Road project development hit as input costs increase 25% in Q2

NEW DELHI: Soaring inflation has hit road projects as input costs have risen over 25% in the second quarter of this fiscal. The construction cost has jumped by almost Rs 1 crore for every kilometre due to dearer steel, cement and bitumen that account for half of the total project cost.

���Steel and cement have pushed up input costs significantly, bringing a slowdown in road construction work,��� Soma Enterprise vice-president transportation (highways) P R Rao said.

Steel and cement together account for 15% of the total cost of construction. According to industry players, cement prices have gone up 8% between April and August 2008, from Rs 245 per bag to Rs 265 per bag.

There is a mechanism to factor in inflation in toll rates under build-operate and transfer (BOT) projects. Toll rates rise with the rise in the wholesale price index (WPI). Mr Rao said the mechanism does not provide adequate compensation. ���Steel and cement prices have been going up 60% every year but the WPI reflects only a 3-5% rise.
Compensation in line with rise in WPI is clearly not adequate,��� he said.

Non-availability of cement is also adding to the cost. ���There is an acute shortage of ordinary portland cement (OPC), which is used for roads vis-��-vis portland pozzolana cement (PPC) ��� used extensively for real estate projects,��� an expert said. With the real estate boom in the past few years, 90% cement manufacturers have shifted to OPC.

The case is no better with bitumen. Its price shot up 25% in July this year due to oil price hike. From an average price of Rs 25,000 per metric tonne (PMT) in April 2008, bitumen prices went up to Rs 31,400 PMT in July.

In the case of item rate contracts, contractors are hit even more. While WPI shows 37% increase for steel bars and rods, the on-ground rise is about 250% over an 18-month period. This hits the bottom line of contractors severely and has been creating delays as fund crunch drags the progress downwards.

���In item rate contracts (cash contracts), the escalation formula does not fully compensate the increase in raw material costs,��� Nagarjuna Construction senior vice-president for roads Kanchan Roy said.

Between July and August there has been rise of 4% with prices rising to Rs 32,850 PMT in line with Chennai and Vizag refinery rates, according to the national highway business federation (NHBF). Bitumen contributes 25% of the total input costs.

With delays in road projects already under review of the prime minister���s infrastructure committee, any proposed action to expedite construction work may have to account for the role played by price rise. However, with inflation control measures likely to moderate only by the year-end, the government may have to revise targets for certain projects, says a senior infrastructure analyst.