Lunch presentation B Special Lecture Impacts of Delays on Hydropower Projects by Judith Plummer given at the IHA 2013 World Congress. For more information on this event, see: http://ihacongress.org/

1. Judith Plummer
University of Cambridge
judithplummer@farmline.com

2. Five Myths of
Delays in
Hydropower
Projects
Judith Plummer
University of Cambridge

3. Myths
 “Pre-construction delays are annoying, but it’s
construction delays you really want to avoid”
 “The more time you spend on preparation the less
the risk of expensive construction delays”
 “The costs of construction delays are fully
captured through contractual penalties and
interest during construction”
 “It does not really matter when you start because
you still get a 40 year project benefit stream”
 “Projects involving international financing
institutions get delayed in pre-construction, but
then move more smoothly in construction”

4. Myth 1
 “Pre-construction delays are annoying, but it’s
construction delays you really want to avoid”

5. Annoying to whom?
“Definitely the delay in the start of the actual construction of the project
had wide ranging delays in the reaching of many of the socio-economic
benefits to the local people. Access to school, hospital and other facilities
were delayed to that extent of the pre-construction activities being behind
schedule.” Survey response
 For many stakeholders the effects of pre-construction delay
are as serious, if not more serious, than the effects of
construction delay (including): -
 Affected families
 Government
 Environment
 Off-takers
 Consumers

6. Increased cost during pre-construction delay
Research on the impact of delays in
environmental licensing for
Hydropower Projects in Brazil
 Direct costs
 Indirect costs
 Unquantifiable costs
A matter for debate?
3-7% of
project cost
In survey results 59% of respondents reported that the cost of the
construction increased by more than inflation during the pre-
construction delay

7. Myth 1
 “Pre-construction delays are annoying, but its
construction delays you really want to avoid”
 Annoying to whom?
 For many stakeholders the effects of pre-construction
delay are as serious, if not more serious, than the effects
of construction delay
 Affected families
 Government
 Environment
 Off-takers
 Consumers
 Delayed projects suffer cost increases in excess of
inflation
 Positive spin – have collected more data in time and know more
 Negative spin – bidders add a risk premium for sluggish projects.

8. Myth 2
 “The more time you spend on preparation the less
the risk of expensive construction delays”

10. Myth 2
 “The more time you spend on preparation the less
the risk of expensive construction delays”
 Data suggests that projects which spend longer in
preparation are more prone to construction delay – not
less.
 Assertion would only be true if the additional time was
all spent on better preparation, of items which are on
the critical path
 But, this is not a call for rushed preparation, simply
that preparation time should be properly planned
and used to reduce construction risk

11. Myth 3
 “The costs of construction delays are fully
captured through contractual penalties and
interest during construction”
 Not true of negative impacts on stakeholders
 May not even be true of developers/contractors who
may gain reputation for delay?

12. Survey results – Impacts of delay
Common to Pre-construction and construction
Nature of impact
• Delay to promised local development impacts - such as access to markets (e.g.
roads and bridges)
• Delayed energy supplies - resulting in additional cost to obtain additional energy
supplies
• Delayed financial returns to Government or state project sponsor
• Delayed wider economic benefits (e.g. impact on industry or potential investors
deterred by lack of secure power supply)
• Industrial and commercial investors discouraged by lack of firm power supply
• Carbon emissions from alternate electricity supplies (typically coal or diesel)
• Delayed energy supplies - resulting in groups of the population remaining un-
served (delayed development outcomes)
• Poor communities remain un-served by electricity with implications for local
development and alleviation of poverty

13. Myth 3
 “The costs of construction delays are fully
captured through contractual penalties and
interest during construction”
 Not true of negative impacts on stakeholders
 May not even be true of developers/contractors who
may gain reputation for delay?

14. Myth 4
 “It does not really matter when you start because
you still get a 40 year project benefit stream”
 If this were the case then there would be times when it
was preferable to build a project later?
 “Real options” analysis shows that it is rarely the case
that it is better to wait for better information than to
build now with flexibility*
* Water Resources Planning under Climate Change: A “Real Options” Application to Investment Planning in the Blue Nile Marc
Jeuland, Dale Whittington – forthcoming publication

15. Economic analysis shows that economic returns
are lower from a later project
Bumbuna – Sierra Leone – construction delay
 Economic rate of return of project 42.2%
 With two year delay 28.5%
“But is still a very healthy rate of return”
Data From Economic Analysis report – Bumbuna Power Project

16. “The impact of delays in construction on
economic returns depends upon when that delay
occurs. If it occurs before construction begins (in
effect delaying all costs and all benefits) there is
no impact.”
World Bank Project appraisal report

17. Rampur Hydropower Project On time Delay
Construction delay
 Economic rate of return of project 14.5%
 With one year delay 12.4%
 Financial rate of return 9.3%
 With one year delay 7.7%
Pre-construction delay
 Economic rate of return of project 14.5%
 With one year delay 13.9%
 Financial rate of return 9.3%
 With one year delay 9.3%
Data From World Bank Project Appraisal Report estimates and calculations

18. Myth 4
 “It does not really matter when you start because
you still get a 40 year project benefit stream”
 If this were the case then there would be times when it
was preferable to build a project later?
 “Real options” analysis shows that it is rarely the case
that it is better to wait for better information than to
build now with flexibility
 Economic analysis shows that economic returns are
lower from a later project
 Standard project economic rate of return analysis
does not reflect the true impact of delay and the
scenarios on project delay should not be
considered as guidance for management of delay.

19. Myth 5
 “Projects involving international financing
institutions get delayed in pre-construction, but
then move more smoothly in construction”
 Survey data revealed a link between the extent of pre-
construction delay and funding source

20. Delay by funding source
0%
5%
10%
15%
20%
25%
30%
None Less than
1 year
1-2 years 2-3 years 3-5 years 5-10 yearsMore than
10 years
Percentageofprojects
Length of Incidence of Pre-construction Delay
IFI funding involved Private Funding
0%
5%
10%
15%
20%
25%
30%
35%
40%
None Less
than 1
year
1-2 years2-3 years3-5 years 5-10
years
More
than 10
years
Percentatgeofprojectswhereadelaywas
identified
Length of Incidence of Construction Delay
IFI funding involved Private Funding

21. Myth 5
 “Projects involving international financing
institutions get delayed in pre-construction, but
then move more smoothly in construction”
 Survey data revealed a link between the extent of pre-
construction delay and funding source
 But the same link existed for construction delay – which
is generally not sensitive to funding source
 Do IFIs cause delay – or do they just get involved in
riskier projects that the private sector wont fund?
But

22. Myths
 “Pre-construction delays are annoying, but it’s
construction delays you really want to avoid”
 “The more time you spend on preparation the less
the risk of expensive construction delays”
 “The costs of construction delays are fully
captured through contractual penalties and
interest during construction”
 “It does not really matter when you start because
you still get a 40 year project benefit stream”
 “Projects involving international financing
institutions get delayed in pre-construction, but
then move more smoothly in construction”

23. Thank you

24. Judith Plummer
University of Cambridge
judithplummer@farmline.com