Data from the RBI reports & the Infrastructure and Project Monitoring Division of the Ministry of Statistics & Program Implementation indicate that the cost overrun of delayed central sector projects as of March 2022 stands at 31.5% with the average cost overrun at Rs. 446 crores.
In the first part of the series on the status of central sector projects, we analysed the time delays in the implementation of central sector infrastructure projects. One of the outcomes of delay in the projects is the increased costs. The cost overrun of the projects result in an increased burden on the government resources and has a bearing on budget allocation. This could lead to a cascading effect on budget planning. Apart from time delays, there are other factors that contribute to cost overruns.
In the second part of this series, we analyse the trends pertaining to the cost overrun of the central sector infrastructure projects.
Data from the Sector-wise Cost overrun of Delayed Central Sector Projects (Table 36) of RBI’s Handbook of Statistics on India’s Economy is considered. This information is based on the data provided by the respective implementing agencies on the Infrastructure and Project Monitoring Division’s (IPMD) Online Computerised Monitoring System (OSMS) for the Central Sector projects with costs of over Rs.150 crores.
Only the projects which are delayed are considered for analysing Cost Overrun. Projects whose Date of Commissioning (DOC) is not available are not considered. Cost Overrun is the difference between the Original Estimate of the project and the current Anticipated cost of the delayed project.
The information is only for those projects whose data is updated on OSMS and does not reflect the actual number of projects. Further, the number of agencies that are reporting the status online has improved over the years, resulting in a greater number of projects in the IPMD database. Hence, it must be noted that the increased number of projects in a particular year does not necessarily mean an actual increase in the number of projects on the ground.
Cost Overrun at 31.5% for the projects delayed as of 31 March 2022
As of 31 March 2022, a total of 728 projects were delayed. The estimated cost of these projects was Rs. 10.21 lakh crores. At the same time, the anticipated cost to complete these projects is Rs. 13.5 lakh crores i.e., an anticipated cost overrun of Rs .3.25 lakh crores. The overall cost overrun of the delayed projects is higher than in the earlier years. This is understandable as more projects are updated on OSMS than in earlier years. In 2013, there were only 285 projects updated as delayed. Hence, the over-run cost compared to the original estimate gives a better understanding of this cost overrun. Data indicates that the previous three years have witnessed a higher cost overrun compared to the original estimates.
As of 31 March 2020, the cost overrun of delayed projects was 29.1% which increased to 29.5 % as of 31 March 2021, which increased to 31.5% by 31 March 2022. If the current increasing trend continues, there could be a further increase in cost overrun resulting in additional strain on the government’s financial resources.
As per the August 2022 flash report, the original cost of implementation of the total projects being monitored is Rs. 21.26 lakh crores. A total of 1,526 projects were being monitored and this includes even the projects for which DOC is not available. The anticipated cost on completion is Rs. 25.91 lakh crores i.e., a cost overrun of Rs. 4.65 lakh crores.
The average cost overrun is Rs. 446 crores per project by end of FY 2022
The higher amount of cost overrun by end of March 2002 can be attributed to the increase in the number of delayed projects as updated on the IPMD’s portal. On average, the cost overrun is Rs. 446.6 crores per delayed project at the end of FY 2022. The average cost overrun is calculated by dividing the total cost overrun by the end of the year with the number of projects marked as delayed.
While the overall cost overrun is higher for FY 2022 compared to the previous year, the average cost overrun per project has come down. In the previous year, it was Rs.489 crores. The lower estimated value of the projects that are delayed, the projects that are comparatively new, the completion of long-standing projects, etc., could be some of the reasons for the reduction in average cost overrun.
Cost overrun of Railway projects is 76% of the original cost
In the earlier story, we highlighted that Railways have the highest share of delayed projects. Nearly 90% of its projects with DOC were delayed as of 31 March 2022. It was also highlighted that Railways have few of the most long-standing pending projects.
This is also reflected in the cost overrun. The overall original cost estimate of the 146 delayed Railways projects was Rs. 1.91 lakh crores by the end of March 2022. The anticipated cost of completion as of 31 March 2022 is Rs. 3.36 lakh crores. This is a cost overrun of Rs.1.45 lakh crores which is 70% more than the original estimate. Comparatively, Surface Transport which has the highest number of delayed projects with 253 has a lower cost overrun. The original cost estimate of these 253 projects was Rs. 1.41 lakh crores. The anticipated cost by the time of completion of these projects could be Rs. 1.56 lakh crores i.e., an overrun of 14.9 thousand crores which make up around 10% of the original cost. A similar case is with the petroleum sector. The cost overrun is 8% for its 87 delayed projects.
Even though the Telecommunication sector has only 3 delayed projects, the anticipated cost is already 81% more than the original cost. For most of the other sectors, there have been new additions to delayed projects during 2022, which reflects in the increased total value of estimated and anticipated costs compared to the end of FY 2021.
In the case of Atomic Energy, the escalation of cost is seen despite no change in the number of delayed projects. By end of 2022, there were 4 delayed projects whose original cost was Rs. 67.1 thousand crores. Since the Original cost of the four projects remained at 67.1 thousand crores from 2018-2022, it can be concluded that these 4 delayed projects are the same ones each year. In 2018, these 4 projects had an anticipated cost of Rs. 69.7 thousand crores. By end of FY 2022, it increased to Rs. 82.9 thousand crores. This amply demonstrates the cost escalation due to the delay in projects.
Atomic Energy, Telecommunication and Steel Sector have projects with higher average costs
The value of cost overrun is also influenced by the type & size of the projects. The Atomic Energy sector has 4 delayed projects whose original cost is Rs. 67.1 thousand crores i.e., an average of Rs. 16.7 thousand crores per project. With a 23% escalation in its cost, the cost overrun is an average of Rs. 3.9 thousand crores.
As highlighted earlier, the Telecommunication sector has the highest proportion of the increase in cost overrun. The average original cost for the 3 delayed projects is Rs. 3.7 thousand crores. The average cost overrun per project is Rs. 3.7 thousand crores. Meanwhile, Surface Transport projects have a lower average cost overrun. The average original cost for the 253 delayed projects is Rs. 557 crores while the average cost overrun of the Surface transport projects is Rs. 59 crores by the end of FY 2022. The average cost overrun of Railways Projects is Rs. 993 crores per project by the end of FY 2022.
Inflation, process related delays, pricing issues among the major reasons for cost overruns
Various factors have a bearing on the cost overrun of the delayed projects. The general increase in prices associated with the time delays is one of the factors and cannot be avoided. This can be brought down by reducing the time delays.
The quarterly report on the Central Sector projects published by MOSPI highlights a few factors influencing cost overruns. Increases in prices, taxes, and changes in foreign exchange rates have a direct bearing on the cost overrun. Apart from these, changes in the scope of the project, new developments have an impact on the projects which cannot be anticipated while determining the original cost of the project. Underestimation of the original cost is also a challenge that comes to the fore once the project is being implanted and the actual costs vary.
Process-related issues like delays in project financing, tendering, shipment, etc. also contribute to cost escalation. While some of these cannot be avoided, constant monitoring and appropriate & timely remedial measures can help reduce the cost overruns.
In the third part of this series, we would analyse a few of the projects across the sectors, to better understand the reasons for the delays and cost overruns of the infrastructure projects.
Featured Image: Cost Overrun of Central Sector Projects