By Tim Cocks

BUJAGALI, April 27 (Reuters) - Splashing the riverbanks with foam as they whoosh through central Uganda, the Bujagali Falls near the Nile's source are a challenge to local fishermen and thrill-seeking white-water rafters alike.

But Uganda's government has other ideas for this powerful jet of water: it wants to harness it for electricity.

Once completed, the Bujagali hydroelectric project is expected to double output on the national grid, ending blackouts that have deterred investors and damaged industry. The target date is 2011.

The World Bank on Thursday approved $360 million in loans and guarantees for the $799 million project.

Drawbacks include scarring a pristine landscape, hurting biodiversity and closing Uganda's top tourist destination. But officials say it could be worth it.

"A few trees will be submerged (but) ... we will have enough electricity to run our industries, be more competitive and be able to meet growing energy demand at a lower cost," assistant energy efficiency commissioner James Banaabe told Reuters.

Much of Uganda's power is generated from two dams at the Nile's source with a combined 250 megawatt capacity, but they are struggling to keep up with demand rising by 8 percent a year in the east African country of 27 million.

"LIVING IN DARKNESS"

The International Finance Corporation, the World Bank's private sector arm, which backs the project, says Uganda's GDP loses 1 percent annually to power cuts and high tariffs.

"Electricity costs 24c per kilowatt/hour. It is going to hit 6c -- that is a quarter of the price," Adnan Khalid, Bujagali Energy's environmental coordinator, said.

Bujagali Energy is a joint venture between a Kenyan and an American company. The dam suffered delays after a campaign arguing it would displace local people.

Responding to criticisms, the company offered compensation to several hundred displaced locals, including 1 acre plots of land and 4-roomed concrete bungalows with iron sheet roofs and rain-harvesting water tanks.

"I used to live in a small thatched hut," said farmer Margaret Bulage, 63, who has ten children, as she sat in the doorway of her concrete house with a back yard animated by pecking chickens and a snuffling piglet.

"Bricks and cement are much better. We are only 50 metres from the school and very near the hospital," she said, adding that her children used to walk 8 km (5 miles) to school.

Bulage wants electricity, too.

"We have lived in darkness my whole life. I want lights in our house so children can study after dark."

"OVER-DRAINING"

Some groups, like the National Association of Professional Environmentalists (NAPE), still object to the dam, arguing it would draw extra water out of overused Lake Victoria.

Uganda's power crisis was triggered by a drop in lake levels that neighbours blame on existing dams.

"(The company) does not ... address the impacts of hydrology ... (dams have) contributed to over-draining of Lake Victoria," NAPE writes on its website.

Proponents say Bujagali will simply recycle existing flows.

"There won't be any impact on lake levels," said Khalid.

That just leaves the impact on tourism of damming up rapids that have become a leading rafting destination.

"It is the best one-day rafting trip in the world," said Cam McLeay, director of Adrift, Uganda's top rafting company. "To put a dam in the middle of it seemed a real shame."

McLeay is building a lodge further upstream, where, he says, he will be able to offer rafting trips almost as exciting as the ones tourists flock to in Bujagali.

The energy company will pay for conservation, reforesting and upkeep of the new tourist site.

British explorer John Hanning Speke is credited with discovering the source of the Nile at Lake Victoria -- though many locals say their ancestors already knew it was there and they even led Speke to it.

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