Centre extends Covid waivers for road contractors again, experts frown

Non-serious players entering highway bids may pose completion risks, researchers say

The Ministry of Road Transport and Highways (MoRTH) has extended liquidity-related Covid-19 relief measures for highway contractors for another year, even as experts have aired concerns over non-serious players entering the market through these measures.

In a letter dated May 4, a copy of which Business Standard has reviewed, the highways ministry extended by a year the measures that were earlier applicable till March 31, 2023. The relaxations, first introduced in June 2020 and modified routinely subsequently, include monthly payments to road contractors for the work they have completed, waivers in delivery obligations, and more.

An official said representations were still being made requesting the extension, which was the reason the ministry chose to do so.

However, experts said there was no pressing need for such a move. “Covid is over now. We believe there is no need for relaxation of the contractual rules. Relaxation leads to hyper competition in the sector with the risk of under delivery. The outcome may not be optimal,” said Mohit Kumar, an infrastructure researcher and analyst with ICICI Securities. 

"Extending the relief measures to road contractors by one more year will immensely support the contractors from liquidity management perspective. This would help the contractors to continue to focus on execution while maintaining a low cash conversion cycle and at the same time allow them to participate / bag more orders as the associated bank guarantee requirements are low. This will also help the ministry to achieve the execution and award targets in the run upto the election year," Rajeshwar Burla, group head and vice-president at ICRA said.

However, he also echoed the same concerns on aggressive bidding in the sector.  "On the flip side, this would mean that the aggression in the project bidding (especially EPC and HAM) is here to stay for a prolonged period of time," he said.

Speaking on the condition of anonymity, a Mumbai-based sector expert said: “Many non-serious highway contractors will continue to make representations requesting extensions, but the Centre must take a call on how long it wants to tolerate substandard players in national highway tenders.”

Queries sent to the National Highways Builders Federation, an association that represents the major highway infrastructure firms, went unanswered.

It is believed that serious players with realistic bids were suffering as smaller players were making abnormally low bids, which could realistically not be executed.

In November 2020, when the first wave of Covid-19 had caused an acute financial crunch for the infrastructure sector, the government had removed the bid security rule. This was because it was affecting the ability of commercial entities to execute contracts in a timely manner. It also had an adverse impact on competitive bidding.

The government had then too reduced the performance security requirement from the normal 5-10 per cent of the contract’s value to 3 per cent, according to a circular from the finance ministry.

In February 2022, the Centre had taken cognisance of the aggressive bidding in the sector and reinstated earnest money deposit (EMD).

“Since there is no EMD, bidders are quoting abnormally low prices for the bid. And, after winning the bid, they start searching for a sub-contractor,” the MoRTH had said then. “This tendency will have an adverse impact on the quality and timely completion of important highway projects.”

This tendency, according to industry estimates, did not change much despite the tightening of relaxations. “Despite the reinstatement of EMD and requirement of additional performance security for abnormally low bids in February 2022, the bidding intensity remained high in FY23,” rating agency ICRA said in a recent report.

According to ICRA, the median percentage of discounts in highway engineering procurement and construction (EPC) bids has been increasing ever since the relief measures were introduced. Meanwhile, the premiums in bids invited through the Hybrid Annuity Model (HAM) have also decreased over the past two fiscal years.

While these relaxation measures were introduced for all government contracts in construction, the most direct impact is seen in the highways sector as other capital-intensive public sectors like railways have contractual barriers restricting the entry of players without skin in the game, experts said.