Road and highway development has been a major focus area of the central government over the past few years. The central government’s strong focus on the road sector is demonstrated by the Ministry of Road Transport and Highways’ (MoRTH) capital spending, which has increased by over eight times to reach approximately Rs 2.59 trillion in 2023-24 from Rs 0.31 trillion in 2013-14, recording a compound annual growth rate (CAGR) of 23 per cent. Further, budgetary grant for the ministry has increased by a healthy 25 per cent, reaching Rs 2.59 trillion in 2023-24 from Rs 2.06 trillion in 2022-23.
Awarding activity
In line with this, MoRTH awards have significantly increased over the past nine years, from around 3,600 km in 2013-14 to 12,375 km in 2022-23 at a CAGR of 15 per cent. These contracts are primarily awarded by MoRTH, National Highways Authority of India (NHAI) and National Highways and Infrastructure Development Corporation Limited. Further, NHAI awards account for over 40 per cent of MoRTH awards in the past nine years, and this ratio has increased to around 48 per cent over the past three years. Over the past three years, NHAI awards have been dominated by the hybrid annuity model (HAM) with a share of around 55 per cent, and the remaining projects are under the engineering, procurement, and construction (EPC) model. NHAI awards via the build, operate, transfer (BOT-toll) mode have been below 5 per cent in recent years, accounting for only 2.5 per cent in 2022-23.
Key policy measures 
Over the years, MoRTH has taken various proactive measures and made suitable amendments to the model concession agreement in order to address the concerns plaguing the industry. The inherent benefits of the HAM model, including upfront availability of right of way (RoW), descoping pending RoW beyond 180 days from the appointed date, inflation-linked revisions for bid project cost (BPC) during the construction period and a relatively moderate funding risk with 40 per cent of the BPC to be funded by the authority in the form of grants, have improved the attractiveness of HAM for developers. Unlike BoT-toll or annuity projects where the entire project was funded by the developer, the HAM model has reduced the funding requirement for the developer.
Over the past few years, EPC players have significantly benefited from the increased road awards and their execution. Increased awards and timely payments from the ministry have enhanced the credit profiles of road EPC players. Additionally, central government agencies, such as NHAI/ MoRTH, have provided relaxations to EPC players during the Covid-19 pandemic, including monthly payments to contractors, removal of earnest money deposit (EMD) requirements, lower retention money requirements and relaxation in technical and financial qualification for bidders. This has improved the cash flow cycle for road EPC players and, thereby, road execution.
Impact on bidding
However, these measures have intensified competition in the sector, as evident in the significant discounts and increased participation in bids floated by NHAI/ MoRTH. From January 2021 to August 2023, over 90 per cent of these EPC bids were won at a discount, going as high as 30-40 per cent in some cases. While the bid intensity remained high for EPC projects, this trend caught up with HAM projects as well. The median premium for HAM projects declined from over 20 per cent during 2018-19 and 2020-21 to 15 per cent in 2021-22 and -1 per cent in 2022-23. There were no discounted bids during 2019-20 and 2020-21; however, nearly 56 per cent of bids during 2022-23 were at a discount compared to the authority bid price for HAM projects.
The way forward
At the MoRTH level, EPC will continue to be the primary mode of awarding projects, accounting for 70-75 per cent of awards in 2023-24, while the remaining 25-30 per cent will be the HAM mode. BOT-toll awards have accounted for less than 5 per cent of the orders in the past five years, and its share is expected to remain at similar levels in 2023-24.
Although NHAI/MoRTH has withdrawn certain relaxations provided to road developers during the Covid-19 pandemic, including the reinstatement of EMDs and requirement of additional performance security, competitive intensity is expected to remain due to fewer opportunities in the state and private sector capex and the timely receipt of payments from NHAI/MoRTH. NHAI has mandated a minimum credit rating of BBB for bidders in HAM and BOT-toll projects. However, its impact is expected to be limited as less than 10 per cent of projects are awarded to bidders with ratings below BBB. Recent bidding trends indicate that aggressive bidding will continue in 2023-24 as well, despite measures taken by the authority.
