Existing EPC model being upgraded to replace annuity model
The existing Engineering, Procurement and Contract (EPC) model for road highway contracts is being upgraded, to replace the annuity model. This is because annual government liability on annuity payment has reached Rs 85,000 crore.
The new model, being prepared by the Planning Commission, is expected to be finalised in three months. It would have fixed total project costs and specifications.
“The total cost of the EPC projects will be fixed but will be subject to change only if the design is changed at a later period. In this new model, the contractor will also be asked to maintain the road project for five years after which it will be handed over to the National Highways Authority of India (NHAI),” said a government official, who did not want to be identified.
In the existing EPC model, a contractor builds the road and all the changes in the design and the cost of input cost is paid by the government. The current model also does not mandate the contractor to maintain the road.
“The current EPC norms make the contractor liable for any defect in the road only for a year after the road is complete, called the defect liability period,” said a senior NHAI official, on condition of anonymity.
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The focus of the road transport ministry has shifted away from the annuity mode of building roads after CP Joshi joined as the new minister. Build Operate and Transfer (BOT) (annuity) is one among the two Public-Private Partnership (PPP) modes on which the NHAI awards projects. The other is BOT (toll).
Unlike the BOT toll model where the private operator takes the risk of toll collection, the government mitigates the risk of toll income in the annuity model by guaranteeing six monthly payments over the concession period, which normally goes up to 18 years.
The government is also concerned about increasing annual liability, on account of annuity payments for highway construction, that has touched a whopping Rs 83,794 crore. Many sections in the government also oppose the annuity on the ground that it becomes very costly for the government to build roads on this mode and want EPC mode over annuity.
The government has so far awarded 41 projects for Rs 24,386 crore. The average annual annuity outgo of the government on this account is Rs 5,263 crore.