Escalation in road cost under lens as prices cool down

Escalation in road cost under lens as prices cool down
The Financial Express, August, 03, 2009, Page 1

Surabhi, New Delhi

With prices of key construction materials cooling down, the Planning Commission is reviewing road projects that witnessed a hike in construction cost after the commodity boom last year. Prices of key construction materials such as cement, steel and bitumen went through the roof in 2008.

“With prices of construction material now falling to pre-2008 levels, there may be a need to revise the cost escalation in highway projects last year,” a senior official said. So, the Planning Commission is collecting data on projects where the road transport and highways ministry scaled up the total project cost to accommodate higher prices and is likely to call for de-escalation of these costs.

While there is a clause in road contracts that allows for price escalation based on the Wholesale Price Index, road developers argue it does not fully reflect price hikes. Faced with a steep rise in cost, they had, in fact, threatened to stop construction if the ministry did not reimburse the increased expenses.

In 2008-09, prices of cement, steel and bitumen —which account for about 40% of the cost in road construction—shot up by over 30%. However, in keeping with overall inflation levels, the prices of these three key constituents have cooled down significantly since then. According to data provided by the National Highways Builders Federation, the price for a bag of cement was Rs 235 in January 2008. It reached a peak of Rs 300 in August and September last year. Similarly, steel prices shot up to Rs 52,000 per mt for 8mm bars in July 2008.

So giving in to the demand of road developers and to ensure that highway projects did not get impacted by the rise in prices of construction material last year, the ministry has increased the total project cost by up to 20% in cases where the project was originally assessed in 2005-06.

However, steel prices had come down to Rs 34,500 per mt by March this year, while cement prices cooled down to Rs 260 a bag.

There are 231 national highway projects of over Rs 5 crore that have incurred such time and cost over runs in the last three years, minister of state for road transport and highways RPN Singh had recently informed the Lok Sabha.

Road developers feel that the move by the Planning Commission to review cost will not be justified as prices of steel and cement have fallen only by about 10% since last year. “The total project cost for these roads was based on detailed project reports from 2004-05. Prices of construction materials have been rising continuously since then and these need to be reflected. Otherwise road projects will not attract bidders,” said M Murali, director-general, National Highways Builders Federation. Along with quoting old prices, the total project cost estimated in the DPR is usually lower than the actual costs, he said.

In fact, apart from the credit crisis, one of the reasons why there were few bidders for road projects last year was the low project costs estimated by the ministry, which made road projects unviable, said Murali.