Undercutting cloud over highway project bidding

Bigger players feel too many qualified bidders in the fray could queer the pitch.

The National Highways Authority of India (NHAI) may face a problem of plenty when the final bids come from private companies for the 60 projects it intends to kick off.

Companies involved in the bid process say that for every project, there are as many as 15 companies which passed the pre-qualification round, which is the first round of filtering done by NHAI. So, many players mean the bids are going to be quite aggressive — something the big established players are not comfortable about.

“Bids could be aggressive this time. Markets have still not cooled down. If there is competition, some people might go for higher grants. That can backfire,” says Parvez Umrigar, MD, Gammon Infrastructure.

In build-operate-transfer model projects, a company would assess the possible traffic in the sector, make technical and financial assessments on the viability of the project and bid on the numbers of years they would operate the road to make profits via toll collection.

In some of the bids in 2007 (there were no bids in 2008 and 2009), companies not only bid for the lowest possible concession period, but also offered a revenue share to the government from the toll collections. “It is not that such negative funding projects do not make money. They do make money when the traffic grows at a healthy rate. But, some of these projects might not make as much profits as they had hoped for earlier,” says an industry expert. Some insiders say many such bids were placed in 2007 and most of these projects have not reached financial closure.

Some of the bigger infrastructure companies might find it tough to win a project when the turf gets too competitive, as aggressive bids mean very low margins, a luxury big companies cannot afford. GMR, a major player in road projects, hopes bidders would be more realistic this time. GMR Chief Financial Officer Subba Rao says: “Everybody has learnt their lessons after the recession. Projects which were bid aggressively could not tie up funds. I think senseless bidding should come to an end,” he says. Some players say tighter qualification norms are necessary to prevent new entrants who are only interested in undercutting, as the penalty and banning of companies who fail to deliver have not yielded the desired results.

Others say smaller players may not find it easy to play the pricing game because of the tougher environment on tying up finance. “It could be a little tough for such bidders this time around. Banks have become alert and have started asking for information like the bid conditions of the L2 bidder (second lowest bidder) and why is there such a difference,” says Virendra Mhaiskar, CMD, IRB Infrastructure.

One encouraging sign is the entry of foreign companies in the fray. Sources say companies like Spain-based Abertis and Isolux, Italian company Atlantia, and Vinci of France have shown interest in the current round of bidding. Such foreign companies, experts say, will bid only for larger sized projects. Indian companies could have some advantage with their entry, as foreign companies tend to come with partnership with local companies.