Cost and Time Overruns in Public Sector Projects

Delays and cost overruns in public sector investments can raise the capital-output ratio in the sector and elsewhere, bringing down the efficacy of investments. Yet there are no estimates of the delays and cost overruns, and of their opportunity cost. This study arrives at rough estimates of the del...

Full description

Saved in:
Bibliographic Details
Published in:Economic and political weekly 1990-11, Vol.25 (47), p.M154-M168
Main Author: Sebastian Morris
Format: Article
Language:English
Subjects:
Average total cost
Capital costs
Coal
Corporations
Cost estimates
Economic costs
Historical cost
Internal rate of return
Public sector
Public sector industries
Review of Industry and Management, November 1990
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Delays and cost overruns in public sector investments can raise the capital-output ratio in the sector and elsewhere, bringing down the efficacy of investments. Yet there are no estimates of the delays and cost overruns, and of their opportunity cost. This study arrives at rough estimates of the delays and cost overruns, and the opportunity cost in terms of the extra 'capital X time' that is used up. Cost overruns (at 80 per cent) and the extra 'capital X time' incurred (about 190 per cent) are very large; even after removing the increase due to inflation. The reasons for this are also identified and rated. Factors internal to the public sector system and government largely account for the delays and cost overruns: Poor project design and implementation, inadequate funding of projects, bureaucratic indecision, and the lack of co-ordination between enterprises. Appraisal by the government very often is devoid of meaning when the emphasis is only on the form of the project proposal rather than on its content. Since public enterprises particularly those in the core sector have large dealings with each other, a 'vicious circle of delays' has been built up. The politically expedient tendency to take up large numbers of projects and short fund them all, except those with the very highest priority, is perhaps the most important factor in delays. The government's ad hoc approach in according high priority to certain sectors-oil and natural gas, and petroleum-while perhaps overcoming the problem in these sectors have compounded the problem elsewhere, particularly in the infra-structural areas-railways, coal and steel.
ISSN:0012-9976
2349-8846