The government's relaxations may intensify competition in roads, bridges and highways, and tunneling projects by way of higher participation from a wider set of bidders.
The government had cut the amount of performance guarantee for all construction contracts to 3% of the value of the respective contracts, from the existing levels of 5%-10%.
The recent relaxations by the Narendra Modi-government will likely enable mid-sized firms to participate in the bidding process to construct highways, along with other construction contracts. These measures may intensify competition in roads, bridges and highways, and tunneling projects by way of higher participation from a wider set of bidders, said a report by India Ratings and Research. The relaxations would also provide the much-needed relief to those construction contractors whose eligibility to bid for new projects has been hampered on account of the coronavirus pandemic-led business disruptions, the report added.
In the latest move, the government had cut the amount of performance guarantee for all construction contracts to 3 per cent of the value of the respective contracts, from the existing levels of 5-10 per cent. After the disruptions led by the pandemic hit the liquidity of the infrastructure developers, these firms had demanded this relaxation. The reform is likely to aid timely project execution and alleviate liquidity concerns. Given the shrinking bank credit to the sector even before the onset of the pandemic, the reform is also significant for the overall sector. It is to be noted that the reduction in performance guarantee is valid for all existing contracts and would remain so for all contracts awarded until end-2021.
Lower net worth required
In another major step towards making the path simpler for mid-sized construction companies, the government had slashed the minimum net worth criteria limit to 15 per cent from 25 per cent of the projected EPC project value in the preceding financial year for bidders of national highway projects. Further, the definition of core sector had been expanded to include the construction of stadiums, hospitals, hotels, smart cities, warehouses, silos, oil & gas, and commercial set-up works. These changes are also likely to benefit construction companies which are likely to be financially stressed on account of COVID-19, hampering their eligibility to bid, Ind-Ra report added.
Other technical relaxations
Meanwhile, the relaxation of technical eligibility criteria for tunneling, bridge works; the extension of concessions for all road projects; and the relaxation of eligibility criteria for road EPC projects are among the other vital measures taken recently and they are expected to provide a new window of opportunity for mid-sized construction companies. India Ratings said that companies which are able to bag new projects as a result of these changes, while maintaining bidding discipline, are likely to drive home the advantage.