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| Inflated estimates push down cost overruns for infra projects |
| Devika Banerji / New Delhi Oct 01, 2009, 00:49 IST |
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Change in costing methodology by project planners the reason
Even as a majority of infrastructure projects in the country suffer delays spanning years, the percentage of projects posting cost overruns has dramatically declined since 2001 in spite of the high level of time overruns.
The reason is an alteration in the costing methodology adopted by project planners. Officials of the Ministry of Statistics and Programme Implementation (MOSPI), who monitor the progress of the central sector projects, say that project planners have started giving inflated cost estimates which assume and factor in the delays that might take place resulting in cost overruns.
“This trend has been there for about a decade (since 2000-2001). The process is to evaluate the cost of the project assuming the time delays. Time delays are inevitable in our country owing to a difficult law and order situation. The concept is to factor in the various changes in the cost of the project which will take place due to time overruns,” said Pronab Sen, chief statistician of India, and secretary of the MOSPI.
According to government data, the percentage of projects running behind schedule has come down to 48.11 per cent in March 2009 from 57.73 per cent in March 1997. The percentage of projects posting cost overruns, however, has steeply declined from around 45 per cent in March 1997 to 13.45 per cent in March 2009.
There has been a continuous and a steady decline in the extent of time and cost overruns in infrastructure projects since 1990 due to better monitoring systems and improvements in facilities of concerned Ministries. However, even though the time and cost overruns went hand in hand till around March 2002, after which even as a high percentage of projects posted time overruns, the percentage of projects posting cost overruns witnessed a sharp decline.
“Time overrun has been on the higher side for the past few years because we are undertaking more difficult and complex projects which result in inevitable delays. Thus, people have started giving cost estimates that factor in such delays and the rise in raw materials that might take place,” said a MOSPI official requesting anonymity.
“Cost is also curtailed to a small extent as there is competition among suppliers which keeps cost of raw materials steady and predictable and less likely to fluctuate,” added another ministry official.
Analysts believe that such a decline in cost overruns does not necessarily indicate that capital is being utilised more efficiently than before in infrastructure projects and might even adversely affect the incremental capital output ratio (ICOR). However, they maintain that such a costing methodology is a practical way to contain cost overruns and ensure availability of funds.
“Infrastructure projects take 4-5 years to complete. During this time, prices of raw materials are bound to change. It is very difficult to set an accurate estimate at the beginning of the project. The cost of the project should ideally be monitored at 3-4 stages during its implementation,” said Vinayak Chatterjee, chairman of Feedback Ventures, an infrastructure services company.
Sen reacted: “We do not have information of how this has or will affect the ICOR but this is a practical way to plan projects.”
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