No further financial relaxation for highway companies after March 22

MoRTH feels effect of pandemic has been neutralised and as industry has not asked for any further relief, these relaxations can now be rolled back as fiscal ends

The Centre is unlikely to extend any of the Covid-19 relief measures given earlier to the infrastructure sector for highway projects, after the end of this month. The Ministry of Road, Transport and Highways (MoRTH) is of the view that the effect of the pandemic has been neutralised and as the industry has not asked for any further relief, these relaxations can now be rolled back as the fiscal ends.  

Many of these provisions which were offered during the last two years of the pandemic, conclude on March 31. These provisions were put in place to tackle the liquidity crunch in the sector with infrastructure companies expressing inability to execute projects.

In January, MoRTH had extended the reduction of performance security till March 2022. The amount was reduced to 3 per cent of the contract value from 5-10 per cent earlier. Performance security is obtained from the successful bidder of a highway project in order to ensure due performance of the contract.

Additionally, it had also resumed waivers on some penalties on account of delays, and compensation for reduced toll collections in tolling contracts. Senior MoRTH officials said that no proposal to extend these measures has been made.

The ministry in February, began normalising the financial relaxations provided to the sector by reinstating the Earnest Money Deposit (EMD) norm.

“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 had said in a circular, adding that this could lead to stalling and delays in crucial projects. It also said that the effect of the pandemic on the sector has been neutralised.

Earnest Money Deposit is a refundable amount submitted by bidders for the tender, to ensure that only serious players are participating and there are no dummy bids.

A senior official said that so far, no representations from the industry have been made for an extension in these relaxations either.

As per sector experts, these relaxations were helpful only till the time there was an issue with financing and credit availability in the aftermath of COVID-19. With financing being relatively easier now, mid-sized players are aggressively bidding for projects, with newer players also entering the fray.

As per Rajeshwar Burla, group head at ICRA, the increased competition has led to discounted bids of as high as 30-35 per cent from National Highways Authority of India’s (NHAI) estimated cost of engineering, procurement, and construction (EPC) projects.

“The return to normal will bode well for the long-term health of the sector. It will ensure that only appropriate and qualified players who have skin in the game are participating,” said Jagannarayan Padmanabhan, director of transport and logistics at CRISIL.

This move however comes at a time when crude is touching record high prices which could have a domino effect on commodity prices especially metals, cement etc. Sector experts said high input cost could squeeze the margins for the road EPC developers. Raw material prices have been surging since the middle of 2021 and there could be a further ripple effect on road construction cost due to the Russia-Ukraine war and high crude price.

Crisil Ratings in December 2021 had said while revenue of EPC companies will grow, operating margins will moderate to 14 from more than 15 per cent earlier, “primarily because of a sharp increase in prices of inputs such as bitumen, steel, cement and fuel.”

Analysts are of the view that these cost pressures would impact government spending on both future projects and already awarded ones. While cost pressures on contractors and developers are high, these can be passed on to the government as it pays them annuities linked to the Wholesale Price Index (WPI) and Consumer Price Index (CPI), a Mumbai-based sector expert said.