New Delhi: Private sector firms in the business of building roads are threatening to stop work on highway projects they have bid and won unless the government reworks the escalation clause in contracts to include a more representative measure of inflation than the Wholesale Price Index, or WPI, that they currently do.
The firms say that the unprecedented spurt in the prices of key raw materials such as cement, steel and bitumen in the past one year are not reflected in the overall WPI because of lower weightage in the index for these commodities. For the week ended 5 April, annual growth in the index for steel was almost four times the annual rate of inflation at 7.14%.
The move by the private road builders comes even as the government is getting ready to offer contracts for some 3,090km of highways, worth more than Rs29,000 crore, for upgrade.
A file photo of work being undertaken on the Muzaffarnagar bypass, part of NH 58. The government is getting ready to offer contracts for some 3,090km of highways for upgrade (Photo by: Rajeev Dabral / Mint)
Cement, steel, bitumen (a crude oil distillate used in road construction) and oil together account for nearly 40% of the input costs of building a highway, according to data from the National Highways Builders Federation, or NHBF, an industry body.
Some builders allege that the prices of certain commodities are not updated frequently because of which the index does not reflect the price growth in that commodity.
They estimate their losses on account of this to be around Rs350 crore for projects worth Rs8,500 crore.
“Steel prices haven’t been updated between January 2007 and March 2008,” said Brahm Datt, who heads Som Datt Builders, which builds highways for the National Highways Authority of India, or NHAI, the regulator of India’s roads sector. Datt is also the president of NHBF.
“And even when the prices get updated, they are not commensurate with the market. We are currently paying roughly Rs4.5 lakh per tonne of steel. At this rate it has becomes unbearable. We cannot absorb the cost any more,” Datt added. “All work could come to a grinding halt if the input costs continue to increase. How long can we continue to absorb these costs?” said a contractor, who has more than a dozen projects under the National Highway Development Programme. He did not wish to be identified.
Road building contracts are typically of two types: EPC, or engineering, procurement and construction, where the contractor builds the road for a pre-determined fee, or BOT, build-operate-transfer, where the operator owns a stake in the project. NHBF officials said many contracts do not even have an escalation clause, and delays typical to highway projects because of problems related to land acquisition drive costs up even more.
An NHAI official confirmed that contractors were unhappy about rising input costs. “Several contractors have written to us stating that they will not be able to continue with construction unless the prices of steel, cement and bitumen are controlled,” added the official, who did not wish to be identified.
Amrit Pandurangi, who heads the infrastructure practice at audit and consulting firm PricewaterhouseCoopers Pvt. Ltd, said it wouldn’t “be fair to let them (the companies) absorb this kind of price growth.”
“I think if the cost of inputs such as steel, bitumen or cement grows by more than 10%, then may be they can think of giving an extension of concession period or building a clause into the concession agreement linking input costs,” he added.
Meanwhile, most new projects currently on offer are spread across phase three and five of the National Highway Development Programme. Of these, 12 projects worth more than Rs16,400 crore are due to be awarded by the end of April, while initial bids for 14 others, worth an estimated Rs10,144 crore, are due by June.
Mint had reported on 17 March that NHAI was getting ready to award contracts for nearly 10,000km of highways over the next year.
Of the 26 projects on offer, the largest is the six-laning of a 315km stretch between Kishangarh and Udaipur in Rajasthan. The contract is expected to cost nearly Rs3,076 crore, roughly Rs9 crore a kilometre.
NHAI, the Planning Commission and the ministry of finance have been named as respondents in a case where a trade body has challenged guidelines designed to limit the number of bidders to prevent frivolous bids. The case is pending in the Delhi high court. An NHAI official, who did not wish to be identified, said response to the tenders was good. “I do not think the case will dampen interest in the bids,” the official said.