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Small Developers the Biggest Beneficiaries in NHAI’s Contract Awarding Spree

The National Highways Authority of India’s (NHAI) recording breaking financial year of 2017-18 saw them award almost half of all road construction projects to the small developers, according to the compiled NHAI data report by investment bank Equirus Securities. The biggest contract winners were large scale companies such as IRB Infrastructure Developers Ltd (Rs 8,900 crore), Dilip Buildcon Ltd (Rs 18,770 crore) and Ashoka Buildcon Ltd (Rs 5,500 crore). However, various other small developers including JKumar Infraprojects Ltd, Gammon India Ltd, Madhucon Projects Ltd and ample other joint ventures by PNC Infratech Ltd and Monte Carlo Ltd swept up 48% from the entire bidding in the financial year.

According to the report by Equirus Securities, contracts under Rs 200 crore had participation from 10-15 bidders while projects over Rs 200 crore saw the numbers fall to 60-10. Apart from bestowing contracts to small organisations, the government also introduced the hybrid annuity model (HAM) back in 2016. In the HAM model, the developer gets 40% of the overall project cost in five installments linked to the project’s constant progress. Rest of the cost is borne by the developer, but it can be recovered from the National Highways Authority of India as annuity. The financial risk factors are reduced by adopting HAM, as the revenue is linked to the project’s progress.

The switch from the BOT (build-operate-transfer) model to HAM has significantly assisted the medium-sized developers and a new set of contractors in coming through. This model has allowed the new buyers to bid for smaller projects, hence the big builders can be choosier while picking projects. As a result, there is enough room for all bidding organisations while additional capacity is getting built. Previously, under the BOT model, the big projects were bestowed to those companies that brought huge amounts of money to finance these plans. Presently, both the NHAI and the ministry of road transport and highways have listed small projects and have changed the bidding models from BOT to HAM

Another notable fact in the report by Equirus states that the share of mid-sized projects constituted 15% of all contracts in FY 2013-14.  In FY 2017-18, this percentage was 40. In the same period, projects in the Rs 1,000-2,000 crore bracket rose from a 15% base to 22% of all contracts. A report by Bank of America on highways sector states that NHAI spent more than Rs 8,000 crore in FY 2017-18 with a mix of funding via budgetary support, market borrowing and cess receipts. NHAI is also due to receive Rs 9,700 crore from the sale of its first Toll Operate Transfer bundle in May this year.

If we look back at FY 2017-18, where NHAI awarded a record 150 road projects spread across 7,397 km, HAM projects lead the way in the total value of awards at 63%, followed by EPC contracts at 35% and the remaining BOT projects. However, experts also say that bringing back the BOT model in a slightly increased capacity would help the government in balancing out the capital risks.

#TollOperateTransfer #MinistryofRoadTransport #HighwayProjectsinIndia

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