MoRTH's stricter bidding rules to ease competition in road projects: ICRA

Hindustan Times

15-05-2025

The decision by the union ministry of road transport and highways (MoRTH) to introduce a new additional performance security (APS) regime last month for all central government road projects (such as national highways) is expected to result in better road quality.
APS is a financial guarantee required to be paid by private contractors for quoting significantly below the estimated base price and acts as a safeguard for the government. This is over and above the standard performance securities, which are forfeited in instances of default. A higher APS ensures that only serious and financially stable contractors participate in bidding, ensuring better quality and timeliness.
On April 30, MoRTH, in a circular, had said that this APS regime is being introduced to deter abnormally low bids in the national highway projects. Under this new circular, now APS will be triggered if bids are lower than 10% of the estimated project costs and it will be set at 0,1% for every percentage of bid price below 10% and 0.2% plus an additional 1% of the bid price in instances when the bid price is 20% or lower than the projected cost. This new circular, which is effective immediately, will remove the 3% cap (of the projected cost) on APS and remove the threshold of a 20% discount to be triggered, which was the case previously.
The National Highway for Electric Vehicles (NHEV), a central government-promoted pilot for building electric highways' national project director Abhijeet Sinha said the previous cap of 3% was unrealistic to impose strict adherence to quality and timelines. He said, 'While it may increase upfront financial commitments for bidders, it serves a larger strategic purpose of preventing post-award costs inflation through change requests and claims. '
Ashish Modani, group head, corporate ratings at ICRA, said this move by the government will deter speculative bidding and promote realistic pricing. 'But in the near term, it is expected to put strain on the credit profiles of small and mid-sized contractors, particularly those with limited-sized bank guarantee limits. The requirement for cash margins to secure additional bank guarantees will increase working capital needs, potentially impacting bidding capacity, revenue growth, and coverage metrics due to higher finance costs.' But he said in the medium term, the policy will eventually result in better quality of road construction.
Echoing Modani's comments, Prabhakar Kumar, government consulting head at REPL, a listed infra consultant company, said this move by the government sends a clear signal that only serious and financially sound players should participate in national-level tenders and cost-cutting at the expense of quality will no longer be rewarded. But he added, 'At the same time, the government should ensure timely payments to contractors for quality and timely work completed.
A statement from ICRA said that most construction projects were awarded at significant discounts, at a median of around 25% between January 2024 and March 2025.
Analysis by the ratings agency showed that the effective performance security will differ by 1% of the project cost at the 20% discount scenario to 2% at a 40% discount scenario due to the policy change.
Currently, the government is facing challenges both in the of quality and timeliness of highway projects, with MoRTH lowering
highway construction targets in recent years, and concentrate on quality.
In January, the Parliament was told that since March 2024, nearly 44% of all national highway projects worth ₹150 crore and above, across 32 states and union territories, were facing delays. In a separate revelation, the government had said there were at least 59 cases of major deficiencies, including cave-ins during the previous five financial years ending FY 24, including provisional data for FY 25.