The easing of eligibility criteria previously introduced by the government for building highways through Technical Procurement and Construction (EPC) and Hybrid Annuity Model (HAM) routes have started to pay off. In addition to increasing competition among bidders for projects, this has made the government less spending on construction routes available, the rating agency Icra has determined.
Earlier this year, the Department of Roads and Highways revised model concession agreements for both EPC and HAM and paved the way for the construction of stadiums, hospitals and hotels to enter the highway sector. The government also relaxed its financial criteria or eligibility.
“The EPC mode remains extremely competitive as many bidders offer a discount of up to 30-35% on the base price of the NHAI. The BOT (HAM) has also seen increased competition, which has resulted in the average premium on NHAI costs being reduced from 25-30% earlier to around 15% and in some cases even negative O&M bids. The number of bidders has exceeded 40 participants (30 of whom qualified) for some of the EPC projects and 10-15 participants (previously around 5-10) for HAM projects, ”said Rajeshwar Burla of Icra.
However, Icra said the reduced bids on NHAI’s base price, along with the rise in commodity prices, could have a significant negative impact on contractors’ profitability. “Bid discipline therefore remains a key factor for road construction companies to maintain reasonable profitability and avoid stressing the working capital cycle,” he added.
The aggressive bidding process for the projects can also result in projects being delayed or stalled or contentious as lower profitability of the projects would limit the contractor’s ability to absorb time and cost overruns in the project.
The time and cost overruns can be due to a variety of reasons, including a sharp rise in raw material prices, changes in scope, delays in land acquisition and permits; and force majeure events among others, Icra said.
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