Home
| Campaigns |
International | International
Financial Institutions | Case Studies and
Resources | BujagaliHydroelectric Power Project
|
The
Struggle for Project Finance AES (Applied
Energy Services Corporation) is the largest independent power producer
in the world, with total assets of almost $37 billion and 63,000
MW of electricity generation from 182 facilities in 31 countries.
The company also distributes electricity in 11 countries through
22 distribution businesses. AES is also one of the largest recipients
of support from the International
Finance Corporation (IFC), the private sector lending arm of
the World Bank Group. Since
1995, the IFC has loaned or mobilized financing totaling more than
$800 million for AES projects. Other arms of the World Bank Group
have chipped in as well: the Multilateral
Investment Guarantee Agency (MIGA) has provided $27.5 million
in political risk insurance to AES, and the International
Development Association (IDA), has provided $359 million in
partial risk guarantees for AES-sponsored projects. AES is a lead sponsor behind the Bujagali hydroelectric power project, a power plant on the Nile River in Uganda. Bujagali is financed with support from the IFC, a partial risk guarantee from the World Bank's International Development Corporation (IDA), as well as several export credit agencies (ECAs). Now another arm of the World Bank Group, the Multilateral Investment Guarantee Agency (MIGA) is considering getting in on the project through its political risk insurance. The Struggle
for Project Finance MIGA's involvement comes fairly late in the game, and comes after several ECAs expressed concern with the project's risk and appear increasingly likely to withdraw support. In fact, a February 28, 2002 Bank board meeting notes that the Swedish ECA concluded that Uganda posed "too high a risk" and therefore withdrew $112 million in planned financing. The Swedish ECA's action follows rejections from the US Overseas Private Investment Corporation (OPIC), and the British ECA. MIGA's political risk insurance may be the linchpin that keeps the project alive. Consistent with its policies and practices, MIGA has not disclosed how much risk insurance may be provided nor for what purpose. Due diligence that MIGA performs as part of its underwriting process will not be made public. Many Concerns
and Questionable Benefits Bujagali is
a controversial project plagued by numerous concerns. The large
dam will disrupt other economic activity in the project region,
especially ecotourism. Thousands of people will be displaced, and
rare species could be affected. In addition, long-term risks about
the project, such as changing water cycles from possible climate
change, have not been addressed. Bujagali has been widely questioned for the development benefits it is supposed to deliver--from governments to potential funders to international and local NGOs. Few Ugandans will be able to afford the energy. In stark juxtaposition to the World Bank's and Ugandan government's professed desires for transparency, the Power Purchase Agreement -- the contract that lays out risks and costs to Uganda-- is secret. Ugandan citizens cannot verify the amount their government has agreed to pay for the project's deliverables and whether it is a fair price. Some reports say that the Uganda government has committed to pay AES up to $100 million annually for the first 10 years of the contract, with payments slowly tapering after that. Other reports say the $100 million payments will be made over the course of the 30-year contract. These payments would exceed the debt relief Uganda has received under the Heavily Indebted Poor Countries (HIPC) Initiative. Furthermore, Uganda has suffered heavily from low commodity prices, and even with this debt relief, a recent IMF/World Bank report admits that Uganda's debt sustainability outlook is "worrisome" and requires a major improvement in export performance and increased donor support. Yet this project would put enormous financial burdens on the government, further exacerbating the debt problem. AES's current financial difficulties, including a depressed stock price, and recent earnings losses, further highlight the concerns over the financial viability of the project. The project's economic viability, as assessed by the World Bank, is also based on over-optimistic macroeconomic assumptions, such as unrealistic GDP and income from coffee exports, as well as inflated figures for increasing demand for electricity. As the World Bank's excessively optimistic projections for export income now undermine Uganda's debt sustainability, so too could over-optimistic assumptions about Bujagali's financial viability threaten the Ugandan economy. MIGA, Enron
and Indonesia: The concerns over the project's financial viability
are reminiscent of another power project MIGA guaranteed: an Enron
project in Indonesia. In the wake of the Asian financial crisis
and the ouster of the Suharto regime, the new Indonesian government
declared its intention to reexamine the project. Under the guarantee
arrangement, MIGA paid Enron $15 million plus $220,000 in interest.
MIGA stopped providing political risk insurance to Indonesia until
February 2001 when the Indonesian government agreed to reimburse
MIGA for the $15 million. MIGA, AES, and Uganda: A Power Purchase Agreement that delivers a sweetheart deal for AES could be a significant burden on Uganda, a heavily indebted poor country. The Ugandan government has pledged to pay AES for electricity for 30 years, regardless of whether the project actually yields the amount of electricity it promises to or whether or not all the electricity produced can be sold. Uganda citizens would still bear the burden of meeting the government's financial obligations to AES. In a country already impoverished and dependent on overseas development assistance, these obligations will likely translate into resources that cannot be provided to other areas. These include primary education, efforts to combat the spread of HIV/AIDS, environmental protection or more decentralized electricity provision that would bring power to outlying rural areas not served by this project. Taxpayers in donor countries could be on the hook too. Subsequent governments may consider the PPA a bad deal, and if they cancel the contract, MIGA's political risk insurance will guarantee AES a return, at the expense of taxpayer dollars that fund MIGA. Or MIGA could require that Uganda pay MIGA back, as it did with the Enron project in Indonesia, further burdening Uganda's citizens. As an independent
power producer, AES has been plagued by the Enron effect, its stock
price more than 80% off its high. The company has frantically undertaken
cost saving measures and sold off assets. However, investments continue
to be skeptical. A May 3, 2002 Bloomberg article states that investors
and analysts contend that AES is unable to profitably manage businesses
in more than two dozen nations and has too much debt to withstand
economic turmoil in several countries at once. Yet AES is being
pummeled by just such turmoil in Latin America, where it has operations
and exposure in several struggling nations, including Argentina,
reeling from a profound and seemingly bottomless economic crisis,
and Venezuela, where a recent coup attempt has spooked investors. AES also bills
itself as an environmentally and socially responsible company, yet
its actions belie that image. In the US, it is currently being sued
in California as part of a class action lawsuit charging wholesale
power generators and marketers with anti-competitive behavior. Its
annual filing with the Securities and Exchange Commission also states
that each of the company's businesses in California is being investigated
by various state agencies, including the Attorney General's Office
and the Public Utility Commission. In May 2000, AES was found to
violate the Federal Clean Air Act at two New York State facilities.
Also in 2000, the company paid a $17 million fine for excess air
pollution at some of its generating facilities in California. The
myriad concerns surrounding this project have persuaded a number
of public finance agencies to step back from this project and focus
their resources elsewhere. Yet the World Bank Group is so vested
in this project it is ignoring its own reports on Uganda's worsening
debt sustainability and flawed assumptions regarding the Ugandan
economy. Now the Bank is mobilizing its insurance arm to save the
project and tread where ECA risk insurers refused to go. In light
of these concerns, the World Bank Group should:
|
