Railway projects: New rules create level playing field

The recent govt directive mandating open tendering of railway projects is likely to boost competitiveness and cut costs for transporter

The Railway Board is trying to eliminate an intermediate layer so that it can get the best possible price for works and create greater transparency in project allocation.
The Railway Board is trying to eliminate an intermediate layer so that it can get the best possible price for works and create greater transparency in project allocation.

In a recent decision that is likely to boost competitiveness in the sector, the Ministry of Railways has directed that all railway works will be allotted through open tendering. Thus, PSUs will now have to compete with private sector players to secure railway contracts. The Railway Board is trying to eliminate an intermediate layer so that it can get the best possible price for works and create greater transparency in project allocation.

While private players will now be able to secure orders directly (unlike earlier when they were subcontracted by PSUs) and hence increase their order book, PSUs which have executed complex projects in the past will have the opportunity to explore international markets and/or focus more, India Ratings and Research (Ind-Ra) has highlighted in a recent report.

As per the earlier system, the Railway Board used to award projects based on competitive bidding among PSU players that were part of a selected master list. The PSUs selected would then float tenders in the open market. For instance, during H1FY22, zonal railways allocated projects worth Rs 47,780 mn to PSUs such as the Indian Railway Construction Ltd (IRCON) and Mumbai Rail Vikas Corporation Ltd, while these PSUs floated tenders worth Rs 19,130 mn for private players.

In the wake of the recent decision, private players such as GPT Infra Ltd, KEC International Ltd, Rahee Infratech Ltd, and Texmaco Rail Engineering Ltd will bid for projects directly, with the increase in the number of competitive bids helping the railways reduce costs, the report said. On the flip side, this can impact the margins of PSU players which will now have to compete with a larger number of players. Private players too will have to go the extra mile to execute projects, since this would require a high degree of coordination with various departments.

As part of the new mechanism, the ministry has also cancelled orders where a letter of acceptance had not been issued or an MoU not been signed or where no major contractual obligation had been undertaken in any form. This directive has impacted the Rail India Technical and Economic Service Ltd (RITES) which in Q2FY22 received orders for laying of new lines for Belgaum-Dharwad through Kittur; Shimoga-Shikaripura-Ranebennur; and Tumkur-Devangere through Chitradurga, worth Rs 40,279 mn.

The overhauling of the bidding process has stemmed from the huge increase in capital expenditure the railway sector has seen in recent years – capex has risen at a CAGR of 15% from Rs 1,082 bn in 2017 to Rs 2,150 bn in 2022. In what indicates the import of the recent decision on EPC players, as much as 75% of the budgeted outlay in FY22 is directly focussed on construction and allied activities.

As it is, competition in the sector has shown an uptrend of late. While competition moderately increased in FY21, with around 10% of the overall orders witnessing the participation of more than five players, the figure went up to 14% in H1FY22. With the railways seeking to create a level playing field for projects and opening the door for more private players to participate in tenders, Ind-Ra expects this trend to continue in the future.

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