Case Study: The Dulhasti Power Plan
Begun in 1985, the Dulhasti Power project, set in the northern Indian provinces of Jammu and Kashmir, represents an example of a disaster in project cost estimation and delivery. As initially conceived, the project’s cost was estimated at 1.6 billion rupees (about $50 million). By the time the contract was let, the cost estimates had risen to 4.5 billion rupees and later successively to 8, 11, 16, and 24 billion rupees (nearly $750 million). As of 2004, the project has still not been completed, although well over $1 billion has been spent pursuing it.
The project was based on a straightforward concept: Dilhasti was designed as a 390MW hydroelectric power plant to be built on the swift-flowing Chenab River in the Doda region, a rugged, mountainous section of the Himalayas, and several hundred kilometers form larger cities. The project sought to build a dam, erect a hydroelectric generating station, and string hundreds of miles of transmission lines starting near the headwaters of a system of rivers flowing onto the plain south of the mountain region. When the contract was awarded at a price of $50 million, the contracting organizations anticipated that the project could be completed in a reasonable time frame.
The contract for the power generation project was first awarded to a French consortium, who almost immediately asked for an upward price revision. The Indian government refused, suspecting that the French consortium has known all along that their initial bid was too low and were hoping to simply “buy” the project prior to renegotiating. The government’s refusal to revise their price resulted in a second bidding process. Because of wider competition from other European countries now in the field, the second, accepted French offer was then even lower than their earlier one. Although this process initially appeared to save the Indian government money, it was not a good beginning to the partnership between the government and the French consortium.
Situated in the mountainous region of the Jammu and Kashmir provinces, the site was intended to capitalize on the proximity to large river systems capable of providing the water capacity needed to run a hydroelectric plant of Dulhasti’s dimensions. Unfortunately, the site selected for the project came with some serious drawbacks as well. Pakistan and India. Jammu and Kashmir have been the epicenter of numerous and serious clashes between separatist forces supported by the Pakistan government and Indian army units stationed in the region to keep the peace. Constructing such an obvious target as a power plant in the disputed area was sure to provoke reaction by nationalist groups, using terrorism as their chief means of opposition. Thus, the additional costs of providing security to the site quickly become prohibitively expensive. A second problem concerns the sheer geographical challenge of creating a large plant in a region almost totally devoid of supporting infrastructure, including an adequate logistics network (roads and rail lines). Building the plant in the foothills of the Himalayas may be scenic, but it is not cost effective, particularly as almost all supplies had to be brought in with air transportation, at exorbitant costs. All raw materials, including cement, wood, stone, and steel, had to be hauled by helicopter for miles over snowbound areas.
The work on the plant continued in fits and starts for over 15 years. By the turn of the century, over $1 billion had been spent on the Dulhasti project and the plant is still not operational. Further, in order to offset the expense of the project, the cost of power to be generated by the plant has risen by over 500%, making the plant an inefficient producer of electrical power for the countryside. The original French-led consortium that contracted to develop the plant has pulled out, forcing the Indian government to rebid it and award the contract to a Norwegian firm.
What is the status of the project to date? Still unfinished, the budget continues to be revised upward in hopes that the project will come on line by late 2005. A recent government report, including an evaluation of the project’s current status, suggests that key elements of the project are less than 50% completes and will require yet another upward revision of the budget for Dulhasti, perhaps to a much as $1.6 billion. The project’s end is still not in sight, form either a completed power plant or budgetary perspective.
and answer the following questions:
1. Explain the challenge of delivering accurate cost estimation when working in harsh geographical conditions.
2. The original bidding process favored the lowest project construction bids using a "fixed price" contract. What are the advantages and disadvantages to the Indian government when using this type of bidding process?
3. How did it contribute to gross underbids and successive cost escalations?
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How did it contribute to gross underbids and successive cost escalations?
How did it contribute to gross underbids and successive cost escalations
How did it contribute to gross underbids and successive cost escalations
1. The challenge of delivering accurate cost estimation when working in harsh geographical conditions arises due to several factors. Firstly, the lack of existing infrastructure in remote and rugged areas makes it difficult to assess and plan for the logistical requirements of a project. This includes transportation of materials, equipment, and workforce, which can be costly and time-consuming. Additionally, extreme weather conditions, such as snowbound areas in the case of the Dulhasti Power project, can disrupt construction activities and further increase costs. The need for specialized equipment and resources to operate in such conditions also adds to the complexity and expense of the project.
Furthermore, security considerations in conflict-prone areas, like Jammu and Kashmir, require additional measures to protect the project site. This often involves hiring specialized security forces, implementing robust surveillance systems, and implementing measures to counter potential terrorist threats. All these factors contribute to the difficulty in accurately estimating costs in harsh geographical conditions.
To mitigate this challenge, thorough site surveys and assessments should be conducted to understand the unique challenges and requirements of the geographical location. Collaboration with local experts, ensuring access to accurate data on weather patterns and geotechnical conditions, and factoring in contingency plans for unforeseen circumstances can help improve cost estimation accuracy.
2. The advantage of using a "fixed price" contract in the original bidding process for the Dulhasti Power project is that it provides clarity and certainty to the Indian government regarding the final cost of the project. With a fixed price contract, the government knows the maximum amount they will be required to pay, which allows for better financial planning and budgeting. It also incentivizes contractors to be competitive and efficient in their cost estimation and delivery.
However, there are also disadvantages to using a fixed price contract. One of the main disadvantages is the potential for underbidding by contractors. In an effort to secure the project, contractors may submit low bids that do not accurately reflect the true cost of the project. This can lead to cost escalations as the project progresses, as was the case with the Dulhasti Power project. Underbids can result in contractors cutting corners or requesting price revisions later, which can strain the relationship between the government and the contractors.
Additionally, a fixed price contract may limit flexibility in accommodating changes or unforeseen circumstances during the project's execution. Any changes or deviations from the original scope can require contract amendments and negotiations, potentially leading to delays and additional costs.
3. The original bidding process for the Dulhasti Power project contributed to gross underbids and successive cost escalations primarily due to the competitive nature of obtaining the contract. Contractors were likely motivated to submit the lowest bids to secure the project, potentially ignoring or underestimating the challenges associated with the harsh geographical conditions and security concerns in the region.
The initial French consortium's underbid was likely an attempt to win the contract and then negotiate for a higher price. When the Indian government refused to revise the price, a second bidding process was initiated, attracting more European competitors. The second, lower bid by the French consortium was accepted to save costs, but this decision did not result in a successful partnership between the government and the consortium.
The lack of accurate cost estimation and understanding of the project's challenges in the bidding process led to significant cost escalations over time. As the project progressed, the difficulties of working in remote and rugged areas became evident, requiring additional expenses for security, transportation, and logistics. These unforeseen costs, along with the inefficiencies of operating in such conditions, resulted in the need for successive upward revisions of the budget for Dulhasti.
Overall, the bidding process favored low initial bids, which did not adequately account for the complexity and challenges of the project, leading to underbidding and subsequent cost escalations.