Waiver of earnest money deposit relief for mid-sized highway players: Icra

Central road implementation agencies seek 1% of contract value as bid bond guarantees

Waiver of earnest money deposit for highway projects in EPC mode comes as a relief for mid-sized highway players, ratings agency Icra said on Thursday.

In place of bid security, the bidders are now required to sign a bid securing declaration accepting that if they withdraw or modify the bids during the period of validity or if they fail to submit a performance security for the awarded contract before the deadline, they will be suspended from participation in the tendering process for a year.

The Ministry of Road Transportation and Highways' (MoRTH) decision that all nodal agencies for national highway project implementation -- NHAI, MoRTH and National Highways and Infrastructure Development Corporation (NHIDCL) -- will no longer be required to seek bid bond guarantees (earnest money deposit/bid security) for engineering, procurement and construction (EPC) projects is a welcome step, it said.

"This waiver comes as a relief for mid-sized contractors especially at a juncture when the players are struggling to get enhancements in non-fund based limits," Icra said in a statement.

Central road implementation agencies seek 1 per cent of contract value as bid bond guarantees and the same is higher for other central government agencies at 2.5 per cent.

Depending on the bid success ratio (which typically ranges between 10-30 per cent), the value of contracts bid for and consequently the requirement of bid bond guarantees varies for each contractor.

Shubham Jain, SVP and Group Head, Corporate Ratings, Icra said: "For every Rs 100 crore of new order addition, the contractors require around Rs 6.25 crore of collateral plus margin money for securing bid bond guarantees; this would get freed up now. In addition to freeing up of margin money which can now be deployed towards working capital requirements, the waiver would also result in savings on bank guarantee commission charges which will be a direct addition to bottom line."

On bid securing declaration, Jain added, "Debarring the contractors from participating in tendering process for a period of one year in case of non-compliance is a good deterrent to weed out erring players. Otherwise the bidding process would lose its sanctity. Overall this is a win-win for both parties.