How the cookie crumbles

With escalated construction costs excarberating to halved traffic growth projections, M Murali explains the startling fact that delays stood at an average of 73 per cent beyond the original timelines.

The road sector is passing through a severe down¡turn, as most of the BOT projects awarded last year have not yet achieved financial closure, and the appointed dates-declared and ongoing projects are languishing, with little hope they will be completed within a reasonable time period.

The main reason for lack response from the concessionaire to take up road projects is shortage of equity, high interest cost and high construction cost. In the past, developers safely assumed GDP growth of 9-10 per cent, giving them an estimated annual traffic growth of 13-15 per cent over the entire concession period, taking the chance on high premiums.

Projected traffic revenues of these projects have come down to the extent of less than 50 per cent and the cash flow of the projects further stressed due to increased interest cost and cost of construction which make the projects unviable and unable to continue further.

Some of the critical issues are:
Pre-construction

• Land surveying, investigations and design issues
• Construction and contract management issues
• Delay in land acquisition
• Resettlement of project affected persons
• Tree cutting
• Shifting of utilities

Record blues: Since encumbrance free site is not made available to the concessionaires in the initial stages of the project, the concessionaire delay the mobilization and in most of the cases. Outdated land records and poor quality of designs make it more difficult. Some¡times additional land requirements become necessary to take care of the designed right-of-way.

Often, no proper records exist of the underground utilities like water supply, sewerage lines, electrical and telephone cables etc. Such utilities get identified as encumbrance only during the implementation stage of the project. Because of the above reasons, substantial extensions of time are required to the concessionaire for starting the construction and may lead to cost over runs and idling of resources/manpower/machinery which will have to borne by them.

Change of plans: There are frequent changes in the designs and alignments during implementation stage.

In some cases, there are discrepancies in the project coordinates and the reference frames resulting in mismatch there¡by resulting in redesign of the alignment. The delay in the construction has led to a large gap between the budget allocation and actual expenditure on the road construction in the country in the past few years. This gap has been in the range of 15-20 per cent. About 70 per cent of the contracts have been delayed and about 50 per cent of the contracts had cost over runs of more than 25 per cent. The mean delay was about 73 per cent of the original contract completion time.

Role confusion: Weak contract management and enforcement environment are major issues in PPP contracts. Specifically,
´The role of the independent engineer is not clear, so the engineer takes no responsibility. ´Lack of the understanding between the employers and the concessionaires that speedy completion of the projects is to both parties´ interest. ´Lack of understanding of the contract conditions both by the employers and the contractors. ´Since the employer is usually lacking in fulfilling his obligations, his leverage on the contract enforcement gets eroded. ´There is resistance to acceptance of the responsibility in taking decisions, even when the employer´s staff is convinced. ´There is lack of training imparted to the staff on the general terms and conditions of the contract and the division of the parties´ rights, duties and obligations as per the contract. Therefore, there is a need to revisit the strategy of PPP projects and a relook at the respective risk allocation between public and private partners.