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Kala Seetharam Sridhar: Building fast and cheap

Output-focused planning can go a long way in addressing delays and cost overruns in infrastructure projects

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One of the possible explanations offered for slowing growth is a slowdown in the efficiency of investment, in addition to other factors. This is plausible. A Central Bureau of Investigation inquiry was recently requested into allegations of fraud against private contractors involved in the Lucknow-Muzaffarpur highway project. The project’s initial deadline was December 2009, but it was extended to June 2012. The cost of certain components was taken out of the project and the Centre decided to fund it on its own, increasing its cost. This is just one example of many cost and time overruns in in the country, with several other recent examples from the defence sector.

India’s high-powered expert committee on urban infrastructure recently estimated that Rs 31 lakh crore (at 2009-10 prices) of is needed to bridge gaps in urban infrastructure. Without roping in the private sector, there is no way to bridge such telling gaps. Cost and time overruns decrease the efficiency of projects. Given this, how can we reduce cost and time overruns in projects? Despite the importance of this question, there are few estimates of cost and time overruns in infrastructure projects. Even rarer are the studies based on completed projects in the Indian context except one by Ram Singh, DSE Working Paper 181, 2009, and a pre-liberalisation one by (EPW, 1990).

In a study for the Expenditure Reforms Commission*, Government of Karnataka, we examined two infrastructure programmes: the Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT), a centrally sponsored programme to boost infrastructure in the country’s small and medium towns; and a Government of Karnataka (GoK)-sponsored infrastructure programme, the Mukhyamanthrigala Nagarothana Yojane (MNY). The MNY has two components: a special Rs 100-crore package for seven city corporations in the state (apart from Bangalore) and the Chief Minister’s Small and Medium Towns Development Programme (CMSMTDP).

We studied these state and central programmes, examining projects in several cities and towns of Karnataka, and our analysis included time and cost overruns. What we found is interesting and has implications for cost-effectiveness and timeliness of infrastructure projects in the country.

We found cost overruns (defined as the difference between the estimated cost of a project in the action plan and that of the approved tender cost) and time overruns (the difference between the due date for work to be completed based on the tender agreement and the actual date of work completion) in the case of many projects. In the case of road projects, the cost and time overruns were found to be higher, respectively 6 and 100 per cent (or about 39 days) in the case of the state-run programme (which is what we found in the Rs 100-crore programme).

We also observed cost overruns due to delay in the process (for example, land acquisition) of executing the works. This is consistent with what other studies have found on infrastructure projects nationally.

Additionally, we found that cost and time overruns are higher in the central programme than in the state programme.
 

INFRASTRUCTURE ROADBLOCKS
 

 Karnataka govt’s  MNY scheme

 Central scheme
UIDSSMT
Rs 100-crore programme CMSMTDP
Average cost overruns (in %) 4.86 2.55 25.48
Average time overruns (in %) 75.66 66.67 227.01
MNY: Mukhyamanthrigala Nagarothana Yojane; CMSNTDP: the Chief Minister’s Small and Medium Towns Development Programme 
UIDSSMT: Urban Infrastructure Development Scheme for Small and Medium Towns

Our analysis suggests that there are several ways to improve the timeliness and cost-effectiveness of infrastructure projects in the country.

First, to increase the cost effectiveness of projects, only physical quantities of outputs should be specified to the contractors, without divulging the financial estimates involved. This will lead to more competition and allow younger and newer contractors to implement projects more cost-effectively.

Second, in the event of time overruns, monetary penalties will provide contractors with enough disincentives to delay the project.

Third, Karnataka has a Transparency in Public Procurement Act to regulate the process of tendering. While legislation is not the solution, other states with similar legislation should set out a defective liability clause, which will set out the length of the defects liability period, the scope of defects the contractor is obliged to remedy and any part of the contract sum retained by the employer as surety for the performance of the remedial work. There is also a need for a set procedure as to the manner followed in notifying defects to avoid any disputes between the contractor and the procuring entity.

Fourth, if delays in processing, such as approval of the detailed project report (DPR)/action plan and time taken for tender call, are reduced, cost overruns can be reduced substantially.

Fifth, we found that time overruns in several projects are due to the non-availability of the materials not specified in the DPR, which boost the material cost due to delay and extra work carried out. If the material were to be procured in advance by the implementing agency and is incorporated in the DPR, then cost and time overruns can be reduced.

Thus, while state-run programmes (such as the MNY) have less cost and time overruns than centrally sponsored programmes such as the UIDSSMT, in terms of the completeness of contracts, the centrally sponsored is better since contractors’ defect liability is specified. Neither specifies the time frame of the defect liability period, though. While we found capacity – primarily personnel – to be adequate for programme implementation in the case of large cities and in the case of centrally sponsored programmes such as the UIDSSMT, personnel are inadequate in the case of smaller cities and state-run infrastructure programmes.

Our findings also conclusively show that the primary focus of infrastructure programmes in this country has been on inputs (funds, processes, personnel and raw materials), and much less on their outputs, outcomes and effectiveness. Failure to clearly define and monitor the expected outputs and outcomes of projects is a major reason the principal-agent problem arises. When the criteria for the selection of roads or other civil works are vague, there is scope for implementing officials, organisations or local politicians to make choices that serve their interests. Lack of public awareness about the objectives of programmes, their selection criteria and outcomes expected of them will make it difficult for citizens and beneficiaries to demand accountability from service providers.


The author is with the Public Affairs Centre. Comments from Samuel Paul are appreciated, as is assistance from A Venugopala Reddy and the PAC team that worked on this project.
* http://www.finance.kar.nic.in/ERC-Web/Third%20Report-Full-E-Final.pdf

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Kala Seetharam Sridhar: Building fast and cheap

Output-focused planning can go a long way in addressing delays and cost overruns in infrastructure projects

One of the possible explanations offered for slowing growth is a slowdown in the efficiency of investment, in addition to other factors. This is plausible. A Central Bureau of Investigation inquiry was recently requested into allegations of fraud against private contractors involved in the Lucknow-Muzaffarpur highway project.

One of the possible explanations offered for slowing growth is a slowdown in the efficiency of investment, in addition to other factors. This is plausible. A Central Bureau of Investigation inquiry was recently requested into allegations of fraud against private contractors involved in the Lucknow-Muzaffarpur highway project. The project’s initial deadline was December 2009, but it was extended to June 2012. The cost of certain components was taken out of the project and the Centre decided to fund it on its own, increasing its cost. This is just one example of many cost and time overruns in in the country, with several other recent examples from the defence sector.

India’s high-powered expert committee on urban infrastructure recently estimated that Rs 31 lakh crore (at 2009-10 prices) of is needed to bridge gaps in urban infrastructure. Without roping in the private sector, there is no way to bridge such telling gaps. Cost and time overruns decrease the efficiency of projects. Given this, how can we reduce cost and time overruns in projects? Despite the importance of this question, there are few estimates of cost and time overruns in infrastructure projects. Even rarer are the studies based on completed projects in the Indian context except one by Ram Singh, DSE Working Paper 181, 2009, and a pre-liberalisation one by (EPW, 1990).

In a study for the Expenditure Reforms Commission*, Government of Karnataka, we examined two infrastructure programmes: the Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT), a centrally sponsored programme to boost infrastructure in the country’s small and medium towns; and a Government of Karnataka (GoK)-sponsored infrastructure programme, the Mukhyamanthrigala Nagarothana Yojane (MNY). The MNY has two components: a special Rs 100-crore package for seven city corporations in the state (apart from Bangalore) and the Chief Minister’s Small and Medium Towns Development Programme (CMSMTDP).

We studied these state and central programmes, examining projects in several cities and towns of Karnataka, and our analysis included time and cost overruns. What we found is interesting and has implications for cost-effectiveness and timeliness of infrastructure projects in the country.

We found cost overruns (defined as the difference between the estimated cost of a project in the action plan and that of the approved tender cost) and time overruns (the difference between the due date for work to be completed based on the tender agreement and the actual date of work completion) in the case of many projects. In the case of road projects, the cost and time overruns were found to be higher, respectively 6 and 100 per cent (or about 39 days) in the case of the state-run programme (which is what we found in the Rs 100-crore programme).

We also observed cost overruns due to delay in the process (for example, land acquisition) of executing the works. This is consistent with what other studies have found on infrastructure projects nationally.

Additionally, we found that cost and time overruns are higher in the central programme than in the state programme.
 

INFRASTRUCTURE ROADBLOCKS
 

 Karnataka govt’s  MNY scheme

 Central scheme
UIDSSMT
Rs 100-crore programme CMSMTDP
Average cost overruns (in %) 4.86 2.55 25.48
Average time overruns (in %) 75.66 66.67 227.01
MNY: Mukhyamanthrigala Nagarothana Yojane; CMSNTDP: the Chief Minister’s Small and Medium Towns Development Programme 
UIDSSMT: Urban Infrastructure Development Scheme for Small and Medium Towns

Our analysis suggests that there are several ways to improve the timeliness and cost-effectiveness of infrastructure projects in the country.

First, to increase the cost effectiveness of projects, only physical quantities of outputs should be specified to the contractors, without divulging the financial estimates involved. This will lead to more competition and allow younger and newer contractors to implement projects more cost-effectively.

Second, in the event of time overruns, monetary penalties will provide contractors with enough disincentives to delay the project.

Third, Karnataka has a Transparency in Public Procurement Act to regulate the process of tendering. While legislation is not the solution, other states with similar legislation should set out a defective liability clause, which will set out the length of the defects liability period, the scope of defects the contractor is obliged to remedy and any part of the contract sum retained by the employer as surety for the performance of the remedial work. There is also a need for a set procedure as to the manner followed in notifying defects to avoid any disputes between the contractor and the procuring entity.

Fourth, if delays in processing, such as approval of the detailed project report (DPR)/action plan and time taken for tender call, are reduced, cost overruns can be reduced substantially.

Fifth, we found that time overruns in several projects are due to the non-availability of the materials not specified in the DPR, which boost the material cost due to delay and extra work carried out. If the material were to be procured in advance by the implementing agency and is incorporated in the DPR, then cost and time overruns can be reduced.

Thus, while state-run programmes (such as the MNY) have less cost and time overruns than centrally sponsored programmes such as the UIDSSMT, in terms of the completeness of contracts, the centrally sponsored is better since contractors’ defect liability is specified. Neither specifies the time frame of the defect liability period, though. While we found capacity – primarily personnel – to be adequate for programme implementation in the case of large cities and in the case of centrally sponsored programmes such as the UIDSSMT, personnel are inadequate in the case of smaller cities and state-run infrastructure programmes.

Our findings also conclusively show that the primary focus of infrastructure programmes in this country has been on inputs (funds, processes, personnel and raw materials), and much less on their outputs, outcomes and effectiveness. Failure to clearly define and monitor the expected outputs and outcomes of projects is a major reason the principal-agent problem arises. When the criteria for the selection of roads or other civil works are vague, there is scope for implementing officials, organisations or local politicians to make choices that serve their interests. Lack of public awareness about the objectives of programmes, their selection criteria and outcomes expected of them will make it difficult for citizens and beneficiaries to demand accountability from service providers.


The author is with the Public Affairs Centre. Comments from Samuel Paul are appreciated, as is assistance from A Venugopala Reddy and the PAC team that worked on this project.
* http://www.finance.kar.nic.in/ERC-Web/Third%20Report-Full-E-Final.pdf

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