Dulhasti Power project

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?