Total Fixed Capital Expenses
Quite often the total fixed capital expenses are taken as the sum aggregate of costs of purchased assets and the costs of erecting them. Sound economic fundamentals demand that each element of investment must be accounted for against the project in consideration. Therefore, it is important to note that the cost of the project entails some more elements than what appears at the face value. We now discuss these elements, in brief.
Basic Equipment Cost
Basic equipment cost is the purchase cost of hardware based on data either from previously executed project cost or fresh budgetary quotations with necessary adjustments, wherever necessary, in order to retain the estimate on realistic footings. Budgetary quotes have been found normally padded to the extent of 20%. Sometimes it is possible to prune these costs during negotiations. This constitutes the basic cost of main equipment only with no strings like spares or duties and taxes or freight whatsoever attached to it.As far as this element of cost is concerned, utilities have huge data and information. The need is to organise it and put it in the form of a database to be handy.
Duties, Taxes and Freight
These comprise
− Excise duty: This is statutory on all indigenous procurement and is normally included by the supplier while giving the budgetary quotation.Nevertheless, it should be ensured through clarifications, if not clearly spelt out in the reference being used. The present applicable rate is @ 16% with 2% education cess aggregating to 16.32%.
− Customs duty: This is statutory and applicable in case of imported procurements. The rates for a particular item are available in the customs manual. Nevertheless, a blanket rate of 10% is applicable, considering the entire imports under “project import” category, if the import value is over Rs. 5.0 crores. For less than Rs. 5.0 crores, the applicable rate is 15% - the peak rate of duty applicable as on date. On top of it, imported supplies are to be applied with countervailing duty (CVD), which is the equalizing counterpart of excise duty on indigenous procurements to provide a levelplaying field for indigenous manufacturers. Budget of 2005-2006 has imposed 2% education cess on customs duty. Thus if the applicable customs duties are 10% and 15%, the aggregated rate of import duty swells to 28.511% and 34.443%, respectively.
The infrastructure projects qualify for further concessional rate of customs duty @ 5%. Once we think of gas insulated switchgear and other automation features, the import components need to be included in the schemes.
−Sales tax: In case of projects, normally the Central Sales Tax (CST) @ 4% is included. If the estimator is very sure about the source of procurement, then State Sales Tax /VAT can be applied, but generally the origin of goods to be procured is clear only after tendering and thus at the time of estimate, only CST is applied.
Freight and Transit Insurance
The freight element based on actual freight rates of truck associations or railway freight as per the case should be applied. But the weight of the goods to be procured (which normally is the underlying consideration in freight rates of transporters) is generally not available till the time of estimate.For estimation purpose, an average rate of 1.5% to 2.0% of the value of the goods can be used, if realistic rates are not available.
Civil Engineering Works
Civil costs can be computed based on preliminary sketches or drawings. In case of standard equipment installation, these can be based on historical data available with the Utility. The rate of local construction material available in the area of project and published rate of basic materials like cement and steel as prevailing in the market may be used for this purpose. Normally, the following types of construction are envisaged:
i)The equipment foundations; and
ii) Buildings
The foundation costs should be estimated in terms of composite volume of RCC whereas the buildings costs, if any, can be estimated in terms of plinth area in sq.m. Building costs can also be estimated in terms of composite RCC which entails ingredients like PCC, earthwork, shuttering and finishing in standard proportions. The crux of the matter is that the project department must have some mechanism of estimating the civil engineering costs.Thereafter, the work is simply reduced to applying the average rate for Rs. of RCC/cu m and Rs./sq m for the foundations and buildings, respectively.These rates are subject to variation in a band of ± 10% depending on the area.Also, a correction must be applied to account for general inflation in order to update the rates from time to time.In addition, there may be incidence of land acquisition, levelling of the same,construction of roads, boundary walls, paved area, etc., which have to be estimated and accounted for in the civil engineering costs. Thus, the components of total civil engineering costs can be listed as follows which may or may not be applicable in all the cases (Box ).
Box : Total Civil Engineering Costs
1. Land costs
2. Compensation towards rehabilitation and resettlements.
3. Levelling costs including provision of storm water drainage.
4. Boundary walls, fencing, watch towers, gates, etc.
5. Paved area / boulder soling, etc.
6. Approach roads / internal roads, etc.
7. Equipment foundations.
8. Building (Civil).
9. Structural buildings.
10. Dismantling / relocation costs, if any.
11. Environment / ecology related expenses like plantations,etc.
It is not possible to deliberate in detail on all these aspects here. However, the idea is to make you aware of the entire gamut of civil engineering works that may be encountered in different kind of projects, whether ongoing or being planned for future.
Finally, if any of the above information is not available, it is advisable to keep provisions for civil engineering costs on some notional basis. However, a realistic estimate on the lines the discussion so far would always be better.
Erection
This includes
• the cost towards storage,
• handling of material at site,
• installation of plant and equipment, and
• testing and commissioning of these items.
The major component is labour cost whereas consumables like welding rods,etc. are involved in minor proportions. The erection insurance, etc. may also be included when bigger projects are to be dealt with.
Engineering, Project Management, Supervision, etc.
Normally, this head is lost sight of in the existing practice of estimate preparation. Even if the design and drawings/surveying works are being carried out departmentally, the business model calls for booking them on some notional basis in the project expenses head. The costs towards hiring of professional consultants, purchasing/hiring of construction plant and equipment like earthmoving equipment, etc., are also included here. In addition, the costs towards enabling work like bringing construction power, setting-up of stores or guest houses, etc., are also to be accounted for here.
The costs of initial fill of oil wherever it is to be done by the promoters are also accounted here. Also, the attendant tax provisions now applicable to every service @ 10.2% of value of such services and a pass through to the promoter should also be accounted for while undertaking the cost estimation exercise. The project supervision charges either by consultants or the promoter’s own personnel should be accounted for under this project head.This head also includes the costs towards establishment expenses including salary and wages of project personnel, travelling, postage, telephone expenses etc. during the execution period. In case, estimating cost of individual items as mentioned above is not possible, a notional provision to the tune of 7-8% as erected cost must be provided towards this head. In future,for big green field projects, this provision must undergo an upward revision to the range of 10-12%.
Contingency
This is the buffer built-up in the estimate to account for any unforeseen aspects of the estimate either for want of firm and binding quotations at the time of estimate or which may arise during real execution of the project or detailing in the form of increased volume of work. Normally, 5% of all the above costs should be kept in the DPR.
Interest During Construction (IDC)
This is a major cost head, second only to basic equipment cost. This was so far not very prominent in power project cost estimates at Utilities as the finances were provided by the Government. With debt financing in electricity sector a reality and financial institutions becoming major financers, this element will now become prominent contributor to the project cost. The first and foremost step while calculating the IDC is to know the financing pattern. FI Loans The last applicable pattern for financing the power distribution schemes is given in Table.
Quite often the total fixed capital expenses are taken as the sum aggregate of costs of purchased assets and the costs of erecting them. Sound economic fundamentals demand that each element of investment must be accounted for against the project in consideration. Therefore, it is important to note that the cost of the project entails some more elements than what appears at the face value. We now discuss these elements, in brief.
Basic Equipment Cost
Basic equipment cost is the purchase cost of hardware based on data either from previously executed project cost or fresh budgetary quotations with necessary adjustments, wherever necessary, in order to retain the estimate on realistic footings. Budgetary quotes have been found normally padded to the extent of 20%. Sometimes it is possible to prune these costs during negotiations. This constitutes the basic cost of main equipment only with no strings like spares or duties and taxes or freight whatsoever attached to it.As far as this element of cost is concerned, utilities have huge data and information. The need is to organise it and put it in the form of a database to be handy.
Duties, Taxes and Freight
These comprise
− Excise duty: This is statutory on all indigenous procurement and is normally included by the supplier while giving the budgetary quotation.Nevertheless, it should be ensured through clarifications, if not clearly spelt out in the reference being used. The present applicable rate is @ 16% with 2% education cess aggregating to 16.32%.
− Customs duty: This is statutory and applicable in case of imported procurements. The rates for a particular item are available in the customs manual. Nevertheless, a blanket rate of 10% is applicable, considering the entire imports under “project import” category, if the import value is over Rs. 5.0 crores. For less than Rs. 5.0 crores, the applicable rate is 15% - the peak rate of duty applicable as on date. On top of it, imported supplies are to be applied with countervailing duty (CVD), which is the equalizing counterpart of excise duty on indigenous procurements to provide a levelplaying field for indigenous manufacturers. Budget of 2005-2006 has imposed 2% education cess on customs duty. Thus if the applicable customs duties are 10% and 15%, the aggregated rate of import duty swells to 28.511% and 34.443%, respectively.
The infrastructure projects qualify for further concessional rate of customs duty @ 5%. Once we think of gas insulated switchgear and other automation features, the import components need to be included in the schemes.
−Sales tax: In case of projects, normally the Central Sales Tax (CST) @ 4% is included. If the estimator is very sure about the source of procurement, then State Sales Tax /VAT can be applied, but generally the origin of goods to be procured is clear only after tendering and thus at the time of estimate, only CST is applied.
Freight and Transit Insurance
The freight element based on actual freight rates of truck associations or railway freight as per the case should be applied. But the weight of the goods to be procured (which normally is the underlying consideration in freight rates of transporters) is generally not available till the time of estimate.For estimation purpose, an average rate of 1.5% to 2.0% of the value of the goods can be used, if realistic rates are not available.
Civil Engineering Works
Civil costs can be computed based on preliminary sketches or drawings. In case of standard equipment installation, these can be based on historical data available with the Utility. The rate of local construction material available in the area of project and published rate of basic materials like cement and steel as prevailing in the market may be used for this purpose. Normally, the following types of construction are envisaged:
i)The equipment foundations; and
ii) Buildings
The foundation costs should be estimated in terms of composite volume of RCC whereas the buildings costs, if any, can be estimated in terms of plinth area in sq.m. Building costs can also be estimated in terms of composite RCC which entails ingredients like PCC, earthwork, shuttering and finishing in standard proportions. The crux of the matter is that the project department must have some mechanism of estimating the civil engineering costs.Thereafter, the work is simply reduced to applying the average rate for Rs. of RCC/cu m and Rs./sq m for the foundations and buildings, respectively.These rates are subject to variation in a band of ± 10% depending on the area.Also, a correction must be applied to account for general inflation in order to update the rates from time to time.In addition, there may be incidence of land acquisition, levelling of the same,construction of roads, boundary walls, paved area, etc., which have to be estimated and accounted for in the civil engineering costs. Thus, the components of total civil engineering costs can be listed as follows which may or may not be applicable in all the cases (Box ).
Box : Total Civil Engineering Costs
1. Land costs
2. Compensation towards rehabilitation and resettlements.
3. Levelling costs including provision of storm water drainage.
4. Boundary walls, fencing, watch towers, gates, etc.
5. Paved area / boulder soling, etc.
6. Approach roads / internal roads, etc.
7. Equipment foundations.
8. Building (Civil).
9. Structural buildings.
10. Dismantling / relocation costs, if any.
11. Environment / ecology related expenses like plantations,etc.
It is not possible to deliberate in detail on all these aspects here. However, the idea is to make you aware of the entire gamut of civil engineering works that may be encountered in different kind of projects, whether ongoing or being planned for future.
Finally, if any of the above information is not available, it is advisable to keep provisions for civil engineering costs on some notional basis. However, a realistic estimate on the lines the discussion so far would always be better.
Erection
This includes
• the cost towards storage,
• handling of material at site,
• installation of plant and equipment, and
• testing and commissioning of these items.
The major component is labour cost whereas consumables like welding rods,etc. are involved in minor proportions. The erection insurance, etc. may also be included when bigger projects are to be dealt with.
Engineering, Project Management, Supervision, etc.
Normally, this head is lost sight of in the existing practice of estimate preparation. Even if the design and drawings/surveying works are being carried out departmentally, the business model calls for booking them on some notional basis in the project expenses head. The costs towards hiring of professional consultants, purchasing/hiring of construction plant and equipment like earthmoving equipment, etc., are also included here. In addition, the costs towards enabling work like bringing construction power, setting-up of stores or guest houses, etc., are also to be accounted for here.
The costs of initial fill of oil wherever it is to be done by the promoters are also accounted here. Also, the attendant tax provisions now applicable to every service @ 10.2% of value of such services and a pass through to the promoter should also be accounted for while undertaking the cost estimation exercise. The project supervision charges either by consultants or the promoter’s own personnel should be accounted for under this project head.This head also includes the costs towards establishment expenses including salary and wages of project personnel, travelling, postage, telephone expenses etc. during the execution period. In case, estimating cost of individual items as mentioned above is not possible, a notional provision to the tune of 7-8% as erected cost must be provided towards this head. In future,for big green field projects, this provision must undergo an upward revision to the range of 10-12%.
Contingency
This is the buffer built-up in the estimate to account for any unforeseen aspects of the estimate either for want of firm and binding quotations at the time of estimate or which may arise during real execution of the project or detailing in the form of increased volume of work. Normally, 5% of all the above costs should be kept in the DPR.
Interest During Construction (IDC)
This is a major cost head, second only to basic equipment cost. This was so far not very prominent in power project cost estimates at Utilities as the finances were provided by the Government. With debt financing in electricity sector a reality and financial institutions becoming major financers, this element will now become prominent contributor to the project cost. The first and foremost step while calculating the IDC is to know the financing pattern. FI Loans The last applicable pattern for financing the power distribution schemes is given in Table.
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| Financing Patter Last Applicable |
It is the loan component of the project finance that attracts interest during construction. It is capitalized and fused with capital investment and treated as part and parcel of capital investment for any subsequent use.Another step is to know the phasing of capital expenditure, i.e., the withdrawal pattern of funds. This aspect becomes significantly important when the implementation schedule spills beyond one year. The phasing pattern follows normally the typical parabolic distribution. The fund deployment starts with equity/grant and loan is resorted to only when the former exhausts. This is a general convention and there could be other patterns of withdrawal of funds. A The cycle shown in Fig. is repeated till the last time period of construction schedule. Then the entire interest accrued in previous years is summed-up as total IDC and added to the project cost like any other component costs discussed in previous paragraphs.
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| Representation of IDC Calculations |
Once these project cost components are finalized, apportioning the cost while implementing the project would depend upon whether the Utility decides to go ahead with unit rate contracts or turnkey contracts. This would be different for internal cost estimates for tendering purposes. The present cost estimates and payback period calculations are for the purpose of getting the finance for the schemes conceived under DPR. The sum total of all the components discussed so far constitute the “Total Fixed Investment” and is used for calculation of payback period.
The discussion up to this point is summarized in the pi-chart shown below giving an account of all the ingredients of fixed capital investment (Fig.). typical sequential representation of IDC calculation is given in Fig.
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| Summary of Project Costs and Finances |
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