An Analytical Framework for Cost and Schedule Planning in the Construction of Hydropower Projects

This dissertation is an aggregation of three major aspects of investment planning – cost projections, measurement of benefits and externalities, and risk quantification. In the first instance, the aim of the study was to assess the statistical significance of a common hypothesis that, cost and time overruns are particularly synonymous with hydropower dams. To demonstrate the magnitude and severity of overrun risks in hydropower planning, the study re-examines the cost issues associated with a portfolio of 58 dams that were financed by the World Bank from 1976 to 2005. Focusing on the technical parameters used in projecting the cost of these set of dams, there is sufficient evidence to show that errors in forecast follow a systematic pattern and cannot be solely attributed to randomness in input parameters such as inflation, exchange rate and demand forecasts. Following the empirical evidence in support of the hypothesis that cost overruns is a commonality among hydropower dams, it was also necessary to investigate the benefit side of dams in order to ascertain if the justification to build these projects are actually invalidated after incorporating the errors in forecast. Hence, the second aspect of this thesis was aimed at estimating the ex-ante and ex-post economic rate of return for the individual hydropower projects as well as for the aggregated portfolio of dams studied. Using the avoided cost methodology for measuring the benefits of a hydropower project, there is substantial evidence to support that the rents generated by these dams has been positive in spite of the common experience with overruns. The ex-post real economic rate of return for the entire portfolio is estimated to be greater than 14 percent. This findings implies that, decision making on building dams must consider iv adequate margins of ex-ante benefits over costs to account for the risks of cost overruns. Finally, the study provides a practical framework for addressing the issue of uncertainty in cost planning of hydropower dams. Using the reference class forecasting (RCF) technique, I construct a forecasting model that depicts what cost overruns can be expected (in probabilistic terms) for dams of different characteristics and locations. This technique is widely applied in the transportation sector, but here, I demonstrate how this methodology can be useful for improving the reliability of costs used for making decisions under uncertainty in power planning. The technique makes it possible to link contingency estimates closely to the likely incidence of uncertainty of construction costs for hydroelectric dams. A case study - the Bujagali dam in Uganda - is used to demonstrate how investment appraisal can be enhanced to better account for the risk of cost overruns. While the Bujagali project had suffered substantially from cost overruns, the expected net benefits of the dam are still expected to be adequate to cover for the actual cost of the dam. The conclusion is that if the dams were not built, the alternative source of generating power could have been more costly. Consequently, this study recommends the use of the RCF as a support tool for prescribing a margin for error, in the CBA deterministic estimates, to account for the risk of overruns before making a decision to build. Keywords: investment appraisal, hydropower, dams, cost overruns, reference class forecasting.