Higher net worth norms likely for road builders

Higher net worth norms likely for road builders

New Delhi: The government is considering a proposal that raises net worth requirements of companies bidding for highway projects in an attempt to match project bids with the capacity of the bidder.

The new proposal involves a three-tier entry norm—depending on project size—for potential bidders, said a National Highways Authority of India (NHAI) official, who spoke on condition of anonymity. Bidders for projects below Rs2,000 crore would need to have a net worth of at least 25% of the cost of the project, with the cap progressively increasing to 50% for projects worth Rs2,000-3,000 crore and 100% for projects above Rs3,000 crore.

The proposal, which came from the ministry of road transport and highways, was at a preliminary stage and yet to be made to the board of the authority, the official said.

As much as one-third of all future highway projects that come up for award may cost in excess of Rs3,000 crore to build, the NHAI official said, and added that the net worth criterion is just one of several changes being considered. Mint could not immediately ascertain the others.

A model document governing initial bids—published by the Planning Commission and meant as a guide for ministries—suggests that companies should have a net worth of 25% of the cost of the project.

Highway experts said the authority has long grappled with a way to assess capacity of highway bidders, as a few firms in India’s still nascent public-private partnership road building industry vie for an ever increasing number of projects.

A road ministry official said the move?was being considered in order to prevent the practice of “name-lending", whereby large companies give their names to smaller firms—often for a fee—so they can be eligible to bid for projects.

An executive with a consulting firm surmised that the proposed regulations may also be a way of ensuring that projects don’t get delayed because of smaller companies bidding for large projects that are beyond their capacity.

To be sure, the government has in the past frequently altered bid conditions, including threshold criteria such as net worth requirements and the extent of prior experience companies need, to bid for projects.

One such change in 2007 led to a stand-off between government and highway contractors after some developers alleged that the new conditions in effect created an entry barrier for smaller, newer entrants.

This year, NHAI also introduced norms that prevented companies that had three or more pending financial closures from further bidding. Financial closure refers to the tying up of funds for the project.

The current proposal gains importance considering the scale of the task the ministry of road transport and NHAI have undertaken. Union road transport minister Kamal Nath has set a 7,000km a year target for highways.

Arvind Mahajan, an executive director with audit and consulting firm KPMG, said the government should also look at ways of assessing the capacity of contractors.

“There will be some degree of concern because of these net worth requirements," said Mahajan. “I am not saying it’s a bad thing. But there will be concerns because there will be a handful of people that meet some of the requirements."