The road sector is at a pivotal point with a plethora of opportunities opening up for expansion. With an array of projects planned to be awarded under the build, operate, transfer (BOT) and the hybrid annuity model (HAM), the industry is gearing up for an increase in project bids. However, this comes with its own set of challenges that must be navigated in order to ensure sustainable and quality-driven development…
Sustainable initiatives
Strategic approaches to road design should be employed to minimise the construction of high embankments. In road projects, especially greenfield highway development involving significant earthwork, the adoption of sustainable practices such as utilising reclaimed asphalt pavement can lead to considerable cost savings. In areas where land availability is limited and obtaining approvals becomes challenging, constructing high-elevation roads solely for the purpose of access control may not be the most efficient solution. Alternative measures can be implemented to regulate public access to highways while avoiding the unnecessary creation of elevated embankments.
However, concessionaires and contractors are bound by the terms and conditions outlined in concession agreements or contract documents. Any attempt to introduce value additions or deviations from the specified scope, even if intended to benefit the project, is generally not permitted unless explicitly stated.
Mitigating challenges
To achieve the projected sector growth, it is crucial to address the various challenges that contractors encounter during project implementation. A key long-standing issue has been the availability of land, which affects the project timeline. Due to this, many contractors have recognised that meticulous planning and close collaboration with relevant authorities are indispensable for ensuring prompt disbursement of payments and resolving construction challenges such as utility shifting and cutting of trees. In recent times, many in-house design teams have assumed a pivotal role in obtaining design approvals, which is a critical determinant for timely project completion.
Often, authorities impose unrealistic project deadlines, mandating a timeline of two to two and a half years for complex road projects that demand at least four years on-ground implementation, thereby compromising quality standards and exposing contractors to potential damages stemming from relentless pressure. Despite the growing recognition of the significance of cutting-edge technologies, the long approval processes and demand for transferring cost savings remain deterrents. Furthermore, the delayed appointment of independent engineers impedes design approvals and memorandum clearances.
Aggressive bidding for road projects is another issue of concern. The pressure to secure projects and utilise resources effectively is immense. This has resulted in a race to the bottom, with contractors quoting bids that are significantly lower than authority estimates. Sometimes, these are as low as 10-30 per cent below the reserve price. This is despite the fact that a substantial portion of construction costs, including materials such as cement and steel, fuel and labour, are fixed and cannot be reduced, leaving very little room for profits. Moreover, design optimisation and efficient use of construction equipment can only offer minor savings.
While the government acknowledges aggressive bidding as a key issue and has explored various options to mitigate this, an effective solution is yet to be found. Companies that quote exponentially low bids often face closure within two to three years. This creates a vicious cycle where new road players join the market and continue the aggressive bidding practice, which is often encouraged by banks, especially in the case of highway projects. This unsustainable cycle poses a significant challenge for the industry and requires a comprehensive approach to address the root causes and restore a more balanced bidding environment.
MCA for BOT (toll) projects: A mixed reaction
Recently, changes have been introduced in the model concession agreement (MCA) for BOT projects to make it a more attractive model for project bidders. However, there are concerns regarding these projects due to their inherent risks associated with traffic uncertainty. As highway networks expand rapidly, with multiple schemes undertaken by various agencies such as the National Highways Authority of India (NHAI), state governments and the ministry, the construction of parallel roads is likely to increase litigation and claims, especially at a time when the government is aiming to reduce these. Hence, pursuing BOT (toll) projects may have the opposite effect.
The construction of parallel roads diverts traffic, leading to revenue losses, due to which developers may refuse to pay premiums. An alternative approach could be switching to BOT (annuity) projects, where developers bear the construction risk, while authorities retain the toll risk. These are likely to be more beneficial. If BOT (toll) projects are deemed advantageous due to increasing traffic, authorities should consider transferring such projects to the toll-operate-transfer model or converting them to BOT (annuity) model. Under these models, concessionaires would receive annuity payments from the authorities, while the authorities would retain the toll revenue.
Despite the risks, there seems to be excitement among certain players for BOT (toll) road projects. A few key players who have received returns from infrastructure investment trusts have shown significant appetite for these projects. However, it is also important that authorities provide bidders with actual traffic data collected from existing tolling agencies, enabling concessionaires to assess the revenue potential more accurately before bidding for BOT (toll) projects.
Key recommendations
It is crucial for the government to conduct extensive audits of a few selected projects that are significantly underbid. This will help identify whether the issue lies with faulty detailed project reports (DPRs) or substandard construction practices. Moreover, integrating resource-based construction programmes at the DPR stage will enhance the accuracy and feasibility of project plans, leading to better execution and adherence to timelines.
There should be a shift towards considering the L2 rather than the L1 to award contracts. This approach can help balance cost and quality, reducing the likelihood of projects being awarded at unreasonable prices. Additionally, the government should focus on improving the eligibility criteria for bidders, emphasising performance and quality standards rather than just financial considerations. This will ensure that only capable and reliable contractors undertake highway projects, ultimately leading to better infrastructure development. Traffic management, road signages and safety measures should be prioritised to enhance overall road quality and safety.
The way forward
In the near future, a strong pipeline of projects is planned to be awarded under the HAM and BOT models. Although low-cost bidding remains a significant challenge, companies are preparing to bid for these projects. Post-Covid-19, there have been several relaxations in performance guarantees, bid security and deployment of manpower and machinery. These relaxations, along with monthly payment schedules in HAM, have eased some financial pressures. A major focus for the future will be to ensure that projects are awarded based on realistic cost estimates without compromising their quality, which could be achieved through more stringent auditing and monitoring of the ongoing projects. While funding remains a concern, especially with NHAI facing high levels of debt, there is confidence that the liquidity in the market will support new projects.
Based on a panel discussion among D. Dillybabu, Vice President, Business Development and Tendering, APCO Infratech; Manoj Garg, Chief Technical Officer, DRAIPL; and R.C. Jain, Executive Director, GR Infraprojects, at a recent India Infrastructure conference.
