The Lesotho Highlands Water Project has throttled wild rivers and drowned verdant valleys. Its concrete megadams have flooded out thatched huts, subsistence farms and grazing lands here in the impoverished mountain region known as the Roof of Africa. And now the project is embroiled in one of the biggest corruption scandals in the checkered history of African development.

In other words, this $8 billion scheme to ship water from the rugged peaks of Lesotho to the industrial heartland of South Africa seems to exemplify the current stereotypes of major dams: massive, expensive, destructive, exploitative and corrosive -- except that the highlands project is also the financial lifeline of this landlocked kingdom, a dynamic source of money, energy and jobs in an otherwise medieval economy.

"People love to attack big dams, but water is Lesotho's only natural resource," said Malefetsane Lepele, the general manager of the project's environmental and social services group. "It's cash. It's business. This project is the only way to keep this country alive."

Even though three of the project's five proposed dams are on hold because the calculations used to justify them were way off base, its former CEO is in jail and a dozen multinational corporations face bribery charges for feeding his Swiss bank accounts, a close look at Lesotho's experience suggests that big dams are not necessarily pure boondoggles.

The project's water fuels growth in the vital Johannesburg area, which has an economic output exceeding the rest of southern Africa's.

The project also benefits Lesotho, a Maryland-size nation where one-fourth of the 2.2 million residents are at risk of starvation and nearly one-third have HIV. The sale of fresh water -- "Lesotho's White Gold," the brochures call it -- is pouring $20 million in annual royalties into the country's coffers, about one-fourth of its total exports. The project has supplied more than 7,000 jobs and all of Lesotho's electricity, while providing new health clinics, schools, sanitation facilities and roads and upgraded water-supply systems for 150 villages. It has promised full compensation for 30,000 residents affected by the dams, as well as training and aid to help them sustain themselves in the future.

In general, the 16-year construction project has brought native highlanders -- who were often hours away from clean water and days away from a hospital -- much closer to the modern world. At the same time, the project has spawned a major spike in HIV rates by drawing outsiders to the hinterlands. But in interviews in the shadow of the 600-foot Katse Dam, Africa's tallest, and the slightly smaller Mohale Dam, completed this month, most Lesotho villagers said they welcomed the chance to modernize their lives.

"We want progress, and the dams bring progress," said Tsebo Pholo, a subsistence maize farmer who is now planting fruit trees and high-yield potatoes through programs created by the highlands project. "We shouldn't stay behind in the old ways. We want electric lights and running water."

The Dream of Itjara

Before the dams, Malefatsa Natsoane was a typical Lesotho homemaker.

Her husband worked in South Africa's mines, along with 140,000 of his countrymen; the money they brought home to the hills made up two-thirds of Lesotho's economy. Natsoane spent much of her time scavenging for water, firewood and food. A trip to buy maize meal required a 10-mile mountain trek. "Oh, it was a very hard life," she recalled.

Today, Natsoane's husband has lost his job, as have three-quarters of Lesotho's miners. But with the help of the highlands project, Natsoane, 56, has transformed herself into a one-woman rural conglomerate. She grows peach trees through the project's sustainable forestry program. She has learned candle-making, basket-weaving and ceramics through the project's training program, and sells her wares along the new paved road that cuts through her village of Ha Lejone. She grows seed potatoes through the project's agricultural assistance program, as well as beet roots and mustard seeds never seen around here before.

"I feel so happy in my heart," she said. "I never thought I would have this itjara" -- the Sesotho-language word for self-reliance.

For Lesotho, the project is all about itjara; for South Africa, it is all about water. It was launched during the apartheid era -- with support from the World Bank despite official sanctions against white-ruled South Africa -- but has been embraced in the democratic era by the ruling African National Congress to help extend water supplies to millions among the long-oppressed black majority.

Southern Africa's extreme climate variations make the region uniquely susceptible to droughts, yet few steps have been taken to store the region's available water. On a per-person basis, the heavily dammed United States stores 100 times more water than most African countries.

Some critics say Johannesburg should address its water shortages by fixing leaks and reducing water use -- which has already begun to taper off because of the AIDS epidemic -- but water managers say conservation alone won't solve the problem.

"You can't run a metropolis of 10 million people without a reliable source of water," said Michael Muller, a top official at South Africa's Water Ministry. "This was just the best deal for everyone."

But for environmentalists, anti-globalization activists and other opponents of megadams, the project is a stark illustration of the general problems identified by groups like the World Conservation Union, which concluded in 1999 that dams are "the major cause of imperilment and loss of freshwater biodiversity." The U.N. World Commission on Dams issued a similarly harsh report the following year.

The highland project's critics complain that water rates have increased for poor South African blacks, that compensation for displaced Lesotho families has lagged, that community assistance programs have faltered and that the multination scandal makes a mockery of the World Bank's professed "zero tolerance" corruption policies.

In his recent book, "Unsustainable South Africa," Patrick Bond, a business professor at the University of the Witwatersand, called the project "costly, corrupt, poorly designed, badly implemented, economically damaging, ecologically disastrous and distributionally regressive." Even the project's own documents acknowledge problems with inadequate environmental planning and monitoring, initial training efforts that failed to provide marketable skills, and a now-defunct development fund that "became highly politicized and lacked transparency."

In some ways, Makobile Lakabane has come to symbolize the project's drawbacks. She lives with her husband and seven children in a dingy stone hut the size of a wrestling ring. Their hillside village, Ha Seotsa, was once home to 50 farming and herding families, but it will be underwater once the Mohale reservoir fills up, and the Lakabanes are the only residents left among the town's ruins. The project built a new home for all her neighbors who wanted one, but the Lakabanes have been embroiled in a bureaucratic dispute about the ownership of their hut. So they live an hour's drive away, along a treacherous dirt road, far from any companions, with no school and few provisions, watching the water slowly rise.

A Lesotho newspaper recently profiled the Lakabanes, bemoaning that "the danger of being swallowed by the dam stares at them every second and moment of their lives." A local human rights group, the Transformation Resource Center, has denounced project leaders who "steal millions but can't build a house for this poor family."

On a tour of her abandoned village, though, Lakabane did not sound like an anti-dam radical. She was just upset that she hadn't gotten the same resettlement offer as her neighbors.

"We would be happy if we can be resettled like everyone else," she said. "We want to be close to other things and other people."

In fact, project officials have now agreed to build a new home for the Lakabanes in a village of their choice, and the only remaining dispute involves $120 in moving costs. Overall, the project will displace only about 600 families. By contrast, more than 1 million people were in the way of China's Three Gorges Dam.

'People With Cash Arrived'

"I went to Lesotho expecting to hate the project, but it's not so bad," said environmental activist Steve Rothert, who once organized a meeting of local villagers and now works for the anti-dam conservation group American Rivers. "The people there really don't have any other economic opportunities."

The good news, said Sister Catherine Lebina, is that the highlands project recently built a mortuary for her hospital in Manohau, a great sanitary advance for a region that has never had the means to refrigerate corpses before.

The bad news, she said, is that the new mortuary is always full.

"This was a nowhere place before they built the dams," Sister Catherine explained. "Then people with cash arrived in a place without cash. Girls started doing things for money. And so? AIDS."

AIDS has been an unforeseen consequence of the highlands project, spread by its truck drivers and construction workers as well as villagers with new access to the outside world. Sister Catherine said 80 percent of her patients are infected with HIV. One study suggested a 40 percent rise in HIV rates. But literacy rates are also rising, and waterborne diseases are declining.

There are pros and cons to almost every element of the project. For example, it diverted 40 percent of the Orange River's flow, transformed the ecology of its valleys and wiped out nearby medicinal plants. But it also set aside two nature reserves, established the first botanical garden devoted to "Afro-alpine flora" and spent $2 million to save the endangered Maloti minnow. Similarly, the project had several development failures -- a recycling plant that sits idle, a soccer field washed away by a storm, a sanitation project doomed by rumors of snakes lurking in toilets -- but it succeeded in forming grazing cooperatives and promoting higher-value crops.

Even the scandal has led to a landmark prosecution, with a Lesotho judge recently ordering a Canadian multinational to pay an unprecedented $2.2 million fine for bribery.

Mahlape Mothepu, a top project official, was once a rural villager herself, rising every day at 5 a.m. to fetch her family's water. It is important, she said, to recognize problems caused by the dams. But she believes it's more important to remember problems that predated the dams.

"We've learned some bitter lessons," she said. "But please remember why we're doing this."

Makobile Lakabane, second from left, and her family are the last remaining residents of Ha Seotsa village. About 50 other families were resettled elsewhere in preparation for the flooding of the valley to create the Mohale reservoir.