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With a view to eliminating time and cost overruns generally associated with national highway projects executed through the conventional item rate contracts, the Ministry of Road Transport and Highways recently released the draft of a model EPC agreement. The model agreement is expected to be sent to the cabinet for approval by the end of this month. Earlier, the Ministry of Road Transport and Highways had sought comments from various stakeholders in the road sector on the finalized draft.
In the item rate mode of contracting, the government provides the detailed design as well as the estimates of quantities for different items of work (Bill of Quantities). Payments to the contractor are made on the basis of measurements of the work done in respect of each item. The EPC mode, on the other hand, relies on assigning the responsibility for investigations, design and construction to the contractor for a lump sum price determined through competitive bidding.
A sample analysis by the government of 20 national highway projects executed on item-rate contracts shows that the projects took, on an average, 61 months to complete. In comparison, projects executed through Public Private Partnership adopting the EPC mode were completed in 29 months. Further, the projects executed on item-rate contracts had cost overruns of an average 48 percent (ranging from 25 to 183 percent) besides large volumes of foregone toll revenues on account of delayed completion.
The main reasons for the poor performance of national highway projects executed through item- rate mode of contracting include inadequate project preparation and estimation coupled with allocation of construction risks largely to the National Highways Authority of India.
Most developed countries have already abandoned the item-rate mode of contracting.
At present, a significant part of the existing national highways consists of single-lane roads. The Centre has drawn a program to upgrade 20,000 km. of these roads to two-lane standards during the 12th Five Year Plan (2012-17). Considering that most of the single-lane roads have low traffic density, the PPP mode of execution is not considered viable. Past experiences prove that annuity based projects are comparatively expensive, while conventional contracts are prone to time and cost overruns. Hence, the EPC mode is the only option for upgrading single-lane roads.
The model EPC agreement aims to ensure implementation of projects to specified standards with a fair degree of certainty relating to costs and time while transferring the construction risks to a private sector contractor. It incorporates international best practices and provides a sound contractual framework specifying allocation of risks and rewards, equity of obligations between government and contractor, precision and predictability of costs, force majeure, termination and dispute resolution, apart from transparent and fair procedures.
The model EPC agreement lays down the required design and performance standards but allows the contractor to design and construct the project using best practices and innovation to optimize on efficiency and economy as compared to the rigidity of the item rate contract that relies on a single design provided by the government. The contractor also has full freedom to plan the construction schedule for efficient use of manpower, equipment and other resources while payments are linked to specified stages of construction as compared to payment for individual items/ units under the item rate contracts.
It is expected that awarding contract for a lump sum price would ensure predictability and financial discipline, both for the contractor and the government. Moreover, clearly stated obligations and risks of the respective parties would help in achieving timely completion of the project while minimizing disputes.
Unlike the normal practice of focusing on construction specifications, the technical parameters proposed in the agreement are based mainly on output specifications. Only the core requirements of design, construction, operation and maintenance of the project highway that have a bearing on the quality and safety of assets need to be specified. The contractor has been given adequate room to innovate and add value. In other words, the framework focuses on the ‘what’ rather than the ‘how’ in relation to the asset to be delivered by the contractor.
For maintenance, the agreement provides the contractor 1.5 percent of the contract price, which is a fixed lump sum amount for construction of the project highway, for the first year and 2 percent for the second year. The contract price is subject to adjustment on account of changes in the cost of inputs, changes in law, or changes in scope of the project.
With regard to the contract period, there is flexibility in the agreement for including maintenance of the project highway in the scope of the project. A maximum of two-year maintenance period has been considered appropriate. The contractor is required to ensure safe, smooth and uninterrupted flow of traffic, and carry out routine maintenance including prompt repairs of potholes, cracks, joints, drains, embankments, structures, pavement markings, lighting, road signs and other traffic control devices during the maintenance period. The agreement lays down quantifiable maintenance requirements and performance standards. A mechanism for dealing with non-performance of maintenance obligations by the contractor has also been provided.
The agreement provides for selection of the contractor through open competitive bidding. All project parameters such as the contract period, price adjustments and technical parameters have to be clearly stated upfront. Short-listed bidders have to specify only the lump sum price for the project highway. The bidder seeking the lowest payment wins the contract.
On risk allocation, the agreement goes by the principle that risks should be allocated to the parties that are best suited to manage them. Project risks have been assigned to the private sector to the extent it is capable of managing them. The transfer of such risks and responsibilities is expected to increase the scope for innovation leading to efficiencies in costs and services. Projects risks such as soil conditions and weather or commercial and technical risks relating to design, construction and maintenance have been assigned to the contractor. The government is liable to pay damages to the contractor for any delays in handing over the land, railways approvals for bridges on railway lines, environment clearances and shifting of utilities.
The agreement specifies the dates for handing over different sections of the land to the contractor. The scope of the project highway is defined with precision and predictability so as to enable the contractor determine the costs and obligations. A ceiling of 10 percent of contract price for catering to any changes in the scope of project has been laid down. This cost is to be borne by the government. The contractor has to carry out survey and investigations and also develop designs and drawings in conformity with the specifications and standards laid down in the agreement. A proof consultant and a safety consultant appointed with the approval of the government would check the designs and drawings followed by the government engineer’s review. Provisions for quality control and assurance are also clearly stipulated. The agreement has a provision for payment of damages by the contractor in case of failure in achieving the prescribed milestones. The government would pay bonus to the contractor for completion of the project highway before scheduled completion date.
The agreement provides performance based standards for maintenance of the project highway. The contractor would be paid 1.5 percent of the contract price for the first year of maintenance and 2 percent for the second year. Maintenance work would be inspected by the government’s engineer once every month, and deductions made for failure or defects in maintenance.
With regard to force majeure events, the agreement provides protection to the contractor against political actions that could have adverse effect on the timely completion of the project.
The agreement precisely quantifies termination payments. Political force majeure and defaults by NHAI qualify for adequate compensatory payments to the contractor. In the event the agreement is terminated by the government on account of any of the specified defaults by the contractor, there is provision for forfeiture of performance security and retention money.
Day-to-day interaction between the NHAI and the contractor has been kept to a bare minimum in the agreement. There are, however, checks and balances for ensuring full accountability of the contractor. Monitoring and supervision of construction and maintenance is proposed to be undertaken through an engineer (a qualified firm) selected by the NHAI through a transparent process. If necessary, a public sector consulting firm could discharge the functions of the engineer.
The agreement provides for a simple and rational method for estimating interim payments to the contractor. Payments would be made for works conforming to the agreement and commensurate with the stages of completion of works. Works have been divided into four categories - road works, major bridges, structures and other works. Each item of work has been further sub-divided into stages and payment would be made for each completed stage of work.
To provide additional comfort to the government, the agreement specifies a defects liability period of two years. Generally, most contracts have a defects liability period of one year.
The agreement also addresses issues relating to dispute resolution, suspension of rights, changes in law, insurance and indemnity.
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