ESTIMATION OF NET BENEFIT FROM THE PROPOSED BAN LA HYDROPOWER
PROJECT IN NGHE AN PROVINCE, VIET NAM

NGUYEN THI HOANG HOA

A thesis submitted
in fulfillment of the requirements for the degree of
Master of Environmental Management in Development planning

Faculty of Social Sciences
UNIVERSITI MALAYSIA SARAWAK
2005


ACKNOWLEDGEMENTS
Firstly, I would like to thank DANIDA funded WaterSPS Subcomponent 1.3 support to Capacity
Building at the Hanoi Water resources University (HWRU), Vietnam for the sponsorship of my
study.
I wish to express my appreciation and gratitude to those who had helped and supported me in the
project that leads to this dissertation.
I wish to thank my major supervisor, Assoc. Prof. Dr Gabriel Tonga Noweg, for his guidance
throughout my study at Unimas. From him and his guidance, I have gained much knowledge and
experiences, which I will pass on in my own future.
I also wish to thank all my lecturers in Unimas for their assistance and advice. I would also like
to thank Mr Robert Malong for his help during my Master Course.
I am also grateful to my co-supervisor Dr Ngo Thi Thanh Van (HWRU) for her kind and
valuable assistance during my data collection in Vietnam. I am indebted to all the officers in the
DANIDA and HWRU Board, Power Engineering Consulting Company No 1 (PECC1), districts
officials of Nghe An province, Institute of Water resources planning (IWRP) and Aquatic
Product Research Institute, Do Luong weir manager, Nam Dan sluice manager, Department of
Agriculture and rural development of Nghe An province, National Central Meteo-Hydrology

Forecast (NCMHF), and local people in the ten districts of Nghe An province. Thank you for
your friendly and warm assistance during my field trip.
My special thanks go to my husband and my children, who love me enough to let me go and
study abroad. Thanks for their endless support and encouragement during the coursework and
completion of this dissertation.

ii


TABLE OF CONTENT
Acknowledgment
Table of content
List of tables
List of figures
Abbreviation
Abstract
Abstrak

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CHAPTER I ............................................................................................................................ 1
INTRODUCTION .................................................................................................................. 1
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1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
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Economy of Viet Nam.............................................................................................. 1
Demand of energy in Viet Nam ................................................................................ 2
Power development plan (2003-2020) ...................................................................... 3
General flood control in Viet Nam............................................................................ 4
Irrigation .................................................................................................................. 5
Problem statement.................................................................................................... 6
Objective .................................................................................................................. 7
Significance of study ................................................................................................ 8
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CHAPTER II .......................................................................................................................... 9
LITERATURE REVIEW ..................................................................................................... 9
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2.1 Introduction.............................................................................................................. 9
2.2 Approach in sustainability development of reservoir for multiple uses ...................... 9
2.3 Cost-benefit analysis (CBA) ................................................................................... 11
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2.3.1 Introduction ................................................................................................. 11
2.3.2 Cost Benefit Analysis (CBA) of dams....................................................... 12
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2.3.2.1 Environmental cost-benefit ..................................................................... 15
2.3.2.2 Social impact mitigation cost .................................................................. 17
2.3.2.3 Flood control costs-benefits .................................................................... 21

2.3.2.4 Irrigation costs and benefits .................................................................... 24
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CHAPTER III ....................................................................................................................... 26
MATERIALS AND METHODS ....................................................................................... 26
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3.1
3.2
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Introduction........................................................................................................... 26

Study area ............................................................................................................. 27
3.2.1 Location ........................................................................................................ 27
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3.2.2
3.2.3
3.2.4
3.2.5
3.2.6
3.2.7
3.2.8
3.2.9
3.2.10
3.2.11
3.2.12
3.2.13

Topography ................................................................................................. 29
G eology ....................................................................................................... 29
Climate ........................................................................................................ 30

Rainfall........................................................................................................ 30
Temperature ................................................................................................ 30
Humidity ..................................................................................................... 31
River flow ................................................................................................... 31
Land use ...................................................................................................... 31
Soil classification and soil erosion........................................................... 32
People ........................................................................................................ 33
Irrigation .................................................................................................... 34
Flood occurance ........................................................................................ 34

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3.3 Conceptual frameworks .......................................................................................... 35
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3.3.1
3.3.2

Private costs and benefits ........................................................................... 37
Public costs and benefits............................................................................. 38

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3.4


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Data collection ....................................................................................................... 39

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3.4.1
3.4.2

Primary data collection ............................................................................... 39
Secondary data collection ........................................................................... 39

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3.5 Contingent valuation .............................................................................................. 40
3.6 Flood control cost estimate ..................................................................................... 40
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3.6.1 Calculation principles for flood control cost ............................................. 41
3.6.2 Link between damage cost and return period............................................ 42
3.6.3 Cost of the energy loss ................................................................................ 42
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3.7

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Data analysis .......................................................................................................... 43

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CHAPTER IV ....................................................................................................................... 44
RESULTS AND DISCUSSION ......................................................................................... 44
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4.1

4.2

Introduction ........................................................................................................... 44
Private costs benefits.............................................................................................. 44

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4.2.1 C onstruction costs ...................................................................................... 44

4.2.2 O peration and Maintenance Costs ............................................................ 45
4.2.3 Resettlement cost ........................................................................................ 45
4.2.4 Electric benefit ........................................................................................... 45
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4.3 Public costs and benefits......................................................................................... 46
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4.3.1

Flood control costs and benefits................................................................. 46

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4.3.1.2
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Flood control costs ............................................................................... 47
Flood control benefits........................................................................... 48
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4.3.2 Irrigation costs and benefits ....................................................................... 52
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4.3.2.1 Irrigation benefits ................................................................................. 52
4.3.2.2 Irrigation costs...................................................................................... 58
Environmental and social costs and benefits ........................................................... 59
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4.4
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4.4.1 Environmental cost ..................................................................................... 59
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4.4.1.2
4.4.1.3
4.4.1.4
4.4.1.5
4.4.1.6
4.4.1.7
4.4.1.8
4.4.1.9
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4.4.2
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Loss of potential timber production....................................................... 59
Loss of land .......................................................................................... 60
Loss of existing agricultural production ................................................ 61
Carbon sequestration ............................................................................ 61
Loss of biodiversity .............................................................................. 62
Loss of existing fishing income ............................................................ 62
Loss of existing hunting income ........................................................... 62
Loss of revenue of existing collection of forest product......................... 62
Disruption of existing River transportation ........................................... 62
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Environmental benefits .............................................................................. 63

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4.4.2.1 Merchantable timber............................................................................. 63
4.4.2.2 Fisheries in Ca River ............................................................................ 64
4.4.2.3 Potential for tourism............................................................................. 64
4.4.2.4 Transportation...................................................................................... 65
4.4.2.5 E mployment opportunities for local people........................................... 66
4.4.2.6 Road access.......................................................................................... 67
Cost benefit analysis of the project ......................................................................... 67
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4.5
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4.5.2 Economic evaluation parameters ............................................................... 69

4.5.3 Sensitivity analysis...................................................................................... 70
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CHAPTER V ......................................................................................................................... 73
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CONCLUSIONS AND RECOMMENDATIONS ........................................................... 73
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5.1 Conclusion ............................................................................................................. 73
5.2 Recommendation ................................................................................................... 75
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REFERENCES ..................................................................................................................... 75
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APPENDIX A ....................................................................................................................... 80
SOIL MAP, SOIL EROSION POTENTAIL MAP AND LAND USE MAP .............. 80
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APPENDIX B ........................................................................................................................ 84
HYDROLOGICAL DATA ................................................................................................. 84
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APPENDIX C ....................................................................................................................... 98
SURVEY QUESTIONNAIRES ......................................................................................... 98
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APPENDIX D ..................................................................................................................... 105
CONTINGENT VALUATION FOR ENVIRONMENTAL ....................................... 105
PARAMETERS .................................................................................................................. 105
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APPENDIX E ...................................................................................................................... 109
COST- BENEFIT ANALYSIS ......................................................................................... 109
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APPENDIX F ...................................................................................................................... 134
PICTURES OF THE STUDY AREA DURING THE FIELD TRIP ......................... 134
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v



LIST OF TABLES
Page
Table 1.1

GDP growth, GDP per capita and Population of Viet Nam from 1995
to 2003…………………………………………….……

2

Table 1.2

The power generation capacities by energy sources………….

2

Table 2.1

Benefit of flood control of Klang river basin flood mitigation project
………………………………………………………….……

Table 2.2

26

Key dimensions and key impacts of access to good irrigation water
………………………………………………………….…….

29


Table 3.1

Land use in Ban La catchment and reservoir area…………..

36

Table 3.2

Soil types of Ban La catchment area…………………………..

37

Table 3.3

Potential erosion in Ban La catchment area………………….

37

Table 3.4

Data need and data collection method…………………………

45

Table 4.1

Construction cost of Ban La dam………………………………

51


Table 4.2

Initial investment costs, annual operation and maintenance cost in
percentage and value ……………………………………

51

Table 4.3

Basic data of Ban La hydropower project ……………………

54

Table 4.4

Damage cost of historical flood events …………………………

57

Table 4.5

Flood damage Vs return period …………………………………

57

Table 4.6

Flood routing by Ban La reservoir ……………………………..

59


Table 4.7

Irrigated area and discharge of Do Luong system from Ca river
…………………………………………………………………

Table 4.8.

Irrigated area and discharge of pumping stations direct from Ca river
in the NNAIS ……………………………………

Table 4.9

60

Irrigated area and discharge of Nam Dan system from Ca
river………………………………………………………………….

Table 4.10

60

61

Irrigated area and discharge of pumping stations direct from Ca river
in the SNAIS………………………………………

61

Table 4.11


Irrigated failure in the future without Ban La project………

63

Table 4.12

Irrigated failure in the future after completed Ban La project
………………………………………………………………

64

Table 4.13

Effective irrigated area…………………………………………..

64

Table 4.14

Annual benefit from irrigation in the area

66

vi


LIST OF TABLES (CONTINUE)
Table 4.15


Forested area permanently flooded after creation ban La
reservoir………………………………………………………..

67

Table 4.16

Estimation of timber loss in the reservoir area

68

Table 4.17

Estimation of land loss by Ban La project (current
value)…………………………………………………………………

69

Table 4.18

Estimation of annual agricultural production loss …………

69

Table 4.19

Average standing volume (or stock) of the forest ……………

72


Table 4.20

Estimation of timber can be harvest in the reservoir area

72

Table 4.21

Merchantable of timber in the reservoir area ………………

72

Table 4.22

The water level along Ca river before and after construction Ban La
project ……………………………………………………

75

Table 4.23

Construction period criteria …………………………………….

77

Table 4.24

Cost disbursement for Ban La hydropower project ………….

78


Table 4.25

Basic data for economic assessment of Ban La hydropower project
(FSL= 200m; P = 320 MW; 5 years construction time and 10%
discount rate …………………………………….

Table 4.26

Result of cost benefit analysis of Ban La hydropower project
discount rate = 10% …………………………………………..

Table 4.27

79
80

Results of sensitivity analysis with changes in discount rate, output
and lifespan of the project

82

vii


LIST OF FIGURES
Figure 3.1
Figure 3.2
Figure 4.1


Location of the study area ……………………………………
Total cost and total benefits …………………………………
Hydraulic network scheme ……………………………………

viii

Page
32
42
62


LIST OF ABBREVIATIONS
%

Per cent

ADB

Asian Development Bank

APRI

Aquatic Product Research Institute

B/C

Benefit/ cost

BVND


Billion Vietnamese Dong

CBA

Cost Benefit Analysis

CVM

Contingent Valuation Method

DARD

Department of Agriculture and Rural Development

EIA

Environmental Impact Assessment

FIPI

Forest Inventory and Planning Institute

FSL

Full Supply Level

GDP

Gross Domestic Product


GWh

Gigawatt hour

ha

Hectare

HPM

Hedonic Price Method

IAP

Institute of Agricultural Planning

IE

Institute of Energy

IG

Institute of Geography

IRR

Internal Rate of Return

IWRP


Institute of Water Resources Planning

kg

Kilogram

km

Kilometer

2

km

Square Kilometer

kW

Kilowatt

kWh

Kilowatt hour

l/s

Liter per second

mm


Millimeter

m2

Square meter

m3

Cubic meter

P

P

P

3

m /s

Cubic meter per second

MARD

Ministry of Agriculture and rural Development

Mm3

Million cubic meter


P

P

P

ix


LIST OF ABBREVIATIONS (CONTINUE)
MVND

Million Vietnamese Dong

No

Number

NNAIS

North Nghe An Irrigation System

NB

National Bank

NPV

Net Present Value


O&M

Operation and maintenance

P

Probability

PECC1

Power Engineering Consulting Company 1

Q

Discharge

SNAIS

South Nghe An Irrigation System

TCM

Travel Cost Method

TWL

Tail Water Level

USC


US Cent

USD

US Dollar

VND

Vietnamese Dong

WB

World Bank

WE

Wood Equivalent

WTA

Willing To Accept

WTP

Willing To Pay

Yr

Year


x


ABSTRACT
The construction and operation of Ban La hydropower project will lead to a variety of changes in
the local and wider environment. Many of the impacts will be beneficial, both at the regional and
national level. Project implementation will have some socioeconomic impacts on communities in
two districts upstream and nine districts downstream from the dam. Completion of Ban La
project will supply water to two irrigation systems: North Nghe An Irrigation System and South
Nghe An, which corner some 62,220 ha of irrigated area in Nghe An province. The construction
of the project will also reduce flood peak in the downstream area and hence reducing flood
damages for riverine residents in the downstream area. This study evaluates economic and
environmental impacts of Ban La project on local communities: upstream of the Ban La dam;
flooded area and irrigation areas downstream from the proposed dam. Private costs and benefits
as well as public costs and benefit are estimated for the project in order to arrive at the total net
social benefits. Contingent Valuation Method (CVM) is used to estimate the costs and benefits
associated with intangible item or non-market goods. The study found that the net present value
of social benefits at 10% discount rate and 30 years project operation period is positive (BVND
533.8). Benefit-Cost ratio is 3.18 and Internal Rate of Return (IRR) is 11%. Sensitivity analysis is
also performed to detect responsiveness of the investment to changes in discount rate, changes in
output of the project as well as different scenarios of project lifespan.

Abstrak
Pembinaan empangan hidro Ban La dijangka akan membawa berbagai kesan, terutamanya
faedah terus dan juga sampingan kepada penduduk setempat khasnya. Kesan sosioekonomi akan
dirasai di dua buah daerah (Tuong Duong dan Ky Son) dibahagian hulu empangan dan juga 9

xi



Abstrak
Pembinaan empangan hidro Ban La dijangka akan membawa berbagai kesan, terutamanya
faedah terus dan juga sampingan kepada penduduk setempat khasnya. Kesan sosioekonomi akan
dirasai di dua buah daerah (Tuong Duong dan Ky Son) dibahagian hulu empangan dan juga 9
daerah di kawasan hilir empangan. Antara faedah yang akan dinikmati ialah dalam bentuk
kemudahan sistem pengairan (North Nghe An Irrigation dan South Nghe An Irrigation) yang
meliputi 62,220 hektar tanah pertanian. Kajian yang dijalankan ini adalah bertujuan untuk
menilai kesan pembinaan empangan Ban La dari segi kesan sosioekonominya.

Analisis

pelaburan dijadikan asas penilaian ini dimana segala elemen faedah dan kos diambil kira.
Faedah dan kos barangan sumber asli dan alam sekitar dinilai dengan kaedah penilaian
kontinjen. Hasil kajian mendapati projek mempunyai nilai faedah sosial kini berjumlah BVND
533.8. Nisbah faedah-kos pelaburan ini adalah 3.18 dan kadar pulangan dalam adalah 11%. Ini
bermaksud projek tersebut adalah baik dan berupaya memberi sumbangan positif kepada
sosioekonomi

penduduk

xii

tempatan.


CHAPTER I
INTRODUCTION
1.1. Economy of Viet Nam
Viet Nam’s modern economy evolves from the burden of military action and political upheavals.

After partition in 1954, North Viet Nam and South Viet Nam each developed their own economic
structure separately, reflecting different economic systems with different resources and different
trading patterns. The North operated under a highly centralized and planned economy, whereas
the South maintained a free- market economy. With the reunification of Viet Nam in 1976, North
Viet Nam’s centrally planned and controlled economy was introduced and adopted in the south of
Viet Nam.

Since 1986, the “innovative” and “opened-door” policy practiced by the Vietnamese Government
has attracted foreign investors to come to do businesses and promote both the state and private
economic elements, which spur the economic development of Viet Nam. It has changed to the
market- oriented economy since then. Having a stable political regime, the Gross Domestic
Product (GDP) growth rate of Viet Nam from 1991 to 2002 has reached an average figure of
7.5%. GDP per capita of Viet Nam was USD 490 in 2003. The GDP per capita and its population
growth from 1995 to 2003 is shown in the Table 1.1

1


Table 1.1 GDP growths, GDP per capita and Population of Viet Nam from 1995 to 2003.
Year
Real
GDP
growth rate
(%)
GDP
per
capita
(USD/head)
Population
(Millions)


1995
9.5

1996
9.3

1997
8.2

1998
5.8

1999
4.8

2000
6.8

2001
6.8

2002
7.0

2003
7.5

287


323

326

342

372

398

422

458

490

71.96

73.16

74.56

75.56

76.60

77.64

78.69


79.70

80.80

(Sources: General Statistics Office of Viet Nam (2004)

1.2. Demand of energy in Viet Nam
The economic growth in Viet Nam is strongly indicated by the increase in the demand for energy.
Electricity generation plants in Viet Nam at present are from petroleum, natural gas, hydropower,
coal and diesel. However, the dependence on oil for electricity generation has declined
significantly in recent year. The Viet Nam government’s policy is to encourage the exploitation
of renewable energy resources, such as hydropower.

The peak electricity demand recorded in 2002 was 8,700 MW, while the total capacity of all
kinds of power plant connected to the network was 8,749 MW. The electricity generation
comprises of the following (Table 1.2).

Table 1.2: Power generation capacities by energy sources
Energy generation
Hydropower plant
Thermal power plant (coal)
Thermal power plant (oil)
Gas turbines (Gas)
Diesel
Total

Power capacity
4115 MW
1245 MW
573 MW

2322 MW
494 MW
8749 MW

B
0

B
1

Source: Tran (2004)

2

%
47.03 %
14.23 %
6.55 %
26.54 %
5.65 %
100%


Power consumption
Energy demand in Viet Nam has grown at a faster rate than the growth of Gross Domestic
Product (GDP). Consumption of energy increased from 11,200 GWh in 1995 to 30,235 GWh in
2003, which is equivalent to the growth rate of 15.3% per annum. The number of customers is
around 4 million. Industry consumed 41.8% of the whole power sales, residential customers
consumed 47.8%, commercials and services used 4.6% and other users consumed 6% of the
power supply.


Economic growth and industrialization has pushed Viet Nam’s demand for electricity up, at an
average annual rate of 14-15% in the past few years. This demand is projected to grow yearly at
13-15% till 2010. According to the government estimates, around 70-80 billion kilowatts of
power will be needed by 2010. Thereafter, the demand is expected to reach between 160 and 200
billion kilowatts in 2020 (Central Government Administration Power Report, 2002a).

1.3

Power development plan (2003-2020)

The development of energy resource in Viet Nam will have to be in tandem with the acceleration
of the nation’s industrial growth, particularly the growth emphasis on the development of energyintensive and energy based industries.

In recent years, sustainable development has become the central concept of formulating strategies
for future economic progress. While raising the real per capital income remains the basic
development goal, there is now increasing emphasis on balancing this goal with the “quality of
life” or “well-being”. This makes the development of an efficient and economic energy system
even more challenging because of the need to reconcile the energy and the environmental policy
objectives.

3


Based on the above forecasted demand, the development programme of power generation for the
period 2003-2020, the plan for expansion of power supply are:
(1) To meet the country’s rising energy need.
(2) To develop balanced development of the resources (hydro, coal and gas fired thermal)
in order to explore effectively the primary energy sources and at the same time limit
the adverse impact on the environment and ecology, and

(3) To reduce the use of fossil fuel. This is one of the causes of serious environmental
problem today (Central Government Administration Power Report, 2002 b).

Hydropower has been proven to be safe, relatively clean, efficient and a renewable source of
energy compared to oil fired generation and natural gas- fired generation. Unlike nuclear and
fossil fuels, hydroelectric is by nature less damaging to the environment as the generation process
does not result in continuous waste production or emission of air pollutant. Hydropower is also
one of the cheapest power and its reservoir have high recreational value. They are extensively
used for fishing, water supply, irrigation, flood control and soil erosion control.

1.4. General flood control in Viet Nam
Water related disasters, including floods and drought, have serious economic implication in the
world, both for individual households and national economies. More and more people in the
world are affected through homelessness, injury, disease, loss of property and death. The vast
majority of the millions of Asians affected annually by flood are the poor. Frequent flooding
gives them no opportunity to break out of the cycle of poverty. In addition, floods often cause
marginally better-off people to descend into poverty as a result of flood related losses (Linder,
2002).

4


Flooding is a major water management problem, which each year causes a great loss of human
life, property damages and loss of agriculture and other output in the flood prone areas. Climate
change and upstream watershed changes both within Viet Nam and other upstream countries have
created associated problems such as flash floods with great damage (Fox, 2001).

Viet Nam is one of the most disaster prone countries in the world because of it geographical and
topographical features. The country suffers from almost all types of disaster, among which water
disasters induced by typhoons and floods are the most frequent and severe. Every year disasters

claim hundreds of human lives and cause millions of dollar of economic loss in the country
(Nguyen and Le, 2002). Flood control is necessary to increase food production and also for
economic development. Government of Viet Nam has always put disaster management,
particularly flood and storm control as top priority in it agenda.

1.5. Irrigation
Viet Nam is one of the few fast growing economies in the world since the 1990s. Its GDP grew at
about 7 per cent per annum during this period. Rapid economic growth contributed substantially
to the reduction of poverty in the country during 1990s. The proportion of poor in the total
population declined from 58 to 29 percent between 1993 and 2002. However, accelerated growth
has also brought considerable inequalities between the rural and urban areas, and between rich
and poor households. The poverty rate drastically declined from 25 to 6.6 percent in urban areas
while from 66 to 37 percent in rural areas between 1993 and 2002. Poverty in Viet Nam is largely
a rural problem; nearly 85 per cent of the country’s poor live in rural areas whose primary source
of livelihood is agriculture. As poverty is widespread in the rural areas, a top priority was laid
down in the comprehensive poverty reduction and growth strategy to accelerate agriculture
growth and rural income, thereby improve the living condition of rural population. Irrigation is a
lifeline for agricultural development especially for Viet Nam where about 80 per cent of cropland

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is planted with rice, which is predominantly an irrigated crop. One of the best outcomes for
improvement to the existing irrigation system will lead to a better availability of irrigation water,
thereby empowering rice farmers through increased in rice yields and in farm incomes (Janaiah,
2004).

1.6

Problem statement


Dam’s multiple uses are both their greatest strength and their biggest weakness. It is a weakness
because of the conflict between the many different stakeholders on how to use a reservoir system.
A classic conflict over water use is the one between those who want to use the water in the
reservoir strictly for hydropower generation and those who want to divert some of it to supply
industrial and agricultural needs as well as who want to reduce the flood in the downstream.

There are many environmental parameters that are affected by hydropower development project.
Environmental impacts can be given positive or negative values that need to be taken into
account to come up with the estimate of net costs or benefits of the project. The application of
cost - benefit analysis to environmental impact assessment is faced with the following problems:
the uncertainly in the valuation of non-market goods such as wildlife and landscape. How should
this be done, and how much should the society rely on the estimates that are generated? Are we
acting immorally by placing money values on such intangible items? How can the society
accurately predict the effects of changes in economic activity on complex ecosystem? How can
an increase in an environmental good be valued? Can we estimate it either on the people’s
maximum willingness to pay is to have this increase, or their minimum willingness to accept
compensation to forgo this item. If a reduction in the same good is being valued we can ask either
their maximum willingness to pay to prevent such a reduction or their minimum willingness to
accept compensation to tolerate it. This allows a monetary value to be placed on an
environmental gain or loss, which is an estimate of underlying utility gain or loss (Hanley, 2001).

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1.7 Objective
The main aim of the study is to estimate the overall costs and benefits of the multipurpose Ban La
hydropower project in Viet Nam.

Specific objectives

Specifically, the objectives of the study are:
a- To estimate the present value cost of the Ban La dam construction to the riverine
residents.
b- To estimate the present value benefit of the purposed Ban La dam project to local
communities.
c- To calculate the Benefit-Cost ratio and Internal Rate of Return for the construction of the
Ban La dam.
The hypothesis in this study is that Ban La hydropower project construction is efficient, and
therefore socially acceptable. In testing the hypothesis, the overall net social cost and benefit
from the Ban La hydropower project implementation would be determined. If the net social
benefit is higher than the net social cost, the Net Present Value (NPV) > 0, Benefit-Cost ratio
(B/C) > 1 and Internal Rate of Return (IRR) > discount rate (r), then the hypothesis is accepted.

To achieve the above objectives, several task involving different sets of estimations have to be
undertaken. Firstly, the estimation of private costs and benefits. Secondly, the public costs and

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benefits are estimated, which impact of the project on the local communities in the regional and
national level. Where sufficient information is available. Finally, the net present value of social
benefit was estimated based on the above information and the B/C; IRR were calculated.

1.8 Significance of study
Implementation of hydropower project have impacts to the physical environment and the socioeconomic. Economic impact study in the hydropower projects are usually undertaken to
determine its effect on the income, wealth of the residents of a given geographic area as well as
economic development of regional and national economy, which is usually in monetary terms.
This study will also provide for decision-makers with information for the feasible implementation
of the project.


The results of the study will give a better picture of regional economic development through the
increased in agricultural area and reduction of peak flood in the study area from the proposed
project. It will also help to identify key planning in land use issues and priorities in the
downstream zone of the hydropower project.

In the study area there is large potential agricultural land. At present the use of the land is limited
to one cropping because of the water shortage in the dry season. Completion of the project will
ensure that water will be available for irrigation. In the study area there is large area in the
downstream, which is prone to yearly flooding. The Ban La will reduce flood peak in this area
and it will lead to reduce flood damages for downstream zone. The study should be estimated
adequate for irrigation and flood control benefits in the downstream areas of the project.

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CHAPTER II
LITERATURE REVIEW
2.1 Introduction
This chapter presents the available literatures and the relevant concepts as perceived by the
author as being related to the study. Theories and brief review of literature of studies carried out
both internationally and locally are discussed as they relate to this study.

2.2 Approach in sustainability development of reservoir for multiple uses
Reservoirs contain most of the earth’s stored surface fresh water. Reservoirs provide water for
drinking, irrigation, industrial processes and power generation. They provide habitat for
numerous species of fish, aquatic life, birds, and mammals. Many of these animals and plants are
important sources of protein provide and income for local inhabitants. Reservoir is also important
for flood control and retaining sediment. Dams and reservoirs are facilities with tourism
potential. A large number of reservoirs are in developed countries, such as North America and
Western Europe, but their role may be even more significant in the formerly centrally planed

economies of Eastern and central Europe, and in the developing countries of Asia, Africa, Middle
East and Latin America. In many of these regions population are growing rapidly and the needs

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for fresh water for domestic and urban uses, irrigation, industrial processes and power generation,
as well as for the protein supplied by fish and other plant and animals are ever increasing (Ayres
et al., 1997).
In recent years, sustainable development has become the central concept of formulating strategies
for future economic progress. Formulating a strategy for managing reservoirs starts with defining
a country’s social, economic and environmental objectives. The strategy recognizes that
investment policies and regulation in one part of the watershed of the reservoir or in one sector of
the economy will affect persons and activities in other parts of the watershed and in other sectors.
Thus decisions need to be made in the context of a board strategy that takes a long-term view,
anticipates the impacts on various users (Ayres et al. 1997).

While improving the real per capital income remains a basic development goal, there is now
increasing emphasis on balancing this goal with “quality of life” or “well-being”. This makes the
development of an efficient and economic energy system even more challenging because of the
need to reconcile energy and environmental policy objective.

Comprehensive strategies for managing reservoir need to be designed for the unique physical and
biological characteristic of the watershed, including the type of ecosystem, climate, topography,
socioeconomic conditions, including the population, density and pressure on the resources, the
economic and environmental objectives.

Stakeholders in reservoir resources may include fishermen, farmers, electrical power generators,
or the public as a whole. Involving stakeholders elicits a wide variety of views and in addition, it
fosters commitment to the final option selected. When persons who are affected by project, are

involved in discussing the options and understanding the risks and benefits- costs, they are far
more likely to accept the ultimate decisions and to behave in accordance with the decision
makers. The decision makers are also farmers and they are likely to participate in implementing

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and managing them. It enhances creativity. Stakeholders can often provide a range of measures to
reduce a project’s environmental impact, avoid conflicts, minimize confrontation, and generate
alternative (Ayres et al, 1997).

2.3 Cost-benefit analysis (CBA)
2.3.1 Introduction
Cost - Benefit Analysis (CBA) is a widely practiced technique of project appraisal (Perman et al.,
1999). Cost – Benefit Analysis is a resource management tool used to test the economic
feasibility of projects. The application of CBA in a wide range of fields, including natural
resources development, criminal justice, foreign aid, and welfare analysis. CBA determines
feasibility by subtracting the total cost incurred over the life of the project from projected total
revenue earned from the project. CBA is useful in comparing alternative development project
(Lawrence, 1994). In many cases, CBA is used as a tool to provide public, officials and managers
with information to assist them in exercising their own judgment on the feasibility of public
project (Smith, 1995).

Cost-Benefit Analysis approach to evaluate environmental policies face difficulties on two levels.
First, CBA relies on cost estimates that represent qualities that are not validly measurable. This
problem is exacerbated when incommensurable costs and benefits are weighed on the same
monetary scale, which makes final decision on whether or not to proceed with particular policies
seems deceptively simple. The second problem with CBA is its reliance on co-modification of
both human and elements of these ‘subjects’ in economic terms such as their non- economic
values can be undermined. As we learn to think of other people and the environment in economic

terms, we may lose our ability of appreciate them for their other characteristics (Spevak, 1997).

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2.3.2. Cost Benefit Analysis (CBA) of dams
Cost- Benefit analysis of water resources development as well as of other development project
involves several stages (Hanley & Spash, 1993):
(1) Definition of project: This definition will include the reallocation of resources being
proposed and the population of gainers and losers to be considered.
(2) Identification of project impacts: Once the project is defined, the next step is to identify
all those impacts resulting from it implementation, which include a listing of all
resources used in implementing the project. In this stage, the net impacts of the project
are identified.
(3) Which Impacts is Economically Relevant: Since the question “what to count” is bound
up in neo-classical welfare economics, in particular in the social welfare function which
society is interested in maximizing. The aim of CBA is to select projects, which add to
the total of social utility, by increasing the value of consumable and nice views by more
than any associated depletion in the level of other utility-generating good. CBA can in
fact select the best, (most efficient) projects from a list (portfolio) of alternatives. Thus,
what are counted as positive impacts, which from now on will be referred to as benefits.
What are counted as cost that is negative impacts. Environmental impacts of projects will
be count so long as they either (i) cause at least one person in the relevant population to
become more or less happy; and (ii) change the level or quality of output of some
positively valued commodity.
(4) Physical quantification of relevant impacts: These involve the determination of the
physical amounts of cost and benefit that flows for a project, and identifying when they
will occur.
(5) Monetary valuation of relevant effects: The common unit in CBA is money. Markets
generate the relative values of all traded goods and services as relative prices; the

remaining tasks for the CBA analyst are then to: (i) predict prices for value flows
extending into the future; (ii) correct market prices where necessary; and calculate prices

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(relative values in common unit) where it does not exist. Bringing environmental values
into business and political calculations as an everyday input to decision-making is a
major goal of environmental CBA.
(6) Discounting of cost and benefit flows: Once all relevant cost and benefit flows that can
be expressed in monetary amounts have been so expressed, it is necessary to convert
them all into present value (PV) terms. This necessity arises out of the time value of
money; or time preference. This is true even if inflation is zero in every time period, so
long as the time preference rate (discount rate) is positive.
(7) Applying the net present value test: The main purpose of CBA is to help select projects
and policies, which are efficient in term of their use of resources.
The Net Present Value (NPV) of a project is:
T

NPV =

Bt − Ct

∑ (1 + r )
t =0

t

where:
Bt is benefit year t

Ct is cost year t
r is discount rate
T is life of project (Randall, 1987).
The criterion for project acceptance is NPV>0. Any project passing the NPV test is
deemed to be an improvement in social welfare. There are a number of alternatives to the
NPV criterion. The two most commonly employed are the Internal Rate of Return (IRR)
and the Benefit- Cost ratio (B/C). The decisions rule becomes: proceed if the Benefit –
Cost ratio exceeds unity. The Benefit - Cost ratio is another way of presenting the NPV
of a project. The IRR is a measure frequently employed in financial investment appraisal.

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