Answer:

As a new initiative for promoting highway development, the mode of Engineering Procurement and Construction (EPC) contracts is being brought in for funding in cases where there are no takers under BOT (toll) mode.

In the BOT model, the enterprise customer provides the financing for the new infrastructure. The service provider does not own the infrastructure but is a concessionaire entitled to manage it for a fee that covers its operating expenses. The BOT model may be advantageous with reference to time and money saving but it has certain limitations. The BOT projects involve high transaction costs (5 – 10% of total costs) and are not suitable for smaller projects. Their success depends upon successful raising finance and the projects are successful only when substantial revenues are generated during the operation phase. Besides, Additional costs are incurred to pay a profit to the service provider for the value of its know-how and time in assembling the service delivery infrastructure. Tie-in effects arise, since the enterprise customer commits to work with the particular service provider (as in any class outsourcing model) and cannot escape for low switching costs until the service provider’s investment is amortized or recaptured.

Under the EPC model, the engineering and construction contractor will carry out the detailed engineering design of the project, procure all the equipment and materials necessary, and then construct to deliver a functioning facility or asset to their clients. The government spends the entire money required to build roads so as to attract builders who are shying away from highways projects for want of funds. It reduces the

stress for the owner. Besides, the cost is known at the start point of the project. The owner is also protected against the changing prices for material, labour etc. Besides, an EPC project has a single point of responsibility. The contractor is responsible for all design, engineering, procurement, construction, commissioning and testing activities. Therefore, if any problems occur the project company need only look to one party – the contractor – to both fix the problem and provide compensation. Also, the projects have a fixed completion date. EPC contracts include a guaranteed completion date that is either a fixed date or a fixed period after the commencement of the EPC contract. If this date is not met the contractor is liable for delay liquidated damages (DLDs).