Changes to roads policy could have gone further

The Ministry of Road Transport and Highways has relaxed the financial and technical criteria, including the annual average turnover, required toqualify to bid for EPC road projects. Changes along similar lines for Build-Operate-Transfer and Hybrid Annuity Model projects were announced in October. 

The new eligibility criteria

·       Average annual turnover requirements for bidders have been reduced from 20% of the estimated project cost for the last five years to 15%. 

·       Sectors from which prior experience will qualify have been expanded to includehospitals, hotels, irrigation, water supply, smart city, oil and gas and real estate development.  

·       Threshold technical capacity for normal highway projects have been relaxed and are now 75% of the estimated project cost for projects up to Rs 100 crore and 100% the estimated project cost in case of projects more than Rs 100 crore and upto Rs 500 crore. 

·       For specialised projects of more than Rs 1,000 crore, the threshold technical capacity has been revised to equal to the estimated project cost, or Rs 1,000 crore.

Widening participation

It is hoped that these changes will attract smaller, less experienced and local Indian companies to bid for such projects. Given that the technical requirements for road building are not too demanding, these changes are positive ones as they should lead to great participation and competition.

Go a bit further - project transferability

Unfortunately, the Ministry did not take the opportunity to look a little more closely at another long-standing aspect of the regulatory/contractual framework for concession-based road projects - the requirement that the shareholding of the successful bidder in the project SPV not fall below 51% for the first 2 years after commercial operations commence. Having this requirement may have fulfilled some policy objective of the government in the past, but that time has arguably passed. Early stages of projects carry higher levels of risk, with uncertainty arising from, amongst other issues, the requirement to secure permits and consents and ensure that all the land has been acquired and handed over to the project in accordance with law. Early stage project developers are more willing and better able to take such risks. Often, their intention is to take the project to a certain level of development and then sell it on to longer-term investors (road operators, sovereign, pension and infrastructure funds) who are generally unwilling to take early stage risks or tend to price such risks higher than local developers.

With the expansion of the universe of project bidders to include potentially less qualified and less financially robust local companies who might be more willing to take early stage risks following the recently announced changes, it might be beneficial to enable projects to be transferred/sold earlier than currently permitted. As project costs and returns are determined at the time of the bid, there is no impact to the project if the early stage developer sells the project at a premium. The government could mandate higher financial and technical thresholds for such transferees, so that better qualified and financially stronger companies eventually hold the project. The fulfilment of these criteria and the suitability of the transferee could be determined by an evaluation committee – even under the current regulatory regime, stake transfers above 15% or 25%, depending on the concession in question, already require government approval.

Let’s hope the government considers this issue in future changes to the roads policy.