Limited investments across the sectors, given the muted private sector spending, is driving the Engineering, Procurement and Construction (EPC) players towards infrastructure projects, especially road sector related projects, says ICRA in its latest study on Road Sector.
ICRA’s sample study on EPC bids suggests that more than 2/3rd of the National Highway (NH) projects awarded through the EPC route during FY2016 and FY2015, were quoted at a discount to NHAI’s base price, with some EPC contracts being awarded for as low as 62-75% of NHAI’s base price during the last two years. The number of bidders for these projects ranged between 3 to 12. The sample study also suggests that some EPC contractors are bidding aggressively even with slim margins in order to shore up the order book. Around 80 national highway projects awarded during FY2015 and FY2016 covering 5,300 km in fifteen states were chosen for ICRA study.
According to Mr. Shubham Jain, Vice President at ICRA, “Given the aggressive bidding witnessed in EPC space, some EPC contracts were awarded for as low as 62-75% of NHAI’s base price during the last two years. Such aggression could lead to losses/stretched liquidity of developers and thereby impacting the pace of execution.”
During FY2015, the top four bidders together won 17 projects totaling around 1474 km (62%), the awarded cost is Rs.72.29 billion, a discount of around 13% to NHAI’s base cost of Rs.83.42 billion. Whereas, during FY2016 for the top five players which together won 27 projects totaling around 1830 km (61% of awarded length in FY2016) the awarded cost is Rs.187.17 billion, a discount of 6.4% to the NHAI base cost of Rs.199.93 billion. At the aggregate level, the top three successful bidders over last two years won 32 projects totaling 2542 km which is around 47% of total awards secured the contracts by quoting a significant discount of 12% to NHAI’s base price.
“The amount for which a player bids depends on several parameters – competitive intensity, the nature of the stretch – whether it is a part of a series of contiguous stretches or is a part of a cluster where several other projects are being executed, its geography – as the ground level execution challenges vary with geography, the credit profile of the EPC contractors and, adequacy of the order book of the developer – whether it is sufficient to absorb the fixed costs.” Says Mr. Jain.
On the positive side, over the last two years, the Government focus on addressing execution bottlenecks have started yielding positive results. Speedy resolution of stuck projects, granting of forest clearances for regional offices, online filing for clearances to construct ROB and RUBs and increasing limits on sand mining have all helped improve the situation. Recently, to make encumbrance-free land available more speedily, NHAI has delegated powers to regional officers to demolish structures on right of way and shifting of utilities. These efforts have seen 43% increase in the pace of execution, with execution rate reaching 5.53 km/day during FY2016 as against 4.11 km/day during FY2015. The pace of execution increased, by 9% during 4M FY2017 to 5.52 km/day, from 5.06 km/day during 4M FY2016. There has been considerable improvement in non-moving projects as well.
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