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NEW DELHI : In a clear sign of slowing road construction activity, the bid premium for the majority of projects awarded this year in FY22 has fallen to a mere 3-5%, as against over 10-20% premiums that road tenders commanded over the previous five years.

Although premiums have risen 8-10% in the first six months of the current financial year, analysts expect the figure moderate in the second half because of global headwinds.

Tenders for road projects are invited on a price and are awarded to the entity bidding the highest premium over and above the listed price.

Road construction is an important component of the PM Gati Shakti scheme, which aims to reduce India’s high logistic costs that have been a drain on the economy.

India spends 14-15% of GDP on logistics, compared with 7-8% by developed economies. This high cost has a domino effect on other parts of the economy.

Falling premiums coincide with big players such as L&T, Soma Engineering and Megha Engineering missing from recent bids. This is put down to the fact that they already have money blocked in other road projects and are actually monetizing these because they are not very optimistic about returns on the new projects on offer.

This in turn has led to mid-size companies with low risk appetites entering the field but providing lower premium and delaying actual construction because their ability to raise the funds needed to get the projects started is limited. This comes in the backdrop of road construction reaching just 39% of the target in the first seven months of the year, with a big slippage expected for FY23.

“There is definitely a slowdown in investor interest for road projects as is evident from the falling number of big bidders in road tenders floated in the first half of current fiscal. What is more worrisome is that dwindling of the numbers of bidders has also shrunk bid premiums for the NHAI (National Highway Authority of India). But with all the winning bidders able to mobilise finds and projects getting financial closure, better quality of asset bundle would improve investor interest in key infra projects," said Aniket Dani, Director, CRISIL Research.

According to data from NHAI and CRISIL Research, in bids under the hybrid annuity model (HAM) during the first half of FY23, the number of bidders shrank to 5-7 while the bid premium remained in 8-10% range but is expected to moderate after the second half.

For FY22, the number of bids was higher at 10-15, and the bid premium had shrunk to 3-5% with an increase in participation from mid-sized players.

Progressively, the bid premium for HAM projects have fallen from a high of 13-16% in FY16-18, to 15-20% in FY19-20, to 10-12% in FY21 before falling to a mere 3-5% in FY22.

Under HAM projects the government pays 40% of the cost while the private investor needs to pay the rest.

The steep fall in bid premiums reflects investors’ lack of confidence in the asset bundles which determine the kind of returns they will get from a road project. One problem is that some investors consider the government’s projections for traffic volumes to be exaggerated.

“The evolving global economic conditions do play on investors sentiments and affect their ability to put in aggressive bids but one of the main reasons for lowering of bid premiums in road projects this year is also the relatively poor quality of asset bundle on offer and better estimation of traffic data available with investors," said Arindam Guha, partner, government and public services, Deloitte India.

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