High risk strategy

BIG PROJECTS are back in style. After years of trepidation, the World Bank has adopted a new high risk strategy. Critics insist this may be bad news for borrowing governments, poor communities and electricity consumers.

Confronted by mounting public criticism, the World Bank shied away from many large infrastructure and logging projects in the 1990s. An internal task force found in July 2001 that: ‘the Bank has become so risk-averse, according to some borrowers, that it would rather do no project than risk criticism.’

Large dams were particularly affected by this trend. The Bank had approved close to US$2B for 13 hydro power projects in the 1990–1995 period. It approved less than US$600M for only six projects from 1999 to 2002.

Now the pendulum has swung back. In February 2003, the Bank re-embarked on what it called a ‘high risk / high reward’ approach to projects in the water sector. The new strategy explicitly called for increased investment in ‘hydraulic infrastructure’, namely dams.

The Bank’s management admits that earlier high-risk projects, including dams, have created development disasters. These projects include the Sardar Sarovar project in India’s Narmada Valley, the Tarbela dam in Pakistan and the Yacyrete project in Argentina and Paraguay. Management claims, however, that developers have learned from past mistakes, and that ‘in recent decades thinking and practice have changed dramatically’. In its new water sector strategy, the Bank commits to a ‘corporate strategy for ensuring that the objectives of the safeguard policies are respected’.

Can these assurances be trusted? How has the World Bank incorporated lessons from past mistakes? How will it assess, contain and mitigate the risks of its new high risk/high reward strategy?

‘The Bank has done little institutionally to promote, monitor, or otherwise make [environmental] mainstreaming happen’, an internal evaluation report on ‘Promoting Environmental Sustainability in Development’ pointed out in 2002. Critics claim that in spite of rhetorical commitments, the Bank has failed to put social and environmental concerns at the core of its development paradigm, and one example is its failure to embrace the recommendations of the World Commission on Dams (WCD).

Internal evaluations show that the World Bank still does not always analyse project risks properly, and tends to overestimate project benefits. Borrowing governments have to pay back World Bank loans regardless of whether investments turn out to be productive or not, and so the Bank can afford to be negligent when it assesses project risks.

A closer look reveals that the World Bank safeguard policies increase project costs by only US$36 – 56M per year; three times less than the cost of the Bank’s procurement and financial

guidelines. Notwithstanding the complaints about the high cost of doing business with the Bank, the safeguard policies are insufficient (and inadequately implemented) in many respects. The Bank lacks a human rights policy and a comprehensive social policy. It also neglects to analyse who will be exposed to the high risks of its

new strategy. Failing to identify the distributional impacts of

investments in dam or mining projects is a crucial shortcoming for a development institution.

Guinea pig

The experience with the Bujagali dam in Uganda illustrates what these shortcomings mean in practice. When the Bank approved this showcase project in December 2001, several board members commended the management for its ‘willingness to engage in such a complex and high-risk project at a time when there was such a temptation to become risk averse because of outside criticism’.

The hydro power project on the Victoria Nile is high-risk indeed. Although forecasts for electricity demand were highly optimistic, the Ugandan government guaranteed to pay the investor, US-based AES Corporation, for power generation at full capacity for 30 years. Even though Uganda is rated one of the world’s most corrupt countries in Transparency International’s Corruption Perception Index, the World Bank did not insist on international competitive bidding for the contracts. The project’s economic analysis and the power purchase agreement were kept secret. The private investor had no experience with resettlement. And the cumulative environmental impacts of the dams on the Victoria Nile were never assessed.

Shortly after approval, the project hit a wall. The Inspection Panel, the World Bank’s independent investigative body, found that several key safeguard policies had been violated. The people who were displaced originally supported the project, but soon complained that all promises were being broken. An independent review found that compared with standard industry practice, the power purchase agreement required Uganda to make annual excess payments of US$20M. As a consequence, the Ugandan government requested a renegotiation of the contract.

In June 2002, a member of the Bujagali consortium was accused of bribing Uganda’s former energy minister (the company claimed the money paid to the minister was unrelated to the project).

The project was subsequently investigated for corruption, and

suspended by the World Bank. In August 2003, AES withdrew from the project.

For many years, Uganda has served as a guinea pig for the World Bank’s private sector development strategy in Africa, and for the new high-risk approach. Nine years after negotiations started, the country’s society – and most of all, the people displaced for the dam – have not seen any rewards. Ironically, the country has a promising potential of geothermal power – a resource that is exploited on a large scale across the border in Kenya in projects such as Olkaria III. The World Bank estimates the capital cost of geothermal power plants to be US$1150-2200 per MW, which is considerably lower than the cost of Bujagali. Yet the Bank neglected to consider this alternative to the dam on the White Nile.

Prolonged deadlock?

The experience with Bujagali indicates that the Bank is not ready for a high-risk strategy. The new approach puts poor people,

who are supposed to be at the core of the institution’s development mandate, at great risk for projects that have produced dismal rewards in the past. The strategy, and the continued failure to mainstream social equity and environmental protection throughout the Bank’s operations, will prolong the deadlock in important sectors such as electric power, and will impede the development of more sustainable options.

In contrast, following the recommendations of the WCD on issues such as the balanced assessment of needs and options, public acceptance, transparency and environmental impact assessment would prolong the initial stages of the planning process and of project development. It would however help identify the most acceptable solutions to a country?s energy and water problems, and would offer more predictability and less conflict in the long run.