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Small road firms to face EPC hurdle as hybrid-annuity model takes back seat

Megha Manchanda/New Delhi 13 Feb 19 | 11:06 PM

With road construction under the hybrid-annuity model expected to take a back seat next year, mid-sized companies such as Gawar Construction, Dilip Buildcon and Ashoka Buildcon, may lose the top positions in the sector. 

These companies emerged winners, as the focus shifted to hybrid-annuity — in which a majority of the financial risk is borne by the Union government. 

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“Hybrid-annuity would be dormant in the next fiscal as the sector’s ability to absorb more of it is restrained," Ankur Agarwal, senior analyst, India Ratings and Research, said. 

Engineering-procurement-construction (EPC) projects, which were dominant in 2018-19, will continue to have a greater share in the number of national highway projects awarded next year, and hence the mid-sized companies will have to step up their execution capabilities, Agarwal said. 

Vishwas Udgirkar, partner, Deloitte India, however, said, “Mid-sized firms will not lose their sheen, as they are into construction and will build the EPC projects, but since these contracts are smaller in size or lesser in economic value, as compared to hybrid-annuity mode (HAM), highway developers will have to execute more projects to stay in the race." 

In 2016, the Union government approved HAM for building roads to fast-track highway projects, revive the public-private-partnership (PPP) mode and attract more investments in the sector. 

Under this model, the government provides 40 per cent of the project cost to the developer to start work, while the remaining investment is made by the developer. 

ALSO READ: Road developers bid for projects, but do not rely on NHAI traffic data

Design, Build, Operate and Transfer (DBOT) or BOT is another form of highway construction, where the project is financed only to the extent of a certain percentage of the cost by the private investor. 

An EPC or engineering-procurement-construction project is fully funded by the government where the entire investment during the construction phase is either made by the Ministry of Road Transport and Highways or the National Highways Authority of India (NHAI) and then the contracts are tendered to the highway companies for operation and maintenance. 

In the past couple of years the infrastructure landscape of the country changed as smaller players like Dilip Buildcon and Ashoka Buildcon claimed top ranks in the sector that was once dominated by Larsen & Toubro, Hindustan Construction Company, Punj Lloyd, GMR and GVK. 

Experts believe the stalwarts in the sector lost ground and made way for medium-sized companies, mainly on account of aggressive bids, delays and banks' reluctance in funding these companies’ projects. 

The HAM faces financing issues and the companies seem keen on executing the government-funded EPC contracts, since it gives assured revenue quickly without the risks that come with managing of projects. 

ALSO READ: NHAI to raise Rs 10,000 cr via Bharatmala bonds in FY19, Parliament told

Bhopal-based Dilip Buildcon has emerged as one of the key players in the highway construction space with an order-book of Rs 14,204 crore. 

“Since we are present in both the EPC and HAM space, we would welcome if the government focuses more on EPC," Devendra Jain, CEO, Dilip Buildcon, said. 

In the 2017-18 financial year, the NHAI awarded 150 road projects of 7,400 km worth Rs 1.22 trillion. Of the total projects awarded, 3,791 km was awarded on EPC mode at Rs 43,000 crore; 3,396 km was awarded on hybrid Annuity mode at Rs 76,500 crore and 209 km on toll mode at a cost of Rs 2,500 crore.

Projects awarded by NHAI in 2017-18

150 projects for 7,400 km, worth Rs 1.22 trillion 3,791 km awarded on EPC mode at Rs 43,000 crore 3,396 km awarded on hybrid annuity mode at Rs 76,500 crore209 km on toll mode at a cost of Rs 2,500 crore

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