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Khuzistan is a province in the southwestern part of Iran. Other than in petroleum riches, Khuzistan is a poor region. The area is too dry for productive agriculture. There are two major rivers in the region, the Dez River and Karun River. The Dez River is subject to occasional flooding which produces serious amounts of damage.
A dam to control the flooding of the Dez River could also provide irrigation water and generate electricity. Khuzistan did have extensive urban development assoicated with the extraction, refining and shipping of petroleum and petroleum products. Electricity generated at a dam on the Dez would have ready markets in the cities of Abadan, Ahwaz, Khorramshar, Dezful and Andimeshk.
In 1957 the Iranian Government asked the World Bank for a loan to help finance the project. The World Bank carried out an economic analysis of the Dez River project.
The World Bank however made some observations about the composition of the proposed project:
The project proposed to irrigate 110,000 hectares (275,000 acres). To carry out this component of the project the Iranian government would have to invest $100 million in addition to its investment in the dam. But, in addition to this financial investment, Iran would have to bring about drastic changes in the area in farming methods, landlord-peasant relationships and agriculture credit institutions. The time required for bringing about these changes was likely, in the estimates of the World Bank analysts, to be much longer than what the project proposed. The World Bank analysis indicated only a 3 percent rate of return on the funds invested in the agricultural component of the project.
Ordinarily electrical power generation is a part of a water development project, but Iran is a special case. In the oil fields of Iran natural gas is produced as a worthless byproduct. This natural gas is simply burned; a process known as flaring. The World Bank suggested that the natural gas come be used in a thermal power generating plant as an alternative to the hydroelelctric installation.
After the World Bank analysis the Iranian government revised the project in 1959. Some of the revisions were:
| The Costs of the Dez River Multipurpose Water Project, Estimates as of 1959 ($ millions) |
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|---|---|---|
| Facility | Pilot Project 1960-1966 | Full Scheme 1966-1974 |
| Dam and common works | 34.0 | 0.0 |
| Power Generation | 30.6 | 9.1 |
| Irrigation | 14.2 | 63.2 |
| Agriculture | 3.7 | 9.3 |
| Total | 82.5 | 81.6 |
| Sugar Cane Company | 11.3 | 0.3 |
| Distribution Systems | 4.0 | 0.0 |
The Sugar Cane Company was another project whose financing was separate from the water development project but was dependent on the project.
An important aspect of the project was the portion of the costs that required foreign (hard) currency. This division is shown below:
| Foreign Versus Local Currency
Costs of the Dez River Multipurpose Water Project, ($ millions) |
||||
|---|---|---|---|---|
| Facility | Pilot Project 1960-1966 | Full Scheme 1966-1974 | ||
| Dam and common works | 14.4 | 19.6 | 0.0 | 0.0 |
| Power Generation | 21.2 | 9.4 | 7.9 | 1.2 |
| Irrigation | 4.4 | 9.8 | 25.1 | 38.1 |
| Agriculture | 0.0 | 3.7 | 0.0 | 9.3 |
| Total | 40.0 | 42.5 | 33.0 | 48.6 |
| Sugar Cane Company | 11.3 | 0.3 | 0.0 | 0.3 |
| Distribution Systems | 4.0 | 0.0 | 0.0 | 0.0 |
In 1960 the World Bank lent Iran the equivalent of of $42 million in hard currencies to finance the pilot project phase. This more than covered the hard currency requirement of the pilot project. The World Bank recommended that a Khuzistan Water and Power Authority be created to manage the project.
The consortium of petroleum companies which carried out the production and refining of the petroleum in the area had its own power generating plant. Its generating capacity was 110 MW and that capacity was scheduled to be enhanced to 140 MW in 1961. The Iranian government entered into an agreement in which it would purchase power for the city of Ahwaz until the Dez hydroelectric facililties were operational. In return the consortium could use the natural gas free of charge.
Before the Bank provided funding for the Dez project it sent a team of consultants to review the revised project. The team suggested some alternatives, such as:
The consultants also gave some attention to the matter of the determining the price of electricity from the hydroelectric plant. This involved the theoretical issue of allocating joint costs in a project. The Iranian government analysis allocated one third of the cost of the dam to the electrical power generating facilities. There was no basis for this one-third allocation.
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