Easier bidding norms to boost infra projects

Easier bidding norms to boost infra projects
The Financial Express Sunday, June 21, 2009, Page 1

Economy Bureau, New Delhi

Barely a month after regaining power, the UPA on Saturday brought about a major revamp the way infrastructure projects are bid out to private players. The finance ministry issued revised guidelines for request for qualification (RFQ) of bidders for public-private partnership (PPP) projects.

The new RFQ, aimed at removing bottlenecks that have plagued the award of infrastructure projects, has removed many contentious clauses, including the cap on the number of bidders for a project and has also clarified the issue of indirect shareholding.

The new guidelines have also redefined PPP and core sector to include logistics parks and metro rail projects, while excluding petroleum and natural gas. The move comes at a time when the railways is set to build a number of logistics parks for its freight corridor, and states are getting ready to construct metro rails. Similarly, for real estate development, townships and residential complexes would be eligible but standalone housing has been removed from the list.

In the revised guidelines, the number of shortlisted bidders has been increased to six and for projects of less than Rs 500 crore or repetitive projects, it has been hiked to seven. More importantly, a reserve list of bidders will be made. For road projects, the existing exemption from short listing of bidders would continue. The earlier provision, which restricted the number of bidders to a maximum of five, had proved to be a major hurdle in the successful bidding out of road projects.

Another obstacle, the 1% cap of cross holding, or the percentage a common shareholder can have in two companies that are bidding for a project, has now been hiked to 5%. Significantly, banks, pension funds, public financial institutions and insurance companies have been excluded from the clause. “The present limit of 1% of crossholding, relating to conflict of interest has been increased to 5%, and the term ‘indirect shareholding’ has been clarified,’’ the RFQ says.

Indirect shareholding will only constitute if an intermediary is controlled by another company’s management, the company has more than 26% stake in the intermediary. Further, in case of a conflict of interest, a consortium member can withdraw 10 days before the application due date. One of the biggest casualties of this stringent criteria regarding conflict of interest was the modernisation of the New Delhi railway station, where 11 of the original bidders faced disqualification.

Analysts however said increasing the cap to 5% on cross holding might not be sufficient as most private equity funds tend to go for an over 5% investment in a company. “This should ideally have been increased to 10%,” a consultant said.

In a significant change to the earlier norms, each of the consortium members will now also be required to hold equity equal to at least 5% of the total project clause for a period of two years since the project is commissioned. Apart from infrastructure, the revised RFQ has an ‘enabling clause’ so that it can be modified and also be used for social sector projects.

“While most changes are welcome, the finance ministry should give a clear indication that the RFQ should be used as guidelines by line ministry and not as rigid norms. This would allow the bidding criteria to be revised depending on the project and the sector. Otherwise it stops being a ‘model’ concession agreement, said Amrit Pandurangi, executive director PricewaterhouseCoopers.

The UPA has been keen to push investment in infrastructure projects as a means to stimulate economic growth.

Road ahead

•The finance ministry has issued revised guidelines for RFQ of bidders for public-private partnership projects

•Number of shortlisted bidders has been hiked to six and seven for projects of less than Rs 500 crore or repetitive projects

•The 1% cap on cross holding a common shareholder can have in two firms bidding for a project, has now been hiked to 5%

•In case of a conflict of interest, a consortium member can withdraw 10 days before the application due date