August 20, 2017

Fudging the books

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Published as Chapter 20 of The Social and Environmental Effects of Large Dams: Volume 1. Overview. Wadebridge Ecological Centre, Worthyvale Manor Camelford, Cornwall PL32 9TT, UK, 1984. By Edward Goldsmith and Nicholas Hildyard.

Cost-benefit studies: the record of falsification

Expertise is as saleable a commodity as gold. The old adage that ‘he who pays the piper calls the tune’ is as apt today as when it was first coined. Indeed, the record of industry generally is littered with examples of cover-ups in order to justify the marketing of products which are unsafe or suspected of causing harm. [1] Always, and everywhere, an ‘independent’ expert is on hand to tell the public what industry would like it to hear.

Nor should that surprise us. Like everybody else, the scientists and consultants who work in industry are ruled by everyday concerns – the mortgage, the need to provide for a family, the fear of failure and criticism. They know that promotion is not won by rocking the boat and that there is little profit in gaining the reputation of a trouble-maker. Is it any wonder, then, that many are tempted to cut corners and ‘believe the best’ for the sake of their companies and their careers?

That is not to say that all studies undertaken by a vested interest are necessarily tarred with the brush of deceit. It is to suggest, however, that a little scepticism is a healthy thing. Indeed, it is always wise to ask who funded a study before coming to a conclusion as to its objectivity. In the case of large-scale water projects, the point has been well made by none other than President Jimmy Carter. Thus, when still a candidate for the democratic primaries, he told a rally held to oppose plans to build a dam at New Melones in California:

“In many of the Corps of Engineers’ dam projects around the nation, the benefit / cost ratios have been grossly distorted. Data and promises on which project approvals are sought are erroneous and outdated. False justifications of projects are attempted.

Every corps project that was initiated many years ago should be thoroughly evaluated and computations should be confirmed by the General Accounting Office (GAO). This would insure the saving of billions of dollars in taxpayers’ money and hundreds of miles of irreplaceable and precious wild rivers.

A recent GAO analysis of the Sprewell Bluff dam project on the Flint River in Georgia indicated vividly the fallacies in existing Corps of Engineers analysis procedures. Construction costs were underestimated, extremely low interest rates were assumed, nearby lakes were ignored, population projections were exaggerated, environmental damage was concealed, power production estimates were based on overloaded generator ratings, no archaeological losses are included, and major recreation benefits were claimed in spite of official opposition from state and federal recreation agencies. Similar distortions exist in the New Melones project.” [2]

The GAO report referred to by Carter was the result of an independent audit by Congress’s watchdog agency of a cross section of seven dam projects then being undertaken in the US. [3] It contained some stinging criticisms of the major dam building agencies. Thus, as Julian McCaull, former editor of Environment, reports:

“The study shows many specific instances in which sponsoring agencies, intent on having the projects authorised, overstated expected annual monetary gains to be realised from water management activities such as flood control, irrigation, generation of electricity and outdoor recreation. At the same time, estimated costs were sharply underestimated for annual operation and maintenance of the projects, reservoir-flooding of productive land, and loss of out-door recreation sites.” [4]

In one case, the US Army Corps of Engineers claimed that Missouri’s Pattonsburg Lake Project would bring $1.1 million a year in agricultural benefits. In sharp contrast, the US Department of Agriculture estimated that the project would result in an annual loss of $1 million a year through the destruction of existing agricultural land and the loss of business to local farm industries. Typically, the Corps chose its own figures for the purpose of its cost-benefit analysis. It also claimed $198,700 worth of flood control benefits and $413,000 worth of water supply benefits without any documented evidence to support either claim. [5]

In another instance, the Corps claimed $65,000 worth of benefits a year in irrigation from the Lost Creek Lake Project on Oregon’s Rogue River. Yet, as Julian McCaull reports, those irrigation facilities would have had to be provided “by a separate project, the proposal for which was subsequently shelved without ever being presented to Congress.” [6]

In a similar vein, the Corps boosted the project’s hydroelectric potential by including “not only the economic value of on-site generating capacity of 14,100 kilowatts, but also the value of 10,500 kilowatts which might be added in the future (but which had not been formally proposed to Congress) at some other site in the Rogue River Basin, and which might then be used to supplement the Lost Creek capacity.”

And because no account was taken of the economic loss that would be incurred by local fishermen when Lost Creek was flooded, the ‘fishing use’ benefits for the project were over-estimated by some $22,500 a year. In total, the GAO estimated that the value of expected annual benefits for the seven projects it considered had been inflated by $12,607,080. [7]

It is worth putting those figures in perspective. In the case of the Pattonsburg Lake Project, “the claimed annual benefits” which could not be justified were valued at $873,000: ‘unsubstantiated’ claims – those benefits which had been overestimated, but which were in part justified – at $413,000 a year: while costs were found to have been under-estimated by $446,000 a year. As Julian McCaull points out, on the basis of the first item alone, “Over the 100-year period used to predict the economic future for the project, this yearly overstatement would total $87,300,000 or 52 percent of the entire estimated cost of the project.” [8]

Elsewhere we find other examples of water projects where the cost-benefit figures are now open to doubt. Thus:

Reviewing the Final Environmental Statement (FES) submitted by the US Bureau of Reclamation in support of its Garrison Diversion Project, the Washington-based Institute of Ecology concluded that the scheme had “no economic justification”. [9] Under the scheme, a 77-mile open channel and a string of dams are being built in order to channel the waters of the Missouri River into a massive reservoir for the purpose of irrigating some 250,000 acres.

Yet, as Onno Kremer, vice-chairman of the Manitoba Environmental Council, reports in the Canadian journal Alternatives, those 250,000 acres already “support a prosperous agriculture” and to irrigate them it will be necessary to “convert 220,000 acres of farmland and wetlands to drains, ditches, service roads and other facilities.” [10] Indeed, the Institute of Ecology estimated that the project would in fact “reduce cropland by 8,148 acres, grassland by 39,172 acres and woods by 6,276 acres.” Moreover, the irrigation costs were likely to be so high that they would “amount to a subsidy of $122,000 per person or $469,771 per farm.”

The Institute of Ecology also pointed out that: “Energy consumption per acre for the Garrison Diversion Unit is nearly nine times the national average for irrigation agriculture”; the “degradation of water quality by the project will be far greater than indicated in the FES”; that “the destruction of family farms, the uprooting of entire families and the concentration of land ownership due to the project are inadequately discussed”; and that, “a disregard for potential effects on complex ecosystems is a basic fault of the FES.”. [11]

The Institute felt obliged to conclude:

“The FES prepared by the Bureau of Reclamation for their Garrison Diversion Unit in North Dakota does not represent a comprehensive and objective examination of the complete impacts of the Garrison Diversion Unit. The FES is final for the principal supply works only and not for the total authorized project. Information included in the FES is grossly inadequate and defies objective evaluation. Further, the Bureau of Land Reclamation’s analysis of its own data is often inaccurate, insufficient, or misleading. The project is described in very general and frequently tentative terms and the existing environment is considered in a cursory manner. Major adverse impacts are ignored and alternatives to the project are not considered. It appears . . . that the FES was prepared as a justification for the Garrison Diversion Project rather than a detailed analysis of its environmental impacts.” [11]

Authorised in 1946, the Tenn-Tom Canal was intended to link the Tennessee and Tombigbee Rivers at a cost of $316 million. George Laycock reports:

“When the calculations were completed, the cost-benefit ratio came out at 1.24 to 1. To reach that profit making conclu\ sion, the engineers had tossed in all the benefit ingredients they could justify from among those allowed by Congress, including several million dollars for recreation, fish and wildlife ‘enhancement’ and wage payments to those employed to work on the canal.” [12]

By 1976, however, the benefit-cost ratio had fallen to 1.08 to 1 -and even that ratio, claim critics, was only achieved by underestimating costs and over-estimating benefits. Thus, in 1981, R. Jeffery Smith reported in Science:

“In 1976 . . . the Corps and its economic consultant, A. T. Kearney of Chicago, found several dozen firms in the region of the waterway who said they planned to use it after it was completed. Early in 1981, the General Accounting Office contacted 17 of these firms – representing the bulk of the predicted shipments -and discovered that only about half were still interested. The GAO found that some of the predictions ‘were not based on ‘definite’ company plans.’ In other instances, the GAO said, Kearney’s estimating practices ‘may have been too liberal’.” [13]

By 1981, the cost of the project had leapt to 1 billion dollars – and a further $960 million dollars was estimated to be necessary to straighten and widen the third leg of the canal in order to avoid bottlenecks.

“Other hidden federal project costs detected by the GAO could include as much as $31.5 million to soften the waterways impact on fish and wildlife: $360 million to deepen and widen the port of Mobile where barges will enter the Gulf: and $48 million to construct waterway-related recreational facilities. Mississippi and Alabama, which are obligated under federal water project rules to spend $170 million for highway and bridge relocations, are actually receiving $90 million of this amount from the Federal Department of Transport . . . None of these costs are included in the Corp’s cost-benefit calculations.” [14]

Despite such criticisms, however, Congress voted in 1981 to continue with the project – at the cost of $10 million a month – on the grounds that construction work on the canal had proceeded too far to put an end to it. Stopping the project, commented one of the scheme’s backers, would leave behind “the largest swamp in America”.

Early estimates of the cost of the power generated by Kentucky’s Devil’s Jump Dam made it clear that the price per unit of electricity would be 8 to 10 times as high as that produced by the Tennessee Valley Authority, the dam’s major anticipated customer. So, too, with other dams already built upstream at Lake Cumberland, flood-control benefits were seen to be negligible. Unable to offer cheap power or flood control benefits, the dam seemed likely to be slated. The Corps of Engineers, however, was not to be deterred. As George Laycock reports:

“Its solution was simply not to drain Lake Cumberland as low as usual for the winter. Automatically, this would mean that Lake Cumberland no longer had storage capacity to hold back as much water during periods of high run-off. Then these waters, for which there had been no room left in Lake Cumberland, could be accommodated in the proposed Devil’s Jump Reservoir. This, at least in theory, would enable the Corps to claim that Devil’s Jump would hold back 256,000 acre-feet of water for flood control in spite of the fact that it offered no such benefits in any real sense.” [16]

The dam was nevertheless approved by Congress, but subsequently halted as a result of public protest.

Such blatant falsification is by no means unique to America’s federal dam-building agencies. Indeed, it would appear to be typical of the industry worldwide. Thus, when the Indian economist Vijay Paranjpye reviewed the cost-benefit analyses submitted by India’s hydro-electric authorities, he found them so consistently wrong that he concluded:

“The estimates had very little to do with the realistic assessment of costs . . . (their) sole purpose was, and still is, to get the approval of the Planning Commission and obtain the necessary financial sanction.” [17]

To support that allegation, Paranjpye cited the findings of an Indian government committee which had analysed 64 dam projects. The Committee, notes Paranjpye, found that “the percentage rise in revised costs over initially estimated costs turned out to be an average of 108 percent.”

More specifically, Paranjpye took a detailed look at the figures submitted by the Karnataka Power Corporation in support of its Bedti Dam. On the basis of his own calculations, Paranjpye argued:

“Even if the most obvious and direct costs of the project are taken into account, the project is economically non-viable. The government of Karnataka will be experiencing an annual loss of over Rs 3 Crores (30 million rupees or £2 million) due to this project throughout the lifetime of the dam, unless the Karnataka Power Corporation raises the average price of power to well over 80 paise per unit, so as to derive a reasonable rate of return which could cover the social and economic cost.” [18]

At that price, the power from the dam would be selling at almost five times the amount that Karnataka Power had forecast.

Paranjpye calculates that the benefit-cost ratio for the project is 0.8 to 1. He concludes: “It is reasonable to presume that if the true costs had been revealed, the Planning Commission would never have sanctioned the project.” Most obviously, Karnataka Power had juggled the figures:

  • by underestimating the costs of resettlement and compensation;
  • by ignoring totally the cost of transmission lines;
  • by omitting to take account of the revenue from the forests which would be lost to the dam;
  • and by allocating derisory sums for such vital measures as soil conservation.

In the event, Karnataka Power was forced at least to recalculate the cost of resettlement. Even then, however, the figures were still underestimated. Thus, where Karnataka power upped the number of people whose land would be flooded from 1,500 to 3,706 (a percentage difference of 147 percent), Paranjpye put the true figure at 5,193. So, too, he estimated:

  • the true figure for paddy land submerged was 1,429 hectares as against Karnataka Power’s raised figure of 459 hectares;
  • for dry land lost, 384.2 hectares as against 201.6 hectares;
  • for gardens, 190 hectares as against 36.4 hectares;
  • and, for the number of houses and hamlets to be submerged, 741 as against Karnataka power’s figure of 50.

Indeed, Paranjpye agreed with the authorities on only one set of figures: the amount of forests which would be lost – some 10,000 hectares.

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Over-estimating benefits, under-estimating costs

The above examples highlight just a few of the means used to manipulate cost-benefit ratios in favour of projects which, under any realistic appraisal, would never have a chance of even getting off the drawing board. Other techniques used to ‘massage’ the figures in order to give a favourable economic assessment of a project include the following:

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1. The use of unrealistically low discount rates

Until 1971, the discount rate* used to evaluate US water projects was often as low as 3.125 percent. [19] That level was set in 1962 under Senate Document 97 and, even at the time, bore no relation to then interest rates, let alone their likely future value. When, in 1971, the rate was revised, the US Water Resources Council – “recognising both the objectives of subsidising water resource projects and the objectives of an efficient combination among and between federal and non-federal investment activities” – set the new rate at 7 percent rather than the 10 percent it acknowledged to be the rate of return of non-federal investments. [20] In 1973, however, the Council reduced the rate to six and seven-eighths percent.

Even so, in its 1973 cost-benefit analysis for California’s New Melones Dam, the Corps of Engineers still insisted on using a discount rate of three and one-eighths percent. Dr. Thomas Parry and Professor Richard Norgaard argue.

“The reason is clear when benefits and costs are examined in the light of the effect of a six and seven-eighths or 7 percent discount rate. Using the six and seven-eighths percent figure, the interest foregone would be approximately $13,500,000 annually (as opposed to $5,700,000 at three and one-eighths percent). Adding figures for amortization, maintenance and operation, and taxes foregone, the total annual costs become about $15,400,000, or significantly more than the $13,500,000 which the corps estimated to be the annual benefit. This disparity, of course, would make the benefit-cost ratio less than one-to-one and, consequently, would make the entire project economically unfeasible.” [21]

The discount rate is described by Parry and Norgaard:

“The discount rate is the rate of interest used to convert future dollar values to present dollar values, and depending on the discount rate assigned to a benefit-cost analysis, it can have a significant influence on the outcome of the analysis. To illustrate what we mean by discount rate, a capital investment which will yield you $10 one year from now really is not worth $10 to you today because you have to wait a year to get the money. If the interest rate in society is 5 percent, that $10 is only worth about $9.50 to you today since you could be receiving regular interest money at the 5 percent rate on the $10, and thus have 10.50 rather than just $10.00 at the end of the year. [B. T Parry and R. B. Norgaard, ‘Wasting a River’, Environment Jan / Feb 1978, Vol. 17 No. 1, p.25].

In other cases, not even a low discount rate can save a project. Idaho’s Teton Dam, which impounded 17 miles of river in a massive irrigation and flood control project, is a case in point. Even using the Bureau of Reclamation’s own figures and its chosen discount rate of 3.5 percent, a group of environmentalists found that the claimed benefit-cost ratio of 1.2 to 1 was in reality only 0.73 to 1 – that is just 73 cents worth of benefits for every dollar spent. Using an interest rate of 6 percent, it was found that the ratio tumbled to 0.4 to 1. [22]

It is also important to recognise that whilst unrealistically low discount rates are used for the water projects themselves, unrealistically high discount rates are employed to evaluate the ecological benefits that eventually will be destroyed. This is of particular relevance in the Third World. Indeed, as the Nairobi-based Environment Liaison Centre points out:

“The use of a discount rate over time seems unrealistic for such rehabilitative projects as timber and food production or the conservation of wildlife and scenic areas. These resources carry only a slight risk of becoming worthless or obsolescent through technological advancement, changes in the weather, or fashion in contrast to machinery, chemical factories, or dam projects. With a growing world population, the risk that soil, water and air will be valued any less in 50 years is almost zero. Their value can only go up, unless we colonise other planets. Yet, if a figure of 10 percent is adopted as a discount rate, which is a much lower figure than in most cost-benefit analyses, it would appear ‘uneconomic’ to plant trees for fuelwood production. If it takes £100 and 50 years to produce a crop worth £2,000 (at 1975 prices), it would not appear ‘economic to do so because interest charges would amount to $10,000. With this analysis, our future generations may have to do without basic requirements of survival, such as forests, fertile soils, clean water and scenic areas. Clearly a new method of evaluating protective measures is needed.” [23]

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