AI Insights

What is the extent of Cost Overruns in Central Sector Projects?

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This post has been authored by Manisha Rikkula, the Research Analyst Intern at Arthashastra Intelligence.

Infrastructure is critical to a country\’s economic development.  India\’s infrastructure investments have been steadily increasing and have been a major focus area in every budget. However, there exists a huge infrastructure investment deficit. This is reflected especially in cost overrun and the project delays in central sector projects. 470 central sector projects have witnessed a combined cost overrun of  ₹4.37 trillion .

This article analyses central sector projects’ (investment greater than 1500 crores) cost overrun in four major sectors over 2010-21. They are Steel, Power, Petroleum, and Coal. For each of these four sectors, the cost overrun of the project in percentage term is plotted against the time. The negative or the positive cost overrun are compared with the corresponding growth rate of the sector.

Cost overrun is the difference between the anticipated and original cost of the project. If positive, it implies the project has not incurred an additional cost for its completion on time.

  1. Steel

From 2010 to 2021, the cost overrun (%),  was declining. In 2020 it stood at -3294.37. This was in high magnitude as compared to other sectors, signifying supply shock or inefficient project implementation. The positive growth rate signals good margins if projects are invested and completed on time. The growth rate of the steel sector was negative in 2015 at -1.3%

The cost overrun was mainly due to Major modernization initiatives that have been undertaken in the steel sector to increase the capacity of existing factories. Supplies are being delayed due to extreme strain on vendors and suppliers because of massive construction projects around the world. Delays in awarding contracts and finding suitable contractors to carry out important activities are also generating implementation delays.

2 Coal

In the coal sector, 2010-11 and 2013-14, the cost overrun % was positive, indicating the projects were completed inefficiently manner. 2012-13, 2015-17, 2020-21 saw negative overrun which shows that the actual outlay was either not sufficient or the excessive delays have escalated the project costs. The growth rate is partially correlated with the cost overrun.

The number of coal projects is being expanded, and these projects are being funded from the coal companies\’ resources, which is causing delays in the expansion projects\’ completion. Because coal operations are site-specific, land acquisition and rehabilitation are key stumbling blocks.

Growth rates of the four sectors:

Sector

Weight

2012

2013

2014

2015

2016

2017

2018

2019

Steel

17.91

7.9

7.3

5.1

-1.3

10.7

5.6

5.1

3.4

Electricity

19.85

4

6.1

14.8

5.7

5.8

5.3

5.2

1

coal

10.33

3.2

1

8

4.8

3.2

2.6

7.4

-.4

Petroleum

28.03

7.2

1.4

0.2

4.9

4.9

4.6

3.1

0.2

2 Power

The power sector performed relatively well as compared to that of the steel sector. Over 2010-21, 2017, 2019, and 2021 had a negative cost overrun(%), however, the magnitude is not much high as compared to other sectors. This was in sync with the growth rate. From 2017, the sector witnessed a decline in growth rate.

Due to law-and-order issues in the Northeast and Kashmir, power projects, particularly hydroelectric projects, are experiencing delays. Geological surprises are also a problem for some projects. Contractors\’ unavailability in challenging places is jeopardizing the timely completion of projects in the power sector.

3 Petroleum and Natural Gas

Petroleum and natural gas are the better performing among these four sectors. The was a positive growth during 2012-19. The cost overrun as % was negative only for a brief period and was with a lesser magnitude as compared to other sectors. In 2017-19, there was an efficient project implementation.

Refineries that are expanding are experiencing supply issues from both domestic and international vendors. Refineries that are expanding for clean fuel production are having difficulty revamping their fluidized catalytic units, which necessitates shutting down their operations for longer periods. Projects in the oil exploration industry have been delayed mostly owing to geological issues.

Reasons behind the cost overrun:

The project delays are cost overrun are mainly due to Inadequately devised project strategy, Bad managers for large projects, more for execution and less for planning, relatively long construction period, lack of infrastructure support and linkages, land acquisition delays, forest, and environment clearances, delayed financing tie-ups, delayed tendering, law and order problems, inadequate manpower, delay in the finalization of detailed engineering, and change in scope of the project.

Apart from this, the econometric analysis of the MOSPI data(Singh, 2010), indicates that since the 1980s delays and cost overruns have decreased. In both absolute terms and as a percentage of the total project cost, cost overruns have steadily decreased. Delays, regardless of their source, are a major contributor to cost overruns. Cost overruns have been substantially higher on larger projects than on smaller ones. Cost overruns as a percentage increase with the duration of the implementation phase – ceteris paribus. Projects in the southern states saw fewer delays. The performance of wealthy states does not differ considerably from that of poorer states.

Few suggestions to reduce cost overruns:

● The National Infrastructure Pipeline, which includes 7,400 projects, the Development Financial Institution, and the $6 trillion National Monetization Pipeline.

● enhanced stakeholder management for land acquisition, regulatory approvals, a dispute resolution mechanism in the public-private partnership model, and the establishment of robust project governance, including strengthening internal processes to build in-house project management capabilities and enhanced stakeholder management for land acquisition

● PM Gati Shakti – National Master Plan for Multi-modal Connectivity through integrated planning and coordinated implementation of infrastructure connectivity projects.

● Lessing of the political and government intervention in project construction. Due diligence plays a significant role and must be done without any bias.

References