NHAI modifies bidding norms for highway projects

Source:

Economic Times (22 Mar 2010): http://bit.ly/cDYdoP

Financial Express (6 Apr 2010): http://bit.ly/ayZyGD

Economic Times (30 Apr 2010): http://bit.ly/cJk6oz

This is not directly finance related, but consultants would do well to be aware of the additional norms that apply to bidders for BOT based road projects:

• A bidder shall not be eligible for bidding if the bidder, its member or associate has been declared by the authority as the selected bidder of three or more projects that are yet to achieve financial closure by the bidding date. The bidder/member/associate may have been named selected bidder by itself or as part of the consortium. A bidder is the 'selected bidder' when a Letter of Award has been issued to it by the authority. Currently financial closure must be achieved within 180 days of the signing of the Concession Agreement, which itself is usually signed within 45 days of the issuance of the LoA.
• The concessionaire must engage an EPC contractor that has experience of at least one completed highway of a minimum of 20% value of the estimated project cost of the awarded project in the preceding five years.
• The Net Worth criteria for the concessionaire has also been modified to apply to both the consortium and individual partners. For consortia, the net worth criteria has three slabs:
• In the first slab are projects worth up to Rs 2,000 crore with a net worth criteria of 25 per cent of the total project cost (TPC).
• Projects worth between Rs 2,000 crore and Rs 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, e.g. for a project worth Rs 2,600 crore, the concessionaire’s net worth has to be Rs 800 crore.
• For projects with a TPC of above Rs 3,000 crore, the concessionaire should have a net worth of Rs 1,000 crore, plus 100 per cent of the cost above Rs 3,000 crore. To elaborate further, if a concessionaire bids for a project worth Rs 3,600 crore, he/she must have a net worth of Rs 1,600 crore.
• Additionally each member, irrespective of the equity stake in the project, must demonstrate a Net Worth of 12.5% of the project cost (up from 5% originally) in the previous year to be part of the consortium. 

These changes are likely to turn the tables in favour of the larger domestic players and international bidders, especially for the planned 'mega highway' projects that cover 400+ km stretches at a cost of Rs. 4000 cr per project. Ten such projects have already been identified by the road transport and highways ministry.

However, there is also a provision that enables smaller companies to bid despite not satisfying the net worth criterion. These companies would be allowed to participate in the bidding process as long as they raise adequate equity from the market before submitting the bid. Raising equity will increase the net worth of the company even though the effect would only be visible on the financials at the end of the financial year.

This is likely to result in frenetic deal-making and JV formations between domestic players and international entrants, perhaps even a few infrastructure IPOs if the smaller players don't want to miss out on the opportunity. Indeed the first of such JVs has already been declared (http://bit.ly/cg2zSb), a mammoth $ 2 bn deal involving Tata, Actis and Atlantia.