2.5.2. Some issues with EPC model

Under this system the entire project is funded by the government rather than shared by the private player as well. Sometimes it becomes problematic as under:

♤ Financial burden on the government: In contrast to PPP where the private player shares the cost of project, thereby enabling the government to save its resources for other socio- economic projects, in EPC the entire cost is borne by the government. Therefore, this model can’t be used always, especially when the government is facing budget deficits.

♤ Lack of incentive to private players to reduce cost of project: It is because, here the nature of project is outsourcing by the government to private entity, which does not have incentive

to reduce cost, as it doesn’t share the risks involved. In EPC the private entity is entitled to get pre-decided fixed amount akin to service charge, while the government takes all the risk. Therefore, this model is used only when the private players lack adequate financial resources, or investment sentiments are bleak, where the government has to intervene.

This model was used recently when projects under PPP were stuck at different stages of completion and new investment was not coming. For example, due to reduced private sector participation, Govt. has increasingly resorted to EPC in 2013-14 and 2014-15. But in view of the high fiscal deficit this model is unsustainable. As a result, efforts are being made to adopt a hybrid model, which borrows the advantages of both the PPP Model and EPC Model, called Hybrid Annuity Model (HAM), which is discussed later in this document.