While the need for large financial resources to develop India’s infrastructure gets substantial attention, what often gets missed out is the need to deploy these resources efficiently. The issue of efficiency is all the more important for a resource-constrained economy such as ours.
One aspect of this is to complete projects without delays. At this juncture, there is a growing concern over the effectiveness of investments made in infrastructure, largely due to cost and time overruns. These overruns, apart from bringing down investor confidence, also undermine government’s ability to create assets and sustain economic growth.
In a recent research project at IIT Madras, we studied the trends in cost and time overruns in road projects in India. Constructing a quality road is one thing, constructing it without overruns is another.
The roads sector has witnessed substantial developments in recent years. Roads are expected to account for the largest proportion of the investment made in the 12th Five-Year Plan. They are the backbone as well as the lifeline of the Indian economy. Despite the strategic importance of the roads network, our research indicates that our efficiencies in road development are poor. Using data from Central road projects, we find that nearly 69 per cent of them are riddled with cost overruns and 89 per cent of them are faced with time delays. While overruns and delays are pandemic in transport projects, the proportion that we see in India is high by any standard.
Time and cost overrun
The average cost and time overruns have been 16.25 per cent and 41.2 per cent, respectively. The significance of these numbers is easily understood. Had the projects been developed within the budgeted cost, we would have been able to build 16.25 per cent km of roads more at the same cost.
The same holds for time overruns as well. For example, if there were no delays, we would have been able to add 41.2 per cent km of roads more in the same period. Since overruns can usually be controlled by better management without any substantial infusion of capital, these numbers indicate the potential for achieving additional road capacity without additional investment.
Overruns in those States where we had an adequate number of projects are given in the table. The first observation that can be made is that there are substantial variations in the patterns of overruns between States. Some States have been more successful than the others in controlling overruns, indicating that the broader State- or district-specific conditions can play a role in influencing overrun. Our analysis indicates that strong enforcement of property rights and the overall law and order situation are associated with reduction in time overruns, possibly due to better management of land acquisition. Paradoxically, higher district-level development is associated with an increase in both time and cost overruns, possibly due to difficulties in acquiring land and developing infrastructure in well-developed areas.
With the accumulation of experience and development of robust project methods, one would expect a decrease in overruns over time. While this was found to be true in the case of time overruns, there was no evidence that cost overruns have significantly changed over time. This indicates two things. First, there seems to be an inherent bias in the procurement methods which makes such cost overruns beneficial to contractors and other parties involved. Second, project management tools and techniques need further development.
To PPP or not?
One topic that has captured the imagination of policymakers in infrastructure development in recent years is public-private partnership (PPP). The roads sector has had the largest number of PPPs in this country so far. How has PPP influenced overruns? It was seen that 88.1 per cent of PPPs had cost overruns as compared with 54.37 per cent in non-PPP projects. However, a higher proportion of non-PPP projects had time overruns (92.23 per cent) as compared with PPPs (80.95 per cent). (See figure ‘Average percentage overrun’.) While PPPs have a superior track record in managing time overruns because of private-sector efficiency (and probably also because of the inbuilt incentive to complete projects faster), it was not the case as far as cost overruns are concerned. The average percentage cost overruns in a PPP is close to three times that of what was observed in a non-PPP project. These numbers achieve even more significance if we consider that the average project size of a PPP (Rs 382.46 crore) is about a half more than that of a non-PPP project (Rs 253.89 crore).
These numbers call for a need to reflect on how we are developing roads. One should not blindly follow the PPP model without analysing all the issues concerned. If we assume that private-sector capability in managing costs is unquestionable, these results indicate that it seems more comfortable with cost overruns on its balance sheet.
Inflating costs leading to excessive returns has been widely observed in private infrastructure projects. Our results indicate the possibility of this happening in India as well. While the PPP model has been able to bring in the much-needed financial resources and management expertise, it needs to be ensured that they do not come at the cost of an unnecessary burden on the exchequer. The contractual arrangements should have appropriate provisions to minimise the costly overruns seen in PPPs.
(Mr Thillai is Associate Professor, Department of Management Studies, IIT Madras. Mr Gopinath is a graduate in infrastructure engineering from the institute.)