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EPC road projects being given away at discounts

The average bid for an EPC (engineering, procurement and construction) road contract has come down by 15-25% over the last few years. This is thanks to the intense competition in this space after the government switched focus to the hybrid annuity model (HAM).

EPC, EPC road project, roadways, infrastructure, HAM projects
The average bid for an EPC (engineering, procurement and construction) road contract has come down by 15-25% over the last few years. This is thanks to the intense competition in this space after the government switched focus to the hybrid annuity model (HAM).

The average bid for an EPC (engineering, procurement and construction) road contract has come down by 15-25% over the last few years. This is thanks to the intense competition in this space after the government switched focus to the hybrid annuity model (HAM). With the EPC pie shrinking, on an average 7-8 companies are vying for such projects of more than Rs 200 crore. Smaller EPC projects find at least 12-15 bidders. In contrast, for HAM projects, which are usually over Rs 400 crore each, there are about five-six contenders for each project. Consequently, on an average, nearly 86% of the bids in EPC projects in FY18 were at a discount to the authority’s estimated project cost, with 55% of the bids awarded at a discount greater than 10%.

The contribution of EPC projects has declined from 71% in FY16 to 33% in FY18, according to Equirus Securities. In contrast, HAM projects have increased from just 12% of the total projects awarded in FY16 to 60% in FY17 and 63% in FY18. For instance, in the Dwarka Expressway (Package 3) project, Larsen & Toubro bid 25% lower than the cost estimated by the National Highways Authority of India (NHAI). Again, in the case of the Varanasi-Dagmapur project, Dilip Buildcon bid 23% lower than NHAI’s estimates. In 2017-18, 63% of the projects contracted out were in the HAM mode, of which over a half were won by just five builders.

Since January this year, three projects were bid out at a discount greater than 20%. Vishwas Udgirkar, partner, Deloitte India, said there are more bidders for EPC projects for a number of reasons. He said: “HAM projects require an equity commitment from the developer, which is not the case for government-funded EPC projects. With banks wary of lending to road projects, achieving financial closure for HAM projects is limited to a handful of established road developers and only players with strong balance sheets are bidding for these projects. “Moreover, banks themselves are not in the best shape to be able to lend to the corporate sector. This, among other factors, has resulted in more companies vying for cash contracts, as compared to HAM projects.” He added that the apprehension among lenders towards the hybrid model, as well as towards developers with stretched balance sheets, will keep participation in HAM limited for the next few months.

Rohan Suryavanshi, head, strategy and planning, Dilip Buildcon, pointed out that the intensifying competition in EPC has not been at the expense of margins. “For a large player like us and some of our peers, there are economies of scale. For companies like us, it is not tough to preserve margins as we do zero sub-contracting. This alone helps to achieve a higher Ebitda margin by 1-2%. For companies that are also able to execute projects ahead of time and earn early completion bonuses, this is added to the bottom line, again translating into higher margins,” he said. The skew towards HAM projects has also resulted in declining market share of the traditional EPC heavyweights in roads construction. From cornering about 17.8% of the total NHAI orders in FY15, L&T, which has refrained from participating in HAM projects, saw its share of the total orders decline to just 3.1% in FY18.

Similarly, IRB Infrastructure Developers, which was focused on build-operate-transfer (BOT) or toll projects, saw its share decline from 14.4% of the total NHAI orders in FY15 to 8.1% in FY18. This would have been even lower had it not been for the company changing its strategy and opting to also start bidding for HAM projects midway through FY18. The toll projects pipeline has completely dried up in the last two years, and only two projects covering 209 km were awarded by NHAI. IRB won one of the projects. For FY19, the road transport and highways ministry has planned an investment of about Rs 2 lakh crore. It is aiming to construct 34,800 km of roads as part of the first phase of the Bharatmala Pariyojana over the next five years at a cost of about Rs 5.35 lakh crore. Of this, about 60% is proposed to be bid out via HAM, 30% via EPC and 10% via BOT.

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First published on: 19-06-2018 at 04:48 IST
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