Examine the 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.

1. Explain the challenge of producing accurate cost estimation when working in harsh geographical conditions.

It would be hard to predict accurate cost estimates due to a number of factors in this project. Setting up in this area is particularly hard due to the fact that it was to be set up in a region that is close to the Pakistani border. They would have to set up security contracts, first of all to protect everyone involved in the project. The site was several hundred kilometers from the larger cities. They would have to set up living quarters and transportation. It probably made it even harder since the contractors do not know the area. The area is also remote so you have to account for getting the supplies to the location.
I would assume there was a lot of activity based costing going on here. The real problem I see would be to plan for all these cost estimates. They would have to do some research on a project “like” this and see what costs were accrued in that project or they are going to be taking some educated guesses on how much this is all going to cost. Also the weather in this mountainous terrain will add more cost to the project.
The challenge would have been hard for this project because of all the variables that the contracting team would have had to put up with. Security, terrain, transportation of people and resources and living quarters being at the front of the list..

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 from using this type of bidding process? How did it contribute to gross underbids and successive cost escalations?

Fixed price contracts do not allow for add-ons and assume that the final price is that which was bid and accepted at the time of the contract’s signing. In this case, a fixed price contract was safer for the Indian government because they knew what to expect, in spite of the harsh geographical conditions surrounding the construction. The construction firms were foolish to enter into such a contract given the lengthy list of unknowns and potentially serious problems they could face (even to the point of being the target of terrorists!). The problem with fixed price contracts is that they allow no latitude for error with the contractors – everything has to go exactly according to plan. In this case, that state was impossible to achieve, leading the French consortium to try continually to renegotiate the contract as costs started escalating. When the Indian government proved unwilling to do so, the French seized on the first opportunity to get out of the project and leave the Indian government to search for a successor.

3. How did it contribute to gross underbids and successive cost escalations?