Highway EPC contracts all set to get a leg-up

Tags: Plan

Higher risks turn BOT projects unattractive

The National Highways Authority of India (NHAI) is planning to increase engineering, procurement and construction (EPC) component of the total road projects awarded, as it seems to be falling short of its target of awarding 9,500 km of road projects in 2012-2013. At present, the EPC component comprises of 40 per cent of total contracts awarded while the build, own, transfer (BOT) component makes up for 60 per cent of road contracts for this financial year.

In EPC projects, developers only take the construction risk and are assured of returns if they have estimated costs correctly and are able to complete the project on time. As opposed to EPC projects, BOT projects involve greater variability of returns as they depend on actual traffic versus projections, in addition to normal construction risks. Also, the larger amount of debt resources required for such projects tends to increase risks from a financing perspective in typical public private partnership projects.

According to a senior industry official, for at least two of NHAI’s BOT projects, one in Bihar and another in Delhi, the authority failed to get even a single bidder, signalling the sorry state response in the BOT segment.

“We failed to draw satisfactory response in the BOT segment due to various issues like land acquisition, lenders getting cautious and worries regarding financial closure. So we plan to increase the total contracts awarded under EPC segment by around 700-1,000 kilometres in the next three months. Response from bidders has been extremely inspiring in the EPC segment with an average of 58 bidders queueing up for pre-qualification per project,” a senior NHAI official told Financial Chronicle.

Initially, NHAI set a target of awarding 3,500-4,000 km under the EPC mode, which would now be increased by another 1,000 km as BOT projects are not generating proper response, the authority feels.

Till November, NHAI has awarded around 750 km under the BOT segment, and another 250 km under EPC. The award is far below the 2012-2013 target of around 6,000 km under BOT and 3,500 km under EPC.

“Initially we did not focus on EPC since our main focus was BOT, but with lackadaisical response we have shifted our focus only now to EPC. We see a possibility of EPC target increasing to 4,500 km to 5,000 km to make up for the shortfall in the BOT projects,” the NHAI official said. In EPC projects, NHAI needs to raise funds to finance the projects, whereas in BOT projects, raising the funds is the responsibility of the winning concessionaire.

Abhinav Bhandari, senior infrastructure analyst with Elara Securities said, NHAI may face some problems if it plans to award additional projects under EPC segment, as EPC requires 100 per cent availability of land before projects are put up for bid. “I am aware that NHAI is close to tying up 100 per cent of land for its target of 3,500 km under EPC, but am not sure if they would be able to secure additional land in such a short period,” said Bhandari. In many BOT projects, bidders have complained that NHAI has been unable to make land available on time, affecting their returns and the cost of executing projects and in turn, inviting penalties from the authority.

“I believe NHAI has the ability to award at least 6,000 km to 6,500 km this year, which is the same as last year. They have awarded around 1,200 km as of now and would award another 1,000 km of BOT and 4,000 km of EPC, taking the total to 6,500 km for the year,” Bhandari said.

Virendra Mhaiskar, chairman of IRB Infrastructure forecasts things to improve from next year onwards for NHAI. “They are trying to bring all of the land under their control before they award new projects. Even for BOT projects, they require around 80 per cent of land before it is put up for bidding.”

The NHAI official quoted earlier admitted that the issue of land acquisition was the biggest challenge since it was a state subject, and unless they provided land on time, projects would continue to get delayed, creating cost overruns and affecting viability. Hence, state governments needed look into the issue on an urgent basis.


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