In line with global practices, the Indian road sector deploys the same implementation models for road projects. What has interestingly made the sector relatively more far-sighted is the scale of policy precision, calibrated in each model, as dictated by circumstances. That being said, prompting shifts between construction models has not been easy for contractors and developers. Yet, the overall pay-off remains clear – continued connectivity-driven growth throughout the country.
Market-driven policy adjustments create a fertile ground
Over time, several macroeconomic factors have influenced the bidding environment. For instance, back in 2020, the pandemic played a key role in determining the potential award mix. At that time, road developers and contractors saw their profits plummet; implementation models with a high risk lost their attractiveness; road traffic on major routes saw a steep fall; toll operations were suspended; and to state the obvious, risky projects were deemed undesirable. Broadly speaking, there seemed no signs of normalcy in the near future. Despite being in the middle of an unprecedented market, the implementing authorities were well equipped with hands-on support to provide relief to Indian contractors. To this end, a “Covid 19” loan was provided to some developers. Reflecting on this, the general consensus that the government has been diligent in supporting the sector to tide over many crises proved to be especially true then.
Due to the concomitant policy push, along with the sector’s priority status, the frantic rush to secure project awards has remained high. Moreover, changes in model concession agreements have made existing implementation models more attractive, certainly infusing more vigour in the space.
Experience with EPC
The engineering, procurement and construction (EPC) market has been through some up and downs in the past two decades. Having been the default mode of project execution in the sector in the past, this segment hit a roadblock with the advent of the public-private partnership (PPP) mode of project execution during 2006-12. However, post 2012, with the limited success of PPP projects, owing to their aggressive bidding, the EPC mode made a comeback. The government had also made some significant modifications to the EPC model, making it attractive to contractors once again. Following this, in 2013-14, around 85 per cent of the projects were awarded on an EPC basis.
The trend, however, reversed once again in 2016-17, with the introduction of the hybrid annuity model (HAM). Although fewer projects were awarded in this mode, the share continued to be in the range of 40-60 per cent. Amidst the pandemic, the share shot up to 66 per cent. This was largely due to pandemic-induced relaxations such as monthly payments to contractors, removal of earnest money deposit requirements, lower retention money requirements, and relaxation in technical and financial qualification for bidders. This set in motion a domino effect – improved cash flow, followed by intensified participation, and ultimately, significant discounts. In another trend reversal, with the HAM disruption in the following two years, EPC projects maintained a range of around 44 per cent of all the projects awarded.
More recently, in 2024-25, the overall share of EPC projects, in line with the overall slow project awarding, has declined significantly to 25 per cent, driven by various regulatory delays, coupled with the centre’s renewed focus on build-operate-transfer (BOT) (toll) and HAM projects to reduce the fiscal burden.
HAM takes centre stage
HAM was launched in 2016, seeking to revive private sector investment. To recollect, this model was launched at a time when project awards largely relied on EPC and the private sector’s interest had almost dried up in BOT projects. Naturally, the sector needed a PPP push, and HAM was a supportive intervention.
Shortly after its debut, the sentiment around the model was euphoric. To put numbers into perspective, HAM share under National Highways Authority of India (NHAI) awards increased sharply from 8 per cent to around 55 per cent in 2016-17. While this is true, it also runs counter to the fact that the market for HAM was a fairly closed one, with the majority of projects being awarded to a mix of only five to six key players. In the following year, in a one-off setback, the share fell to around 45 per cent. This was due to delays in obtaining regulatory clearances and financial closures; and public banks being wary of lending. Collectively, these factors brought some prudence in bidding. Into the bargain, the average land acquisition costs spiked from Rs 9.2 million per hectare in 2013-14 to Rs 23.8 million per hectare in 2017-18. As a result, the focus was shifted to EPC projects – a model predominantly planned for projects under the Bharatmala Pariyojana at the time. The next two years went through a spillover effect. Post Covid 19, the model gained traction again. Between 2021 and 2024, HAM share soared to an average of over 50 per cent. Provisions such as the availability of 80 per cent right of way before the appointed date, and inflation and interest rate hedging through indexation of cash flows provided to concessionaires sustained the interest in these projects.
In fact, during 2024-25, in the backdrop of the overall slow awarding activity and the government’s plan to revive the BOT (toll) model, the HAM model continued to dominate NHAI project awards, with 65 per cent of awards. This is a big leap, considering that it has now outpaced EPC project awards.
Building on BOT
BOT (toll) awards have accounted for less than 5 per cent of the orders in the past five years. Continuous efforts have been made to revive this model. After multiple rounds of policy changes, this model has been welcomed by the industry and remains an area of prime interest. During 2024-25, BOT (toll) accounted for around 10 per cent of the total NHAI project awards, signalling market recovery. While the overall performance of this model is yet to be seen, this approach is expected to accelerate highway construction.
NHAI is now actively awarding BOT (toll) projects. Some of the key projects include the Virar-Alibaug multimodal corridor project in Maharashtra and Guwahati ring road in Assam.
Mapping recent bidding participation and patterns
Going by the number of bidders, the EPC model remained constrained in early 2024-25, attracting an average of five bidders on a monthly basis. Conversely, HAM projects, despite delayed awarding, generated significant interest with 10-12 bidders. Interestingly, by the end of the third quarter, following post-election improvements in awarding and execution activities, EPC bidder participation reached parity with HAM projects.
This increased participation across implementation models has consequently yielded substantial bid discounts, ranging around and above 40 per cent. Although EPC projects have historically demonstrated a higher bid intensity, HAM projects now exhibit comparable competitive dynamics. Furthermore, HAM premium rates have declined precipitously from approximately 20 per cent in 2018-19 to negligible margins now.
The road ahead
EPC has been the primary model of implementation for the ministry. However, with renewed interest in the BOT (toll) model now, a shift away from the EPC mode can be expected under NHAI project awards. Due to the recent subdued awarding activity, increasing share of HAM and the BOT (toll) model resurgence, small and mid-sized EPC players may face challenges in securing contracts in the medium term.
It is now clear that NHAI has plans to rely on private sector investment for upcoming road projects. This makes the outlook for HAM and BOT (toll) projects promising. HAM is expected to continue dominating NHAI project awards, in line with the trends seen in recent years. Moreover, it has moved away from being a closed market and has found new takers. Going beyond statistics, the first round of completed HAM projects has also seen good acquisition bets for investors. Over the past seven years (till December 2024), operational HAM projects worth over Rs 700 billion have been monetised, enabling various sponsors to realise around Rs 115 billion from the stake sale of 58 HAM assets. In the near term, the continuation of this trend will enhance the capacity of road companies to bid for more projects.
Going forward, moving away from its
historically subdued share, the BOT (toll) model is expected to have more visibility in the overall mix. Developer appetite, however, is yet to be seen.
Finally, with a solid policy environment, developers and contractors will find themselves well positioned in the bidding space. That said, it is pertinent to keep the execution capability and expertise of contractors in check. To keep things fair, the Ministry of Road Transport and Highways has now decided to rein in errant bidders by imposing additional security performance on low bids.
Harman Mangat
