Wednesday, March 19, 2014

Ending the Flood of Megadams/WSJ

Ending the Flood of Megadams
The $20 billion cost of the Itaipu Dam impaired Brazil's finances for three decades.

March 18, 2014

Brazil, China, Ethiopia, Indonesia and Pakistan have begun to build large hydroelectric dams, after a decadelong lull world-wide. Yet these projects routinely come in late and over budget, and a new survey from Oxford University's Sa�d Business School of 245 large dams built since 1934 reveals their dismal track record.

Brazil's Itaipu Dam was built in the 1970s. It cost nearly $20 billion, 240% more in real terms than predicted and it impaired Brazil's public finances for three decades. Despite producing much-needed electricity, Itaipu is unlikely to ever pay back its capital and debt costs. More recently, Ethiopia's $4.8 billion Grand Ethiopian Renaissance Dam on the Nile, which began construction in 2011, will likely cost $10 billion before its projected completion in 2017�nearly a quarter of Ethiopia's GDP. Instead of helping Ethiopia grow, the dam could drown the country's fragile economy in debt.

These are not outliers. Actual construction costs of large dams are globally on average 96% higher than their budgets, and the magnitude of cost overruns hasn't declined. There is also the negative impact on human society and the environment such as flooding, as well as erosion, landslides and loss of fish populations. Then there are cost overruns and debt servicing.

The Itaipu hydroelectric dam, on the Parana river, Alto Parana. Agence France-Presse/Getty Images

Because megadams take 8.6 years on average and often more than 10 years to build, these projects don't ease urgent energy crises. The long lead time makes the projects especially vulnerable to currency volatility, inflation, political tensions, swings in water availability and electricity prices. Some combination of these constitutes the typical dam disaster.

For example, thanks to incorrect estimates of water availability, Kainji Dam in Nigeria has fallen short of its hydroelectricity production targets by as much as 70%. Volatile swings in water flow have threatened the dam's safety in times of flood and impaired its hydropower and irrigation benefits during drought.

Forecasters have proved incapable of accurately predicting or controlling projects. This is true for large hydroelectric dams, as well as airports, bridges, tunnels, public buildings, high-speed rail and Olympic Games. The optimists ignore hard facts and uncertainty, betting the house on projects with very low probability of success. The more pernicious exploit the project for private fiscal or political gain by predicting overly-positive investment prospects. The systematically poor outcomes of large dams suggest that either fools or liars are at the helm when initial budgets are estimated.

Proponents tend to focus on rare stories of megadam success. The Hoover Dam�finished in 1936�is used as a prime example. But decision makers should consider evidence for the entire dam record, and in the case of large dams, failure is much more likely.

Champions of these projects argue that renewable water resources could be wasted without dams with a wall height higher than 15 meters. Our research shows that smaller, more flexible hydroelectric projects that can be built and go online quicker, and are more easily adapted to social and environmental concerns, are preferable to high-risk megadams.

Norway is an excellent model of how a flexible approach can yield substantial payoffs. With 99% of its electricity produced from water, hydropower is highly successful in Norway. Pressure groups and political parties began to question large dams on environmental grounds at the turn of the century. The government responded with a plan to encourage small hydro development, defined as plants with an installed capacity of 10 megawatts or less, typically using low head and run-of-the-river technologies. Today, some 1,000 such plants exist in Norway and more are on the way.

Norway nurtured homegrown competitive and technologically innovative industries in hydropower planning, design, construction, turbine manufacturing and management. Instead of slowing down under criticism, Norwegian hydropower shifted and accelerated development.

This experience has yet to inform such emerging economies as Brazil, China, Indonesia and Pakistan. China needs the biggest rethink, with its plans to almost double its current hydropower capacity of 250,000 megawatts through a huge dam-building effort. Rather than drowning their economies in debt from megadams, developing countries should think of more agile alternatives.

Mr. Flyvbjerg is a professor of major program management at University of Oxford's Sa�d Business School. Mr. Ansar is a lecturer at University of Oxford's Blavatnik School of Government.

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