The Hindu Business Line : Competition increases in road operations sector

What experts say
Large firms have huge orders on hands. They are now cherry picking.
Sub-contractors turn road operators.
BOT projects bring in competition in real sense.

New Delhi , Aug. 9

With firms perceiving road operations as profitable, competition in the build-operate-transfer (BOT) road space is increasing by the day with newer players — both large and small — entering the sector. This is evident from the national and State highway contracts.

"Most of the large firms in the sector are neck deep in work. Now, they are cherry picking and are bidding selectively. Thus, smaller companies are seeing an opportunity in the sector," said Mr Mohanjit Singh, Vice-President, Srei Infrastructure Finance Ltd.

Moreover, smaller firms are able to bid competitively as they have lower overheads relatively, Mr Singh said, adding that the sector has been operationalised for 5-6 years now and there is enough experience for smaller companies to fall back on.

The Feedback Ventures Vice-President, Mr Harsh Srivastava, said: "Initially we saw large players such as Larsen & Toubro, Hindustan Construction Company and Nagarjuna Construction Company. Then came the second-generation players such as IVRCL Infrastructure, GMR, GVK and DS Construction. They were followed by the more competitive third generation lot — Unity Infrastructure, Ideal Builders, Oriental Structural Engineers and Era Construction, which are bidding very aggressively."

Several mid-sized companies, which were earlier sub-contractors of larger road operators, have now entered the sector on their own. "Early entrants in the national highways sector for BOT projects were typically companies such as L&T, Gammon and Continental, which had undertaken huge turnkey projects across sectors both within India and abroad. We are now seeing a lot of real estate firms which would have acted as construction contractors in the initial years with bigger forms," said Mr Singh.

However, competition in BOT (annuity) projects appears to be higher than in BOT (toll) projects, said Mr Rajesh Samson, Vice-President, E&Y. In annuity projects, the toll collection revenue risk is taken by the National Highways Authority of India, whereas in toll projects, the toll revenue risk is taken by the player.

"While in BOT (toll) projects, 3-4 players bid on an average, for BOT (annuity) projects, there are 8-12 bidders," said Mr Samson.

Compared to engineering procurement contracts (EPC), BOT projects bring in competition in real sense, said Mr Shailesh Pathak, Head-PPP Initiative, IDFC, adding that even though EPCs were awarded to lowest bidders, most of these projects had change in scope of work, delays and cost overruns, and the Government ended up paying up much higher.

"In EPC, the lowest bidder, having won a contract, looked for ways to increase project cost, but in BOT projects, where entire projects are bid out, players actually aim for cost minimisation," said Mr Pathak.