Cost and Time Overruns in

Large Scale Transportation

Infrastructure Projects

Managing large-scale transportation

infrastructure projects is difficult due to frequent
misinformation about the costs which results in
large cost overruns that often threaten the
overall project viability. Investments in
infrastructure are a considerable burden on a
countrys gross domestic product (GDP). For
example, in 2005 the Dutch government invested
about 8 billion euros (CBS, 2005 in KIM, 2007) in
infrastructure, amounting to 1.55% of GDP. This is
of even greater concern if the inefficient
allocation of financial resources as the result of
decisions based on misinformation are
recognised (Flyvbjerg , 2005b, De Bruijn and
Leijten, 2007). Cost estimates are often
inaccurate and consequently the ranking of
projects based on project viability is also
inaccurate. Inevitably, this means there is a
danger that eventually inferior projects are
implemented, that resources are used which
could have been assigned more appropriately,

and that projects that are unable to recover their

costs are implemented. Inaccurate estimates
make it particularly difficult to manage large
projects and often lead to cost overruns, which
further increases the burden on the countrys
GDP. The problem can be summarised as follows:
managing large-scale transportation
infrastructure projects is difficult due to frequent
misinformation about the costs which results in
large cost overruns that often threaten overall
project viability. Various studies have addressed
the issue of cost overruns in transportation
projects (van Wee, 2007). Some studies,
including a large database of projects, reach the
following conclusions. The Government
Accountability Office, for example, found that
77% of highway projects in the USA experienced
cost escalation (in Kaliba et al., 2008). Merewitz
(1973) suggests that the average overrun of
infrastructure projects is a little over 50percent
(Merewitz, 1973). A review by Morris and Hough
(1987), which covered about 3500 projects,
revealed that overruns are the norm, and
generally range between 40 and 200 percent
(Reichelt and Lyneis, 1999). Furthermore, a study
by Flyvbjerg et al. (2003a) indicates that in 86
percent of the projects cost overruns appear to
overrun by an average of 28 percent1.

India is the fourth largest economy in the world.

However, one factor which is a drag on its
development is the lack of world class
infrastructure. Infact, estimates suggest that the
lack of proper infrastructure pulls down Indias
GDP growth by 1-2 per cent every year. Physical
infrastructure has a direct impact on the growth
and overall development of an economy. But, the
fast growth of the Indian economy in recent years
has placed increasing stress on physical
infrastructure, such as electricity, railways, roads,
ports, airports, irrigation, urban and rural water
supply, and sanitation, all of which already suffer
from a substantial deficit. The goals of inclusive
growth and a 9 per cent growth in GDP can be
achieved only if this infrastructure deficit is
overcome. Infrastructure development will help in
creating a better investment climate in India. To
develop infrastructure in the country, the
government is expected to revisit issues of
budgetary allocation, tariff policy, fiscal
incentives, private sector participation, and
public private partnerships (PPPs) with resolve.
There are many issues that need to be addressed
in different infrastructural fields. To begin with,
the gap between electricity production and
demand is affecting both manufacturing and

overall growth. Then though road transport is the

backbone of the Indian transport infrastructure, it
is inadequate in terms of quality, quantity, and
connectivity. Also in the overall transport sector,
civil aviation and ports desperately need
modernization. It is expected that the public
sector will continue to play an important role in
building transport infrastructure. However, the
resources needed are much larger than what the
public sector can provide2.

The Fate of major

Infrastructure Projects in
India
Four out of every 10 central government
infrastructure projects are running behind
schedule or have overshot original cost
estimates, providing evidence of the heavy toll
taken on project execution by delayed regulatory
approvals, financial constraints and stalled land

acquisition. The cost of one of these projects is

expected to increase 20 times and another is set
to miss its original completion date by 21 years,
according to data shared by the ministry of
statistics and programme implementation
(Mospi) with the Lok Sabha on 18 March, 2015.
Infrastructure projects running into delays and
cost overruns because of bureaucratic snarl-ups
is not uncommon in India, where the problem has
been compounded in recent years by an
economic downturn that crimped finances as well
as snags in completing land acquisition. National
transporter Indian Railways is implementing
seven of the top 10 of these 315 projects facing
the longest time overrun, and eight of the top 10
facing the highest cost increase3.

Implementation of infrastructure projects in India

has improved substantially over the years.
Although the complexity of infrastructure projects
have increased but capacity to handle them
efficiently is inadequate on many fronts that is
why, time and cost overruns in projects still
persists. It emerges from the analysis of the
Central Sector Projects by the Ministry of
Statistics and Programme Implementation that

many of the projects suffer from inadequacies in

project formulation and implementation, resulting
in large time and cost overruns, affecting the
very viability of the projects and acting as drag
on the economy4.

Delay in execution of a number of key Railway

projects has resulted in cost overruns of more
than 100 per cent, according to the latest
government data. While freight operation
information system, approved in March 1983 at
an estimated cost of Rs 520 crore, is
running behind schedule by 204 months,
construction of the Lanjigarh- Junagarh new line
has been on for 120 months, as per the latest
data compiled by Ministry of Statistics and
Programme Implementation (MoSPI). The cost
overrun of these two unfinished projects is Rs
114crores and Rs 127crores respectively, it said.
Out of 562 projects that the ministry monitored,
132 belonged to the Railway sector. The total
original cost of implementation of these 132
projects is of the order of Rs 65,054.70crores and
their anticipated completion cost is Rs
134,133.50crores which reflects a cost overrun of
more than 106 per cent. The expenditure

incurred on these projects till December 2011

was Rs 56,395crores, as per the data. The range
of delay in Guna-Etawah new line project is close
to 213 months. MoSPI has found 102 projects
facing cost overruns. While the original cost of
these projects was Rs 37,373.60crores at the end
of March 2011, the anticipated cost have been
reported as Rs 106,509.20crores, projecting an
overall cost overrun of 185 per cent. Railways
officials said the major reason for delay is the
non-availability of adequate funds for large
number of new lines, gauge conversion and
doubling projects5.

Majority of infrastructure projects in India are

affected by time overruns. These overruns vary
from a few months to as high as five or more
years, placing the project viability at risk. Survey
respondents identified the bottlenecks which
affect their projects and the challenges they face
in conquering them. These bottlenecks, as
enlisted below, are divided into two phases (i)
pre-execution phase and (ii) execution and
closing phase. Delays in land acquisition and site
handover is the primary reason for schedule
overruns in pre-execution phase. Transport &

Logistics and Energy sector are the worst

affected by land acquisition issues. Insufficient
management of Project design/scope change is
widely prevalent in the infrastructure sector and
is the key reason for schedule overruns in
execution and closing phase6.

Cost revisions and cost overruns are common

across infrastructure projects. According to
MoSPI, infrastructure projects in central
Government sector costing INR 150crores and
above are currently experiencing cumulative cost
overruns of 16.9 percent of their planned cost.
Our survey makes an attempt to identify the key
factors, experienced by project owners, resulting
in cost overruns in a project from the pre
execution stage until the close out phase. Scope
creep and inadequate Detailed Project Report
(DPR) are primary factors impacting cost
overruns in pre execution stage. Material price
escalation beyond projections is the primary
reason for cost overruns during execution. Poor
connectivity to project site and inadequate
availability of skilled resources are also the
reasons for cost escalations7.

And The Estimated Cost of the

Dedicated Freight Corridor
Gets Revised Yet Again...

Mr. X read this headline while sipping his early

morning coffee in a daily newspaper and started
wondering about the future course of the
infrastructure projects where he is one of the
major stockholders. His scepticism was
completely legit as almost every infrastructure
project in India is facing humongous cost and
time overruns due to various bottlenecks in the
system.

Recently the Managing Director of the Pink City

Expressway linking the national capital New Delhi
and the Pink City Jaipur was summoned by the
PMO (Prime Ministers Office) to expedite the
project which is running way behind schedule. So

like that, if every project needs to go through the

PMO for timely completion, then there are
certainly some loopholes that should be taken
care of.

Case of DFC (Dedicated Freight

Corridor)

The funding requirement, which was originally

estimated by RITES in January 2007, was
28000crores. This changed to 37000crores in
October 2007 based on the study by JICA (Japan
International Cooperation Agency). While it
created a controversy, it got resolved that the
difference was primarily attributable to additional
rolling stock requirements. DFCCIL was not
responsible for the rolling stock, though fresh
rolling stock would be required to effectively use
the DFCs. The 2009 DFCCIL estimates were
57,667crores including interest during
construction (IDC) for the WDFC and the EDFC up
to Sonnagar. With the extension to Dankuni, this

figure was then updated in the draft business

plan of October 2010 to 77,630crores, including
IDC in 2016-17. As per the CA, the base
construction cost of DFC was estimated at
46,561crores at 2009 prices inclusive of
preliminary expenses but excluding the cost of
rolling stock and cost of land as both costs were
to be borne by IR. The same had been increased
by 5.4% inflation rate, a figure derived from
average WPI from 2000-01 up to 2008-09. The
figure was then increased by 7% for covering the
cost of insurance, taxes etc, 5% towards
contingencies and IDC. Working capital equal to
three months O&M expenses had been
capitalized8.

Key Assumptions made in framing the

Financial Projections for the Business Plan9:
(These assumptions enabled calculation of track
access charges payable by IR to DFCCIL)

a) Base Construction Cost has been taken as

Rs.46561crores excluding the cost of land
Rs.4200Crores. This cost is based on detailed
estimates received from the field offices and is
based on 2009-10 prices.

b) Project phasing has been assumed based on

estimated progress of construction during the
construction period.

c) Cost escalation factor of 5.4% per annum has

been assumed. This is based on the average WPI
from 2000-2001 to 2008-2009.

d) Project completion cost consists of escalated

construction cost, soft costs like insurance, IDC,
contingency etc. Land will be acquired by IR
under Railway Amendment Act 2008 and leased
to DFCC; hence cost of land has not been
included in DFCCILs financial rate of return and
in Project Cost.

e) Soft costs include Contingencies @ 5% of

escalated construction cost and Insurance &
Taxes have been takes @ 7% of escalated
construction cost.

f) Working Capital has been assumed to be three

months estimated O&M costs plus 1% of Project
Construction Cost (less cost of land) for
inventories to allow DFCCIL to work its first

operating cycle and includes maintenance

spares, traction bill and O&M expenses during
the operating cycle. This will be financed partly
from LOAN and partly from MoR Equity as DFCC
will have no income of its 64 Source: Draft
Business Plan for DFCCIL, October 2010, pp. 4748 (Minor editing done by authors).

g) Additional capital expenditure of Rs. 100 Cr.

per annum for both the corridors has been
assumed to meet demand for further facilities
from customers. This expenditure would be made
on annual basis starting from fifth year of
commencement of operations and will be met
from internal resources.

h) The Project commences from 2009-10.

Although the different sections would get
completed in 2016 it is envisaged that operations
will start from 2017-18.

i) The project will be financed through loan from

Ministry of Railways which will be extended on
back to back basis based on the General
Budgetary Support received by MoR against the
multilateral/bilateral financing. As of now, the

loan from MoR will be Rs.37265crores comprising

of Rs.10800crores of loan received by MoR from
World Bank for Eastern Corridor and Rs. 26,465
Cr of LOAN received from JICA for the Western
Corridor.

j) Loan from MOR will be in the form of a 7% loan

in perpetuity with no principle repayment.
Interest will accrue and accumulate but payment
would be deferred for ten years and would be
paid in ten equal instalments from 2020. Interest
@7% would be paid annually.

k) Any additional funding required by DFCCIL will

be undertaken through commercial borrowings.
Commercial Bonds with a 10 year tenor and
interest rate of 9.5% have been assumed.
Interest on commercial bonds, payable during the
period of construction, will be financed from
additional equity provided by MoR. Repayment of
principal will be made in full at the end of ten
years in the year of maturity.

l) All traffic moving over two or more consecutive

junctions on the existing route will be assigned to
the Dedicated Freight corridor.

m) DFCC will receive Track Access Charges (TAC)

from IR for the services rendered. TAC consists of
Variable component consisting of Traction
Power, Staff and Materials - and Fixed component
consisting of Staff, Material, Depreciation, cost of
Debt (including interest on Loan from MoR as well
as on Commercial Borrowings, and cost of Equity.

The cost for the project was proposed to be

funded by a combination of debt from
bilateral/multilateral agencies and equity from
MOR and PPP. The capital structure of DFCCIL
would entail a debt equity ratio of 2:1. The
loans from multilateral/bilateral lending agencies
will be given to MOR through the Government of
India (GOI). MOR would then pass on the fund to
DFCCIL10. Recently, the CCEA (Cabinet
Committee on Economic Affairs) approved the
revised cost estimate of 81,459crores for
the Eastern and Western Dedicated Freight
Corridor (DFC) Project, including land costs and
financing plan11.

References:
1. Cost overruns in Large-Scale Transportation
Infrastructure Projects: Explanations and Their
Theoretical Embeddedness by Chantal C.
Cantarelli, Bent Flybjerg, Eric J. E. Molin, and Bert
van Wee. Page no.-2&3.
http://www.ejtir.tbm.tudelft.nl/issues/2010_01

2. Infrastructure Challenges in India: The Role of

Public-Private Partnerships by Geethanjali
Nataraj.

3.http://www.livemint.com/Politics/tJkxdTZWlvS1k
wNgJdbqII/Delays-cost-overruns-plagueinfrastructure-projects.html

4.
http://www.nbmcw.com/articles/miscellaneous/pr
oject-management-arbitration-consultant/20898time-and-cost-overruns-in-implementation-ofinfrastructure-projects.html

5.http://articles.economictimes.indiatimes.com/2
012-04-08/news/31308402_1_overruns-projectscompletion-cost
6. Study on project schedule and cost overrunsExpedite infrastructure projects by PMI & KPMG
2013, page no. 8-14.

7. Study on project schedule and cost overrunsExpedite infrastructure projects by PMI & KPMG
2013, page no. 23-29.

8. Indian Institute of Ahmedabad- Structuring

the Dedicated Freight Corridor Project A lost
Opportunity by Shobhesh Kumar Agarwalla and
G.Raghuram- W.P.No. 2012-07-02, July 2012,
page no.-13.

9. Indian Institute of Ahmedabad- Structuring

the Dedicated Freight Corridor Project A lost
Opportunity by Shobhesh Kumar Agarwalla and
G.Raghuram- W.P.No. 2012-07-02, July 2012,
page no.-29&30.

10. Indian Institute of Ahmedabad- Structuring

the Dedicated Freight Corridor Project A lost

Opportunity by Shobhesh Kumar Agarwalla and

G.Raghuram- W.P.No. 2012-07-02, July 2012,
page no.-14.

11. The Economic Times- 24 June, 2015

http://articles.economictimes.indiatimes.com/201
5-06-24/news/63782871_1_western-dedicatedfreight-corridor-dfc-ccea-okays