Continuous change in highway bidding norms

The government has yet again changed the norms for highway projects. Only in February were the norms revised, wherein any developer having three or more projects which have not achieved financial closure would not be allowed to bid for new projects. Developers at that point of time had to achieve the financial closure of the projects within 6 months.

According to the National Highway Builders Federation "The new policy will prevent aggressive bidding by some contractors, who win projects just to spruce up their order books, but then struggle, while tying up the funds.

"The NHAI has taken the right move, as companies cannot delay projects any longer. This will help them keep a check on construction firms, which have too many projects in hand and also achieve the 20 km per day target" - E sudhir Reddy IVRCL

Developers said there are many formalities to handle even before one can start raising funds for a project. After a letter of award is given, it takes 30-45 days to form a special purpose vehicle (SPV). After presenting the SPV document, the concession agreement has to be put through. Only after which is the developer allowed to proceed for financial closure. This process takes around three months. After necessary approvals are in place, companies approach banks for funds. Banks appraise the project and sign loan agreements, and this could take anywhere between two and three months.

On an average, financial closure of a road project takes around five to six months. It can go up to nine months for a larger-sized project.

'financial closure' is defined as fulfilment of all conditions precedent to the initial availability of funds under the financing agreements.The phrase 'conditions precedent' refers to commitments to be met by the developer and by NHAI. "These are the conditions to be fulfilled prior to when you can start working on a project. These can be land acquisition, rehabilitation, and environmental clearances,". While the developer's responsibility will be arranging for shareholders' funds, setting up an escrow account; NHAI deals with the necessary state support required for the project in terms of clearances and land acquisition.

New Norms - 26th April 2010
The changes include linking the technical and financial scores of large firms in direct proportion to the extent of their equity participation in the bidding consortium that will execute the project. This step was adopted by the Government to prevent name-lending by large firms, wherein smaller companies tied up with large firms only with an eye to beef up the consortium's technical score. This, in turn, helped the consortium bid for larger projects.

Also, the technical score of only those firms will be counted who have over 26 per cent equity participation in a project.
"The consortium would provide an undertaking to NHAI that the EPC works of the project will be executed by such contractors who have completed at least a single package of over 20 per cent of TPC or Rs 500 crore, whichever is less."
The consortium will share the names of contractors involved and will also have to take prior permission from NHAI if the contractor is changed.

Additionally, the Ministry has given approval to changes which require higher net-worth criteria. In the revised norms, NHAI has increased the net-worth required for participating in projects over Rs 2,000 crore. Earlier, the net worth clause was flat 25 per cent of the total project cost for all the projects.

Now, the projects with a total cost of Rs 2,000-3,000 crore will attract a total net worth criteria of Rs 500 crore plus 50 per cent of the cost above Rs 2,000 crore. So, for bidding for a project with estimated cost of Rs 2800 crore, the bidder's net worth has to be Rs 900 crore.

The criteria becomes further stringent for projects of above Rs 3,000 crore, where the concessionaire has to have a net worth of Rs 1,000 crore plus 100 per cent of the cost above Rs 3,000 crore. For example, any concessionaire bidding for a project worth Rs 4,000 crore, must have a net worth of Rs 2,000 crore.

Additionally, the financial closure criterion has also been made more stringent for large projects. If a company has won two projects of over Rs 3,000 crore for which it has not attained financial closure, then it cannot submit financial bids for new projects.

The current norms allow highway developers to achieve financial closure six months after signing the concession agreement between NHAI and the project developer. For many projects, the time difference between the date of LoA issuance and the concession agreement is as high as six months.

This move is different from an earlier attempt of the Government to limit the number of bidders to the top four-five technically qualifying players — a move that was quashed subsequently.

"A bidder shall not be eligible for bidding if, as on bid due date, the bidder, its member or associate was, either by itself or as member of a consortium has been declared by the authority as the selected bidder for undertaking three or more projects and the bidder is yet to achieve financial closure. A bidder shall be considered as declared selected bidder for the projects of NHAI, where the letter of award (LoA) has been issued."