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Govt sweetens highway contracts for top-rated ones

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In short

The government has introduced new rules for highway contracts, offering financial advantages to top-rated contractors while penalizing lower-rated ones. The revised model concession agreement includes a 3%, 4%, and 5% performance security for EPC projects, aiming to give financial advantage to highly rated contractors but affecting cash flow for low-rated contractors. The government plans to award the highest number of highway projects in the current financial year, with 26 projects under the EPC mode, 21 under the hybrid annuity model, and seven under the build-operate-transfer model.

Key points

  • The government has introduced new rules for highway contracts, offering financial advanta…: The government has introduced new rules for highway contracts, offering financial advantages to top-rated contractors while penalizing lower-rated ones.
  • The revised model concession agreement includes a 3%, 4%, and 5% performance security for…: The revised model concession agreement includes a 3%, 4%, and 5% performance security for EPC projects, aiming to give financial advantage to highly rated contractors but affecting cash flow for low-rated contractors.
  • The government plans to award the highest number of highway projects in the current finan…: The government plans to award the highest number of highway projects in the current financial year, with 26 projects under the EPC mode, 21 under the hybrid annuity model, and seven under the build-operate-transfer model.

Sources checked by our analysis pipeline: 1

Three slabs of 3%, 4% and 5% have been introduced for engineering, procurement and construction (EPC) projects through the revised model concession agreement introduced recently. Until now, a standard 5% performance security was applicable on all projects.

Also Read: After two-year slowdown, national highway project awards fast-tracked

"The idea is to give financial advantage to highly rated contractors as quality of highway construction is the top priority," a government official said. "However, additional-security retention can affect cash flow for low-rated contractors."

Besides, it has introduced penal provision for contractors for every fatal accident on the highway, put in place a formula-based compensation mechanism with a cap, set up higher standards for land acquisitions and introduced price adjustment for key raw materials to suit the current need.

As per the revised framework, contractors with rating above 80% will have to deposit a 3% of the project value as security while the rate of deposit is 4% for contractors with rating between 70% and 80% and 5% for ratings below 70%.

The last major revision in the concession agreement for EPC projects happened in 2022.

Jagannarayan Padmanabhan, senior director and global head, consulting at Crisil Intelligence said the revised EPC framework contains both contractor-supportive and authority-protective changes.

Also Read: Govt invokes catastrophic failure event clause against 2 highway developers

"Differentiated performance security and a formula for prolongation costs may improve bid financing and entitlement certainty," he said. "Howeevr, restrictions on contractual arbitration for large disputes and limits embedded in compensation and escalation mechanisms can constrain claim recovery," he added.

The government plans to award highest number of highway projects in the EPC mode in the current financial year with the National Highways Authority of India identifying 26 projects under the engineering, procurement and construction (EPC) mode, 21 under the hybrid annuity model (HAM) and seven under the build-operate-transfer (BOT) model for awarding.

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Original source: economictimes.indiatimes.com

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