Projects worth Rs150 crore and above face a cost overrun of 12.5%, finds SBI study

Study cites delays in securing clearances, lack of supporting infrastructure, change in scope of projects and funding constraints among reasons why projects run into time and cost overruns

a staff writer
Updated27 Sep 2016
According to the SBI study, the total cost of implementation for the 1,076 projects was Rs12.7 trillion at the time they were commissioned.  Photo: Mint
According to the SBI study, the total cost of implementation for the 1,076 projects was Rs12.7 trillion at the time they were commissioned. Photo: Mint

Mumbai: A State Bank of India (SBI) study of 1,076 projects, worth at least Rs150 crore each, shows that they face a cost overrun of 12.5%. A third of the projects have been delayed and the time overrun was as high as 11 years in a coal project.

That, coupled with a low upgrade-to-downgrade ratio for corporate debt, has led to sluggish investment growth in the country.

According to the SBI study, the total cost of implementation for the 1,076 projects was Rs12.7 trillion at the time they were commissioned. Their anticipated completion cost has ballooned to around Rs14.3 trillion, a 12.5% increase over the original cost.

SBI is releasing this report in its third banking and economics conclave starting on Tuesday with the theme “Laying the foundations of India’s Growth”. India’s largest bank is also launching a research platform that will provide access to valued-added real-time data analytics and research reports pertaining to the economy and banking.

For larger infrastructure projects, the cost overrun is even more.

SBI also looked at 284 projects with initial costs of at least Rs1,000 crore. The original cost of these projects was Rs9.4 trillion, but subsequently it jumped to Rs10.9 trillion, an increase of 14.1%.

The biggest cost overruns have been reported for a heavy industry project (122.8%) and a pertrochemical complex (82.5%), the report said.

To be sure, costs have also jumped because many projects are facing delays. The study cites delays in securing clearances, lack of supporting infrastructure, change in the scope of projects and funding constraints among the reasons why projects run into time and cost overruns.

Almost one-third of the projects that were surveyed are delayed because of such reasons. For larger projects worth at least Rs1,000 crore, the ratio is higher at 49%. Out of 139 such delayed projects, three sectors—power (44), road, transport & highways (33) and railways (22)—accounted for the lion’s share, it said.

“The effects of some of the major steps taken by government like activation of some of the auction-allocated coal blocks and some other mines, road contracts awarded through EPC (engineering, procurement and construction) and hybrid annuity schemes, power transmission contracts, urban infrastructure projects, will start showing visible results over the next few months,” the report said.

These time and cost overruns coupled with the poor balance sheet health of many big firms has stymied investment demand. However, that might end soon.

“We expect that the credit ratio of upgrades to downgrades is likely to bottom out considering the last two years of rating actions differentiating men from the boys,” the report said.

“While the process may still be on, corporates with strong cash revenue cycle and healthy net worth are likely to weather adversities and ride the upside cycle in the time to come,” it added.

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