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Road building or rip-off?

By Prof. Amal S. Kumarage


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 Lankas 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 worlds 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 Lankas 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 noncompetitive 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.
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