Thursday, March 13, 2014

Study Finds Big Cost Overruns on Global Dam Megaprojects

Study Finds Big Cost Overruns on Global Dam Megaprojects
Engineering News Record, 03/11/2014
By Scott Lewis

Large dam projects make bad investments, according to a new global study
by a team from Oxford University, England. Three-quarters of the
projects analyzed by researchers experienced cost overruns, with the
average increase reported as 96% higher in real terms than the figure
cited by the project owner when the construction decision was made, says
Bent Flyvbjerg, professor of major program management at the
university's Saïd Business School.

"We find that even before accounting for negative impacts on human
society and environment, the actual construction costs of large dams are
too high to yield a positive return," the study concludes. The report
analyzed all large dams built between 1934 and 2007, for which
comprehensive documentation was available. It covers 245 projects in 65

The documents include both business case documents, project appraisals
and implementation completion reports drawn from six sources: World
Bank, Asian Development Bank, World Commission on Dams, U.S. Army Corps
of Engineers, Tennessee Valley Authority and the U.S. Bureau of Reclamation.

"Sources of cost overruns can be divided into apparent causes and root
causes," says Atif Ansar, an associate fellow at the Saïd school and the
study's co-author. Apparent causes include site-specific characteristics
such as unfavorable geology, imported dam inputs with exposure to
commodity prices and exchange rate depreciation in developing countries.

"Underlying these apparent causes are root causes," adds Ansar. One root
cause is "optimism bias," which occurs when political officials make
too-bold claims of speed-of-project completion; these claims happen more
often in democracies than in authoritarian countries, the report
contends. Another root cause is "strategic misrepresentation," which is
when project promoters (deliberately) underestimate costs to push
approval, the study says.

The authors acknowledge that large dams in North America do not
experience certain problems facing dam owners and builders in developing
nations. Because North American dams are built with domestic inputs,
they are not exposed to exchange rates or global supply-chain problems,
researchers say. Nonetheless, the projects still experience cost
overruns, often tied to schedule delays due to optimism bias.

The study found that cost overruns on large dams are higher than for
most other large projects. The authors cite typical cost overruns of 6%
for thermal power plants, 20% for roads, 34% for fixed links (bridges
and tunnels) and 45% for railways. However, on nuclear powerplants, the
figure is 207%.

The study's "methods of evaluation appear to be credible but very
narrowly focused," says Keith Ferguson, national program leader for dams
and hydraulic structures at HDR and current president of the U.S.
Society on Dams, whose members are dam designers, builders, owners and
government officials. "They have highlighted our industry's past
challenges in estimating costs for construction," he adds. "The current
state of practice in the U.S. and beyond has a keen focus on estimating
costs more reliably, including introducing risk and uncertainty into the
cost modeling, to better understand and characterize the true long-term

Peter Bosshard, policy director of International Rivers, an
environmental group, says the recent resurgence in megaprojects is
because China, Brazil and Korea "have pretty much rolled up the world
market." The Oxford study "poses serious questions" about whether large
dams should continue to be built, he says.

The International Energy Agency, part of the United Nations, recommends
building renewable projects and mini-grids to feed a small area. "It is
not cost-effective to extend national grids to reach the rural poor in
Africa and South Asia," says Bosshard. "The future of wind, solar and
small hydropower is probably more promising from a disinterested
investor perspective."

Flyvbjerg notes that the study "should not be seen as anti-hydropower
but against the flaws in the building of very large dams."

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