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 per cent of NHAI’s base price during the last two years. The number of bidders for these projects ranged between three to twelve. 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 15 states were chosen for ICRA study.
Shubham Jain, Vice President at ICRA, said, “Given the aggressive bidding witnessed in EPC space, some EPC contracts were awarded for as low as 62-75 per cent 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 FY2016 the top five players together won 27 projects totaling around 1830 km, the awarded cost is Rs 187.17 billion. At the aggregate level, the top three successful bidders over last two years won 32 projects totaling 2542 km which is around 47 per cent of total awards secured the contracts.
“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 Jain.
On the positive side, over the last two years, the government focus on addressing execution bottlenecks have started yielding positive results. There has been considerable improvement in non-moving projects as well.