Often recognised by the speed and scale of development, the road sector is now turning over a new leaf. In the previous issue of Indian Infrastructure magazine, the story titled “Bold Bids” discussed the structural adjustments that have shaped the road construction landscape. One persistent trend has been the overall highly competitive bidding environment. Contractors have continued to submit aggressive discounts to win projects. In fact, between January 2024 and March 2025, projects were awarded at significant discounts – a median of per cent. This was amplified by relaxed bidding norms, which not only intensified competition but also invited speculative bids. Along with this, many small-sized players have entered the market, which has led to reckless bidding practices. In the roads sector, which is backed by strong government support, all players are eyeing a share in the growth story pie. All these developments have now turned the screws on the need for better discipline.
Realigning sector priorities via decisive policies
In a significant step to curb aggressive bidding, the Ministry of Road Transport and Highways (MoRTH) introduced the Additional Performance Security (APS) policy in april 2025 – a measure aimed squarely at discouraging careless underbidding and poor-execution standards.
These issues have long plagued the sector. As of March 2024, the Ministry of Statistics and Programme Implementation (MoSPI) reported that 440 out of 1,873 infrastructure projects (each project worth over Rs 1.5 billion) had cost overruns totalling Rs 5.01 trillion – a staggering 18.65 per cent over the initial estimates. Further, 779 projects, out of a total of 1,873 (41.6 per cent), were delayed by an average of over three years. Moreover, of the total, around 393 projects have not received a commissioning date.
In its current form, the APS policy may seem to be an isolated measure, but it supports the broader goal of ensuring timely and quality execution. In fact, it perfectly complements another move by the MoRTH, which aims to synchronise project approval, award and appointed date declaration with milestones for land acquisition as well as environment, forest and wildlife clearances. These are intended to streamline pre-construction activities, minimise delays in declaring appointed dates and help avert future project execution setbacks.
Shifting the ground rules
The APS policy aims to address such gaps, while also fostering discipline and quality. Moreover, it is expected to deter post-award cost escalations from inexperienced contractors and aligns with the ministry’s clear stance – cost-cutting at the expense of quality will no longer be tolerated. And so, this new framework sends a strong signal that only serious, financially sound players should be bidding for national-level tenders.
A key reform under the policy has been the removal of the cap on APS. The APS is now directly proportional to bid deviation. So, lower bids will require higher performance security. Previously, the APS was capped at 3 per cent of the bid project cost (BPC), which limited its effectiveness. For instance, under the earlier cap, a Rs 5 billion bid on a Rs 10 billion authority estimate required only Rs 0.15 billion security, despite being significantly more aggressive than a Rs 6.5 billion bid (which required Rs 0.19 billion APS). The new policy has addressed this loophole. Now, aggressive bidders cannot hit a lower limit while submitting bids without facing significant financial implications in terms of security.
Short-term strains for longer-term stability
This shift, however, brings with it additional pressures. While the intent of the APS policy is unambiguous, the implications are far from one-dimensional.
Contractors, particularly small and mid-sized players, will need higher cash margins to secure additional bank guarantees, tying up valuable working capital. With already limited bank guarantee limits, many such firms could face strained credit profiles, weakened debt coverage metrics and reduced bidding capacity. In fact, their order books, too, may take a temporary hit.
Moreover, as per experts, there seems to be another specific drawback. Under hybrid annuity model projects, the APS policy is not fully effective in controlling aggressive bidding. This is because many contractors, especially those backed by strong investors, still have access to large bank guarantees even though fewer projects are being awarded. Also, performance security is released based on how much of the project is completed, not on the quality of the work. These factors reduce the intended pressure that APS was supposed to create.
With such potential implications, in reality, it will not be far-fetched to think these short-term distortions could potentially lead to market consolidation, naturally favouring larger and better capitalised players who are more equipped to shoulder the financial load.
Towards a future where capital meets credibility
The revised APS policy has sparked a mixed but meaningful debate across the sector. On the one hand it has been widely lauded as a necessary step towards fostering greater financial discipline, improving construction quality and encouraging more rational pricing practices. On the other, there is a clear consensus that the policy introduces immediate financial pressures, particularly for smaller contractors.
To balance tighter financial demands imposed by the APS, the government also has the responsibility to hold up its end of the bargain. Ensuring timely payments for work that meets quality and deadline benchmarks will be critical. Without such reciprocal accountability, the liquidity stress may undermine the very objectives that the policy aims to achieve. This may soften the blow for contractors, to some extent.
That said, stringent norms for APS on their own may not be sufficient to curb the intense competition in the roads sector meaningfully. Imbalances such as access to ample bank guarantees by well-backed players will continue to blunt the deterrent effect.
Nevertheless, in the medium term, the policy will eventually encourage serious, credible and well-capitalised bidders for participation, to get the desired performance output in terms of road construction quality.
Harman Mangat
