Overlooking inflation escalates hydropower projects’ costs

Not taking into account the inflation rate in the initial cost estimates is one of the common reasons for cost escalations for hydropower projects in Bhutan, according to a report by Bhutan Electricity Authority (BEA).

Besides, geological surprises, design changes, increase in installed capacity and construction of additional infrastructures are also factors that led to cost escalations.

The report on hydropower project cost overrun was prepared as per the directives of the BEA Commission during the 58th Commission meeting held on 19th July 2016 to study the ongoing practices followed in and outside the region. The report was published in December 2017.

An international comparative assessment of construction cost overrun was carried out in 2014 for 61 hydroelectric projects across the globe for project costs worth about USD 271.50B. The study found that these projects experienced collective cost overruns of USD 148.60B, which translated to average cost escalation of 70.6 percent.

In a similar study conducted by the World Commission on Dams (WCD), it was found that the average cost overrun for hydropower dams was about 21 percent.

However, it was noted that cost escalation in sub-region of South Asia was highest – 138 percent.

Poor development of technical and cost estimates and supervision by sponsors, technical problem during construction and poor implementation by suppliers and contractors were highlighted as the major causes for cost variations.

The BEA also mentioned the WCD report titled ‘managing the cost overrun risks of hydroelectric dams’ that highlighted political influence as major contributor to cost overruns. “When the interest of the politician was involved the project costs were strategically kept low to go ahead with project and avoid criticism,” it stated.

Inadequate prefeasibility studies, the BEA report stated, also led to poor project cost estimates, flawed technical designs and geological aspects. In the implementation stage, the report stated that lack of adequate supervision, inexperienced contractors, design changes and political interference and corrupt practices could lead to cost overrun. In rare cases, the report stated that changes in external conditions such as change in economy of a country or regulatory aspects also contribute to cost overruns.

As per the DPR prepared by the NHPC, the estimated cost of the Mangdechhu project was Nu 28.96B – at March 2008 price level. While the expected cost escalation is about 40 percent, it was highlighted that the initial cost was prepared without considering inflation. In addition, the construction of transmission line to Jigmeling substation, Gelephu was excluded.

Similarly, the cost of Punatsangchhu I was estimated at Nu 35.14B at 2006 price level, meaning the inflation was not taken into account. The BEA issued the licence on November 11, 2008 which was valid till November 10, 2015. When the BEA approved the extension of licence till July 31, 2019, the cost was already escalated by 166 percent (Nu 93B).

Change in design, shifting the dam location and geologicial surprises further contributed to rise in cost.

The Punatsangchhu II’s licence expires by February 2019 and it already experiences a cost escalation of 93 percent. This project will also have to seek for further extension given the new deadline.

The initial cost estimate of this project was also derived without considering inflation. Further, construction of 400 kV D/C transmission line from PHPAII to Jigmeling, Gelephu was not in the DPR. There was also a change in design from surface powerhouse to underground powerhouse.  Geological surprises visited the project, adding to the cost overrun.

As per the Electricity Act of Bhutan (EAB) 2001, no person or an entity shall engage in construction, generation, transmission, system operation, distribution sale, export or import of electricity without a license. In this regard, when an applicant applies for licence, the applicant is expected to submit set of reports containing information to the BEA. After the receipt of the licence application, the BEA conducts review of an application and issues a licence.

“On the BEA’s roles and accountability with regard to cost overrun, there are no provisions either in EAB and licenses conditions explicitly mentioning on cost aspects. However, BEA seems to have implied responsibilities to control the cost of projects through some sections and provisions of EAB and License Conditions,” the report stated.

Meanwhile, among the hydropower plants in operation, Chukha experienced the highest cost overrun by 197 percent (from Nu 831M to Nu 2.46B), followed by Tala with 193 percent (from Nu 14B to Nu 41B). While the lower Basachhu project experienced a cost overrun of 28 percent, the upper was 0.41 percent less than the estimates. Kurichhu and Dagachhu had a cost escalation of 79 percent and 48 percent respectively.

Tshering Dorji 

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