Earnest money deposit provision in highways bidding process restored

The government has restored the earnest money deposit (EMD) provision in the bidding process for highway construction and consultancy contracts. It said that the effect of the Covid-19 pandemic on the highway sector has been neutralised.

The government’s decision also comes in the backdrop of a rising tendency of bidders to make abnormally low bids for construction and consultancy contracts.

“Since there is no EMD deposit, bidders are quoting abnormally low prices for the bid. And, after winning the bid, they start searching for a sub-contractor,” the ministry of road transport and highways said in a circular.

It added, “This tendency will have an adverse impact on the quality and timely completion of important highway projects.”

In November 2020, when the first wave had caused an acute financial crunch for the infrastructure sector, the government had removed the bid security rule. This was because it was affecting the ability of commercial entities to execute contracts timely. It was also having an adverse impact on competitive bidding.

The government had also reduced the performance security requirement from the normal 5-10 per cent of the contract’s value to 3 per cent, according to a circular by the finance ministry.

According to Rajeshwar Burla, group head at ICRA, the reintroduction of EMD is a step in the right direction. It should result in cooling off aggression in bidding.

“The average number of bidders increased in the past six quarters also due to the relaxations provided by National Highways Authority of India (NHAI) in technical qualification criteria and waiving EMD requirements. 

This has enabled many medium-sized contractors to bid for higher quantum of projects. It also paved the way for entry of new players in the road segment. Many of the players, who were earlier working as sub-contractors for tier-I & II principal contractors, have started bidding on a standalone basis,” Burla said.

In the recent past, the number of qualified bidders has remained at around 40 for some of the EPC (engineering, procurement and construction) projects.

The increased competition has resulted in discounted bids of as high as 30-35 per cent from NHAI’s estimated cost for EPC projects, he added.

Bidding discipline remains a key factor for road contractors from a credit perspective, failing which, profitability and working capital management could be adversely impacted. These issues could result in projects getting stalled midway, Burla said.