Hydroelectric dams are doing more harm than good to emerging economies

Large dams in developing countries are not economically viable. Instead of obtaining hoped-for riches, developing countries risk drowning their fragile economies in debt owing to the ill-advised construction of large dams.

New research undertaken at Oxford University, investigating 245 large dams built since 1934, reveals the dismal track record of such megaprojects. With an average cost overrun of over 90%, large dams have one of the highest cost overruns among all infrastructure asset classes. This result is before accounting for negative impacts on human society and environment, and without including the effects of inflation and debt servicing.

What's worse, planners do not seem to learn. Forecasts are likely to be as wrong as they were between 1934-2007. Dam budgets today are as wrong as at any time during the 70 years for which data exist.

Nearly half the dams we studied suffered a cost overrun so large as to be considered stranded. That is, the capital sunk upfront could not be recovered. For example, Brazil's Itaipu dam, built in the 1970s, suffered a 240% cost overrun that impaired the nation's public finances for three decades. Despite producing much-needed electricity, it is likely Itaipu will never pay back the costs incurred to build it. Yet Brazil is currently building the controversial Belo Monte hydroelectric project, which studies suggest may be non-viable even before opening. China, Indonesia, Pakistan and other nations show similar amnesiac behaviour regarding the building of dams.

The costs of large dams and similar failed mega projects have caused an explosive growth of debt in developing countries. For example, the actual cost of Tarbela dam, most of which was borrowed from external sources, amounted to 23% of the increase in Pakistan's external public debt stock between 1968-1984.

Similarly, for the Chivor hydroelectric project in Colombia, the planners predicted that there would be no changes in the exchange rate between the Colombian peso and the US dollar during the construction period (1970-77). In fact, the Colombian currency depreciated nearly 90% against the dollar. Since over half the project's costs covered imported inputs, this depreciation caused a 32% cost overrun.

Countries with a higher per capita income and better macroeconomic climate typically build dams more quickly with lower cost overruns. This suggests that developing countries, in particular, despite seemingly being most in need of complex facilities such as large dams, ought to stay away from bites bigger than they can chew.

A 90% complete dam is as valueless as a dam not built at all. This typically escalates politicians' desire to throw good money after bad and try to complete a dam long after it has become clear that the investment is a dud.

Costs aside, mega dams also take an inordinately long time to build – 8.6 years on average and often more than 10 years. Our research shows that these long time horizons leave dam projects particularly ineffective in resolving urgent energy crises and especially vulnerable to currency volatility, hyperinflation, political tensions and swings in water availability.

Some combination of these factors constitutes the typical dam disaster. For example, owing to incorrect estimates of water availability, Kainji Dam in Nigeria has fallen short of its hydroelectricity production targets by as much as 70%. Volatile swings in water flow have threatened the dam's safety in times of flood and impaired its hydropower and irrigation benefits during drought.

Despite forgoing large dams, developing countries can still take advantage of their water resources. Our research shows that smaller, more flexible hydroelectric projects that can be built quicker, and are more easily adapted to social and environmental concerns, are preferable to high-risk mega dams.

Norway is an excellent model of how a flexible approach can yield substantial payoffs. With 99% of its electricity produced from water, hydropower is highly successful in the country. Pressure groups and political parties began to question large dams on environmental grounds at the turn of the century. The government responded with a plan to encourage small hydro development, defined as plants with an installed capacity of 10 megawatts or less, typically using low head and run-of-the-river technologies. Today, some 1,000 such plants exist in Norway and more are on the way.

Norway nurtured homegrown competitive and technologically innovative industries in hydropower planning, design, construction, turbine manufacturing and management. Instead of slowing down under criticism, Norwegian hydropower shifted and accelerated development.

This experience has yet to inform such emerging economies as Brazil, China, Indonesia and Pakistan. China needs the biggest rethink, with its plans to almost double its current hydropower capacity of 250,000 megawatts through a huge dam-building effort. Rather than drowning their economies in debt from megadams, developing countries should think of more agile alternatives.

Atif Ansar is a lecturer at the Blavatnik School of Government, University of Oxford. Bent Flyvbjerg is professor and chair of Major Programme Management at the Saïd Business School, University of Oxford