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Tuesday, June 25, 2024

Highly Inflated Cost of Chinese Road Building in Sri Lanka: A Rip-off

Why highway constructions are a costly exercise in Sri Lanka


The choice of rapid road building as a catalyst to economic development, particularly post-war, is a judicious and timely strategy that must be commended.

When properly planned, highways should deliver benefits much greater than the cost of construction, thus contributing towards economic growth. However, higher construction costs and poor planning lead to inadequate benefits that will make such roads a buden to the economy.

It is found that the cost of constructing a kilometre of expressway has increased two to three fold over a period of five to six years. This is far higher than the rate of inflation for road construction. The cost of constructing roads in 2005 appears to match global norms while, in most instances, the current costs for foreign funded projects are also comparable with global rates. Thus, not all roads projects can be considered as being over-priced.

An exception is where contracts are awarded without competitive bidding. In this case, it has been mathematically proven that contract costs are higher by 55 per cent. The award of contracts without competitive bidding reached a peak in 2014 with projects reportedly worth Rs. 333 billion awarded over the last 12 months alone. In these projects, costs are higher by around 135 per cent. The losses arising from them alone are estimated at Rs. 200.5 billion.

Notably, all these projects have been funded with Chinese sources and awarded to Chinese contractors. This approach is spreading, with contracts worth Rs. 110 billion funded with borrowings from local banks also being awarded on the same basis this year to local contractors.
This article is written to provide professional insight to the continuing debate on the costs and benefits of highway development in Sri Lanka. I have decided to share, to the best of the information available to me, the results of a rigorous analysis of road construction costs in recent years.
Roads are irrefutably important for development. Modern economies are built on reliable and fast connections between ports, airports, cities and different industries. Convenient personal transport is an important feature of social contentment. Sri Lanka has followed many other countries in prioritising road development as a foundation for economic prosperity.

However, road development is a double-edged sword. Just as correct roads connecting the right places spur economic and social dividends, poorly planned, designed and constructed roads, or ones that cost hugely more, become a financial burden — requiring loan repayment and upkeep over many years for infrastructure with little or no direct benefit to the country or its people.

From the reported cost of Sri Lanka’s expressway programme to date, it is clear that the per km cost of the expressway programme has steeply increased from US$ 7 million a kilometre for the Southern Expressway financed by Japan and the Asian Development Bank (ADB) to US$ 72 million a km for a section of the Outer Circular Highway recently awarded to the Metallurgical Corporation of China.

Many have compared this and erroneously concluded it to be a 10-fold increase in cost. With the section from Matara to Beliatta and Stage 1 of the Northern Expressway awarded most recently, the total investment would reach US$ 4,328 million, possibly the largest investments in the world for road construction for a country having a similar economy.

The comparison of per km cost can be misleading and should be done carefully. No two roads or the conditions where and when those roads are built will be identical. The World Bank commissioned a study of over 430 road projects from 65 developing countries including Sri Lanka. A more recent study by the University of Oxford using costs from 3,000 road construction projects in 99 developing countries has also been concluded.
Both studies found that construction costs vary with the terrain, soil and climatic conditions, design standards, construction type, type and number of structures, labour and material costs, land costs etc. According to the calculations arrived at in these two studies, even the ‘high’ averages of global expressway construction costs are significantly lower than the costs in Sri Lanka.

Construction costs can sometime become ‘high’ as they are heavily influenced by the frequency and type of interchanges and other structures, especially tunnelling. Even after allowing for such variations, and for inflation in material and fuel costs, the Katunayake Expressway at US$ 15 million per km; the Outer Circular Highway (OCH) at US$ 19-72 million per km (based on RDA estimate of Rs. 86.6 billion for OCH Phase 3); and the proposed Northern Expressway at US$ 19 million appear to be two to three times higher when compared with the construction cost of a four-lane expressway obtained in a range of developing countries which at current global prices should be between US$ 7-10 million per km.
More alarming is the difference of six to seven times between the recently concluded Galle-Matara section and the recently awarded extension to Beliatta at a cost of US$ 26 million per km!

The inflation of cost for expressway construction measured for the United States over the last 10 years has been 10 per cent. In Australia, the index adjusted to USD is around 20 per cent while in most European Union countries the construction index rose by just two to three per cent. In India, the index between 2007 and 2014, when adjusted for exchange rate variations, was found to be nearly constant.

The road construction cost index published by ICTAD in Sri Lanka rose from 240 points in the year 2004 to double that in 2013. But when adjusted for the foreign exchange variation, the cost increase in USD reduces to just above 50 per cent.

Hence, the most reasonable estimate for non-urban expressway construction in Sri Lanka should average around US$ 7-10 million a km, and at most up to US$ 15 million for difficult soil conditions, frequent structures and interchanges. There is also evidence that expressway construction in urban areas costs around four to five times more than in rural areas, while mountainous terrains, tunnelling and bridges also shoot up the costs for individual projects.

Thus, claims that all expressways in Sri Lanka cost five to 10 times more are very difficult to substantiate. However, they are significantly higher than what they should be. Such an escalation in construction cost cannot be explained by price inflation or design alone.

However, the expressway construction contracts awarded over the last 12 months in Sri Lanka ranging from US$ 19 to 72 million per km appear to be in a cost class of their own, raising questions about the economic viability of new expressway projects in the country.

A comparison with some other Asian countries shows that India has one of the lowest expressway construction costs in the world. However, our own costs for 2013 to 2014 projects are double that of Vietnam, quadruple that of Pakistan and are generally five to ten times more expensive than India.

In India, land acquisition costs and construction material as well as labour are less expensive and this can be partly the reason. There should, however, be other reasons to account for this difference.Short sections of urban expressways where tunnelling and other complex structures are required can cost several hundred million USD per km. Japanese expressways cost over US$ 200 million per km on account of very special conditions in that country (mountainous terrain, high seismic activity and exorbitant land acquisition costs).

The section of the Outer Circular Highway between Kadawatha and Kerawelapitiya at US$ 72 million per km comes close to being the world’s costliest suburban expressway, outside of Japan, known to the author.

Good planning takes time. The hurry demonstrated by the Government and the RDA for initiating and awarding the most recent contracts appears to have been a costly mistake. These feasibility studies and public discussions have remained known to only a few selected people and senior officers of the RDA are still unable to even provide basic details of these recent projects.

The exclusion of national transport and highway experts in the planning process of this multi-billion rupee investment must surely be for a reason. In previous expressways, the feasibility studies were done by both foreign consultants and local institutions such as the University of Moratuwa. These checks and balances are essential and a possible reason why earlier expressway were constructed at globally comparable costs. Poor scheduling of projects by starting many road construction projects simultaneously can increase resource costs created by short term shortages.

The most alarming reason for high cost is the possibility of corruption. Both the World Bank and University of Oxford studies, referred to earlier, found that corruption levels in a country as measured by the Transparency International Index and the World Governance Indicators increased road construction costs.

It concluded that countries with corruption levels above average have about 12% higher for bank funded projects costs and that corruption and collusive practices were even higher for projects undertaken directly by governments without the need to comply with international procurement procedures.

Apart from expenditure on the expressway programme, Sri Lanka’s road network has seen rapid expansion and improvement at national, provincial and even rural levels. However, travel speeds have not improved due to increasing vehicle imports. Deteriorating public transport and road safety still remain a critical issue.

Nevertheless, this development holds great potential for integrating production and consumption areas through transport nodes such as the ports and airports. These are vital for sustainable economic development. However, the expenditure on road rehabilitation, too, is being questioned in recent times.

Given that the investment on road reconstruction was well below par for several decades, the high expenditure is justified if these roads will result in the envisaged benefits. But if we have indeed spent more than is warranted on a road, it becomes that much more difficult to make it economically viable. A multiplicity of such roads can bankrupt an economy.

A detailed analysis was done of 22 national road development programmes awarded by RDA from 2011 to date — worth a total of Rs. 406 billion — financed with external and internal borrowings from a host of agencies. The majority of funding has been for road rehabilitation and improvement. These include a variety of roads ranging from two-lane national roads in mostly rural flat terrain (costing US$ 0.5 million per km) to multi-lane roads in urban areas (over US$ 2 million per km).

A comparison of two-lane projects in similar flat terrain carrying low to moderate

traffic shows that the four projects funded by China Development Bank (CDB) range

from 20 per cent to 80 per cent higher than comparative projects funded by the ADB.

Moreover, there is a further sharp increase in costs especially for the CDB projects

commencing in 2014 when compared with those that commenced in 2011.

Non-adherence to established engineering costing and procurement processes can also contribute to higher costs. An even more detailed and rigorous analysis was performed on another 93 individual road projects awarded between 2005 and 2010, again using borrowings. This showed that the best estimate of the cost of rehabilitating a two-lane national road in 2005 was Rs. 47.5 million per km. This compares well with the international average of US$ 0.2 to 0.7 million per km for varying degrees of road widening.

This has increased to Rs. 72 million in 2010, which matches the recorded changes in the ICTAD road construction index over the same period. Project costs were tested statistically against different funding agencies and the only variation that was established was for the eight projects financed by China and awarded without competitive bidding to five selected Chinese contractors for an amount of Rs. 63 billion rupees. In this case, the cost per km was found to be an outlier at 55 percent above the rate of all other projects funded by all other agencies. These were also the only projects that did not have competitive bidding.

A trend is observed of preferring road construction projects to be awarded on non-competitive bids. From available information, all expressway contracts awarded over the last couple of years as well as a number of road reconstruction projects were awarded without competitive bids or tenders.

Based on mathematical inference, there is clear forensic evidence that such projects were 55 per cent costlier than those that were bid competitively in 2011. However, the same statistical testing shows that this increases to an average of 135 per cent by 2014.

For example, the Kadawatha-Kerawalapitya section is estimated to be over priced by at least 68 per cent, while the Northern Highway which was launched last month appears to be over priced by 126 per cent. The extension of the Southern Highway from Matara to Beliatta, however, appears to be in a class of its own. It is overpriced by an astounding 545 per cent.

The common denominator of all these projects is that they were funded with Chinese borrowings and contracts have all been awarded in 2014 without calling for competitive bids. The loss arising from these four projects alone is estimated at Rs. 200 billion.

It is recommended that there is a return forthwith to competitive bidding which is the regular process adopted in all societies and governments valuing transparency in business dealings. It is suggested that proper feasibility studies are conducted using both local and foreign experts and institutions. Private funding must be sought at least in part for road projects that have revenue potential. Finally, an integrated master plan must be developed to ensure that benefits from these roads reach the masses.

While we all like to travel on new roads, we need to remember that there is a cost for using them. But Investment in roads does not always lead to prosperity. It can even lead to a downward spiral of economic potential if the benefits required to pay off the loans are not forthcoming.

(Prof Kumarage is a Chartered Civil Engineer and Senior Professor in the Department of Transport & Logistics Management at the University of Moratuwa. He is also the former Chairman, National Transport Commission and the current International Vice President of the global body of the Chartered Institute of Logistics & Transport.

[Original caption: Road Building or Rip-off? ]

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