The Victoria Reservoir is a multipurpose water resources development project initiated by the Sri Lankan Government four decades ago by inundating nearly 2,000 hectares of land within the fertile Mahaweli catchment area and another 100 hectares in the densely populated Teldeniya sub-city.
Although the affected people were given reasonable compensation, their sacrifice cannot be measured in financial terms. Ultimately, the Victoria project has now become a highly-valuable national asset that will last for at least another 60 years.
Most Sri Lankan citizens prefer to have a stable local currency. However, due to the current economic crisis prevailing in the country, most financial analyses are now based on foreign currencies, preferably US Dollars, due to the stability and global recognition. As a result, the term ‘USD billion’ has become commonly used in economic analysis and the debt restructuring process.
The Victoria hydropower project is a grant from the British Government, and in this economic analysis, GBP (£) is used instead of USD as a tribute to the British Government and for easy conversion. It is very easy to convert Sterling Pounds (GBP) into Sri Lankan Rupees (LKR) by just multiplying by 400.
It can be demonstrated that the Victoria hydropower project, which commenced in 1981 with a £ 100 million grant from the British Government, has proven to be one of the most financially-viable projects ever constructed in Sri Lanka, considering the Government’s investment. The total estimated cost was £ 135 million, with only a £ 35 million contribution from the Sri Lankan Government.
Assuming a long-term inflation rate of 3% for GBP, the present worth of the project is £ 467 million. The expenditure incurred by the Sri Lankan Government, in terms of present worth, is only £ 121 million. However, the real asset value of the project is in the range of £ 2.5 billion due to the technical advancement and expansion taking place in the hydropower sector and the high demand for hydroelectric equipment.
Over the last 39 years, the Victoria Powerhouse has produced over 23,000 GWh of energy valued at £ 2.3 billion. This single hydropower project has also contributed to saving carbon dioxide emissions of 13 million tonnes, worth at least another £ 130 million.
The Victoria Reservoir not only stores water for hydropower generation at the Victoria Powerhouse in Adikarigama, but also supplies a regulated flow for power generation at Randenigala and Rantambe powerhouses.
Therefore, at least 25% of the hydropower benefits derived from the Randenigala and Rantambe system, which produced an additional 19,000 GWh of energy, is accounted for in the Victoria project. Hence, an additional financial benefit of £ 4.75 GBP is counted for the Victoria project.
The irrigable area under the systems A, B, C, and E of the Mahaweli project is more than 60,000 hectares (Ha), with an irrigation requirement of about 1,800 million cubic metres (MCM). These systems never suffer from water scarcity due to the presence of many reservoirs and the excess water in the system. However, it can be demonstrated that crop yield would considerably increase with a reliable irrigation supply, especially in the dry season.
A regulated and controlled flow of 1,000 MCM in volume is supplied through the Victoria Reservoir at an economic value of Rs. 5 per unit (this does not imply any water taxation is imposed, and economic terms are considered in the analysis).
As a result of a reliable irrigation water supply, annual economic benefits can be estimated to be another Rs. 5 billion. Therefore, irrigation benefits derived from the Victoria Reservoir during the last 39 years have amounted to nearly £ 500 million. This demonstrates that the entire cost incurred for the project has now been returned in terms of irrigation benefits, which shall be counted for financial analysis.
Therefore, hydropower and all other benefits shall be counted for the net profits. Let us assume that the net maintenance cost incurred during the last 39 years amounts to £ 500 million. Then the total foreign funds saved from the project is more than £ 3 billion.
Another important fact is the transparency demonstrated by the Ministries of Lands and Land Development and Mahaweli Development during the construction period. There was an outstanding contribution made by late Minister Gamini Dissanayake, and due to his dedicated efforts, the Government was able to obtain a British grant amounting to £ 100 million.
The tentative estimate and the expenditure statement up to 1983 are published to demonstrate the transparency shown by the Mahaweli Ministry at that time. This level of transparency was not maintained after the Mahaweli project and the success of the project can be directly attributed to the transparency shown by the Government at that time.
Contract estimated cost 1985 SLR million of the project. Expenditure up to 1983 and predicted asset value SLR billion by 2023 December.
- Civil contracts
- C1 – Dam – 2,588 1,412 256
- C2 – Tunnel – 1139 602 114
- C3 – Power station – 381 207 38
- C4 – Hydraulic equipment – 658 380 132
- C5 – Electric distribution – 49 980 10
- Mechanical and electrical turbine generators, transformers switch yards, etc. – 1,037 319 200
- Expatriate consultancy – 365 217 36
- Local consultancy – 60 35 6
- Digna township – 100 40 10
- Work by other agencies – 768 241 77
- Other expenses – 2003, 763, 2009, 148 5,196 1079
This calculation is based on the following assumptions:
- Long-term inflation rate for hydropower projects shall be considered as 5%
- In the year 1981, the foreign exchange rate was equivalent to Rs. 32 per GBP
- The current average foreign exchange rate is Rs. 400 per GBP
- This results in a hundredfold increase in the value of civil works in terms of LKR
- However, due to the sudden economic crisis in Sri Lanka, the price increase in electro-mechanical equipment is taken as 200 times in terms of LKR
This will prove that the total asset value of the Victoria project is £ 2.5 billion, which is equivalent to the IMF loan.
Final tentative accounts statement of the project can be expressed as follows:
- Net profit gain from the Victoria project = (Real value of assets) + (Total benefits) - (Capital cost + Maintenance cost)
- Total benefits (B) = Hydropower benefits + Irrigation benefits + (Environmental benefits) = (2.3+0.4875) + (0.5) + (Neglected) = £ 3.2875 billion
- Real value of the asset (A) = £ 2.5 billion.
- Therefore, cost incurred for construction and maintenance (A) = (0.467+0.5*) = £ 0.09657 billion
* Assumed value. It is necessary to incur this expenditure in order to prevent any deterioration. Net profits during the last 40-year period = A+B-C = 2.5+3.2875-. 9657 = £ 4.8212 billion and net profit to the Government = 4.8212+(0.467-0.121) = £ 5.1672 billion
During severe droughts, other hydropower plants take only the peak load, while thermal plants handle the base load. In the event of any failures in the thermal plants, a significant portion of the electricity demand is compensated by the Victoria project.
As a result of overloading, the overall energy efficiency of the Victoria project has further reduced by at least 5% (this information is derived from an unpublished research paper by the author). It can be shown that hydropower benefits can be further increased by 10%, not only from the Victoria project but also from other hydropower projects scattered across Sri Lanka.
According to the Paris and Kyoto Protocol, there was a proposal to reduce carbon dioxide emissions during this decade. Carbon trading might be legalised worldwide, and thermal, as well as a portion of nuclear energy, will be gradually replaced by renewable energy sources. In this context, it is very important to manage the existing hydropower projects in a very efficient manner.
The effective management of such a valuable national asset should be the responsibility of all citizens living in this country. Sri Lanka may face further difficulties in the next year due to poor management of hydropower sources. However, selling this asset will contribute to creating an even darker future for our next generation.
(The writer is a chartered civil engineer)