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No more system failures

Adopting a turnkey approach in building public infrastructure will end corruption, writes Gajendra Haldea.

india Updated: Apr 28, 2011 21:11 IST

The scam season seems to be in full bloom. There have been scams in the past too, though not on the same scale. In the past, little effort was made to identify the systemic failures behind a scam. As a result, effective safeguards have not been introduced to eliminate the possibilities of recurrence. Good governance, then, is all about checks and balances that channelise behaviour in the right direction.

Take the example of the Delhi Commonwealth Games (CWG). According to press reports, not only were the projects of the Delhi government hugely delayed, their costs were also allegedly doubled from about R2,000 crore to R4,000 crore.

In contrast, redevelopment of the Delhi airport, with an investment of over R10,000 crore, was completed well before the Games. The construction of the Games Village, worth about R5,000 crore, was also finished on time albeit with some deficiencies in construction work. But the key outcome was that such huge construction projects were completed on time and without cost over-runs while several smaller projects were barely completed just before the Games opened, and at much higher costs.

Nothing seems to have been written about the basic reason for this stark difference in outcomes. All projects other than the Delhi Airport and the Games Village were undertaken through an outdated mode of contracting that has potential for delays, cost over-runs and corruption. In a conventional PWD-style contract, bids are invited on the basis of the unit rates payable in respect of each item of work. The government engineer measures each item and pays for the work done. He is free to allow additional quantities and new items. Delays on this account are borne by the government through compensation for inflation. This is like an open contract which offers many opportunities for corruption. The engineer and the contractor have little incentive to complete the work on time and within the estimated costs. The result of this approach was evident in all the Games-related projects handled by the PWD, etc.

On the other hand, the Delhi airport was constructed through the public private partnership (PPP) mode, which allocates all the construction risks to the concessionaire. Since the concessionaire can collect the user charges from the new facility, he pushes even harder for early completion. For the Games Village, the contractor was given a turnkey contract, which also required him to bear the burden of time and cost over-runs. As a result, this project was also completed on time and at no extra cost to the government — unlike the PWD projects related to the Games.

The message is simple: allocate the construction risks to the contractor and let him have an incentive for timely completion. It would change the entire scenario. All that needs to be done is substitution of the item rate contracts by turnkey contracts. If this is done, the construction of highways, flyovers, bridges, dams, etc. won’t suffer from time and cost over-runs. The potential for corruption would be minimised too.

The advantage of a turnkey contract is that the government engineer would lose his day-to-day control over the project. The engineer and the contractor not be able to collude to increase the project costs at government expense. This would affect the contractor-engineer-politician nexus, known for its pursuit of rent extraction. As a result, while the developed countries as well as the private sector across the world have moved towards the turnkey approach, all the engineering departments in India seem opposed to this reform.

This is an issue related to good governance. Hopefully, the shame and embarrassment that India faced before the world during the run-up to the CWG will lead to some systemic reforms. The money thus saved can help build more projects that would accelerate growth.

( Gajendra Haldea is advisor, Planning Commission )

The views expressed by the author are personal