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Fresh net worth criteria for road projects to benefit large firms

Fresh net worth criteria for road projects to benefit large firms
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First Published: Wed, Mar 24 2010. 10 21 PM IST

Updated: Wed, Mar 24 2010. 10 21 PM IST
The proposed revision in eligibility norms for participation in road projects by National Highways Authority of India (NHAI) is a positive step to hasten project execution and bring in credible players with experience. However, it’s likely to benefit the larger companies and work against smaller firms.
A key pointer in this direction is the change in net worth criteria. Until now, irrespective of the project size, the bidder had to have a net worth of 25% of the project cost. This has been retained for projects up to Rs2,000 crore. However, net worth limits keep rising in tandem with the project size. Projects in the region of Rs2,000-3,000 crore will require bidders to have net worth equal to 25% of the project cost plus 50% of the amount of project cost exceeding Rs2,000 crore. The new norms have increased the net worth requirement of bidders on an average by around 50% for large projects. In addition, NHAI has also introduced a clause which states that in case of a consortium, each individual bidder, too, must have a net worth of at least 12.5% of the project cost.
The key factor would therefore be financial strength and only big companies will be able to participate in large highway projects.
Photo: Indranil Bhoumik / Mint
For example, companies such as Larsen and Toubro Ltd, with a net worth of around Rs12,500 crore in 2008-09, and the IVRCL group with a combined net worth of around Rs4,500 crore, will be able to participate in projects above Rs3,000 crore. Other large companies are Gammon Infrastructure Projects Ltd and GMR Infrastructure Ltd. Larger companies also have better credentials that will help them complete financial closure faster than small entities that do not have the balance sheet strength to do so.
Financial closure has at times taken more than a year, leading to delays and cost escalation. However, in one instance, IVRCL Infrastructures and Projects Ltd completed financial closure in around eight days, raising debt of around Rs1,200 crore.
According to a report by Edelweiss Securities, “the new norm will make it difficult for smaller players to take large projects, which may, eventually, stretch their financial and technical capabilities.” Smaller companies such as Gayatri Projects Ltd and Madhucon Projects Ltd, with net worth under Rs1,000 crore, may find it tough to participate in large projects. Often, new entrants who aspired to participate in large projects to cash in on the infrastructure boom worked out loose arrangements with overseas firms to gain the pre-qualification needed to participate in projects where they had no experience. In some cases, the overseas partner left the project before completion, resulting in execution delays.
In the next few years, NHAI is expected to present an opportunity for around 35,000km of highway projects, with nearly one-third being in the Rs3,000 crore category. The revised norms will, therefore, hinder smaller companies that bid aggressively at unviable rates, just to get an entry into the sector. In other words, larger and more serious players will benefit from reduced competition.
Write to us at marktomarket@livemint.com
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First Published: Wed, Mar 24 2010. 10 21 PM IST