Central sector projects suffer cost overrun despite lower commodity prices

While falling commodity prices are helping companies to retain margins despite a weaker growth in revenue, government projects are yet to show a direct benefit. According to the data released by Ministry of Statistics and Programme Implementation (MoSPI), the cost of 787 central sector projects each with an initial budget of Rs 150 crore or more shot up by 21% compared with their original costs.

According to the data, the total original cost of implementation of these projects was Rs 10.2 lakh crore ($ 150.1 billion). At the end of November 2015, their anticipated completion cost increased to Rs 12.3 lakh crore ($ 181.2 billion). The cost of 249 mega projects, which have initial outlay of Rs 1,000 crore or more, too shot up by 23%. This is despite the falling trend in commodity prices. Over the past year, metal prices have fallen by 15-23% while coal price is down by a third. The Brent crude has lost over 40% during the period.

“Project costs tend to increase as the delay in implementation increases. This is because you have incur fixed costs such as salaries of the staff and interest to service debt linked to the project,” said Madan Sabnavis, chief economist, CARE.

According to Sabnavis, one way to reduce further cost overlay is to speed up implementation. “Lower commodity prices have in a way have limited the extent of cost overrun. The condition should improve once projects are set in motion,” he said.