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

Upswing in investors' interest in engineering-procurement-construction projects

There has been an upswing in investors’ interest in engineering-procurement-construction (EPC) projects.

They have bagged 80 per cent of those tendered last year by quoting rates lower than the reserve price. 

These projects are expected to be completed in time because the clearances are in place. Investors are interested because the eligibility threshold to bid for such contracts has been lowered. The Union road transport and highways ministry had in January last year relaxed the eligibility criteria required to bid for them. 

For instance, before January 2017, a company that wanted to bid for a Rs 10-billion contract was required to have finished jobs worth Rs 5 billion.

Now a company that has finished jobs worth Rs 2.5 billion qualifies to participate.

“Mid- and small-sized companies are eligible to participate in the tender, thereby widening the pool of investors,” a senior ministry official told Business Standard.

Earlier, large contractors bagged these contracts at a premium and employed small-sized companies as sub-contractors to finish them.

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

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

He adds the focus should be on three things — easing pressure on incumbents, free work front, and ensuring that the projects deploy skilled sub-contractors and a trained workforce, besides strong project governance, planning and controls.

In 2017-18, the National Highways Authority of India (NHAI) awarded 150 road projects for 7,400 km and worth Rs 1,220 billion.

In the last five years, the average length of road projects awarded by the NHAI has been 2,860 km, with 4,335 km awarded in the last financial year.