Railway projects: New rules create equal opportunities

In a recent decision, which is likely to boost competition in the sector, the Ministry of Railways has directed that all railway works be awarded through open tender. Thus, PSUs will now have to compete with private sector players to secure railway contracts. Railway Board is trying to eliminate an intermediate layer so that it can get the best possible price for the works and create more transparency in project allocation.

While private players will now be able to receive orders directly (as opposed to earlier when they were sub-contracted by PSUs) and hence increase their order book, PSUs that have executed complex projects in the past will have access to international markets. There will be an opportunity to explore and/or focus more. India Ratings and Research (Ind-Ra) has highlighted this in a recent report.

As per the earlier system, Railway Board used to award projects on the basis of competitive bidding among PSU players who were part of a selected master list. Thereafter, the selected public sector undertakings will float tenders in the open market. For example, during H1FY22, Zonal Railways allocated projects worth Rs 47,780 million to PSUs like Indian Railway Construction Limited (IRCON) and Mumbai Rail Vikas Corporation Limited, while these PSUs allocated Rs 19,130 ​​million to private players. issued tenders.

In view of the recent decision, private companies like GPT Infra Ltd., KEC International Ltd., Rahi Infratech Ltd. and Texmaco Rail Engineering Ltd. will directly bid for the projects, increasing the number of competitive bids helping the railways reduce costs, the report said. On the other hand, it may affect the margins of PSU players, who will now have to compete with a large number of players. Private companies will also have to put in extra efforts to execute the projects, as it will require a high level of coordination with various departments.

As part of the new mechanism, the ministry has also canceled orders where sanction letter was not issued or MoU was not signed or where no major contractual obligation was taken in any form. The directive affected Rail India Technical and Economic Service Limited (RITES), which received orders for laying new lines for Belgaum-Dharwad via Kittur in the second quarter of FY22; Shimoga-Shikaripura-Ranebennur; and Tumkur-Devangere via Chitradurga, which is worth Rs 40,279 million.

The massive increase in capital expenditure witnessed by the railways sector in recent years has led to an overhaul of the bidding process – capex has increased from Rs 1,082 billion in 2017 to Rs 2,150 billion in 2022 at a CAGR of 15%. What indicates the import of the recent decision on EPC players, 75% of the budget outlay in FY 2012 is directly focused on manufacturing and allied activities.

Anyway, the competition in this area has shown an uptrend of late. While there was a slight increase in competition in FY2011, around 10% of total orders saw participation from more than five players, this figure rose to 14% in H1FY22. With demand to create a level playing field for railway projects and open the door for more private players to participate in tenders, Ind-Ra expects this trend to continue in the future.