Road sector revival: Projects being awarded at lower than reserve price

The Union road ministry had in January 2017 brought down the eligibility criteria required to bid for highway contracts; that is one reason for investors' interest in quoting below the reserve price

 

A slew of measures taken by the Union government have bolstered growth in the road sector, with nearly 80 per cent of the Engineering Procurement Construction (EPC) projects tendered last year being bagged by infrastructure developers quoting lower than the reserve price. These projects are expected to be completed within their timelines as the necessary clearances for the timely completion are already in place.

One of the reasons for investors’ interest in quoting below the reserve price was a lowering of the eligibility threshold to bid for such contracts.

The Union road transport and highways ministry had in January 2017 brought down the eligibility criteria required to bid for highway contracts. For instance, prior to January 2017, any company that wanted to bid for a Rs 10-billion contract, was required to have finished Rs 5 billion worth of work to be able to qualify for submission of bids.

After the ministry’s decision, any company that has finished contracts worth Rs 2.5 billion also qualifies to participate in the tender for Rs 10 billion contract.

“With this decision, various mid-sized and small-sized companies were eligible to participate in the tender, thereby widening the pool of investors for a single road contract,” a senior ministry official told Business Standard.

Earlier, large contractors bagged these contracts from the government at a premium and employed small-sized companies as sub-contractors for finishing the project.

“With the new system in place, the margins have declined for mid-sized contractors and they can bag these projects as primary contractors and execute the contract themselves,” an official said.

The new eligibility criteria came into effect from January last year and 80% of the contracts were sold since then at a price lower than reserve price.

"There is a merit in what the government is saying. With increased pace and volumes of construction, and significantly higher targets to achieve, work will inevitably get sub-contracted,” says Puneet Narang, partner, Major Projects Advisory, KPMG India.

He adds, the focus should be on three things – release encumbrance, free work front, and ensuring that EPC deploys skilled sub-contractors and trained workforce, besides strong project governance, planning and controls.

In 2017-18, NHAI awarded 150 road projects for 7,400 km and worth Rs 1,220 billion. In last five years, the average length of road projects awarded by NHAI has been 2,860 km, with 4,335 km being awarded last financial year.