Reference no: EM131841269

Problem: The Hidden Costs of Infrastructure Projects-The Case of Building Dams

In recent years, there has been an upsurge in the development of large dams in both developing and developed countries, including Brazil, Ethiopia, Pakistan, and China. There are a number of reasons for this increased interest in dam building. Demand for electricity is expected to double worldwide between 2010 and 2035. As a result hydroelectric power is seen as a cheap, available option for countries with river systems that allow for dams, particularly as it is a preferred option to dirtier coal-burning plants. Other arguments in favor of building these dams include its use for flood control, crop irrigation, inland transportation, urban water supplies, and as a job creator. These are all powerful and tempting arguments in favor of building large dams; however, there is one important counter-argument to the push toward these hydropower megaprojects. They fail to offer the advantages they are assumed to provide. There are a number of criticisms of large dam projects. First, megadams take, on average, nearly nine years to complete.

As a result, arguments that they will ease the burden of energy demands must be taken on faith; given their long lead times, they certainly are not an option for energy crisis situations. They also assume that all current circumstances (energy demand, population growth patterns, water availability, and energy prices) are likely to remain steady, or at least predictable, over the time period in which the dam is developed, which can lead to dangerous assumptions of future benefits. Nigeria's Kainji Dam, for example, has fallen short of generating its expected hydroelectricity levels by as much as 70%. Second, cost and schedule projections to complete these dams are almost always grossly underestimated. In fact, research suggests that cost overruns for large dam projects average 96% higher than estimated costs; that is, actual project costs were nearly double the original estimates. Schedules for these dams averaged overruns of 44%, or 2.3 years. Third, the cost in absolute terms for these large dam projects can nearly bankrupt the countries investing in them. For example, Ethiopia's Grand Ethiopian Renaissance dam on the Nile River was projected to cost $4.8 billion when it was started in 2011. By the time it is completed (projected for 2017), it will end up costing more than $10 billion, or one-quarter of Ethiopia's GDP.

Instead of helping the economy and fostering growth, Ethiopia could be facing enormous problems paying off longterm debt from financing the dam. Nor is this a new phenomenon. Brazil's Itaipu Dam was built in the 1970s at a cost of almost $20 billion, or 240% more than projected. Since opening, it has been a drain on the country's finances. Despite producing electricity that is needed to support development in Brazil, it is unlikely that the costs of the Itaipu Dam will ever allow it to break even. What is the solution? Countries such as Norway, which produces some 99% of its energy from hydropower, have adopted a smaller, more flexible solution to the use of dams. The government encourages the development not of large megadams, but of smaller, more flexible plants designed to produce smaller volumes of electricity but located at more locations within the country. Thus Norway currently supports some 1,000 smaller energy-producing dams that do not disrupt the natural flow of rivers, cause no environmental impact, and produce cleaner energy. Large megadams of the type that are being developed around the planet are a tempting and expensive pursuit for the majority of countries undertaking them.

With poor project development records historically, including huge cost and schedule overruns, these projects are typically undertaken as much for the national prestige they offer. At the same time, countries that have invested precious budget money in creating the dams are frequently disappointed with the results, including underutilization, decades of financial squeeze and debt obligation, and a failure to realize the expected benefits. When it comes to large megadams, the energy they produce is usually neither abundant nor cheap.25

Questions: 1. Given the history of large cost overruns associated with megadam construction, why do you believe they are so popular, especially in the developing world?

2. Develop an argument in support of megadam construction. Develop an argument against these development projects.