding of compliance by the Aquatic Systems: The Panel finds that the origi- i 13% 4.01 Inspection Panel. nal fisheries study reported in the EIA was limited / ‘43 but that the subsequent studies that have been I Action: No action required. undertaken rectify this. Consequently, Manage- / ment is now in compliance with the applicable / provisions of OP 4.01.

/ 1.5. Kalagala Offset: In accordance with the interpre- / 5.6, OP Comment: Management acknowledges that there is ambiguity in

tation given in the Legal Opinion, the Panel finds / ,58 14% 4.04 the language contained in the exchange of letters on this subject that there is no obligation to preserve Kalagala between Bank staff and the Government on the one hand, and the Falls in perpetuity as an environmental offset in the provisions of the Indemnity Agreement on the other. Management Agreement on Kalagala Offset or the Indemnity ’ would however explain that supplementary letters of this kind are Agreement. More importantly, in accordance with used frequently in Bank financed operations. In view of this ambi- the same interpretation, the Panel finds that the guity, Management agrees that the Governments policy and inten- GoU has assumed no obligation whatsoever to tions with respect to the Kalagala offset should be clarified. preserve the Kalagala Falls as an offset. Further, the Panel finds that the lack of a clear and binding obligation on behalf of the GoU to preserve the

Action: The Government has furnished a clear commitment to

Kalagala site as an environmental offset in the abide by the provisions of the Indemnity Agreement, and further

Projects legal agreements is inconsistent with the ! clarify the Government’s intention to set aside Kalagala entirely to

Management Response and with Managements / protect its natural habitat, environmental and spiritual values, and

statements during Panel interviews. for tourism development, and not use the site for hydropower de-

/ velopment purposes. The Panel finds that Management is not in corn- I pliance with OP 4.04 because the Project entails /

The letter is provided as Annex 2. It notes that: “I am writing

a significant conversion of natural habitats and IDA / to confirm the Government’s intentions with respect to the Kala-

has failed to ensure the establishment and main- / gala Falls site. The Government will set aside Kalagala exclusively

tenance of the appropriate and technically justified : to protect its natural habitat, environmental and spiritual values

mitigation measures. and for tourism development, and not subject the site to hydro-

/ power development, as required by OP/BP 4.04 on Natural Habi- tats.”

“To this end, we have established a task force of stake-

! holders to identify sustainable investment programs to facilitate

17

- BUJAGALI NYDROPOWER PROJECT I

3nding

adequacy of Kalagala Offset: The Panel also re- iewed the technical adequacy of the Kalagala off- et provisions, as OP 4.04 calls for the establish- lent of the “ecologically similar protected area.” ‘he Requesters brought to the Panel’s attention ie claim that the Bujagali EIA does not give atten- on to the biodiversity present in the islands that rill be flooded by the Project. The Panel reviewed ?e Bujagali EIA and found that the analysis of ter- sstrial ecosystems performed in it is limited. The xus was on species listing and identification of reas to be inundated rather than on mapping lant communities and associations. From the EIA is thus impossible to determine whether or not

>e Kalagala offset will indeed protect plan com- Iunities equivalent to, if not, identical to, those on le islands of Bujagali. Moreover, no separate EIA ‘as performed for the Kalagala site in order to en- ure that Bujagali site and Kalagala site are ecol- gically similar and the latter will be an adequate ffset for the loss of the former.

iecl ‘ara

1.6, 55

Comment I Action

tourism, with appropriate mitigation measures to protect the spiritual and natural habitat values. We have requested IDA financing to develop this plan further.”

Annex 2 also provides the Government’s agreed revision to the text of the Indemnity Agreement. The revised text, in the replacement section 3.08a, reads:

“Uganda will set aside the Kalagala Falls site exclusively to protect its natural habitat and environmental and spiritual values ant to develop tourism, and will not develop the site for power generation without the Agreement of the Association.”

The Indemnity Agreement will be revised accordingly and signed as soon as possible.

Comment: No separate EA was prepared for the Kalagala site, because Kalagala was evaluated as an offset as part of the environmental assessment process for the Bujagali Hydropower Project. The Bujagali Hydropower Project EIA (March 2001) summarizes and cross-references detailed information on the terrestrial ecosystems at Bujagali Falls as the basis for its conclusions. For example, the Evaluation of Environmental Impacts of Bujagali and Kalagala a: Potential Hydropower Sites in Uganda” (A.H. Karatunga, Interna- tional Institution for Aerospace Survey and Earth Science, 1997) which is referenced in the March 2001 EIA, concluded that the Bu- jagali site is similar to and may be less ecologically significant than the Kalagala site, including consideration of terrestrial ecosystems. Additional studies prior to the March 2001 EIA and referenced therein also compare the ecological characteristics of the Bujagali and Kalagala sites. These are: . Bujagali Hydroelectric Project Environmental Impact Assess-

ment Inception Report (WS Atkins, July 1998, Volume 2); . Bujagali Hydroelectric Project Environmental Impact Statemen

(WS Atkins, 1999); and . January 2000 Cumulative Effects Assessment, cited in Buja-

gali Hydroelectric Power Project Environmental Impact State- ment Final Report (WS Atkins, September 2000). In the “Assessment of Generation Alternatives -- Uganda Final

Report” (Acres International, May 2000) comparative tables illus- trate that the Bujagali and Kalagala sites are very similar (see tables on pp.8-4 and 8-21). The “Haplochromine Habitat Study” (Fisheries Resources Research Institute and WS Atkins, October 2001) the supplementary fishing study requested by IDA/IFC, also concluded that both sites had similar habitats.

The ecological adequacy of the Kalagala Falls offset is con- Firmed in the “Sixth Report of the International Environmental and Social Panel of Experts” (February 9, 2000) which states that Kala- gala Falls “. .deserve protection, and if the vegetation on the islands snd adjacent river bank can be protected.. .the area could be an im- oortant scenic resource and a significant part of Uganda’s natural ieritage” (p.8). This report further states (p.10) with respect to base- ine ecosystem surveys: “None of the plant, bird or mammal species ‘ound in the area [Bujagali] are globally endangered or threatened, and it appears that flora and fauna and ecosystems in the limited >roject area are characteristic of much of the river below the dam site.

IDA Management believes that the March 2001 EIA correctly :oncluded that, based on prior studies, the sites are ecologically similar and the offset at Kalagala Falls is adequate to compensate ‘or the loss of Bujagali Falls, including both aquatic and terrestrial iabitat.


18

fGANDA - BUJAGALl HYDROPOWER PROJEC1 I

in compliance with OP 4.37 on Safety of Dams.

.8. The demand forecast range is too narrow

1. Load Forecast Comparisons: In view of the ‘high risk/high return’ nature of the Project, and the central role of the load forecast - not least because, if the forecast fails significantly on the low side, all the dynamic issues of affordability come crowding in, while if it fails on the high side it represents significantly greater access to electricit and poverty reduction - it might have been anticipated that the process would take special care to address the dangers of a relatively narrow range between the high and low load forecasts. In the Panel’s view, there is little evidence to suggest tha it did so. In this sense, it did not fully comply with paragraph 6 of OP 10.04, which stresses that “the economic evaluation considers the sources, magnitude, and effects of the risks associated with the project by taking into account the possible range in the values of the basic variables and assessing the robustness of the project’s outcome with respect to changes in these values. ”

2. In the Panel’s view, a wider range on the demand forecasts would have stretched the resultin range of estimated EIRR values that emerge from the Monte Carlo risk analysis. This would have more appropriately reflected the range of risks ant rewards, facilitating risk mitigation, consistent with OP 10.04’s, paragraph 6 on risk.

3. In the Panel’s view an analysis of the sensitivity of the key findings of the due diligence to a widen- ing of the load forecast ranges would have been and could still be appropriate and valuable, and was needed in order fully to satisfy the requirements of paragraph 6 (Risk) of OP 10.04. This is not least because it might help in identifying key areas in which risk mitigation activities might be undertaken, refined or enhanced.

4. Least Cost Scenarios w/Bujagali: In the Panel’s view, a wider range on the load forecasts would have enabled a more robust examination oi the risks and rewards associated with the Bujagali Project, with respect to both hydrologies and tim- ing. The narrow range limits the ability of the analysis to satisfy fully the requirements of paragraph 6 of OP 10.04 in terms of “assessing the robustness of the project’s outcome” and help ing to “identify the scope for improving project design, increase the project’s expected value, and reduce the risk of failure. ”

-

ccl ara

.7, 59

-

2 71- 75

.3, 72- 73

3, IO- 16

‘.3, !43- 146

31- Y __

P 37

P 104

Comment I Action

Comment: Management notes the finding of compliance by the nspection Panel.

4ction: No action required.

Comment: Management agrees with the Panel that the demand ‘orecast range is narrower than usual. Management interpreted Jaragraph 6 of OP 10.04 where it calls for using “the possible .ange in values.....” in terms of finding a range of values for most variables that captures about 80% of the probability of occurrence. The demand forecast range for Uganda is a result of a thorough and rigorous technical methodology based on these ranges for the ‘actors that determine demand growth.

The adopted range of values was selected on the underlying assumption that the project would be carried out in a reasonably Nell-managed macro-economy and power sector. A completely separate - and much lower - demand forecast range, based on a nuch more pessimistic range of assumptions (an economic reversion scenario), was considered inappropriate. Uganda has a track record of sound macro-economic management dating back over a decade. Currently, consistent with the economic outlook underly- lng the Uganda Country Assistance Strategy, there are no grounds to assume a reversion scenario. Thus, a reversion scenario as a downside risk of the present policy framework was not carried out because the assumptions underlying a reversion scenario are not simply lower probability extensions to the ranges of assumptions underlying the “good management” scenario.

Even though the low end of the range of variables in the existing low demand growth projection showed the projects risks clearly, Management agrees with the Panel’s view that had the lower demand forecast been lower still, there would have been a reduced tower bound of the EtRR, and the economically least-cost commissioning date of the Bujagali Hydropower Project on the yet lower low demand case would be after 2010. Also, the financial equilibrium of the power sector could be impaired, and the cost- risk advantage for proceeding now rather than delaying a decision would have been at least narrowed, but most likely not eliminated unless the demand projections were very much lower indeed. However, the more pessimistic the tow demand case is, the less likely it is to materialize, and the less weight it may carry with regard to an investment decision.

The experience of 2001 is worth mentioning in this context. Notwithstanding continued adverse movements in the terms of trade, GDP growth was within the projection range. The latest power sector data indicates that electricity consumption increased by about 8.1% in 2001 relative to 2000. Thus, the actual outcome for 2001 is within the range of the demand forecast described in the PAD. It occurred in a context of incomplete privatization, a major tariff increase mid-year that hit especially the residential sector, a national election and the lowest coffee prices in recent memory. The data shows that demand stagnated, but did not decline, for several months after the tariff increase, then resumed an upward trend for the remainder of the year. The average tariff in Decembe 2001 was about USD O.O94/kWh, compared with about USD O.O56/kWh seven months earlier, and a narrow range around USC O.O95/kWh in the early 1990s - since which time real incomes have increased considerably.

It would be possible to implement the Panel’s suggestion of i yet more extensive risk analysis by using a yet lower demand projection. To do this properly, a new low demand growth projection

19

JGANDA - BUJAGALf HYDROPOWER PROJECT i

IO. Finding Set/ Pol- Comment I Action I Para icy

would need to be developed based on coherent determining assumptions with their probabilities of occurrence, a new set of system expansion scenarios would have to be developed to determine whether and when Bujagali would be an appropriate investment in these conditions, the cost-risk analysis would need to be recast and the tariff modeling repeated. This work would take at least three months to complete, after the time required to secure the estimated USD 75,000 to fund the study, and it would be unlikely to yield more information useful in designing risk mitigatior measures. If Management judged there to be a substantial probability of demand being much below the existing forecast range, it would not have recommended proceeding with the project.

The risks inherent in the low demand forecast scenario are covered by a range of risk mitigants that were formulated or are al. ready in place, such as a tariff leveling mechanism, PPA payment caps, scope for reshaping of PPA payments, debt relief from old and poorly performing loans, and support for a high quality privatization of the distribution sub-sector, with clear commitments agreed between the Government and the private operator to sub- stantially increase viable connections to the power system and to improve cash collections and reduce system losses.

Action: Management plans to closely monitor electricity demand growth, billing and collection management, and tariff levels under the ongoing supervision of the Bujagali Hydropower and Power IV Projects. In addition, the proposed Bujagali Technical Assistance Project (FY03) will include power sector financial and contractual advisory services to the Government as well as assistance in developing a contingent liabilities management program with particular emphasis on the Bujagali Hydropower Project. These actions will help to develop an early warning system on the project and power sector such that financial and other issues can be identified at an early stage, and measures can be undertaken appropriate to the circumstances.

8.9. Institutional, Tariff and Affordability Risks: OP

1. In the Panel’s view, given the importance of dis- 6.1, “.04 Comment: Concerning the statement that the robustness of the

tribution sector performance for new connections 162- projects affordability is missing from the economic appraisal sum-

and non-technical loss reduction, the institutional 170 marized in the SEDD, Management wishes to clarify that the SEDD

risk to sustainability through delayed distribution, is not required or intended to satisfy any Bank OP. In the case of

privatization, and/or underperformance, should Bujagali, IDA and IFC prepared and made available to the public an

have been more thoroughly explored. Conse- extensive economic analysis of a power project pre-Board, prior to

quently, the Bank is not in full compliance with completion of the IDA appraisal process. As agreed as an outcome

paragraph 5 of OP 10.04. of the July 2000 NGO Forum held in Washington D.C, the SEDD was issued into the public domain (IFC website) to give interested members of civil society a greater opportunity to comment on the

2. Tariffs and Affordability: In the Panel’s view, 6.5, work.

what the analysis suggests is that even if all the 177- Section V.B of the PAD reflects the outcome of the IDA ap- underlying assumptions hold (the achievability of / ‘84 praisal process (and not the SEDD), discusses these risks in some the load forecast, including the price responsive- / depth and quantifies the possible financial consequences of re- ness of consumers, the success of the distribution j duced demand growth on the financial equilibrium of the power privatization, the exports available and sold, etc.) ! sector. there is still a potentially serious affordability prob- Management clarifies that debt restructuring and tariff level- lem that could be addressed through financial ar- ing mechanisms are financial management devices that redistrib- rangements that include debt restructuring, and ute costs over time and between parties. These measures reflect tariff leveling mechanisms. The analysis does not historical performance issues and the increasing future cost of address the net economic costs and benefits of these devices, although it would be appropriate to I

power in Uganda - regardless of the generation source. They would be common to almost any power system restructuring and

do so since they might add to the net costs of the I development program in Uganda, hence they are not necessarily Project. project-specific, nor do they increase the social economic resource

In the Panel’s view, because it represents a sig- costs of any project. Management wishes to highlight that the im-

nificant risk to the affordability of the Project, it [ef- pact of the Governments financial restructuring plan on tariff levels

20

r UGANDA - BUJAGALI HYDROPOWER PROJECT

I 40. ‘inding

ects of deterioration (or an appreciation) in the JSh/USD exchange rate] should have formed part )f the risk analysis and/or discussion relating to af- ordability in Annex 4 of the PAD.

1. In the Panel’s view, an indication of a thorough txamination of the institutional risk of a delayed or mder performing privatization of the distribution system, and its impact on the robustness of the 3roject’s affordability is missing from the economic appraisal summarized in the [Summary of Eco- comic Due Diligence], although this was needed or full compliance with paragraphs 5 and 6 of OP 10.04. Such an appraisal would have given some ndication of appropriate risk mitigation activity and night also have inspired greater confidence in the indings about the Projects affordability.

iecl ‘ara

'.a, IO- 16

'Ol- CY

Comment I Action

ind on the establishment of a sinking fund in order to smooth out ariffs (and thus support the affordability of electricity) has been described in the PAD on pages 21, 22 and 25-29. The detailed as- jumptions for the projections are provided on pages 84-88 of the ‘AD.

The following analyses were carried out under the supervi- jion phase of the project (i.e., following Board approval), since due diligence is an on-going process. The specific issues concerned vere:

1 What could be the exposure of the Government to the Buja- gali PPA payments if GDP growth were only about 3% per year;

1 If demand were below the base case and tariff increases were needed to maintain power sector revenue adequacy, what would be the further impacts on demand; and

1 Are the present and forecasted tariffs “affordable”?

iccordingly,

A scenario was constructed to determine the potential public sector liability if GDP growth were to be only 3% per year, domestic demand for electricity were correspondingly much lower than in the base case (about 20% less by 2006 and one-third less by 2011) and end-user tariffs could not be increased. The results of this analysis indicated that by 2011 the potential call on the general revenue of the Government would be about 1.3% of year 2000/2001 tax revenue or 1% of projected year 2011 tax revenue. Another analysis was undertaken to assess the impact of a 10 percent lower level of electricity demand relative to the Base Case in respect of the tariff increases needed to sus- tain adequate revenues to meet the power sectors obligations, and the consequential further reduction of demand due to the increasing tariffs (i.e., price and affordability impacts of demand well below the expected level). These results showed that in 2007, with Bujagali commissioned and 10% lower demand, end-user tariffs would need to be increased by about 10.6%, and the induced reduction of consumption would be 49 GWh, or about 3% of the original demand level. The analysis demonstrates that “affordability” moderately im- proves or deteriorates depending upon the magnitude of the shift in tariff levels.

Regarding the affordability of tariff increases, an examination of historical and prospective tariffs and incomes indicates that, on the whole, Ugandans’ purchasing power of electricity has not been impaired.

Privatization of distribution was and remains a fundamental lremise underlying generation system expansion in Uganda. The Issumption has been that the concessionaire would be mobilized )y the Fall of 2001. Management acknowledges that some delay If distribution privatization has occurred for reasons beyond the :ontrol of GoU, as has the implementation of the Bujagali Hydro- lower Project. No scenarios were constructed with the specific lurpose of portraying delayed privatization. Given the commitment )f GoU and the stage the process has now reached, it is most ikely that privatization of distribution will happen in sufficient time o facilitate adequate growth of connections and reduction of asses by Bujagali’s commissioning date. For information, the bids rom the pre-qualified firms are due mid-July 2002, and award to he winning bidders is expected shortly thereafter. Given the 44- nonth construction period of the Bujagali Hydropower Project, the listribution concessionaire has ample time and opportunitv to im-

21


40. Finding Set/ Pol- Comment I Action Para icy

prove sector efficiency (reduce losses, improve collections and ex. tend grid connections) as per the performance based concession contracts.

It should be highlighted that UEB’s poor performance bot- tomed in 1998, with a steady trend of billing improvement since then, and introduction of efficiency improvements such as the reduction in staff, etc.

In respect of exchange rate risk on affordability, the Panel’s comment that inflation accompanies devaluation implies that

I nominal incomes also inflate, thus maintaining affordability of electricity. Real income may well increase at the same time inflation and devaluation occur, preserving affordability. Since all of Uganda’s power supply options are about equally dependent on imported inputs, any investment in generation capacity would cause Uganda to face the risk of exposure to exchange rate movements. Hence the impact of devaluation would be mitigated by implementing the least-cost option for power supply.

Acfion: Through IDA’s ongoing macro-economic dialogue, Man- agement will monitor the exchange rate and the affordability of electricity. Similarly, through supervision of the Bujagali Hydro- power and Power IV Projects and the proposed Bujagali Technical Assistance Project (FYO3), the evolution of distribution system development, electricity consumption and tariff levels will be monitored at regular intervals to ascertain whether remedial measures are warranted. Finally, Management proposes to enhance the collection and analysis of household income and expenditure data vis a vis electricity consumption.

~10. Examination of Power Generation Alternatives OP

1. Alternatives - Generation Options: In the 7.1, 10.04 Comment: Analysis of Alternatives: The Acres Report of Novem-

Panel’s view, this evidence that alternatives to 219- ber 2001 is the most comprehensive options analysis undertaken Bujagali had not been considered (as opposed 221 to date for developing Uganda’s power generation capacity. The to having evaluated and rejected them), confirms depth and accuracy of such analyses depend on available infor- the importance of IDA’s responsibility to scope and mation at the time the project analysis is undertaken. International evaluate them thoroughly. This is clearly required experience indicates that many potential generation capacity op- by OP 10.04: “Consideration of alternatives is one tions are rarely brought up to feasibility level of preparation be- of the most important of features of proper project cause of the time and expense involved. Many options developed analysis throughout the project cycle. To ensure to the pre-feasibility level are frequently included in least-cost that the project maximizes net present value, sub- planning studies. Best efforts were made to assess the appropri- ject to financial, institutional, and other constraints, ateness of geothermal energy as a practical alternative to hydro- the Bank and the borrower explore alternative, mu- power, based on available information and experience elsewhere tually exclusive, designs.” 7.2, with geothermal at the time of due diligence. Management be-

2. Least Cost Scenarios w/o Bujagali: The Panel, z$- lieves that the proposed development program and costs cited in

finds that in its treatment of geothermal energy, the Acres Report of November 2001 for implementing a geother-

Management has only partially complied with mat program are realistic. The issue is that the available informa-

OP 10.04. tion about geothermal is too limited on which to base a decision about deferring a project such as Bujagali, which is ready to im-

3. In the Panel’s view, it is regrettable that the 7.2, 1999 ESMAP recommendation was not fol-

plement, has an economic advantage and is anticipated to meet / 233- projected demand.

lowed. Had it been so, better information on costs ‘242 Follow-up to ESMAP Study: In line with the recommenda- and possible environmental and social impacts tions of the 1999 ESMAP study, the Government sought interna- would have been assembled and available for use tional assistance (including the United States Department of En- in the least cost expansion analysis, thus enabling ergy and others) to finance a Geothermal Exploration II Project as a more thorough consideration of alternatives, consistent with OP 10.04.

a follow up to the 1992 Geothermal exploration I Project funded by the UNDP, the OPEC Fund, and the Governments of Iceland and Uganda. In August 2000, the GoU signed an agreement with the AfDB for an “Alternative Energy Resource Assessment and Utiliza- tion Study.” This study will carry out the processing, interpretation and evaluation of existing geologic geochemical and geophysical data, and Phase 2 will prepare feasibility studies and market analysis for the development of three possible geothermal fields

22

YGANDA - BUJAGAU HYDROPOWER PROJECT

40. Finding Secl Pol- Comment I Action Para icy

(Katwe, Kibiro and Buranga) in Western Uganda for power genera tion. Selection of the geothermal consultants is under way for this AfDB supported project.

Status of Geothermal Development: The status and limita- tion, to date, in geothermal development in Uganda are discussed in a paper published in the Proceedings of the World Geothermal Congress, Kyushu-Tohoku Japan, June 2000 by Edward lsabirye Mugadu of the Uganda Department of Geological Survey and Mines, Entebbe. In discussing the fields at Katwe, Kibiro and Bu- ranga, the paper concludes as follows:

“Although all the three areas above are potential geothermal targets, some more work is required to raise the confidence level 01 the results, especially those of Katwe and Buranga. [...I A selection of one of the three areas for detailed studies is not possible at this stage without carrying out geophysical investigations to ascertain the size and structural characteristics of the geothermal reservoirs [....I From the preliminary results of Geothermal Energy Exploration Project (GEEP) I, the chemical composition of the thermal waters from Katwe and Buranga shows that the anions of Cl, HC03 and SO4 occur in about equal proportions. This is an unusual composition of geothermal water whose utili- zation may prove problematic [....I the possibility of intercepting more dilute fluids at depth cannot be ruled out [....I Finally, the failed projects in this sector of the Rift System underscore the need to respect the role scientific research plays as a basis for successful technological and engineering design. It can only be expensive in terms of time [....I”

Need for Detailed Investigation Program: The above comments indicate that, as an alternative to the rapid scoping study proposed in the Panel Report Section 72, para 24, it may be more useful to proceed directly to a detailed program of field based investigations complemented by geothermal exploration and drilling to more comprehensively assess this resource and evaluate its po. tential at the national and local level for commercial power generation. As the Panel’s Report notes in Section 7.1.3, para 231, “field investigations to ascertain the productivity of the geothermal source have still to be carried out”.

Action: Since other sources of funding for geothermal exploration and drilling have not been forthcoming, IDA proposes to include a component in the proposed Bujagali Technical Assistance Project (FYO3), to assist the Government with these activities in Western Uganda assuming that the ongoing technical and market studies financed by the AfDB determine that it is an economically and financially viable option for power.

.I I. Externalities OP

White Water Rafting: Since the loss of white wa- 6.4, 10.04

Comment: As mentioned above, the SEDD is not required or in- ter rafting is part of the costs of the Project, and 174 tended to satisfy any Bank OP; it was a document issued on IFC’s since this is an issue around which much contro- website prior to completion of IDA appraisal which was intended to versy centers, in the Panel’s view, the SEDD help provide more information to the public on the economics of should have presented the underlying assumptions the project. The PAD describes the outcome of the IDA appraisal (particularly those involved in the Monte Carlo process. In the PAD, Annex 4, paragraphs 24 and 25 provide a analysis) and the findings in a more transparent description of the main assumptions and conclusions of the white- fashion. Consequently, full compliance with

: !

water rafting analysis. The main conclusion is that: “A separate paragraph 8 of OP 10.04, which requires that “the /analysis conducted on the value of reserving the Bujagali rapids economic evaluation of the Bank-financed projects /for white-water rafting rather than power supply indicated that take into account any domestic and cross-border / there are no realistic circumstances in which it would be economic externalities, ” has not been demonstrated. to do so.” The EIRR analysis does include the loss of white-water

rafting value-added as a charge against the project. Finally, the Project File contains a detailed paper addressing the requirements

23

JGA

1.12.

DA - BlJJAGALi HYDROPOWER PROJECT

%xling

Xsclosure of Information

lisclosure of information - Economics and Fi- lancing: In the Panel’s view, pursuant to BP 17.50 and the OM on Disclosure of Factual Tech- Qcal Documents, the factual technical documents, 1s feasibility studies, including cost-benefit analy- ;es, should be disclosed to the public, unless the estrictions set forth in the paragraph 3 of the OM )n Disclosure would apply. The Panel did not re- :eive any evidence that these restrictions were applicable to the Acres Report. The Panel finds hat Management is not in compliance with DA’s Disclosure Policy because of its refusal to elease the Acres Report on Economic Review of he Bujagali Hydropower Project.

-

iecl ‘ara

1.2, s26- i37

‘Ol-

CY

3P 17.50

Comment I Action

of OP 10.04 paragraph 8 in respect of white-water rafting, and is the background material supporting PAD Annex 4 paragraph 25.

Action: The report is in the Project File.

Comment: Management would like to note that the provisions of BP 17.50, and the OM on Disclosure of Factual Technical Docu- ments apply to documents produced or owned by the Bank. How- ever, under the Bank’s Disclosure Policy, “some documents and information are provided to the Bank on the explicit or implied understanding that they will not be disclosed outside the Bank.... The Bank must treat such information accordingly. A related considera. tion is the obligation to respect property rights over documents held by the Bank but owned by, or jointly with, other parties. The Bank, as a legal matter, does not publish such documents, nor does it distribute them to the public without the permission of the owner of such documents.”

Management wishes to highlight that the Acres Report is owned by AESNP and IFC and therefore the restrictions set forth in paragraph 3 of the BP on Disclosure which states that, “the only factual technical documents the Bank does not release are those that (a) involve confidential material or material that could compromise government/Bank interactions, or (b) are directly related to internal Bank decision making.”

This is a private sector project. IFC’s Policy on Public Disclo- sure (September 1998) which is publicly available on IFc’s exter- nal website, states that “IFC recognizes and endorses the fundamental importance of accountability and transparency in the development process. Accordingly, it is the Corporation’s policy to be open about its activities, to welcome input from affected communities, interested members of the public and business and to seek out opportunities to explain its work to the widest possible audi- ence.” As IFc’s operations all involve private sector sponsors, the Policy also states that “the Corporation’s approach to information about its activities embodies a presumption in favor of disclosure where disclosure would not materially harm the business and competitive interests of clients.”

IFc’s Policy on Public Disclosure articulates principles for nondisclosure of certain documents and information in order to “reassure clients that the confidentiality of business sensitive information will be respected....Clients entrust information to IFC for the purposes of enabling the Corporation to determine whether to make an investment in the clients business and to administer the investment throughout its existence. IFC, as a financial institution promoting the development of private sector enterprises, has a duty to its clients to respect their confidential business information. If IFC did not respect its clients’ legitimate expectations of confidentiality, its credibility and effectiveness would be diminished....”

IFC entered into a mandate arrangement with AESNP on April 13, 2000 for the purposes of appraising and potentially financing the Bujagali transaction. Under this agreement, IFC has contracted with AESNP that “the information and work product developed by IFC during the course of such Appraisal are for internal use by IFC.” Therefore, AESNP has a legal right to require confidentiality in that due diligence materials will not be publicly disclosed without its consent. AESNP has recently reaffirmed its de- sire to not publicly disclose proprietary information.

As noted in para. 327-328 of the Inspection Panel Report, the “Bujagali Project: Summary of Economic Due Diligence” SEDD) was prepared and released to the public in November ZOOI. The SEDD notes that *‘in spite of specific requests for its re- ease, the Acres Report, which was the basis for the SEDD, was

23

!JGANDA - BUJAGALl HYDROPOWER PROJECT

JO. Finding See/ Pol- Comment I Action Para icy

not disclosed and remains confidential to this date.” The SEDD

I states the major findings of the Acres Report, and thus achieves a balance between protecting client confidentiality and openness.

Action: No action proposed, as AES has confirmed, in its letter dated June 3, 2002, that it does not agree to the release of the Acres Report.

5.13. Power Purchase Agreement and Executed 6.6.1, Agreements - Specific Issues: Concerns related / ii;-

Comment: Transmission: In line with the Panel’s findings, the par ties have endeavored to achieve equitable risk allocation consis-

to transmission, parent company support and ca- tent with the objective of mobilizing private capital. The sector has pacity charges are of secondary importance as been unbundled into generation, transmission and distribution enti compared with the strategic risks considered be- ties, wherein UETC is responsible for the development, operation low. Nevertheless the Panel believes that their and maintenance of the transmission system in the country. This i: treatment in the Executed Agreements alone, if not essential for ensuring optimal operation of the transmission sys- rectified elsewhere, could increase risk for the tern. In order to ensure that there is no mismatch between the power purchaser and their guarantors. construction of the 100 km 220 kV transmission line additionally

required for the evacuation of the power from the Bujagali Hydro- power Project and the commissioning of the power plant, the financing and construction of the line has been included as a part o the Bujagali Hydropower Project and AESNP’s obligations. UETC is thus not exposed to the financing and construction risk associated with the transmission line which will be built, together with the hydropower facility, as apart of the turnkey construction contract for the Bujagali Hydropower Project.

Parent Company Support: The fundamental nature of a limited recourse structure is to limit the flow of liabilities from the project company (i.e., AESNP) to the parent (or sponsor), in this case AES. Most often, the parent’s financial support terminates at aboui the time the project commences operation. In the Bujagali Hydro- power Project, AES will also backstop the obligations of its wholly- owned operating subsidiary. These obligations represent a significant long-term commitment on the part of AES to the Bujagali Hy- dropower Project.

Capacity Charges. The proportionate penalty scheme for lower than specified availability is meant to deal with scenarios were the plant availability of Bujagali Hydropower Project is somewhat impaired. This is a rare occurrence in hydropower projects once they are successfully commissioned. A pro- longed/sustained non-performance by AESNP during construction and operation of the plant under the PPA/IA does provide the GoU with the option of terminating the project agreements thereby not incurring ongoing capacity charges. This is consistent with the risk reward regime for similar projects and commercial utility practice.

Action: No action proposed.

.14. Power Purchase Agreement and Executed 6.6.3- OP

Agreements - Strategic Risks/Affordability I6.6.6, 10.04 Comment: The risk allocation embedded in the project agree-

192- ments reflects a negotiated arrangement between the GoU and

Benefits: The question for the Panel, however, in 202 AESNP for developing, financing, and constructing the plant over a

relation to the Request for Inspection is whether 44-month and operating it for a period of 30 years. These ar-

/the Executed Agreements are satisfactory in their ! rangements are essential to mobilize private capital for the project.

/ response to the strategic risks - which in the end ’ While capacity payments are only payable during the operational

may be risks for all stakeholders, including the phase, significant risks remain in the developing, financing and

people of Uganda, or whether more could have construction phases of the project.

been done to mitigate them whilst preserving the As in the case of the Bujagali Hydropower Project, the appor-

potential benefits. tioning of risks is essential in private power projects where inde-

In the Panel’s view, the strategic risks just exam- pendent regulation, commercial decision making and participation

ined in relation to the PPA suggest the value of of the private sector have only recently been introduced.

additional risk mitigation measures beyond those While the long term objectives of the Bank and the govern- already provided for. ment are to progressively transfer more risks to the private sector,

as suggested by the Panel’s Report, this can be only achieved af-

25

YGANDA - BUJAGALI HYDROPOWER PROJECT

JO. Finding

By the reduction of uncertainty for both sides, the total of these costs should be minimized and the prospect that the Project would be able to deliver its benefits would be increased, in line with the approach to risk mitigation and sustainability recommended in OP 10.04. As it is, the Panel concurs with the PAD that this is a high risk/high reward project for Uganda, with the rider that the risks may come early and the rewards late. In summary, the Executed Agreements generally address and allocate risks appropriately and the provisions generally reflect good international practice. Specific questions arise in respect of treatment in the Agreements of responsibility for transmission and UETC’s role; the scope of Parent Company responsibility; and particular aspects of the capacity payment. At a strategic level, serious risks remain for the purchaser and their guarantors, arising from demand shortfall and/or non- affordability. It is possible that further provision to mitigate those risks could have been - and might still be - made in the Agreements.

1.15. Economic Appraisal and Project Risks: In the Panel’s view, however, if the Project is a high risk- high return Project, as described in Section V.E. of the PAD, it is inconsistent that the Risk/Risk Miti- gation table on page 46 of the Bujagali PAD should fail to describe any of the risks as ‘high’, instead listing them all as ‘substantial’ or ‘moderate.’

i.16. Social Compliance - RAP -

Socio-economic Survey: In brief, the Panel finds that the socio-economic survey requirement may have been met in the formal sense that surveys are mentioned and ultimately carried out, but there is no real evidence of their use or utility in planning. Thus, the requirements of OD 4.30 have been met in respect of process but not in respect of substance. Overall: In conclusion, although the RAP component of the RCDAP as updated in the EIA of March 2001 may be regarded as formally in compliance with the provisions of OD 4.30, there are important requirements still to be met. This is particularly true of those that are related to valuations and payment for the crops, which continue to be disputed by a significant number of affected people.

;ec/ ‘ara

j.7, !03- !09

1.2, !52- !60

'Ol- I Comment I Action CY

ter there is a credible history of commercial operation of the sector corresponding development in the legal, institutional framework as well as the improved credit rating of the country and the utility, as recently evidenced even in developed countries. The project agreements envisage that the government guarantee of UETC obligations would be eliminated as soon as it achieves a local cur- rency investment grade rating.

If the private sector were to assume significant market risks as suggested in the quoted paragraphs, then it would amount to what is commonly termed as “merchant risk”. Projects with “merchant risks” borne by private investors have been implemented in very few countries. In a sector which is on the verge of being pri- vatized and has only been commercially operational for a couple 01 years, as is the case in Uganda, merchant risks are still largely undefined and beyond the scope of risks which can be reasonably borne by private investors. The Bujagali Hydropower Projects risk allocation is typical of private-public partnerships. Over the medium term as the private sector establishes itself, the GoU has envisaged phasing out the single buyer (UETC) in favor of the private sector. Under such an arrangement, the private sector in Uganda may also take an increasing share of market risks.

Action: No action proposed.

‘AD, Comment: As noted by the Panel, Section V of the PAD provides iec. a detailed analysis concerning why Management considers this

project high-risk, high-return. In the table on page 46, Manage- $?yi ment has assessed and rated each of the project risks on an indi-

Y vidual basis. When assessing the combined risks of the project,

,::‘,, however, Management has determined the project to be high-risk, high-return. Thus, Management concurs that the “Overall Risk Rat- ing” on the last line of the Table should have indicated a consoli- dated project rating of “high”, instead of “substantial”.

Action: No action envisaged. The PAD was issued to the Board in mid-November 2001 and cannot be revised.

)D Comment: Management notes the finding that the RAP compo- .30 nent of the RCDAP may be regarded as formally in compliance

with the provisions of OD 4.30. At the outset of involvement in the Bujagali Hydropower Project, staff social specialists found the socio-economic survey to be inadequate. An adequate baseline survey, reflecting pre-project conditions, had been precluded, because AESNP had already initiated land purchase surveys. This activity had triggered in-migration and local speculation in land and crops. Thus, the baseline conditions by which to gauge impacts on income as a result of land acquisition and to identify economically vulnerable people had become skewed. Upon the request of staff social specialists, the sponsor carried out a second census and a retrofitted socio-economic survey to gather basic demographic and income data. In addition, the social specialists requested that the sponsor perform a house-by-house follow-up to identify vulnerable households and those that would experience significant economic impact. The vast majority of those affected lost very small plots of land (less than 0.1 ha). Despite the weakness of the sponsor’s initial surveys, these additional studies were done to ensure full compliance with OD 4.30.

Crop valuations were based on a study carried out by qualified agroeconomists. The GoU took action to limit crop speculation and established a cut-off date for new planting, which was made public. Nevertheless, it was difficult to stop the momentum of speculation. On the basis of IFC and IDA experience, it is not un-

26

L

‘GA/WA - BUJAGALI HYDROPOWER PROJf CT 1

3. Finding ~Secl Pol- / Para

, Comment I Action icy

usual for expectations to be high and for disputes to arise in such a situation, even when appropriate steps are taken.

Action: AESNP will be requested to carry out focused surveys, during the construction phase, to support design, implementation and monitoring of relevant components of the CDAP. During IDA supervision, following financial close, IDA will revisit the crop payments with assistance from PAPS, PAP’s legal counsel, Witness NGO and local land commission authorities to identify and resolve any cases where legitimate, non-speculative crop payments were not made. IDA supervision showed that, as of April 2002, only 5 of about 4,000 compensation cases for the hydropower facility were disputed or outstanding. IDA will continue to monitor this issue ant will inform the responsible parties of any problems identified.

17. Social Compliance - CDAP: The Panel finds that 8.2, OD Comment: As the Panel notes: “. .the Panel concludes that, with the CDAP does not meet the requirements of 4.3u few exceptions, most of the people resettled ended up not worse OD 4.30 because it is weak and sketchy in the ex-

z;i- off, but better off than they were prior to their physical relocation

treme; it focuses almost entirely on short-term ex- and, in this sense, the main objective of OD 4.30 was achieved”. ercises; its targets are poorly laid out; and it makes no significant or systematic effort at achieving

A CDAP is not an instrument required by OD 4.30. It repre-

long-term poverty alleviation. It does not ade- sents an attempt to develop best practice over and above the safe

quately address the issue it raised initially in the guard provisions of the OP, the formal requirements of which were

CDAP regarding the development of safety met by the RAP.

mechanisms for people who experience difficulties after the compensation and resettlement process. Action: IDA will continue supervision to ensure that required RAP

Most of the resources are directed to short-term actions are met and that the best practice objectives of the CDAP

construction projects rather than institution building are achieved.

or social fundamentals. Further, the net present value of the resources to be contributed over a 35 year period seems very low. The CDAP is, therefore, not in compliance with IDA’s policy on Invol- untary Resettlement.

18. Process Compliance and Implementation and /8.4- OD 8.5, 4.30

Comment: Such conflicts are not unusual during implementation Compensation of Land and Crops: In the of RAPS and this is why grievance procedures are provided. Panel’s view, the initial implementation of the RAP had serious problems, especially in the determina-

$$

tion of legitimate claimants and in the valuation of Action: IDA will review this issue as an element of supervision,

land and crops. In this sense, it is not in compli- consistent with B.17 above. Supervision will include field visits to

ante with the requirements of OD 4.30. None- determine if specific parties have been harmed and any such is-

theless, the Panel concludes that, with few ex- sues identified will be brought to the attention of the project spon-

ceptions, most of the people resettled ended sor.

up not worse off, but better off than they were prior to their physical relocation and, in this sense, the main objective of OD 4.30 was achieved.At the same time, this does not pre- / elude the possibility that some affected people may have been harmed.

19. Compensation for Tourism: In failing to ensure 8.6, OD 301- 4.30

Comment: Loss of tourism income and employment was dealt that compensation was paid, and/or rehabilitation with in two ways: (1) at the level of the tourism enterprises or op- was provided, to people who will lose their primary ! 307 erators; and (2) at the level of project-affected individuals deriving sources of income as a result of the Project’s im- ! income from tourism. At the enterprise level, the IFC loan agree- pacts on the tourist industry, the Panel finds that ment provides, as a condition of disbursement, that mutually satis- Management is not in compliance with OD 4.30. factory Memoranda of Understanding (MOUs) will be signed by

AESNP and tourism enterprises affected by the project. One of the five tourism operators has already signed an MOU. At the level of individuals affected by loss of employment, AESNP will give first priority to the employment of economically displaced individuals, as part of its overall commitment to employing the local population. The sponsor has an ongoing process in place to identify individuals affected by loss of employment, including tourism.

27

KGANDA - BUJAGALI HYDROPOWER PROJECT

40. Finding jSec/ Poi- Comment I Action IPara icy

The long-term outlook for employment in the tourism industry is positive in light of proposed tourism development in the circuit between the Bujagali dam and Kalagala Falls, where investment in tourism is being actively promoted (see B.5).

I Action: IDA will verify that the five MOUs are signed with tourism / operators and monitor implementation of the MOUs’ provisions.

During supervision, IDA will work with IFC to reiterate to the spon- ! / sor its commitment to proactively identify and give first priority for

employment to people affected by project-induced loss of income/employment. The sponsor will monitor, track and report on all cases where employment priority has been given to those economically displaced. IDA will also examine other measures that could be taken to address re-employment of Ugandan citizens affected by loss of tourism-related jobs.

UO. Cultural Property Management: In short, while 8.7, OPN Comment: Management notes the finding. there are irresolvable issues related to cultural 3oa- 11.03

property management, it appears that the sponsor 323 has acted responsibly in consulting local people,

Action: Efforts will be made by IDA, as per the recommendation OI

religious specialists and leaders, and has acted in the Panel, to include all religious leaders in consultations and to

good faith in attempting to mitigate the cultural i take steps to minimize disturbances to local communities.

consequences of losing the Bujagali falls. In deal- ! ing with spiritual forces one has to work with the / human resources at hand. It is obvious that the sponsor has allocated considerable time and resources to the problem of community spirits. AESNP’s Cultural Property Management Plan appears to meet applicable policies and its implementation to date is satisfactory even though not free of controversy. One would hope that as the Project goes forward, efforts would be made to include all religious leaders in consultation and take steps to minimize the very real possibility of distur- bance to the local communities that might arise from excluding any faction.

1.21. Disclosure of Information - Disclosure of the 9.2, BP Comment: Management notes the Panel’s finding of compliance Power Purchase Agreement (PPA): It seems evi- zzy- 17.50 with relevant policies in not requiring AESNP or the GoU to dis- dent that, as claimed, full disclosure of the PPA close the PPA. is vital if the intent is to place the public in a posi- Confidentiality with regard to PPAs is a standard industry tion to analyze, understand, and participate in practice. The disclosure of the PPA was actively discussed informed discussion about viability of the Project amongst a broad range of stakeholders during the July 2001 NGO and its impact on the economy and well-being of forum held in Washington D.C, at which IDA and IF-C facilitated a Ugandans. It is also evident and the Panel finds discussion between the stakeholders, the Government and that according to IDA’s policy, there is no specific I AESNP. The Government has consistently stated that it does not requirement to disclose contracts to which IDA is intend to disclose the PPA: it will disadvantage the Government in not a party. Therefore, in not requiring that the any private projects to be negotiated in the future, since all devel- PPA be disclosed, Management’s actions have opers will strive to have the Bujagali terms, even under different been consistent with IDA’s Disclosure Policy. commercial and risk profiles.

IDA received a letter from the Government on June 4, 2002, stating that, “it is the Government policy not to release to the public investment documents which have sensitive commercial information. This policy applies not only to the Bujagali PPA but to all investment documents like Production Sharing Agreements for petroleum exploration and development ; mineral development agreements and mining teases. . ..the PPA was laid before the parliament of Uganda before it was executed. Parliament debated the PPA, including the Report of the Joint Committee of Natural Re- sources and the National Economy which had analyzed the PPA as mandated by Parliament. The people’s representatives in Uganda did approve the PPA following a thorough analysis.”


IO. Finding ‘Secl Pol- Comment I Action iPara icy

AES, through its letter dated June 3, 2002, has stated that it does not agree with the release of the PPA. AES advised that “the terms of the PPA itself provide for explicit confidentiality terms. Each of the possible lenders and participants to the Bujagali Hy- dropower Project has to sign a detailed Confidentiality Agreement before receiving copies of any project documents, including the PPA. Even if AES were to agree to such release (which, as noted above, it does not) the Government and UEB would also need to consent to the disclosure of the PPA as otherwise AES would be in default of the PPA and would risk losing the Bujagali Hydro- power Project.”

Action: The Government and AES have advised IDA that they do not intend to release proprietary documents such as the PPA.

1.22. Disclosure of Information - Environment: .the 9.3.2, BP Comment: Management notes the finding of compliance by the Panel finds that Management is in compliance 30 17.50 Inspection Panel. with OP 4.01 and BP 17.50 on the issue of public disclosure and consultations with respect to the environmental matters on the Bujagali Hydro-


power Project.

1.23. Clarifications on the Panel’s Findings related OP

to the Economic Analysis 10.04

1.a. Economic Rate of Return: In the Panel’s 6.3, Clarification: As noted above, the SEDD was published on the

view, it is surprising that in neither document is it 172- IFC website before completion of IDA appraisal in an effort to

made clear which analysis is the most recent; it is 173 make useful information available to the public well before presen-

also unsatisfactory, because of the substantial dif- tation of the IFC and IDA financed projects to the Board. The PAD

ferences in the EIRR values and their distributions. reflects the final phase of the technical work on the EIRR following

1.b. Economic Analysis - Overview: In the the completion of IDA appraisal.

Panel’s view, such a lack of transparency [of the 6.8, 210-

SEDD] is inappropriate when dealing with areas of 216 high sensitivity: to reach an informed judgment, concerned stakeholders need to be able to appre- ciate both the complexity of the appraisal problem and the sophistication with which the Bank has addressed it. In addition, the SEDD does not al- ways make clear the documentary origin of the analysis that it summarizing.

2.a. In relation to affordability, it illustrated how a Ex. Clarification: A depreciation of the Ugandan Shilling would also mild depreciation of the Ugandan Shilling of 10% Sum,

per year against the US Dollar would double the electricity tariff to Ugandan consumers over 7 Ii”,,

affect most costs of any alternative power generation because they are all predominantly composed of imported resources and fi-

/184, nancing. A depreciation of the Ugandan Shilling of 10% per year

years, raising many questions. against the US Dollar would require less than a doubling of tariffs

2.b A mild depreciation of the Ugandan Shilling of after 7 years, because (1) Bujagali capacity payments are one

10% per year against the US Dollar would double component of system costs amongst others; and (2) not all costs

the electricity tariff to Ugandan consumers over 7 ;;6 of delivered energy are linked to the US Dollar. The statements

years, to the equivalent of 13-l 5 cents wholesale, also imply that the Ugandan power tariff is increased at double the

or up to 20 cents on lower output - surely unaf- rate of the devaluation, while there is no obvious reason why this

fordable. should occur. If tariffs were to be increased at the same rate as the devaluation, then they would remain at the same level in US Dolla terms.

29

1

IGA NDA - BUJAGALI HYDROPOWER PROJECT

JO. Finding

3. The treatment of the potential role of imported electricity, in particular, raises questions about whether sufficient efforts were made in their appraisal.

-. In the Panel’s view, the decision to rely only on the single year’s data for the year 2000, which yields an increase of two-thirds on the average 1994-99 figure and nearly five times the 1999 figure for total new connections, is not properly justified, except for a brief reference to the ‘specific nature’ of the year 2000 [. .]

5. The SEDD points out that the EdF work was completed before the Uganda Electricity Authority announced a new tariff effective June 1,200O. This implied an average increase of 74% and was structured different from Bujagali assumptions. This raises some questions about whether the Electricite de France tariff analysis accurately represents the range of affordability..

6. Apart from a cast iron guarantee by IDA to AESNP for a full return on equity, it is hard to see what more could have been done in the Executed Agreements to mitigate strategic/political risks for investors and lenders -which is not to say that significant political risks to them do not remain.

jecl ‘ara

j,6.3, I94

Ix. ;um j6

i.1, 66,

1.5, 79

8.6.2, 90

‘Ol-

=Y Comment I Action

Clarification: Acres concluded that the prospects for finding large scale imports of electricity for the foreseeable future are highly unlikely. IDA is supporting a Trust-fund financed study for the East African Community to assess options for promoting regional cooperation in electricity. Once this study is completed, it will provide the member States with new perspectives for future planning of power exchanges. However, there is uncertainty about when this study will be completed and agreed upon by the East African Community members and when the follow-up analysis required to deal with a complex set of issues involved in preparing a project covering at least two, but possibly more countries will be initiated and completed. In addition, financing needs to be identified and agreements negotiated and executed amongst sovereign governments. Uganda needs to take decisions today based on the available information to ensure that the prevailing power shortages are eliminated in the short to medium term to meet its economic development objectives. The analysis that was undertaken was based on a rigorous assessment of feasible options.

Clarification: Usually, the base year values of demand forecast assumptions are the actual base year levels unless there is good reason to suggest that they should be different. Though admittedly not well articulated in the Demand Forecast Up-Date Report of January 2001, Management wishes to clarify that the consultant adopted the year 2000 value based on the likelihood that this connection rate would be a more representative starting point for a power sector undergoing privatization and generation expansion, compared with the previous years when connection rates were negatively impacted by inadequate supply, under-investment in distribution and management problems.

Clarification: Staff work undertaken after the June 2001 tariff increase indicates that the GoU’s actual tariff increase in 2001 and Electricite de France’s forecasted increase differ in structure, but are similar in aggregate end-effects and would most likely have a similar impact on demand.

Clarification: The IDA guarantee covers the Government’s contractual obligations under the Project Agreements and does not provide a guaranteed return on AES’ equity. Lenders and investors are exposed to risks associated with the development, financing, construction and operation of the power plant. The AESNP equity return would be reduced if the plant is not constructed on time and operated with in the agreed performance standards.

Annex 2 KALAGALA OFFSET - LETTER FROM GOVERNMENT OF UGANDA AND

REVISED TEXT OF INDEMNITY AGREEMENT

Mr. Callisto Madavo vita President Word Bank Washington P.C

Dear Mr. Madavo,

We understand that subsequent to the IDA and IFC Board approvals of the Guarantee and Loans for ths Bujagalli Projecf, uncartain interpretations of the Government‘s commitment, articulated in Me Indemnity Agreement, not to devdop d-18 Kaiagala site for hydropower purposes, have emerged from project stakeholders and the Bank’s lnsptxtion Panel.

I am writing to continn the GavemmenIs intentions with respect to the Kalagala Falls site. The Gavernmant will set aaide Kalagata erdusively to projecr its natural habitat, envIronmental and spiritual values and for tourism develapment, and not 6ubject the sit8 to hydropower development, as required by OPlEP 4.04 Natur;il Habttata. .

To this end, w8 have established a task force of stakeholders to identify sustainable investment programs to facilitate tourism, with appropriate mit!gation meaeurea to protect the spiritual and natur@l habitat values. We have reque8ted IOA financing to develop this plan further.

In particular, the Government of Uganda has taken inta consideration its policy objective cf developing lease cost options for the country’s &ctricQ supply. In that regard, I wfah to add that government wil1 work with World Bank Group to examine in sufficient d8tail alternative generation options equivalent to the Kalagala pcnarrtial.

31

”

Althchecl pleass find a new subsection 9DSa af tfie Indemnity Agmement which replaces .the exist.hQ subectihn 3.0821. We kindly request that you sign both copies and r&m one to us.

Yours sirlcarely,

. AND ECONOMfC ClEVElS’MEHT’

Attachment.-

32

@UJAGALi HYDROELECTFX PROJECT

i#DEYNlTY AGREEMENT BEiWEEN THE REPirWC bf WAND AND INTERNATIONAL

DEVELOPMENT ASSOCIATION

Replac8ment Section 3.0&b

Uganda will set aside tie tilagala Falls site wklusively ta protect its natural habitat and envfronmental and spiritual values and to development tourism, and will not develop the site for power generation without the Agreement of the Assaciatiw.

33