EPC Experience: Challenges faced by contractors in project execution

Challenges faced by contractors in project execution

The engineering, procurement and construction (EPC) model essentially works as an enhanced version of the item rate contract. The engineering part seems to be missing in “EPC” as there is little scope or flexibility for contractors to optimise and innovate in terms of project design. However, on a positive note, government authorities are proactively trying to solve the problems at hand and contractors are hoping to see these issues resolved soon.

Experience so far

The central government has adopted the EPC mode of contracting as a favoured mode because of the stress in the road sector. While the EPC experience in terms of participation by EPC contractors and project awards has been good, the implementation experience has been mixed.

EPC is still in its infancy as far as National Highways Authority of India (NHAI) projects are concerned. Though these projects were initiated during the latter part of 2013-14, a number of projects were awarded during 2015-16. Thus, a full cycle of award, completion and execution has not taken place, and therefore, the performance of the EPC model cannot be properly assessed till these projects are completed.

Prevailing challenges

The absence of encumbrance-free land is the biggest roadblock in the sector. Unless 3G and 3H drawings are put in place and funds transferred into the account of the landowner, land acquisition is not considered complete. As a result, projects get delayed. While the government has taken concrete steps to resolve land acquisition-related concerns, the impact has not been significant.

Besides, the Indian EPC segment is not yet in step with trends in the global EPC segment. There has been a trend of underbidding of projects since several contractors are cash starved. Unless cash flows improve, projects are likely to suffer and get delayed. Debarring companies that are under corporate debt restructuring from participation in EPC contracts also remains a grey area.

Another major challenge is the lengthy process involved in obtaining regulatory approvals, especially for mining of boulders, earth and sand. These approvals are in the domain of state governments and local authorities. It is often seen that these authorities are not as involved in projects as NHAI or the central government, resulting in project delays. Further, some state governments have discouraging rules. For instance, in Karnataka, no contractor is given more than 25 acres of mining area. This becomes a huge deterrent if contractors have to undertake multiple projects in the region. Similarly, in Bihar, there is a ban on the mining of aggregates. To add to the woes, despite the single-window clearance system, there is a long waiting time and multiplicity in obtaining clearances, which become yet other constraints. Securing clearances for utility shifting and the removal of structures also add to delays and costs.

The inadequate time for project preparation to complete pre-construction activities acts as a hindrance. Detailed project reports are made in a general manner with limited focus on area/terrain-specific details. Besides this, independent engineers are not seen as being neutral in their approach. The lack of design flexibility in EPC contracts is also a challenge.

The way forward

In the coming years, the level of EPC activity, both at the national and state level, is expected to pick up considerably. Projects worth Rs 1 trillion are likely to be implemented in a mix of EPC and hybrid annuity models. In the current year itself, 12,000-15,000 km of projects are likely to be awarded on an EPC basis together by the Ministry of Road Transport and Highways (MoRTH), NHAI and National Highways and Infrastructure Development Corporation Limited. States such as Uttar Pradesh (Lucknow-Ballia expressway), Maharashtra (Mumbai-Pune expressway), Andhra Pradesh, Telangana and Madhya Pradesh have lined up large-scale EPC projects.

The contractor fraternity is of the view that going forward there is a need for macro-level intervention to obtain speedy clearances, and the national policy needs to gel with state policies to ensure this. Besides, 80-90 per cent of the land acquisition needs to be ensured before awarding projects. Moreover, the alignment of the associated engineers, NHAI and the contractor with the MoRTH’s efforts towards innovation and adoption of new road construction technologies is also necessary. In the case of any dispute, arbitration should not take place on the entire project. Instead, only the disputed section should be arbitrated to avoid blocking the contractor’s funds in a legal loop.

That said, the EPC contracting model needs to be analysed in greater detail and the best global examples need to be leveraged for better project execution in the country.

Based on remarks by Lt. General Anil Malik, AVSM (Retd.), Vice-President, Business Development & Corporate Affairs, HCC;

K.V. Praveen, Vice-President & Head, Roads, Runways & Elevated Corridors, Transportation Infrastructure, L&T ECC, and

T.R. Rao, Executive Vice-President, Infrastructure, PNC Infratech, at a recent India Infrastructure conference