Bidding norms could end up being an entry barrier to smaller players

Bidding norms could end up being an entry barrier to smaller players

Guidelines aimed at keeping out frivolous bidders for privately financed and operated projects, key to fixing India’s poor infrastructure, could be keeping newer and younger upstarts from gaining ground in the sector.

The guidelines, which were issued by the finance ministry and ratified by the Prime Minister’s committee on infrastructure in May, are applicable to the so-called PPPs, or public private partnership projects. They favour bidders who have executed large projects and cap the number of bidders at six, with the exception of power projects.

The idea was to streamline the bidding process and remove ambiguity as well as to keep out “non-serious" bidders who could resort to litigation after losing a bid.

“Earlier, each sector followed different bidding norms," says a Planning Commission official who didn’t want to be named. “Now, we have restricted it to one way."

But, opinion within government itself is divided over the merits of this policy and smaller companies say they are concerned.

“It is clearly an entry barrier," said Ankineedu Maganti, a director with Soma Enterprise Ltd, which posted revenues of Rs710 crore in 2005-06. “But there are pros and cons (to the guidelines). You don’t want smaller companies to get the project by quoting very small prices when they are not capable of executing it. My opinion itself is divided at this point, We are waiting and watching. We may have to partner with a large international company."

Soma currently has four road projects in the build-operate-transfer mode, where the concessionaire has the right to operate the project for a specific period of time.

The new bidding requirements have come at a time when the Indian infrastructure sector is seeing many small regional civil engineering subcontractors wanting to do such PPP projects. The Planning Commission estimates that to maintain current growth, India’s infrastructure spending needs to increase from about 5% of gross domestic product, or GDP, to 9%. The commission has projected total investments at $475 billion (about Rs19 trillion) over the next five years and proposed a PPP model to make up for resource shortfall in the public sector.

A board member at the National Highways Authority of India, or NHAI, the country’s highway regulator, who did not wish to be identified, said: “When they (the guidelines) were issued we opposed it, saying it will lead to undesirable consequences. But, we were overruled, so we have to implement it."

The new bid process is being implemented by NHAI in all future road projects, including the five large road stretches costing an estimated Rs3,000 crore and for which currently bids are being processed.

“I don’t think this is the right thing to do. If you are preventing competition, then you have to pay a very high price later," the NHAI official said. Prior to the guidelines, the official said, NHAI would invite everybody who qualified the basic criteria to put in bids.

“Sometimes, there would be 10-15 bidders for the project," he said.

Officials at the Competition Commission, the government organization that regulates anti-competitive activities, declined to comment, saying they were unaware of the guidelines.

“I don’t think it is wise to tie-down the number of bidders," says Partha Mukhopadhyay, senior research fellow at Centre for Policy Research, a New Delhi-based think tank. “Earlier, they would fix the number of (pre-qualified) bidders on a project-by-project basis. But, setting a common limit across all kinds of projects seems a little silly because what works for ports, will not work for roads, and what works for the Mumbai port, may not work for the Cochin port."

The guidelines give greater weightage to experience of bidders in sectoral projects and reduce it proportionately for their construction experience. The guidelines also retain minimum net worth norms, which require companies to have a net worth of at least 25% of the estimated capital cost of the project. In the case of projects costing at least Rs1,000 crore, the net worth criterion can be relaxed to 15%.

What some industry representatives and government insiders fear is that by doing so, the guidelines may actually reduce the chances of companies primarily engaged in construction graduating to owning and operating infrastructure projects.

They would, however, be able to participate by being a member of a consortium with one larger company.

“If there are some 10 projects and only five or six compete for all of them, this could lead to cartelization. You are needlessly preventing competition, you are needlessly encouraging cartelization. It is a retrograde step," says a senior executive of a large infrastructure company who didn’t want to be identified. “Their argument could be that too many bids could make it a fish market, but more bids would mean better price discovery for the government."

A finance ministry official, who did not wish to be identified and was not part of the drafting process, said the guidelines could potentially stymie competition. “Who is to say that five is the right number and not seven or eight or 10," he says.

Sangeeta Singh contributed to this story.