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Government: Managing cost overruns? - Views on News from Equitymaster
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  • Sep 2, 2003

    Government: Managing cost overruns?

    Government initiatives towards infrastructure development have a very important role to play in the growth of an economy. And this is all the more important when the economy is in doldrums and even private expenditure is at low levels due to poor expectations about future growth. However, it is not just about government spending on developmental projects. What is of critical importance is managing the same, both during the period when the project is under execution and after it is completed. In this article, we try to analyse how the government has fared on one of the fronts i.e. Central Sector Projects (CSPs).

    Performance of Central Sector Projects
      June 2003 June 2002 June 2001
    Ahead 42 77 5
    On schedule 70 71 54
    Delayed 93 61 56
    Others* 59 69 74
    Total 264 278 189
    Cost overruns of delayed projects (Rs bn) 263 243 220
    Cost overruns of delayed projects 59% 60% 76%
    (% of original cost of projects)      
    * Projects without original date of commissioning or date of commissioning
    Source: RBI Annual Report 2002-03

    The above table shows the government's status as regards the progress of the CSPs. On looking at the first division, which indicates the number of projects on which the government is ahead of schedule (of completion), it seems to be a very encouraging sign that the Centre's efficiency has shown a considerable improvement in 2003, over 2001. This is considering the fact that compared to a mere 5 projects in June 2001, the government was ahead on 42 projects by June 2003. Similar is the trend observed for the 'on schedule' projects. The total number of projects has also increased from 189 to 264 over the last couple of years, thereby reiterating the government's initiative on increased infrastructure spending. All credit to the government for this endeavour!

    However, are the above figures the best indicator of the government's efficiency at managing the CSPs. Well, maybe not! A better picture of government performance should be judged from another parameter viz. cost overruns of delayed projects (% of original cost of projects). This is where the picture turns a little ugly. As on June 2003, the total cost overrun (of the 93 delayed projects) as a % of original cost of those projects was 59%. Though this figure has reduced over the last couple of years, it is still is a huge amount! (Just have a look at those absolute numbers of cost overruns - Rs 263 bn!).

    Though the CSPs are primarily in the power, petroleum and coal sectors, in recent times, surface transport has also played a significant role in the overall CSP scenario. The Reserve Bank Of India (RBI) Annual Report points to various reasons for the delay in the completion of the projects, which it has sourced from the Ministry of Statistics and Programme Implementation. A few of these reasons include absence of proper techno-economic studies before sanctioning projects, inadequate financial resources, problems pertaining to land acquisition and awarding contracts (in UP, Orissa, Tamil Nadu and Karnataka), poor law and order situation in certain parts of the country and…inadequate infrastructure! Hopefully, the last of the reasons will be a thing of the past in the near future! Also, it must be noted, that according to the RBI Report, 52% of the total cost overrun in respect of delayed projects is contributed by the power sector alone!

    All said and done, the government's efforts at infrastructure spending (and also various reforms measures), must be appreciated. At the same time, the government still has a long way to go as regards managing costs and improving efficiencies is concerned. Some part of this deficiency should be improved now as the power sector reforms gather pace post the passage of Electricity Act 2003. However, in the meanwhile, the government will need to further focus on the successful and timely completion of projects, rather than just planning and allotting projects. After all, these cost overruns ultimately contribute to a grimmer fiscal position.



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