Rise in the prices of building materials like cement and steel has taken a toll on the highway developers too. According to estimates, for executing various projects in the last two and a half years has seen them taking a hit of Rs 12,000 crore as prices of materials like bitumen, cement, steel and fuel sky rocketed. The total value of the projects executed by these companies in the last two and a half years is estimated at Rs 40,000 crore.

According to the estimates of the National Highways Builders Federation (NHBF) a grouping of leading highway construction companies in India, the increase in the prices of key material has been as much as 100%, leading an overall cost escalation of 35 to 40%.

A delegation from the NHBF on Tuesday met Prime minister Manmohan Singh and apprised him of the situation and said if the government did not intervene, they would be forced to abandon construction of the national highways infrastructure. The raw materials required for construction of roads constitute 35 to 40% of the construction cost.

?Any construction company cannot absorb this increase in cost, whether they are big or small carrying out a big or a small project. More so, the rise in cost has also led many of the banks to stop lending or giving credit to the contractor as the project that they are lending for has become unviable. This will cause the contracting company to stop construction of the project,? Mukesh Ralhan, CGM of Nagarjuna Construction Company told Fe.

The price of a bag of cement for instance was Rs 163 in January 2006, which has risen to Rs 209 in January 2007 and hit Rs 231 in January 2008. The price of a bag of cement in April 2008 was Rs 265.

Similarly, for bitumen, the basic price in the Vishakhapattanam and Chennai refinery in January 2006 was Rs 13,260, which rose to Rs 18,240 in January 2007 and Rs 24,700 in January 2008. The basic price in the Vishakhapattanam and Chennai refinery in April 2008 was Rs 25,140.

?The prevailing escalation clauses provided in many contracts are not sufficient to accommodate the extraordinary variations in the prices causing the construction companies to absorb the extra costs which is much higher than even the margins. Earlier the rise in prices was around 5 to 6%, which could be absorbed but now with prices doubling or rising a minimum 60% absorbing the cost is not possible,? Narayana Raju Alluri, managing director, NCC Urban.

The present formula for providing for escalation of costs is on the basis of the wholesale price index (WPI) of the respective raw materials. This is not in tandem with market prices of the raw materials causing the road developers to lose money incurred.

Builders are proposing a new methodology to determine the compensation for price escalation. According to them, a separate index should be made as the construction materials are not represented properly in the WPI. ?The CPWD has already stopped following the WPI and has its own internal index for the raw materials,? MH Desai, head, roads and runways, Larsen & Toubro. The World Bank’s method has a good solution. They take the prices 28 days before the biding and after the project is finished they reimburse the developer the difference in costs.

Another issue that had the NHBF up in arms related to the new policy of the government to restrict the bidders for road projects to the top five construction companies by experience.

According to the policy, the tenders will define some technical and financial criteria for the bidders to meet. Around 30 bidders should qualify for this but after this, the government will prepare a shortlist of five bidders depending on experience. Over the next six months 23 projects worth Rs 40,000 crore are expected to be awarded by the five companies. ?This idea is against competition which makes sure that the bids received are the best possible and the project is completed in time. This will not allow smaller bidders with the ability to complete the project a chance. The five bidders will remain the same throughout. No stakeholder was consulted when preparing this policy and we have submitted our reservations about this policy and are lobbying against it. One hopes the government sees our point, VC Verma, ED, Oriental Structural Engineers said.