Africa / African Business
Beware large dams and their handlers — study
BY RAZINA MUNSHI, MARCH 11 2014
MEGAPROJECTS should be approached with caution, as few managers anywhere in the world are able to forecast their costs and deadlines correctly, new research on megadams between 1934 and 2007 shows.
This applies particularly in the energy field and in Africa, making South Africa's support for the largest hydropower scheme in the world, the $100bn Grand Inga project in the Democratic Republic of Congo, quite risky.
Large dams usually overshoot their budgets by an average of 96%, which is more than any other asset class, including rail, roads and tunnels, Atif Ansar, Oxford University lecturer and associate fellow at its Saïd Business School tells Business Day.
Dr Ansar has co-authored a report published this month in Energy Policy journal, titled Should We Build More Large Dams? The Actual Cost of Hydropower Megaproject Development. "One ill-conceived dam in a developing country has the potential to cause a sovereign debt crisis," he says.
Pakistan's Tarbela dam, built in the 1970s, resulted in a 23% increase in Pakistan's external public debt stock between 1968 and 1984. Pakistan is still paying, decades later, says Dr Ansar.
Costs of dams are often too high to deliver risk-adjusted returns even in developed countries, his research has found.
Three out of every four large dams surveyed suffered cost overruns. They also took an average of 8.6 years to build, often making them ill-advised, and even dangerous.
African nations are particularly vulnerable. Costs are likely to spiral in countries with low per-capita incomes, unstable currencies and high inflation rates. Without strong economic fundamentals, as well as high-level expertise to manage complex projects, developing countries are at risk of damaging their economies by constructing large dams, Dr Ansar says.
Brazil's $14.4bn megadam, the Belo Monte hydroelectric project, is a classic example.
Tensions with local communities have overshadowed its economic sacrifice. By the time the dam is completed, its costs will have ballooned to $27.4bn. Public money, some from pension funds, has been used to build the dam, because of a lack of interest from private investors.
The research surveyed 245 large dams, with a total value of $353bn, built between 1934 and 2007 in 65 countries, including South Africa. All large dams for which valid and reliable data could be found were included.
There are other concerns. The ability of African countries to develop and manage mega-projects is limited, which increases the high risk of failure, head of capital projects advisory at Deloitte, Sheldon Morris, says.
Even in South Africa, where state enterprises such as Eskom and Transnet have commissioned large projects, in-house expertise is limited. Reliance on contractors is dangerously high.
Repeated delays to the construction of Eskom's 4,800MW Medupi power station have seen costs spiralling, the project is far from complete and problems have compounded.
Mr Morris says megaprojects around the world seem to attract the same people, who move from project to project, developing specialised and highly technical skills. African nations are rarely exposed to this expertise.
And Dr Ansar's research shows that managers do not learn from past mistakes. Forecasts about costs and deadlines are likely to be as misguided today as they were in 1934.
But Africa's demand for energy could result in a push for projects such as Grand Inga. It has the potential to produce up to 44,000MW from eight separate dams, more than a third of the electricity produced in Africa.
The Democratic Republic of Congo has dreamt of developing the project for decades, but internal conflict has prevented it from being realised.
In October last year, President Jacob Zuma signed a treaty with Congo's President Joseph Kabila to co-operate on Inga 3 Basse Chute, the next step in the development of the Grand Inga site. South Africa has committed itself before to buying 2,500MW from Inga 3, which will have a capacity of 4,800MW. The project could cost about $12bn.
This treaty, Mr Zuma said at the time, "represents a practical commitment of the two countries to jointly partner to develop this gigantic project". But it has not been released to the public, fuelling speculation that it adds little more to previous treaties.
Despite reports of plans to begin construction of Inga 3 in October, it is hard to tell whether there has been real progress.
Three bidders are standing in line to benefit: China Three Gorges and Sinohydro; Posco and Daewoo of South Korea in partnership with Canada's SNC-Lavalin Group; and Spain's Actividades de Construccion y Servicios and Eurofinsa Group.
The condition of Inga 1 and 2 underlines that investors should approach new projects with caution. Inga 1, built in 1972, and Inga 2, completed in 1982, have a capacity of only 1,775MW, but a lack of refurbishments have resulted in their operating even further below capacity.
Both have suffered from a chronic lack of maintenance. Power lines to Congo's capital Kinshasa, which is 450km away, have not been upgraded at all, according to news reports.
South Africa's reasons for supporting the project are said to be political. Cost savings do not appear to be the issue — South Africa is able to develop energy projects more cheaply. Energy from other renewable sources will cost significantly less than what South Africa will eventually pay for hydro-generated power from Congo.
The investor community's scepticism may also affect the project. Opinions at the recent Africa Energy Indaba in Johannesburg suggested investors are wary about megaproject development, in spite of high demand, and regardless of which asset class they fit into.
Smaller projects in South Africa have been very successful. Investment into South Africa's power sector has increased dramatically, but the record of investment in the rest of Africa is extremely low. Last year in sub-Saharan Africa excluding South Africa, just 12 renewable energy projects were closed.
The reality for Grand Inga is that only a successful Inga 3 would help raise investors' confidence in the remaining five stages of the project.
Dr Ansar's research has found fault with the behaviour of politicians and policy makers: they bring an "optimistic bias" to new projects, because they seek the support of a constituency wanting to see development.
Others deliberately mislead the public about the time and cost of getting projects approved, sometimes for personal benefit.
And some policy makers, he says, ignore rare events and problems that are likely to affect the project. They have difficulty processing the probability of events that may happen far into the future.
Policy makers should keep projects as short as possible, he believes. In Africa, limited funds, coupled with the urgency to grow the continent's energy capacity, lend themselves to the construction of smaller projects that can deliver energy projects quicker, using fewer resources.