Livemint reports that the EPC bids for the National highway projects have been following the same script of aggressive and over-optimistic bidding,
A total of 52 EPC road projects worth about Rs.26,700 crore have been awarded between January and June, according to data compiled by brokerage Equirus Securities Pvt. Ltd. Of these, close to 40 projects were won below the National Highways Authority of India’s estimated cost and each of the projects attracted three to 14 bidders. The government’s push for a new low-risk hybrid-annuity model (HAM), in which the state commits up to 40% of the project’s total cost to kick-start private sector investments, and the emergence of a number of smaller, regional companies have added to the competitive intensity, according to road developers and analysts.
And to get a sense of the scale of froth,
Larsen and Toubro Ltd (L&T) has... won five awards in the six months ended 30 June, all of them below estimated costs. It won two EPC projects in Tamil Nadu in February by bidding 27% and 13% lower than the project cost... In March, L&T won a road project in Kerala at a bid that was 38% below the estimated project cost. Similarly, Bhopal-based Dilip Buildcon Ltd has won six contracts, which were between 13% and 31% below the estimated cost.
It is inconceivable that these projects can be completed at such optimistic cost estimations. Given the transaction costs and inevitable delays (even with full site acquired), it would be a near miracle to make reasonable returns at such cost estimates. The public agency which is allocating the bids and the bankers who are lending to such developers are clearly living in a world with a different set of economic rules.
Clearly developers are bidding aggressively to bag the contract, with the expectation that they can renegotiate. Further, for cash strapped infrastructure contractors, the 40% upfront cash payment holds great attraction. Cash flow considerations, therefore, trumps commercial viability.
In the real world of infrastructure financing, there is nothing unusual about such reckless bidding. In fact, it is a truism that finance loses its disciplining powers and developers their prudence, when the market is on the upswing, as is the case with roads EPC projects. The only surprise is that the latest cycle has been initiated even as the damages from the previous bout still remains large on the balance sheets of both developers and lenders.