Change in highway projects' costing

NHAI prepares new index with sector's need in mind to replace WPI use, invites feedback

With the Wholesale Price Index (WPI) not considered comprehensive enough for costing of road projects, the National Highways Authority of India (NHAI) plans to put in place a National Highways Construction Cost Index (NHCCI).

WPI is used in price escalation clauses for settling claims in many construction activities. However, it doesn’t include all the items required by highway projects. This creates problems in settling price escalation clauses and also in generating an index on construction. Therefore, getting a continuous and consistent index for highways might not be possible if it depends on WPI.

“The need has arisen due to limitations of using WPI for escalation clauses and other road construction-related matters. Based on the information received from concessionaires and contractors, an NHCCI up to the month of December 2014 has been computed,” stated NHAI.

Issues relating to choice of base period, selection of item basket, derivation of weighting diagram, collection of data and method of calculation have led to the need for this. It is intended as an index that can be used to track pure price-changes strictly associated with highway construction costs. It covers the items used in this regard. All the work on collection of data, scrutiny, validation, processing and dissemination is to be done by NHAI.

The WPI basket subsumed many items not relevant for road construction, unlike NHCCI’s item. And, while NHCCI uses the price at which the items are purchased by contractors for construction of roads, inclusive of transportation costs and local taxes, WPI did not take that into account.

“As it concentrates only on relevant items, the number of items is less than the WPI basket and, therefore, it is feasible to collect more number of quotations (prices),” it is claimed.

NHAI has invited comments on the proposed index. The hybrid annuity model, recently introduced by the road transport & highways ministry, will have a reference index with 70 per cent weight provided to the WPI and 30 per cent to the weekly Consumer Price Index. The implication being that when companies quote a cost figure for bagging a project, this would be eligible for revision based on changes in the price index.

The applicable project cost is important since the government pays this to the private operator, with interest, in the form of a half-yearly annuity. In the hybrid annuity, unlike the earlier model, the government will pay part of the capital cost at the commencement of construction itself, giving the private company a revenue stream even before actual commercial operations begin. Besides, up to 10 per cent of the project cost will be paid by NHAI as a mobilisation advance.