The Union government may want to award more contracts under the engineering procurement contract (EPC) mode but a model agreement is yet to be finalised. Some time ago, the National Council of Applied Economic Research had submitted a model to the road ministry, which has not moved for requisite approvals after numerous meetings and exchange of letters.
The defect liability clause that is crucial in maintaining quality roads is one of the points on which there is a lack of consensus within the government. While the Planning Commission wants the defect liability clause to be of one year, the road transport ministry, headed by C P Joshi, wants it at least to be at three or five years.
The defect liability period makes the contractor liable for any fault for a particular time period after the completion of road construction.
The ministry feels that the new model agreement for EPC projects should have more safeguards to check the developer from increasing the cost of the project and building quality roads. Says a senior ministry official: “Longer defect liability clause will ensure that the developer does not build poor quality road, which is of no use just after a year of construction.”
The Planning Commission is of the view that a longer defect period could push up the bid values and increase the government expenditure. Says an official in the commission: “The road transport ministry and the National Highways Authority of India (NHAI) should ensure through proper checks that the road being built is not of poor quality.” He is of the view that defect liability clause can be resolved through discussions and should not be a reason for any delay in finalising the bid document for EPC.
The industry does not see much merit in the Planning Commission’s view. It wants the defect liability clause to be more than one year. “No major defect during the construction of roads will show in the first year after the construction is completed,” notes S S Raju, president and CEO Infrastructure (India) at Punj Lloyd. “The defects start surfacing only after the first year or from the second year. It is always advisable to keep the defect liability clause for at least more than one year.”
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In the existing EPC model, a contractor builds the road and the government makes the payment. Any change in the design and input cost is also paid by the government. The current model also does not mandate the contractor to maintain the road.
In the past couple of years, NHAI has not awarded any project on EPC. It has awarded projects only on BOT (toll) and BOT (annuity). In BOT (toll), the developer builds the road and recovers investment through toll collection for a period of time. In annuity, the developer builds the roads and the government pays it in instalments.
The Public Private Partnership Appraisal Committee, an inter-ministerial group that sanctions viability gap funding for infrastructure projects, has objected to the annuity model on the ground that it would turn out to be expensive for the exchequer in the long run. A number of other committees too have favoured award of contracts on EPC mode.