by Scott Lewis

Study Finds Big Cost Overruns on Global Dam Megaprojects

Dam projects is bad investment

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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 countries.

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 impacts."

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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