Road asset development models have come of age, with many private equity (PE) platforms finding comfort in the operational histories of assets. Organised capital has aided the sector’s growth and development potential. And it is primed for more, with developers being able to free capital by selling aggressively to infrastructure investment trusts, asset managers, and PE platforms.
Yet, somewhere there has been a slowdown — in both public-private partnership (PPP) and engineering, procurement, and construction (EPC) modes — leading to reduced kilometres awarded in FY26. Aggressive bidding compared to benchmark costs, right of way availability issues, clearances during construction, and securing of financial closure have delayed projects. They bring out the ugly dimension of cost escalation, deadline extensions, and disagreements leading to claims.
Discounted pricing followed by small construction contractors winning bids and trying their hand at the time-tested hybrid annuity model (HAM) has stripped its life. The discounted model would work only if land, project clearances, approval of design and drawings, utility shifting approvals and plans, equipment and manpower, financial closure, and capital are available on day 1 itself. This is never the case in most projects.
Late last year, the government took a bold step in revising the eligibility criteria for contractors, both on technical (ensuring experience fits project requirements) and financial (enhancing net worth criteria and streamlining security needs) terms. However, key changes are necessary.
Technical capacity: Bidders must have experience of handling projects of similar scale and complexity (the definition of “similar work” is stricter, demands completed project to include all major components of the proposed project within the last 10 years). Secondly, joint venture members must individually meet higher thresholds: 35% of the project cost for one similar work or 25% each for two similar works.
Financial capacity: Net worth requirements must be standardised to 5% for projects up to Rs 100 crore and 10% for those above Rs 100 crore. It should incorporate a net worth adjustment mechanism for existing commitments in PPP projects. In essence, 20% of balance value of exiting PPP commitments will be reduced from the actual net worth. Secondly, the average annual turnover must match amounts specified in the notice inviting tender, generally based on the last three years. Attaining bid/performance security through third-party enhancing accountability should be prohibited. Lastly, additional performance security (APS) must be applicable where bid project costs are 90% of the authority estimates and lower. The APS increases with every percentage decrease in project cost, with no cap.
The changes brought about (currently under review) in the model concession agreement will also help introduce an element of balance in setting expectations around implementation and operations. Some key aspects are as follows:
Better transparency: Clarity on appointed date with 90% of land to be handed to the concessionaire and clarity on scope of works if the complete land required to construct the project is not handed over. If complete land is not handed over by the appointed date, the scope of work on balance land is subject to change of scope (COS) clause as per the concession agreement.
Improved viability: Open to providing construction support, in case existing alignment is under tolling. The support will be released in 10 performance-based execution milestones.
Mitigating risk of time and cost overrun: Super delays from concessionaire lead to termination of concession as per the contract clause, to avoid litigation.
Mitigating COS costing disagreements: Clarifying the process of COS and cost approvals, which are at the heart of disputes over quantity and costs as per applicable schedule of rates
Easier interpretation of quantum of termination payments: Clarifying the definition of debt due during the tenure of the contract till transfer.
Documented bill of quantities-led work execution weightage: Detailed technical bill of quantities included in proportions of the contract price to the EPC contractor for different stages of construction of the project highway.
Better transparency: Escrow bank to provide account viewing and downloading rights to authorities and lenders can seek inspection reports. Monthly progress reports to be more descriptive with data on real-time movement of construction vehicles, etc.
Traffic risk mitigation: Traffic variation and competing roads — adequate compensation through increase/decrease of concession period, in case traffic on the stretch reduces/increases as per traffic variation clause contours.
While FY26 witnessed muted awards in road projects, particularly those in PPP mode, FY27 is likely to see a reversal.
As of April 30, MoRTH/NHAI/NHIDCL tenders that have been announced or were due for submissions in the subsequent weeks showed a pipeline that is veering towards PPP modes of award. However, it is time the authorities reflected on the HAM awards and outcomes in the last two years and did a course correction.
Pausing the popular HAM model and awarding build-operate-transfer (BOT) (toll) projects is the need of the hour, as it will attract developers who have the execution capacity and capability to estimate revenue risks and bid for projects accordingly. Such a step will not only increase the kilometres awarded but also attract good developers in building quality roads.
The author is Deputy MD, Lending & Project Finance, National Bank for Financing Infrastructure and Development.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.