Donors tell World Bank to block dam in Uganda

The fate of Africa's biggest commercial investment hung in the balance yesterday after the World Bank postponed a decision on whether to fill a massive funding shortfall left by the withdrawal of sceptical financiers.

Construction of Uganda's controversial $550m (£370m) Bujagali hydroelectricity project, a 200-megawatt dam on the Victoria Nile, was due to start early this year, but was halted after Swedish, Norwegian and Finnish export credit agencies withdrew guarantees worth more than $200m. The Scandinavian agencies were apparently worried that the Ugandan government would be unable to repay the hefty project costs to AES Corp, the US power giant contracted to build the plant.

Local civic groups and international environmentalists have questioned the economic viability of the project and say it could drive Uganda further into debt, just as it is starting to pull out of a vicious debt spiral.

The World Bank board was due to meet in Washington today to approve a $215mguarantee to fill the funding shortfall. The meeting was postponed at the last minute after the board examined a stinging report that raised serious questions about the project. A World Bank spokesman said there would be "further discussion with the sponsors over the coming weeks".

The investigation, by an independent panel, found that Bujagali breached five internal World Bank guidelines, lacked transparency and ignored potential risks that could result in electricity costs doubling in Uganda within seven years.

The postponement was a victory for civic groups in Uganda and international environmentalists, who say the project may hold hidden dangers for Uganda. Frank Muramuzi, of the National Association of Professional Environmentalists, said: "They want to use it as a showcase of investment. But we shouldn't be used as guinea pigs. What if it goes wrong? It will be a very big problem for Ugandan taxpayers."

Peter Bosshard, of the California lobby group International Rivers Network, said AES could charge the Ugandan government a "near-usurious" interest rate of 13 per cent if it failed to meet its repayments under current conditions.

Last month the rock star Bono travelled to Uganda with the US Treasury Secretary, Paul O'Neill, to see how debt savings have resulted in better education and healthcare facilities.

AES and the Ugandan government say that Uganda desperately needs a fresh power supply for economic development, and that hydropower offers the most cost-effective solution.

The multibillion-dollar company, which has an interest in more than 125 power plants around the world, is confident that the World Bank will eventually agree to guarantee the $215m. Christian Wright, the project manager, said: "This is seen by the clear-minded as a very good project."

AES has been having financial difficulties of its own because of the Enron crisis. Its share price has plummeted in recent months, a fall caused by investor worries over its complicated accounting system and a price slump in the electricity business. The company has started to sell $1bn of assets to improve cash flow.