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PRESENTATION

EPC INDUSTRY IN INDIA


ISSUES & CHALLENGES

Knowledge Partner

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EPC Industry in India: Issues and Challenges
TECHNOLOGY & INNOVATION

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Contents

Chemtech Foreword

KPMG Foreword

Executive Summary

Acronyms Used

Methodology

Coverage and Scope

Setting the Context

Value Creation Strategies

Key External Drivers and Issues

Key Internal Issues

End-Use Industry Views

EPC Industry in India


Action Agenda for Sustained Growth

Acknowledgements

About Chemtech

About KPMG in India

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CHEMTECH Foreword

S
trong infrastructure and industry are critical for India as the country
sees leapfrogging growth. As far as both these sectors are
concerned, India is in a sweet spot, which has created multitude of
opportunities in the fields of engineering, capital goods and construction.

Though, India has witnessed significant investments in both industrial and


infrastructure space, the growth has remained restricted due to various
weaknesses of the Indian EPC industry and difficulties for the foreign
players to ply in the market.

At this juncture, it is an imperative to address the challenges, which restrict


Jasu Shah
the growth of this sector in India and will continue to repress industrial
Founder & Chairman,
CHEMTECH Foundation development lest addressed.

CHEMTECH has made an attempt to address the issues faced by the


EPC industry through each edition of its international conference, EPC
World Expo. Renowned speakers from world over have deliberated over
the topical issues that must be resolved to accelerate the development of
India’s EPC sector, which would eventually lead to country’s sustainable
economic growth.

As we reach another milestone year with 25th edition of CHEMTECH series


of expositions and international conferences, Jasubhai Media and KPMG
have come together and taken the initiative address these issues through
this report. I wish to thank all the members of CHEMTECH Advisory Board
for EPC who despite their busy schedules shared their opinions and guided
the team to come up with the study report that aims to leverage the Indian
industry.

We sincerely hope that this report would be a useful information tool for
both industry as well as statutory bodies to gear up for the challenges for
the Indian EPC sector during this decade.

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KPMG Foreword

T
he Engineering Procurement and Construction (EPC) services
industry in India is faced with a large and unique opportunity due to
galloping Indian economy, and investments in public and industrial
infrastructure. The 11th five year plan has been an inflection point in
Infrastructure investments, with them contributing upto 9 percent of India’s
GDP.

The 12th plan envisages a total investment in the region of USD 1 trillion,
contributing upto 10 percent of India’s GDP. Similarly, there are large
investments expected in industrial infrastructure, whether it be Oil and Gas,
Metals and Mining and other industries.
Arvind Mahajan
Executive Director
KPMG Advisory Services Pvt Ltd This large and fast build out of industrial and plant infrastructure requires
a robust and growing engineering, procurement and construction services
industry for spreading and management of risks, efficiency and productivity
in engineering and construction and supplementing the management
bandwidth of project developers.

This report in line with the theme for Chemtech’s EPC conference, takes a
forward looking view on the future of the EPC industry in India, based on
current issues and challenges identified for the industry.

We hope that the collective insights shared in this report contribute towards
shaping future business strategies and government enablement that drive
India’s long term growth in this sector.

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EXECUTIVE
SUMMARY

The EPC industry as defined here is the performance of a “unit” or the whole multiple routes, with engineering
different from the pure engineering plant. The scope of work would include companies, equipment suppliers,
or construction industry. We define engineering, supplies, construction or construction companies and project
the EPC industry as comprising of construction management, erection developers morphing in to EPC service
companies who are involved in and commissioning and providing providers by filling in the gaps.
executing projects involving multiple performance guarantees. The EPC
engineering companies in India are evolving from
disciplines with overall responsibility for

Expectations
As a fallout of the USD 1 trillion to benefit from this wave. However, the Similarly, customers now expect EPC
investment expected in infrastructure expectations far exceed the historical service providers to ramp up their
and industrial growth keeping pace, performance delivered and the EPC financial and execution capabilities
there is heightened interest among the service providers need to step up their to be able to execute larger projects,
investor community from engineering ability to win and deliver business to in time and with ever improving cost
and construction companies who stand meet structures.
these expectations.

Acronyms Used
EPC Engineering, Procurement & Construction
GDP Gross Domestic Product
PPP Public Private Partnership
TSR Total Shareholder Returns
EPCM Engineering,Procurement &Construction Management
PMC Project Management Consultant
FEED Front End Engineering Design
O&M Operation & Maintenance
JV Joint Venture
BOP Balance of Plant
BTG Boiler Turbine Generator
BOT Build,Operate & Transfer
BOOT Build,Own,Operate & Transfer
DBO Design Build & Operate

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Value Creation Strategies and
Routes to Growth
EPC companies can improve their wealth sectors like Water, Roads involving BOT,
creation profile by focusing on performance, BOOT contracts. International expansion by
prospects and managing risks and financing EPC companies is likely to be limited largely
costs. While performance is
about due to global competitive intensity and the
improving margins by way of correct large domestic demand.
estimations, procurement and project
management capabilities, and focusing on
We expect increasing number of
adding higher margin components to the acquisitions
services provided, prospects is about in this industry, as companies look to
continuously adding newer avenues of enter new end-use industries by buying
revenue growth. qualifications.

The most likely route for diversification Lastly, risk management and “no-surprises”
is through penetration in new end-use go a long way in improving investor
industries or taking the developer route, perception, and materially bringing down
which in fact is an imperative for growth in financing costs for the EPC companies.

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Key Challenges

External Internal
The key external challenges faced by the EPC industry are as The key internal challenges are about managing scale and
follows:- building capabilities to address issues emanating out of this:-
Continuously evolving contracting models and relatively slower Project Manager Empowerment, especially in Indian
adoption of the EPC-LSTK concept, especially where customers companies
are large public sector companies with in-house teams, and Balancing speed and cost control in the Procurement
large private sector developers, who have significant in-house function
project management capabilities. Creating a robust engineering organization and balancing
Order book uncertainty brought about by purely price based between efficiency and effectiveness
procurement decision making of customers, which has led to Adoption of leading Risk Management practices
the emergence of large number of hitherto unknown companies
winning relatively large contracts. While this is essential for The challenges are accentuated for two sets of companies a)
capacity building, it has led to uncertainty of order book for the International entrants and b) mid-size companies looking to
incumbent service providers. It also makes making investment scale up.
decisions more difficult for companies.
Shortage of skilled manpower for managerial as well as site Policy making can help mitigate some of the issues related to
labour. The country has its task cut-out in terms of creating skill enabling private sector for building a skilled workforce, develoing
work force for the industry. However, the onus really lies on the speedier mechanisms for speedier resolution of contractual
private sector and the EPC companies to undertake initiatives to disputes, and clarifying taxation regulations related to the
address this “supply-chain” issue. industry.
The perception on the sanctity of contracts remains divergent,
especially between Indian companies and International entrants.
There is a need to establish faith in our ability to enforce
contracts by standardization, following international practices
and setting
right dispute resolution mechanisms.

EPC Industry in India: Issues and Challenges


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Learnings from the
Korean Construction Industry

There are macro level learnings to be derived from Korea’s EPC


growth story, which may be replicated by the Indian industry

Government support in terms of ministerial oversight for the


industry, followed by active promotion of the industry overseas
Capacity building initiatives in terms of institutions for
developing construction industry talent
Engineering firms working in collaboration with construction
majors, facilitated by not-for-profit engineering industry
associations

Apart from the above, the report discusses specific end-use


industry issues and demand outlook for Power, Oil and Gas and
Water, bringing out nuances in terms of differences in contracting
models, profile of service providers and key challenges.

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Methodology
Coverage & Scope
The report has been prepared by KPMG Advisory Services many of the generic EPC industry issues identified in this
Private Limited in association with Chemtech. Leading report would also apply to EPC services for these other
executives from the industry were interviewed to seek inputs industries.
for the report. The representation included project
developers, EPC companies, engineering consultants and
construction companies.

We have collected insights based on numerous


engagements with nodal agencies, infrastructure companies,
engineering and construction firms, and foreign players
looking to enter India and equipment suppliers.

Secondary research was conducted using published reports,


news analysis and usage of standard financial databases
subscribed to by KPMG. We have leveraged the expertise
and relationships of our advisory teams in the area of
Infrastructure and Government and Industrial Markets
spread across the country.

Taxation related inputs have been provided by our Tax team


based on their working experience with clients in the area of
infrastructure and engineering and construction.
The report covers primarily the EPC services industry from
the perspective of the following end-use industries - Power,
Refining and Petrochemicals, Water and Water Treatment.
These industries have large investments planned in the
country for the next 5 to 10 years, and involve technological
complexity apart from being complex from a project
management perspective.

Also, they are varied and bring out the nuances of the EPC
sector across most aspects. Specific issues related to EPC
services for other end use sectors like Roads, Railways,
Metals and Mining etc are not detailed as part of this report,
though

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Defining
EPC Industry

EPC or Engineering, Procurement and Construction industry not undertake turnkey construction of a plant or packages
is referred to by various terms like Construction industry, within a plant are not considered as EPC companies by this
Engineering and Construction, Contracting or just definition. It is difficult to draw a strict boundary in terms
engineering industry. Here we define the EPC industry as of what constitutes an EPC firm vis-à-vis construction or
consisting of service providers who are capable of executing engineering firms. One way to distinguish between a
projects on a turnkey basis, including detailed engineering, classical EPC company from a primarily civil construction
procurement, construction, commissioning and performance company is the construction intensity of the end-use
testing. sector, defined by Crisil as the percent of construction
spend in the overall investment towards creating an
We concern ourselves with players who are able to infrastructure or industrial asset. For example, Roads is
aggregate multiple engineering disciplines like process estimated to be close to 100 percent, while a thermal power
engineering, mechanical, structural, civil and electrical. plant is 20 percent.
Examples of such companies in India are Larsen and
Toubro, Punj Lloyd, Tata Projects, Essar Projects etc. The rest is towards equipment, mechanical fabrication,
Players who only operate in the civil construction and electrical and non-construction engineering spend.
structural engineering domain and would
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Setting
The CONTEXT

Route 1 Route 3
Expanding scope from being engineering companies to Expanding scope from equipment supply to EPC companies.
EPC companies. The most prominent example of this route This route has been more commonly followed in the
Engineers India Limited, which is India’s leading engineering engineering and capital goods segment. Companies
company, especially in the Hydrocarbons segment and now manufacturing major pieces of equipment for a particular
offers EPC services. However, successful instances of this manufacturing process have upgraded themselves to execute
route are limited. projects around their equipments. Examples are Elecon, TRF
who are suppliers of material handling equipment and
Route 2 undertake projects in Power Balance of Plant packages
Expanding scope from being construction companies to supplying entire Coal handling systems or in industrial plants
EPC companies. This is the more commonly followed route, involving large material handling components.
wherein companies have added engineering and
procurement capabilities to their existing expertise in Route 4
mechanical and civil construction. The leading example of A relatively new development has been of project developers
this route has been Larsen and Toubro, which moved from backward integrating and setting up their own EPC divisions.
being a fabrication and construction company in to one of the This has been motivated by a desire to leverage their in-
largest and most respected EPC companies in India. house project management capabilities, and to capture the
margins typically belonging to contractors.

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Relevance of the EPC industry to the
India Growth Story

The 11th plan was an inflection point for the Indian policies in various sectors, policies around creating
infrastructure story. The 11th plan laid the foundation for investment clusters, land acquisition and environmental
large scale investments in infrastructure in India. Of the USD clearances. However, the chain is only as strong as the
500 billion planned to be invested in the infrastructure, at the weakest link.
current rate, it is expected that the plan will be met to 94
percent. This would amount to 9 percent of India’s GDP and Achieving this rate of infrastructure build-out calls for massive
is expected to go up to 10.25 percent of GDP. capacity building down the chain in terms of manufacturing
capacities for equipments, raw material and commodity
Mid-Term Appraisal of 11th Five Year capacities (e.g. steel, cement, fuels etc) and human
Plan
resources. Similarly, it calls for massive capacity building in
In order to achieve this plan, various pieces of the puzzle
the engineering and construction sector in terms of
need to come together, and would require all stakeholders,
reasonable number of large to mid-size contracting or EPC
the government, public sector undertakings, private sector to
companies available to be able to undertake Lump-Sum-
contribute their achievements in a co-ordinated manner. It is
Turn-Key (LSTK) and sub-contracting jobs in the country.
expected that the private sector would contribute 50 percent
by way of financing to achieve this plan. The obvious policy
Purely from a construction perspective, investment in
focus has been on building financing capacity, formulation
construction is estimated to double to INR 16,809 billion over
of PPP

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the next five years (2010-11-20114-15), from INR Projected Infrastructure Investments in 12th Plan
8,895 billion recorded during the last five years1. Base Yr
(2011-12) 2012-13 2013-14 2014-15 2015-16 2016-17
Within this the infrastructure segment, would GDP (USD Billion)
comprise 85 per cent of the total construction GDP Growth (%)
Infrastructure
investment. Within infrastructure segment, the Investment
roads, power, irrigation and urban infrastructure (% of GDP)
Infrastructure
sectors would contribute around 73 percent of Investment
total construction investment. The opportunity for (USD Billion)
Total Investments (USD Billion) 1,019
EPC players varies by industry given the
contracting models and construction intensity of Source: Planning Commission
each class of infrastructure or industrial asset.
CRISIL Resarch estimates that investments in
the industrial sector would be 1.2 times in the
next 5 years as compared to the previous five
years while in infrastructure it would be 1.9
times, bringing the total growth to be 1.7 times.

1
Source: Crisil “Construction-Opinion August 2010”

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Expectations from the EPC Industry

The EPC industry has gained prominent share of media, largely on account of future expectations. Similarly, the large
investor and entrepreneurial attention in the last 3-5 years. investment plans have raised expectations of customers from
The stock markets have handsomely rewarded companies this industry.
operating in the infrastructure, construction and EPC space,

Investor Expectations
During the period of 2008-2010, the Total Shareholders ratios, whereas the CAGR growth demonstrated in the last 3
Return2 (TSR) by the EPC companies has been ~31 percent. years has been around 28 percent for the set of companies
TSR for the more broad-based Infrastructure index in the considered below3.
corresponding period has been only ~ 9 percent. KPMG
analysis indicates that the expectations embedded in the Hence the stock market expectation of growth of EPC
current valuations indicate that investors are expecting the companies appears to be very high. Private equity interest
leading EPC companies to grow their order books and has also been high in the industry.
revenues at a rate of ~65 percent if they
continue to maintain current profitability and capital turnover

RECENT EXAMPLES OF PRIVATE EQUITY DEALS CONCLUDED


CONSORTIUM OF PRIVATE EQUITY FIRMS, INCLUDING BARING, SEQUOIA CAPITAL, FIDELITY
AND DEUTSCHE BANK, ACQUIRED A 16 PERCENT STAKE IN INFRASTRUCTURE-EPC COMPANY
COASTAL PROJECTS FOR $54.8 MILLION1
AVIGO INVESTED $14 MILLION IN DELHI-BASED NAFTOGAZ INDIA PVT LTD, AN EPC PLAYER IN
THE O&G SECTOR.
DELHI-BASED UEM GROUP, SPECIALISING IN WATER & WASTE WATER COLLECTION,
TREATMENT AND DISPOSAL, MOPPED UP ` 90 CRORE FROM INDIA VALUE FUND
CHENNAI-BASED AQUA DESIGNS INDIA, A WATER MANAGEMENT ENGINEERING COMPANY,
RAISED
` 55 CRORE FROM PEEPUL CAPITAL
CONCORD ENVIRO SYSTEMS, A WATER MANAGEMENT ENGINEERING COMPANY, RAISED $10
MILLION FROM SAGE CAPITAL FUNDS IN DECEMBER 2009
A2Z MAINTENANCE & ENGINEERING SERVICES LTD (BACKED BY IEP, BEACON
INDIA PRIVATE EQUITY FUND AND MR RAKESH JHUNJHUNWALA), IS PRESENT IN
POWER DISTRIBUTION EPC BUSINESS.

2
TSR computation has been done for last 3 years data for companies which have been publicly listed in the last 3 years and
may be classified as engineering and construction companies
3
Source of data for analysis is Prowess, CMIE
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Total Shareholder Returns of Select Engineering and Construction

Companies

20.0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

Era Infra Engg. Ltd.


Engineers India Ltd.
Sadbhav Engineering Ltd.
Jaiprakash Associates Ltd.
Mcnally Bharat Engg. Co. Ltd.
Bharat Heavy Electricals Ltd.
Larsen & Toubro Ltd.
Ahluwalia Contracts (India) Ltd.
Gayatri Projects Ltd.
Thermax Ltd.
Hindustan Construction Co. Ltd.
Patel Engineering Ltd.
Alstom Projects India Ltd.
Madhucon Projects Ltd.
Punj Lloyd Ltd.
Unity Infraprojects Ltd.
Nagarjuna Construction Co. Ltd.
Ion Exchange (India) Ltd.
I V R C L Infrastructures & Projects Ltd.
J M C Projects (India) Ltd.
Gammon India Ltd.
S P M L Infra Ltd.
Elecon Engineering Co. Ltd. 13.5%

Source: KPMG Analysis, financial data from Prowess, CMIE

In summary, the expectations from the investors are much higher


than the pace at which companies have delivered performance in the
recent past. This is an indicator of the strongly positive expectations
surrounding the sector, and hence the need for the industry to
deliver a consolidated performance in line with what is expected of
them.

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Customer Expectations
The value proposition offered by the EPC industry is based to exectution by the developer organization or the more
on the concept of risk sharing or risk transfer from the traditional route of procuring equipment, services and
project developer to the EPC engineering services separately
Company, at least to the tune and owning the integration and
of the capital cost of the project
EP C c ompan y t ak e s o n the project management.

and to a limited extent to the


a
initial operating performance of
muc h highe r leve l o f r eal It is important to point out

the plant / facility being built. In and perceived risks within here that given the customer
expectations and the consequent
exchange for that, the project a project, than other service
EPC business model, an EPC
developers are willing to pay providers in the pure company takes on a much
a premium for the integration Engineering, Consulting or higher level of real and
services provided. Over a period Project Management space. perceived risks within a
of time, customers have come
project, than other
to expect a reduction in the total cost of putting up the plant service providers in the pure engineering, consulting or Project
and the time schedule through the EPC route, compared Management space.

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EPC
EP Report
Repor New.indd
New.ind 15 2/20/2011 8:13:41 PM
EPC game is
The

competitive,
while

EPCM game The p u r e Given its business model, an EPC Company hence has to
e n g i n e e r i n g , target profitability from each contract, since the value at risk
consulting o r in the case of overruns is very high, in proportion to its
is about PMC se rvice s expected margins. Further, the nature of the customer

relationship & companies build


their
relationship continues to be “arms-length” over the period of
business the contract, as EPC companies look to protect themselves

trust models around against time and effort overruns delays on account of the
profitable developer and a plethora of other risks that might take them
c u s t o m e r off their initial estimates. At the same time, customers want to
relationships, and ensure that they get their plant or facility up and running, with
the desired quality
do not necessarily need profitability in each project that they in time and with no extra claims raised by the contractor.
undertake.

However, the services of an EPC contractor are supposed


to be based on comprehensive contracts with little room for
interpretation and ambiguity, whereas pure engineering or
EPCM service providers do not take on most of the project
cost or time overrun risks which remain with the developer.

APART FROM THIS BASIC CUSTOMER EXPECTATION, DURING OUR


DISCUSSIONS WITH PROJECT DEVELOPERS SEVERAL OTHER
EXPECTATIONS
FROM EPC COMPANIES WERE COMMONLY MENTIONED
EPC COMPANIES NEED TO IMPROVE THEIR FINANCIAL AND BALANCE SHEET STRENGTH TO BE
ABLE TO TAKE ON LARGER JOBS, AND NOT DEPEND ON ADVANCES AND FAST TRACK
PAYMENTS FROM DEVELOPERS TO BE ABLE TO PROGRESS
INDIAN EPC COMPANIES NEED TO SIGNIFICANTLY IMPROVE THEIR ENGINEERING
CAPABILITIES, ESPECIALLY ON THE FRONT END SIDE. THIS IS ESPECIALLY TRUE FOR THE
ENGINEERING COMPANIES WHICH ARE RESPONSIBLE FOR PREPARING THE FEED (FRONT
END ENGINEERING DESIGN) PACKAGE SO THAT LSTK BIDDING CAN BE FACILITATED.
DEPLOY LATEST CONSTRUCTION METHODOLOGIES AND TECHNIQUES, BOTH MANAGERIAL AS
WELL AS TECHNICAL TO EXECUTE PROJECTS FASTER AND TO BETTER QUALITY.
DEVELOP EMPOWERED PROJECT MANAGERS, SO THAT THEY CAN ACT AS MORE THAN JUST
COORDINATORS, AND CAN INTERFACE WITH THE SENIOR MOST LEVELS IN THE CLIENT
HIERARCHY AND TAKE DECISIONS TO RESOLVE PROJECT ISSUES.

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Value Creation Strategies

The “project level” value creation driver in terms of b) Manage the entire ecosystem of customers, vendors,
profitability for an EPC company is its ability to regulators, engineers and sub-contractors, to deliver within
a) Correctly estimate the detailed costs and time schedules those estimates.
of a project and

Sources of Long Term Value Creation


However, long term value creation requires EPC companies customers. Financing component of value creation involves a
to improve in all three aspects that impact the market value reduction in the risk premium and discount rate associated
of a company – performance, prospects, and financing. with future cash flows of the company. This can be achieved
While performance is enhanced both through revenue and by a combination of a reduction in actual cost of borrowing
profit growth, future prospects are enhanced when the EPC and the “expected” cost of equity through improved risk
company management
is positioned well to serve high growth segments and practices and reduced volatility of revenue streams.
profitable

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Scale and other Value Drivers for EPC companies

Performance improves for an EPC company with scale, as investment in world-class tools and techniques.
it is able to leverage efficiencies in procurement, overheads,
relationship building with vendors and sub-contractors. Also, The other two important aspects for value creation are
there are scale opportunities created when companies are “Growth to create future prospects” and Risk Management
able which are covered subsequently.
to invest in standardization of designs, value engineering and

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Routes to Growth
iversification is a key element execution capabilities of Tata Projects. lower risks, it doesn’t provide

D
of growth, and will be There are many other examples, of aggressive top line growth. Such
aggressively pursued in India. such strategies being followed by vertical expansion into Construction and
It is driven companies all over the country. Project Execution by publicly listed
not only from the point of growth, but manufacturing or engineering
also from the perspective of managing Route companies, is also driven by the higher
volatility in order booking. Presently, the 2 earnings multiples currently associated
established EPC companies operating V E R T I C A L E X PA N S I O N S o m e with such “high potential” businesses.
in a limited set of industries in India, companies are expanding to control The market recognizes that
are also perceiving a high risk to their more of the investment value of the construction and project management
order booking levels due to the large project, by becoming system integrators. service providers will be in short supply
number of new entrants into the EPC A large proportion of these companies and high demand in the short to
space, as well as a perceived dilution are equipment vendors, who believe medium term.
in qualification criteria from many that they have the ability to execute
customers that appears to be providing contracts on a turnkey basis. Examples As a note of caution, however, it is
a level playing field to the new entrants. of this route being followed being worth mentioning that companies who
Hence diversification has become a prevalent largely enter the Projects business from
popular mode of seeking both growth in the Power Generation equipment product manufacturing or engineering
and stability in revenue streams of EPC side. For example companies like services backgrounds, need to
companies. Elecon, TRF which were earlier carefully built the required
primarily material handling equipment capabilities for project
Route 1 vendors are now competing for turnkey
HORIZONTAL EXPANSION material handling systems
Existing EPC companies are packages. Similarly, there are
diversifying in to new end-use industry engineering companies like DIVERSIFICATION
sectors, inspired by the large EIL, who are now offering
investments coming up in these EPC/ LSTK services to their
PROMISES GROWTH
sectors. For example, Punj Lloyd, a clients.
& STABILITY IN
player in the Oil and Gas space,
expanded in to the Power Generation The vertical expansions have REVENUE STREAMS
EPC market and has recently won been driven by the desire to
orders enhance the top line and to
in the Balance of Plant EPC space. control a larger share of the EXPANSION MODES
Similarly, Tata Projects has entered in investment pie. Engineering
to
a JV with EIL to form a TEIL, to services contribute not more Horizontal
address the investments in the Oil and than 5-10 percent of the total Vertical
Gas space. The JV leverages EIL’s plant investments, and while
Backward Integration
engineering know-how, client engineering services have
relationships in the Oil and Gas sector higher margins and relatively
and the LSTK contract

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Routes to Growth
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execution, and identify and manage strong internal project execution teams. are few others capable of
their risk exposure in a higher risk Moreover they believe they can derive simultaneously executing a number of
business in a calibrated manner. substantial benefits on procurement full EPC projects in the Power Sector.
Several traditional manufacturing activities through in-house One private developer mentioned that
companies have faced financial procurement. Further, as an executive the available set of EPC companies
difficulties in managing their project from one of the leading players in the does not inspire confidence in their
businesses in the recent past. industry pointed out large business being able to deliver projects on time
houses making significant and with the initial estimated cost.
Route 3 investments believe that there isn’t Typically in such scenarios, the risk of
BACK WARD INTEGR ATION enough expertise and scale within the both schedule and cost is transferred
Many Indian entrepreneurs have existing EPC companies for assuming back to the developer in forms of claims
typically wanted to control as much of and managing their project risks. and counter claims on who is
the value chain as possible. The story is responsible for delays and escalations.
being now repeated in the EPC industry In the Power Sector, for example, the As a result, the developer feels
- Reliance ADAG has Reliance only large full service EPC company compelled to manage his projects on
Infrastructure, while Essar Group has that comes to mind is Larsen and his own if he has the organization and
Essar Projects. GMR has its own EPC Toubro, which can offer full EPC, BTG resources to do so, and a large enough
division, while the Tata Group has Tata package, BoP package and also pipeline of projects to utilize these in-
Projects. Many other business houses individual equipments and sub- house resources
have established systems. There efficiently.

International Expansion
COMPANIES WHO ENTER
International expansion for growth international level in this field. Hence
THE PROJECTS BUSINESS
has really not been a focus area for companies like Larsen and Toubro,
FROM PRODUCT
most Indian EPC companies given the Punj Lloyd, Essar Projects have won
MANUFACTURING OR growth in the domestic sector, and the business at the international level
ENGINEERING SERVICES stiff competition posed internationally and should continue to do well in the
BACKGROUNDS, NEED TO by the global majors. However, hydrocarbons space. Similarly, sub-
there remain certain sectors where contractors in this space (e.g. Petron
CAREFULLY BUILD THE
international expansion is likely. The Engineering) may also be able to
REQUIRED CAPABILITIES
Indian Oil and Gas plant engineering compete internationally, as they have
FOR PROJECT EXECUTION, and construction market has all the been working as sub-contractors to
AND IDENTIFY AND global majors present in India. Hence, global companies in India.
MANAGE THEIR RISK Indian companies competing with

EXPOSURE IN A HIGHER them have raised their game to the On the other hand, there are niche

EPC RISK
Industry inBUSINESS IN A
India: Issues and Challenges | 20 |
CALIBRATED MANNER.
EPC Report New.indd 20 2/20/2011 8:13:42 PM
EPC segments, with limited market size are quite stringent for entry.
in India, which has prompted Indian
GLOBAL ACQUISITIONS
companies in these domains to go Ta t a P ro je ct s acq u ire d
BY INDIAN COMPANIES
global. Examples of this are to be found A rt so n
Engineering, while entering into a JV

in Walchandnagar for sugar and Mineral beneficiation


with EIL for its Oil and Gas foray.
biomass based power plants, KEC equipment business
IVRCL acquired Hindustan Dorr-
International for EPC in transmission of cement major KHD
Oliver to strengthen its Water
and distribution space. Some of these Humboldt Wedag
Treatment business and gain a
expansions have been facilitated by by McNally Bharat
foothold in the mineral beneficiation
global acquisitions as well – for Engineering
plant construction market. We expect
example the acquisition of the mineral the acquisitive activities of Indian Sembawang and its
beneficiation equipment business of EPC companies to intensify over the subsidiary Simon Carves
cement major KHD Humboldt Wedag by next 3-5 years. Opportunities for by Punj Lloyd
McNally Bharat Engineering has partnering or acquisition will arise as SAE Towers’ business,
provided them a foothold in the a leading manufacturer
smaller, niche EPC companies find
international market. Similarly, the it difficult to compete against large of steel lattice structures
acquisition of Sembawang and its companies. Additionally, the recent for transmission towers
subsidiary Simon Carves has bout of aggressive bidding by Indian with subsidiaries in Brazil,
significantly improved the international EPC companies is likely to throw up Mexico and US by KEC
profile of the Punj Lloyd. KEC winners and losers in the next 3 to 5 International
International acquired SAE Towers’ years. This will likely lead to
business, a leading manufacturer of consolidation in the industry.
steel lattice structures for transmission
towers with subsidiaries in Brazil,
Mexico and US. This is the most
plausible route that Indian companies
are likely to take acquiring companies
in niche areas globally to create large
multi-country EPC businesses. There
are no large acquisitions of note in the
main plant EPC market, other than Punj
Lloyd’s acquisition of Sembawang.

In the domestic market, diversification


in to newer areas by EPC companies
has been accompanied by acquisitions
or JVs - particularly in the
Hydrocarbons space, wherein the
qualification criterion

| 21 | EPC Industry in India: Issues and Challenges


EPC Report New.indd 21 2/20/2011 8:13:43 PM
Key External Drivers and Issues

Contracting Models
The demand for the EPC industry is driven by the contracting models adopted by customers. Theoretically, the EPC industry
is driven by the need to reduce the risk for the developer, at the same time leveraging the expertise of the EPC player to
reduce
the overall execution period and cost. Some of the prevalent contracting models are mentioned below:

Contracting Models and their Drivers


Model
Engineering
Procurement
and Construction Management (EPCM)

EPC - Lump Sum


Turn Key (LSTK)

Package EPC

Source: KPMG Research and Analysis, Industry inputs

EPC Industry in India: Issues and Challenges | 22 |


Key External Drivers and Issues
EPC Report New.indd 22 2/20/2011 8:13:43 PM
The choice of the contracting models especially where projects are being
are driven by multiple factors awarded through the competitive
bidding
CONTRACTS
Internal capabilities of the project in the public sector, is the emergence being bagged by
developer of a large number of relatively small,
Influence of financial institutions
Availability of enough number of
unknown players bagging significantly
large contracts.
COMPANIES
with LIMITED
quality LSTK suppliers
Prevailing market conditions, While it is important from a capacity
including supplier power. In a building and competitive stand point,
capacity constrained scenario, it has led to order book uncertainty for
CAPABILITIES
contracting models move towards the incumbents. At the risk of sounding
will affect
shifting the anti-competition, a senior management
risks on to the project developers.

PROJECTS in
executive of a large EPC company
However, a few general trends can be suggested that it is not a healthy trend
drawn based on the above drivers, as at all. “It is leading to contracts being
follows: bagged by companies with limited the medium to long run
In the infrastructure segments, the capabilities, which will affect projects
uncertainty is the appetite for
contracting models are moving in the medium to long run”. While the
investment
towards transferring more risk to extent of truth in this prophecy can only
in manufacturing or in-house value
contractors, including operating risks be borne out over time, it is a fact that
addition. The BTG manufacturing
in the form of BOT, BOOT models. this phenomenon has increased the capacities of private sector companies
In the industrial segment, it is order book uncertainty for the
in India like that of L&T, Bharat Forge,
expected that the EPCM or even incumbents.
Thermax, BGR etc are faced with the
lesser risk models will continue to
prospects of being under utilized as
dominate. Strategic planning methods based most main plant equipment orders have
What will tilt the balance in on projected capital expenditure and
been won by BHEL and the Chinese
favour of turnkey models in the historical market shares do not throw up
companies.
industrial segment is the entry reliable revenue projections, and there
of new developers, especially is scramble to hedge risks by
This phenomenon was also seen in the
in the mid-scale segments, who diversifying and being present in as
Roads sector, where there is
have limited internal capabilities to many sectors as possible. There are
consequently now a cap on how many
execute projects without LTSK type numerous examples around this; a look
orders can be placed on a single
contracts. at the portfolio of the top 10 company, and also in the Balance of
construction companies in India Plants in Power space, where multiple
illustrates this point. companies have sprung

Order Book Uncertainty up to take advantage of the under-


Another ramification of this order book
One significant trend in industry, capacity scenario.

| 23 | EPC Industry in India: Issues and Challenges


EPC Report New.indd 23 2/20/2011 8:13:43 PM
Human Resources workers like carpenters, fitters, welders, Incremental Human Resource Requirement
but what they lament the most is the (including skilled workforce) in 000s
The shortage of skilled manpower is lack of Project Managers with adequate Profile of People
most acutely being felt in the experience and skill levels to execute
Project Managers and
construction the ever increasing size and complexity Engineers
industry. The construction industry of projects. Supervisors
currently employs 32 million people in Foremen
the country. It is estimated that 1 The 11th plan envisages the Crane Operators
percent increase in GDP translates to 1 development of a National plan for Electricians
percent Human Resource development Weleder
increase in jobs for the construction through training and certification of S o u r c e : National Skill Development Corporation and IMaCs s
industry. With the accelerated construction personnel. However,
investment in infrastructure, this is only industry participants feels that this
going to increase. If the 12th plan large capacity building will require
skilled levels4. Centum Learning, a joint
envisages doubling of infrastructure significant private sector effort, for
venture between Bharti Group’s
investment from the 11th plan, it calls establishing training institutes, setting
Centum Learning and NSDC is one
for doubling course material and reducing trainee
initiative, to skill and train 1.2 crore
of requirement for the construction career risks by providing absorption.
Indians on workskills in sectors like
industry, which indicates a large While the need for upgrading the
Telecom, Retail, Building and
shortage of resources. While current set of ITIs and vocational
Construction. However, there is need
mobilization of unskilled labour at training institutes is felt, more
for many more, especially from the
construction sites may be of relatively importantly, there is a need to establish
Construction Industry itself. Hence
lesser concern, the need for doubling training centers with private
there is an urgent imperative for
the skilled resources available in the participation at major labour centers in
collaborative action by the Engineering
country is being acutely felt. Anecdotal the country, in the semi-urban and rural
and Construction companies in investing
evidences indicate that construction areasThe challenge is accentuated due
in skill building at the supply centers, in
managers with 15+ years of to the demand centers and the supply
a non-competitive environment. In the
experience in building high quality centers being different. The supply
meantime, the government may have
roads are now drawing compensation is likely to be driven predominantly
to refrain from disallowing the use of
in the same range as their peers in by states like Orissa, West Bengal
foreign labour for project
advanced countries, which was and Bihar, especially at the minimally
unheard of in the Indian context.
Industry leaders are worried about the
shortage of skilled
“The existing public school infrastructure can execution, till such time as
be skilled labour shortages are
upgraded through private participation with minimal addressed.
additional expenditure with after-school hours used
for providing vocational skills” While, the skilled resource
- Senior Executive at an EPC
company
4
NSDC report on Human Resource and Skill Requirements in Building, Construction Industry and Real Estate Services

EPC Industry in India: Issues and Challenges | 24 |

EPC Report New.indd 24 2/20/2011 8:13:43 PM


requirement at the Engineer and of professionals to act as integrators, are few institutes focusing on teaching
Supervisor levels is a constraint as well, who can act as engineering Project Management, especially for
we feel that it is easier addressed as coordinators and are comfortable with the construction industry in the country.
over a period of time through private various engineering disciplines and not In the absence of specialist finishing
sector participation in engineering just one specific discipline. It is only schools for Project Management, the
education, as this is financially with the availability of such talent, that industry relies on in-house training, and
rewarding even with limited or no companies can innovate, carry out on-the-job training programs. While
government support. What may be value engineering to improve the those are important, there is a need to
needed though is more specialized overall productivity of a capital project. go beyond the generic project
curriculum development (for example management credits introduced in
Power Plant engineering). A second The second of critical challenges apart business schools or engineering
requirement is for cross- functional from technical and skilled labor, lies in institutions. It is strongly believed that
engineering skills and exposure. The developing managerial talent. There the development mandate given to
EPC industry needs a set the Construction Industry
Development Council and the National
“There is a need for building a high profile Institute of Construction Management
project and Research (NICMAR) needs to be
management school along the lines of an IIT/ supplemented by the establishment

IIM, all we need is some land allocation and of some such high quality Project
Management schools.
the industry can do the rest”
– Senior Executive of an EPC
company

| 25 | EPC Industry in India: Issues and Challenges


EPC Report New.indd 25 2/20/2011 8:13:43 PM
Contracts

(i) Ease of doing business in India

In the latest rankings5 for ease of doing business, India is ranked 134th in the world.

Ease of Doing Business Ranking for India


Ease of Doing Business Starting a business

134 165
Source: World Bank Group, Ease of Doing Business Rankings, 2011
India scores particularly poorly in the who see the immense potential of India, design engineering and consultancy
establishment of new business and as also reflected in the FDI flowing firms, while evolving it strategy for
construction, closure of businesses, in to the country. However, for many emerging markets recently, found these
and enforcement of contracts. While, global companies contemplating entry rankings to be particularly forbidding in
one may argue that these rankings into India, these are not encouraging its evaluation of India’s attractiveness
mean little to investors and companies indicators. One of the world’s leading as
a business location.

Risk Assessment of aggressive delivery periods, the primary they will have to accept terms from
Typical Contracts reason for such evaluations, we found, the customer. Interestingly, as a senior
During a recent engagement for an were the typical contractual clauses, executive in in an EPC firm told us,
Indian EPC client, we studied the risk including payment and retention terms the ability to manage within a weakly
evaluation frameworks in use by which detract international companies enforced regulatory framework is a
international majors. We found that from taking up large contracts in India. competitive advantage for Indian EPC
many international companies would Moreover, many EPC companies find companies who have learnt to operate
rate typical Indian projects as “No-Go”. arbitration as a lengthy process in India, under these conditions. For example,
While the reasons would typically also and hence the risk averse companies these companies have realized that
include issues related to logistics assume that in case of any disputes, Liquidated Damages are rarely
constraints and overly enforced
by Public Sector clients. Further,
new infrastructure developers, when
“Managing within a weakly enforced regulatory
dealing with large experienced EPC
framework is a competitive advantage for firms operating in India, find it
Indian companies” difficult to prevent extra claims, and
- Senior Executive at an EPC costs from escalating.
company
5
http://www.doingbusiness.org/rankings

EPC Industry in India: Issues and Challenges | 26 |


Contracts
EPC Report New.indd 26 2/20/2011 8:13:43 PM
We feel, the industry requires that nodal contracts, especially in respect of off- controversy and litigation. Hence, it
agencies in various government sectors, shore supply of goods / services under is advisable to structure contracts in a
take up these issues, to align the a composite contract, has become a tax-efficient manner after taking into
project contractual clauses to matter of great debate and litigation. account the peculiar facts of each case.
international standards, particularly if Equally important is the issue in relation Further, there as several provisions
they wish to receive enough number of to withholding tax on such payments. under the Proposed Direct Taxes Code,
bids in the International Competitive The onshore supplies and services are 2010 such as General Anti – Avoidance
Bidding routes, reduce the number of normally taxable in India. Rules, etc. that will have to be taken
disputes and raise the trust levels in the into consideration while entering into
industry between project developers There has been a lot of litigation in EPC contracts.
and engineering and construction relation to taxability of offshore supply
companies. and offshore services. However, the Pe r ma n en t E st a b lish me n t (‘P E ’ )
controversy in relation to offshore Issues
Taxation services is now rested with an Deputation of personnel for erection /
Direct tax amendment installation / commissioning / designing
A typical EPC contract will have the in the domestic law and accordingly / training activities is a common
following scope of work in a single offshore services are now taxable in phenomenon in case of EPC contracts.
project: India if they are utilised in India. A
general
Supply of equipment (offshore and principle which was emerged out of the The ambit of the domestic law of India
onshore); judicial precedents is that profit from is very wide and it tries to tax income
Installation / commissioning offshore supplies would not be taxable from all the activities which give rise to
Services (offshore and onshore) in India provided following conditions some business connection in India.
Software / Technology transfer are satisfied: Based on the tax treaty, the business
income
(offshore and onshore) Principal to principal transaction of foreign companies would be subject
Title (i.e. risk and ownership) in the to tax in India only if they have a PE in
Under a typical EPC contract, a non- offshore supplies passed to the India. There are various types of PEs
resident contractor performs multitude buyer outside India like fixed base PE, agency PE, service
of activities. The scope of work under Sale consideration is received PE or construction / installation PE.
EPC contract: outside India
Offshore: Offshore supplies and Sale is at arm’s length Practically, in an EPC Contracts,
offshore services activities take a long duration to
complete, and
On-shore: Onshore supplies and Although the above rulings suggest that hence PE clause (especially fixed base,
onshore services (installation, offshore supply may not to be taxed in construction / installation PE and
commissioning, etc.) India, the taxability depends of facts service PE) comes into play in this
of each case. Further, the revenue industry more often. This would imply
that a foreign
Taxability of payments received by authorities have not accepted the above rulings and hence, it
foreign companies in respect of EPC is still a matter of
company rendering services in India for more
than the specified period would

| 27 | EPC Industry in India: Issues and Challenges

EPC Report New.indd 27 2/20/2011 8:13:44 PM


be taxed in India in addition to being and much depends upon the facts and
taxed in the country of residence only circumstances of each case.
by virtue of the fact that services are Following are the consequences of
being rendered in India for more than constituting an AOP:
the specified number of days or they Applicability of Maximum Marginal
have a virtual presence in India. Hence, Rate;
it is important for the EPC contractor to Issues in relation to carry forward
structure their operations and contracts of losses;
to mitigate PE exposure. Issues in relation to Foreign Tax
Credit;
Association of Persons (AOP) Ta xation at two level due to
Generally, two or more EPC contractors applicability of Minimum Alternate
come together to bid for EPC contracts Tax on profit distribution from AOP
in the form of a consortium. In such
a situation, an AOP exposure would
arise. The term AOP is not specifically
defined in the Act. One has to rely on
the ordinary meaning and the law
emerging out of the judicial decisions to
determine what constitutes an AOP.
Whether AOP exist or not is a very
vexed issue

BROAD PARAMETERS TO
ANALYZE CONSTITUTION OF
AOP
TWO OR MORE PERSONS
VOLUNTARY COMBINATIONS
A COMMON PURPOSE OR
COMMON ACTION WITH OBJECT
TO PRODUCE PROFITS OR GAINS
SHARING OF PROFITS AND
LOSSES
JOINT AND SEVERAL LIABILITY OF
THE MEMBERS; AND
SOME KIND OF SCHEME FOR
COMMON MANAGEMENT

| 28 |
EPC Industry in India: Issues and Challenges

EPC Report New.indd 28 2/20/2011 8:13:44 PM


Key Internal Issues

The key internal challenge facing the the director of one of India’s leading Most mid-size fast growing EPC
Indian EPC industry today is issue of engineering and construction company. companies in India are facing issues
being able to manage scale and The glue that binds all these together related to empowerment of Project
diversity, with the rapid growth in is Project Management . Project Managers and the primacy of the
business and diversification into new Management is a science, with its own Project Management function in an EPC
business areas. Other issues around school of tools and techniques, both firm.
improving the quality and value in the scientific and the behavioural
addition of engineering, domain. As a result, projects are de facto mana-
implementing leading practices in ged by Business Unit Heads or other
project management, implementing very senior professionals,
modern construction methods are “E+P+C is not equal to reducing the designated
also specific challenges facing the EPC” project managers to co-
industry players, but we believe these “In our company, project managers ordination roles, and resulting in senior
will get addressed in natural course are GODs” is the common refrain management being involved in day to
as the EPC industry matures in India. in international EPC or engineering day project issues.
However, the core challenge facing the
companies. However, this is not the
mid-size, fast growing companies are case in Indian EPC companies, as Further, with business growth, senior
around effective project management, is evident from various perspectives executive time available for a specific
management of growth and scalability provided by Indian companies as well project becomes limited, resulting in
without compromising on project and as developers. A leading Hydrocarbon loss of execution control. We suggest
business risks, and developing systems major, in an industry forum, called upon that fast growing mid-size companies
and processes to make companies the EPC companies in India to develop relook at their organization structures
more scalable and less dependent on better project management talent, and and policies to ensure that their project
individuals. especially requested the Indian offices managers are empowered. They should
of global firms to rotate local talent have accountability for project cost and
Project Management through global assignments to develop time control, and adequate control over
“E+P+C is not equal to EPC” said these skills. decisions related to the project.

RESPECT FOR SENIORITY IN INDIA LEADING TO PROJECT MANAGER


EMPOWERMENT ISSUES
THE OTHER DIMENSION OF THE CHALLENGE IS THE RESPECT FOR SENIORITY IN THE INDIAN
CULTURE. WHILE PROJECT MANAGERS ARE DE-FACTO CEOS OF A PROJECT, THEY MAY NOT
ALWAYS BE MOST SENIOR IN THE PROJECT ORGANIZATION’S HIERARCHY. THE PROJECT TEAM
MAY CONSIST OF ENGINEERING COORDINATORS, CONSTRUCTION MANAGERS WITH MANY
MORE YEARS OF EXPERIENCE – WHO WOULD BAULK AT REPORTING TO THE DESIGNATED
PROJECT MANAGER DUE TO THEIR CULTURAL CONDITIONING.

| 29 | EPC Industry in India: Issues and Challenges

EPC Report New.indd 29 2/20/2011 8:13:44 PM


Organization Design & Management:
Building the Engineering

ORGANIZATION
As we discussed earlier in evolution of Engineering which being a knowledge EPC companies, who would like to
EPC companies, most EPC companies based function requires careful design balance efficiency with effectiveness.
are likely to evolve fromthe of organization structures, career paths For example, companies tend to
construction or the developer route. In and development strategies, and a ce n t ra liz e “e nd - us e / p ro ce ss ”
both the cases, the key capability gaps different approach to performance independent engineering disciplines
would remain in the domain of assessment and management as like civil, structural and electrical, while
engineering. While
Project compared to the other functions in the the other disciplines are de-centralized.
Management is the execution arm, organization. However, there is no right answer, it
engineering does and should function needs to be carefully assessed in light
as the brain, adding competitive Also, with rapid diversification, the of the company’s portfolio, strategy and
advantage centralization vs. decentralization culture.
in terms of standardization, value question stares at managements of
engineering and technology leadership.

Risk Management
Less than one third of the survey respondents in KPMG-PMI Infrastructure report,
had confidence in their risk management capabilities.

The EPC business model revolves risks. Hence it is absolutely critical for processes for risk identification and risk
around taking ownership of project EPC companies to establish robust management. Such a process would
address risks identified
at both the sales and
execution stages of the
project.

While the ideal situation


would be for EPC
companies to be able to
identify, mitigate or provide
for all risks at the
tendering stage, this is
usually not practical,
given the need
to complete bids within
a specified deadline, and
to not rely indiscriminately
Source: PMI-KPMG Study on drivers for success in infrastructure projects 2010 - Managing for change on additional contingency
margins that may impair

EPC Industry in India: Issues and Challenges | 30 |


Organization Design & Management:
Building the Engineering
EPC Report New.indd 30 2/20/2011 8:13:44 PM
the competitiveness of the bids. Hence based on risk ratings. Similarly, the help of knowledge and experience that
while key risks are identified and portfolio of projects is weighted based is codified into these tools. These risk
mitigated during the bidding stage, a on risk categories as strategic planning assessment frameworks, customized
large number of additional or minor inputs. Another common element is and developed with the inputs from
unmitigated risks may need to be Independent review of risks by senior management of the company,
addressed during ongoing project personnel not directly involved in can flag off critical risks in the tenders,
execution. Most leading international Project Sales or Execution. With the and ensure awareness and more
EPC companies, process all enquiries / rapid growth in order books, and a informed decision making during
tenders through a risk identification senior management stretched for time, bidding. Also, nuanced and
process based on which, go-No-go it is essential that Indian companies differentiated processes of project
decisions are taken, and risk ratings are also rely less on individual or execution, monitoring and control and
assigned to each project or proposal. subjective experience and expertise, staffing of projects based on the risk
and more on agreed risk management assessment will help in focusing the
The more sophisticated systems also tools and objective frameworks which best and most careful decision making
have contingencies and margin policies can be used even by less capacity towards the most risky of the
experienced people with the projects in a company’s portfolio.

strategies are either ‘reduce’, transfer


or avoid. While “accept risk” type
strategies are used infrequently, ‘exploit’
strategies are rarely used. The
industry thus is yet to reach maturity
levels at which mitigation strategies
are leveraged to exploit project risks
and are used as means to maximize
project income potential.

Risk reporting and monitoring are the


remaining links in the risk management
process that are critical for its
Source: PMI-KPMG Study on drivers for success in infrastructure projects 2010
- Managing for change effectiveness. Evolving information
systems can make timely and accurate
The KPMG-PMI study in 2010 also that were hitherto unidentified and project information for reporting
highlighted the some concerns on the hence not mitigated. Critical purposes. The information reported
comprehensiveness of risk identification improvements are also required to should comprise early warning
by companies, given the high incidence acquire a robust level of sophistication indicators and provide content that
of projects having suffered due to risks and maturity in risk mitigation. facilitates decision making.
Routinely used mitigation

| 31 | EPC Industry in India: Issues and Challenges


EPC Report New.indd 31 2/20/2011 8:13:45 PM
Procurement disclose overall project cost burden of that job has been transferred
budgets for confidentiality and to developer or the consultant.
Procurement can be a vital element flexibility purpose.
influencing timely and profitable project The constant trade-offs between This is however, not the case with
delivery in EPC projects. In projects procurement time and procurement private sector clients, especially new
with low construction intensity like costs to meet the often conflicting entrants. EPC companies we believe,
Power projects, Refining and goals of cost control vis-a-vis would benefit significantly from an
Petrochemical complexes and other schedule control on a project. increased focus on vendor
industrial plants, just the standard development, including supporting high
“bought-out” components quality emerging vendors
may comprise anywhere between 30- It requires companies to evolve strong in getting themselves accredited with
50 percent of the project value, apart sourcing teams, capable of vendor PSUs.
from other procured items like discovery and price discovery on a
construction materials and sub- larger scale than would be required Given this context, we feel Procurement
contracted services. There are several in a manufacturing set-up. In most capability can emerge as a strategic
reasons leading to complexity in the manufacturing companies, rate differentiator for improving performance
procurement function of an EPC contracts, differentiated procurement and winning business in the EPC
company: processes for minor vs. major items, industry. It requires efforts on the part
and MRP based
Number of individual items to procurement processes reduce the of engineering, procurement and client
be procured for a large project, transactional overhead significantly. facing personnel to discover, qualify
within specific and often varying new suppliers and convince customers
deadlines. Moreover, most public sector units have to include them in their approved lists or
Cost targets for Procurement are made, depending on how one looks allow deviations on the projects. We
usually set at individual component at it, the job easier or more difficult for feel however, in the emerging high
level, not at an overall Procurement contracting companies by providing growth but hyper competitive scenario
budget le vel – sinc e vendor lists. This has resulted in vendor for EPC companies, this would be a
senior development take a backseat as the worthwhile investment to make.
management usually does not

EFFICIENCY IMPROVEMENT INITIATIVES FOR PROCUREMENT


FUNCTION
REDUCE CYCLE TIME, BY DESIGNING THEIR PROCUREMENT PROCESSES FOR INCREASING
DECISION MAKING SPEED
REDUCING THE NUMBER OF TRANSACTIONS BY STANDARDIZATION AND IDENTIFYING
COMMON ITEMS ACROSS PROJECTS EXECUTED IN THE PAST
IMPROVE THE COMPETITIVENESS OF THEIR SUPPLIER BASE BY CASTING THEIR NET WIDER,
INCLUDING ELEMENTS OF GLOBAL SOURCING IN THEIR STRATEGY

EPC Industry in India: Issues and Challenges | 32 |


EPC Report New.indd 32 2/20/2011 8:13:45 PM
End-Use Industry Views

Power Generation
Power Generation Units – especially term. The thermal power and nuclear equipment sourcing, engineering and
thermal power plants are likely to be power units both have relatively lower integration management as compared
amongst the largest opportunities for civil construction component and to other infrastructure classes like
EPC players in the short to medium require superior capabilities in terms of Roads,
Ports etc.

Demand Outlook
By 2015, India would need to increase significantly across regions and is additions was conducted based on a
its current generation capacity of 152 estimated as 62 GW in Western variety of sources such as the CEA
GW to 205 GW (an increase of 53 GW) Region, database for upcoming additions,
till year 2014-15 for meeting the base 62 GW in Northern Region, 54 in the industry reports and KPMG’s internal
load capacity requirement to support Southern Region, 24 GW in the assessment. Only those plants which
growth of economy at 8 percent and Eastern Region and 3 GW in the North have reached an appropriate state
address unavailability of power in many Eastern Region of India in the year of readiness for commencement of
parts of the country. To meet the peak 2014-15. This projection implies an commercial operations within the period
load capacity requirement, the installed average annual generation capacity FY 2010-15 have been considered
capacity requirement would need to be addition at the rate of 16 GW per year for capacity addition. Effective supply
more than 270 GW. during the period addition for each year of the period
2007-08 to 2016-17 (covering two 5 (FY 2010-15) was calculated based on
The generatio n capacity gap to Year Plan periods in India viz. XIth and the total capacity addition. We expect
meet baseload requirements varies XIIth). During the IXth (1997-2002) and a total capacity addition of 99 GW in
Xth (2002-2007) 5 Year Plan periods, this period. Assuming a similar rate,
the average annual generation capacity
addition in the
Expected Capacity Addition (GW)
country has been this translates in to an approximate
3.6 GW and 4.2 opportunity size of INR 500,000 crore
GW respectively. (i.e. over USD 100 Billion) towards
The poor capital expenditure for these plants.
performance in the The majority of this investment will be
past is attributed towards thermal power plants, of which
to implementation 80 GW are likely to be commissioned
d e l a y s 6 b y t h e by
public sector utilities 2015. The opportunities for EPC
coupled with hitherto players, equipment vendors are for
limited private sector projects which are likely to get
participation. commissioned beyond
2012-13 as they are the ones which are

Source: KPMG Research and Analysis A bottom up mostly likely yet to be tendered out - for
analysis of balance of plant equipment if not main
6
And not necessarily poor planning
expected plant plant equipment.

| 33 | EPC Industry in India: Issues and Challenges


End-Use Industry Views

EPC Report New.indd 33 2/20/2011 8:13:45 PM


End-Use Industry Specific Issues

The thermal power industry has the entire sector is favourably inclined generation projects in their planned
been one of the fastest to adopt the towards contracting project execution portfolio.
EPC model on a LSTK basis. The current
landscape While complete power plant as a single
The Power Generation industry has indicates that large public or private EPC/ LSTK package is still rare in the
seen one of the fastest adoption rates sector generation companies like Indian scenario. Moreover, the trend
in terms of EPC contracting model. NTPC, given their internal of not awarding the entire EPC job (i.e.
Prior to the reforms in the power sector engineering and project management both BoP and BTG of a power plant) to
and the policies around public private talent pool, will continue to buy one single service provider has been
partnership models, power plants were individual packages, keeping the driven by:
integration to themselves.
being constructed by the state level However, they may combine multiple Distinct set of competencies required
generation companies and NTPC. The power plants in their portfolio, going for for the BTG and BoP packages.
tariff regime and operating models of combined bids to get the best prices While BTG is technology, equipment
some these power generation entities at and reducing transactional bidding and manufacturing intensive, BoP
that time did not require utmost costs. NTPC floated a tender for requires complex integratio n
attention to projection completion on different packages for 11 units of 666 capabilities of sub-systems to be
schedule and to cost budgets. MW each, the award of which is likely sourced, erected and commissioned
However, with the competitive power by first quarter of 2011. With this move, from different sources.
pricing policy PPP bids, - wherein one NTPC is expecting to bring down the A single LSTK package would amo-
can participate in developing power, cost/MW of setting up power plants, unt to a range of around INR 6000
only if you are the most efficient on which many experts believe today is crores for a typical 2X660 MW
capital cost as well as operating cost - at about 5.5 project, requiring EPC companies
has led to increased focus on crore/MW . State level generation
7
with large balance sheet and risk
executing projects on time and within companies, most of whom are currently bearing capability. It will be difficult
budget. Most projects are being on the twin package mode (BTG and to find enough number of such
financed by project finance companies BoP), may continue to procure in that contractors to get a competitive bid.
and financial institutions, who demand manner.
that developers manage the project
budget escalation risks. The trends in the private sector are
interesting, where a distinction needs to
Internal teams at even established be made between large business
generation companies are stretched, groups like Reliance ADAG, Essar
and at the same time, there have been Group, JSW Group, Sterlite Group,
a large number of new power sector GMR Group, Lanco etc who are likely
entrants, some with limited background to build large portfolio of power projects
in executing large projects. Hence in the future, vis-à-vis smaller
players with fewer

7
Source: http://www.sify.com/finance/ntpc-likely-to-float-rs-18-000-cr-tender-news-equity-km4bvDidjib.html

EPC Industry in India: Issues and Challenges | 34 |


End-Use Industry Specific Issues

EPC Report New.indd 34 2/20/2011 8:13:45 PM


Typical Outsourced Package Structure by
Thermal Power Plant Developer Segments
Central Sector P
EPC Contract for Entire Plant (BTG + BOP) · Not Applicable

* Balance of DVC projects to b


Plant – EPC NLC also expected

Coal Handling · NTPC, N


Plant (CHP) – separate C
package

Ash Handling · NTPC, N


Plant (AHP) – separate A
package

W a t e r · NTPC and NLC


Packages separate package

Source: KPMG Research, News Analysis


The large business houses like Tata, Company for main plant equipment to imagine, large private companies
Reliance, JSW, Adani have significant supply for all its thermal power plants, wanting to outsource setting up of
in-house capabilities as far as project and in the process also getting access
power plants to EPC companies on a
execution goes. Moreover they have to cheap funds. Estimates put the turnkey basis. If EPC companies are
substantial leverage with equipment savings on financing cost alone at INR looking to capture this private sector
vendors and sub-contractors due to 6500 Cr. for just the Sasan UMPP market in utility power plants, we
their large portfolios. (Reliance has project being developed by Reliance believe they will have to bring a value
demonstrated this by entering in to Power8. proposition which reduces power plant
an agreement with Shanghai Electric capital expenditure costs by at least 10
With that kind of leverage, it is hard – 15 percent over the
currently prevailing benchmarks, through
“Do the EPC companies really deliver for efficient global procurement and strong
us?” project execution capability.
- Power Plant Developer
8
Economic Times, 23rd January 2011
| 35 | EPC Industry in India: Issues and Challenges
EPC Report New.indd 35 2/20/2011 8:13:45 PM
Hence in terms of contracting model, procurement capabilities, and regarding Chinese supplies have
the following trends are likely to sustain hence will place smaller sub- been expressed, we understand
/ materialize contracting or equipment orders. from our interview respondents that
In the BTG segment, the Chinese there
is no conclusive evidence to this
Majority of the public sector projects companies will likely continue to effect. In fact a CEA study9 in 2008
or projects of new developers are have the second largest market found no material reason to doubt
likely to be on twin package route share, after BHEL. It may be difficult the quality or the technology offered
(BTG and BoP) for Indian companies in JV with by the Chinese suppliers. On the
Most large business houses in foreign partners to make inroads in other hand, BHEL is the most
the Thermal Power business will to this market due to the cost established player in Indian with
manage their projects in-house to advantage offered by the Chinese ~60 percent market share and
leverage their portfolio, faith in their players due to overcapacity in their with recently augmented capacity
internal project management and domestic market. While quality should continue to protect its market
concerns share.

9
Report of the Committee to study Design Features of Boilers and Auxilaries being sourced from Chinese Manufacturers,
September 2008

EPC Industry in India: Issues and Challenges | 36 |


EPC Report New.indd 36 2/20/2011 8:13:45 PM
Refining and Petrochemicals

Demand Outlook

Investment (in INR thousand crores)


Oil and gas constitutes about 65 Five year plans Planned Expenditure vs Actual Expenditure
percent of the global and 40 percent 25 0
-
of the Indian primary energy
200
consumption. In the Indian context, the
primary energy consumption over the
15 0
last five years 112

has increased by over 6.5 percent


100 67
CAGR as compared to global increase
16 9
of about 1.7 percent CAGR. The 50
127
overall contribution and pace of growth
of oil and gas provides a perspective 0

on the
importance of this segment to the VII Plan VIII Plan IX Plan X Plan XI
Plan*
Indian economy.
Actual expenditure as
Planned Expenditure Actual Expenditure
% of planned outlay
*XI plan actual expenditure is only up to August 2009
Oil and gas is one of the few sectors Source: Planning Com m ission

which
exceed the investment targets as laid increase in planned expenditure. This is and private companies have announced
out in the Government’s five year mainly because of aggressive their investment plans in the various
plans. For instance, in tenth five year investment plans by oil and gas streams of the oil and gas sector such
plan, the actual expenditure was 112 companies in India. The actual as exploration and production, oil and
percent of planned outlay at INR expenditure during the first two years gas pipelines, petroleum refineries,
1,08,003 crores. Similarly, during the and 4 months of eleventh plan (up to liquefied natural gas, city gas
midterm appraisal of eleventh plan, August 2009) is INR 1,08,625.91 crores distribution and petrochemicals. All
government has to revised its planned which is 47.38 per cent of the plan these investment plans would create a
outlay to INR 2,69,461 crores from INR approved Outlay. The Oil and gas robust opportunity for EPC companies.
2,29,278 crores, a 17 percent sector is poised for growth. Many public The total value of
the EPC10 opportunity in India for Oil
EPC Investment opportunity in Oil & Gas Sector and
Gas sector can be pegged at USD 60
Investment (in USD Billion)

2 60-6 5
70
3-4

60 21-23
3 - 65 billion in the next five years. On the
50 USD 18 - 20 billion has been envisaged
in the next five years for development
12
30 of offshore fields and laying pipelines.
18 -20 1 A substantial part of this investment
20
is expected to be done by ONGC in
10
developing the east coast gas
0
discoveries and maintaining production
from existing discoveries. Moreover, the
government is

Source: KPMG Analysis


10
Refers to opportunities for companies as well as equipment suppliers, not restricted to those on offer through the EPC-
engineering and construction LSTK model
| 37 | EPC Industry in India: Issues and Challenges

EPC Report New.indd 37 2/20/2011 8:13:47 PM


also planning to offer shale gas blocks an EPC opportunity of USD 2 billion. In in first two rounds and plans to have
in second half of 2011, which will create addition, the Ministry of Chemicals and offer further 16 cities in next two
more opportunity over and above the Fertilisers has approved proposals of rounds. Thus even if one were to
aforesaid investments. The midstream about USD 35 billion in three regions assume a conservative spread per city,
segment would see a spurt in under its flagship Petroleum, the EPC opportunity in CGD network is
investments given that the PNGRB is in Chemicals and Petrochemicals about USD 3-4 billion in the next 5
the process of awarding four key Investment Regions (PCPIR) policy. years.
pipelines segments more than 4,000 These three PCPIRs are
kms. Further there has been plan to — Visakhapatnam and East Godavari End-Use Industry
launch additional pipeline such as districts in Andhra Pradesh, Bharuch Specific Issues
Asansol-Howrah, Chennai- Nellore in Gujarat and East Midnapore in The Hydrocarbons industry is unique in
and other pipeline segments as part West Bengal. We have not included terms of player profiles as the very best
of national gas grid. This would mean investments in PCPIR in our overall in the world have a presence in India.
an EPC opportunity of about USD 12 estimate. City Gas Distribution (CGD) Here is just a sample list of companies
billion in natural gas pipelines. is another downstream segment which operating in India, not just by means of
Additionally around USD 1 billion is set to see a spurt in investment having offshore engineering centers,
investment opportunity exists in crude opportunities, due to new domestic gas but having won & executed projects in
oil and petroleum products pipelines. discoveries and bidding by PNGRB. India. Our discussions with these
Further, to meet the domestic gas companies
supply constraint, LNG regasification The regulator has already completed indicate that they have at least 20
terminals the bidding for 13 geographical areas percent of their India center manpower
have been planned at Kochi, Mundra deployed on Indian projects.
and Ennore which would require the Examples of International Engineering Companies Presence in
capex investments of about USD 3 India in Oil and Gas
billion by 2015. In the downstream Company
segment, refinery sector has seen Foster
Wheeler
number of announcements by
Uhde India
companies for expansion of existing
Jacobs
plants and setting up of Greenfield India
refineries. The new refineries are
Technip
expected to increase the India’s refinery
capacity by 55 mtpa. Given that Tecnimont
refineries are highly capital intensive, ICB
the EPC opportunity can be pegged Linde
at about USD 21 - 23 billion. Besides Aker
Solutions
this, some companies have announced
firm additions in their petrochemical Source: Company Websites and News Reports
production capacity which would mean

11
Including offshore engineering centers supporting global projects
12
Not an exhaustive list of projects, examples provided only to demonstrate instances of work executed in India

EPC Industry in India: Issues and Challenges | 38 |


EPC Report New.indd 38 2/20/2011 8:13:49 PM
It is a phenomenon very unlike the user industry feels that the EPC FEED, so that it is good enough
other sectors discussed like Power companies are just not willing to to give it out for LSTK itself takes
Generation or other infrastructure take large risks in this sector. While about a year, followed by bidding
segments. One of the differentiating L&T and Punj Lloyd are among the and contracting for another year.
factors is the engineering and few Indian companies capable of This process adds a good two
equipment intensity, put together as the taking up large LSTK packages, years to the 3 odd years of project
technological intensity of the projects. the international companies do not execution cycle. Moreover, Indian
This is an area where the relative have Indian balance sheets of the user companies seem reluctant to
strengths of the international size wherein they can afford to take spend that kind of man-hours and
companies are believed to be superior. such large risks. The international cost towards front end engineering.
Moreover, the qualification criteria parent companies hesitate taking Majority of the capital
are stringent and past experience in up large projects in India on account expenditure is being done by
a particular type of unit / package is of their internal risk assessment the state run oil marketing
demanded. As a result, it has been policies. Additionally, there is companies, ONGC or Reliance.
observed that international companies ambiguity related to various taxation While the state-run companies
have established their niches. Amongst issues, which results in limited have their large in- house teams
Indian companies, the key players number of bids being received in an developed over the years to take
include Larsen and Toubro, Punj Lloyd international competitive bid route. on the integration challenge,
and recently Essar Projects, which has One of the state-run refining and companies like Reliance are well-
received large size orders in the recent marketing company highlighted the equipped to assume the project
IOCL refinery project. lack of enough number of global risks on their own, given their
bids received, when they did break entrepreneurial history and esteemed
The industry is also unique in terms their contracting pattern to attempt project management capabilities. In
of the prevalent contracting models, awarding large LSTK packages. that light, the LSTK model or larger
with very little being given out as LSTK KPMG’s tax experts believe there packages would be possible only in
contracts. The various reasons cited for are ambiguities in Indian taxation the event that the internal teams of
this phenomenon are as follows laws related to importing of capital Petroleum companies are stretched
on account of a large number of
Limited set of LSTK equipment for projects, and also in capital expenditure projects ( which
contractors in the Oil and Gas taxation on work performed in India it appears, is not the case), or there
sector, capable or willing to for global companies, which force are mid-size refining and
execute large turnkey contracts. these companies to either not bid, petrochemical companies setting up
While the EPC companies believe or bid very conservatively. plants in India. The answer in terms
that process plants are too The complexity of the process of encouraging mid-sized players to
complex and the quality of front industry makes it difficult to invest in India seems to have been
end and basis engineering which prepare detailed and found in the form of PCPIRs being
will provide the solid ground for firm comprehensive fixed- set up in the country which will
estimation is lacking, the cost bids. The preparation of the encourage foreign

| 39 | EPC Industry in India: Issues and Challenges


EPC Report New.indd 39 2/20/2011 8:13:49 PM
as well as domestic investment, marks the entry of the famed Indian EPC companies looking to enter
with the feedstock being supplied Korean the Hydrocarbons sector, have to
by the anchor investor. Though not EPC companies to India. overcome the challenge of qualification.
exactly falling in this bracket,
ONGC’s petrochemicals venture, Contracting Models: The routes adopted by them to build
OPaL, being set up in the Dahej Medium Term Outlook their credentials have included
PCPIR is a case in point. ONGC As far as the hydrocarbons and the a) acting as sub-contractor s to
has limited in-house expertise in process industry is concerned, it will international companies,
petrochemicals, and hence there likely continue to see the dominance b) bidding in consortiums or
is a clear difference in the way it of the EPCM model of contracting. c) acquiring small companies which
has gone about its procurement. However, to reduce the complexity have partial qualifications.
The EPC order for the ethylene of procurement and integration, the
cracker has been placed on a individual packages being procured for However, as compared to EPC in other
consortium of Linde and Samsung a Greenfield refinery or similar plant, industries or infrastructure segments, it
Engineering India. This is one of the are likely to come down from the is a more gradual process to establish
largest EPC contracts awarded in current 20- oneself in the Oil & Gas sector in India.
India in the Oil & Gas sector. Also, 25 to may be 10-15 packages and even
it less going forward.

EPC Industry in India: Issues and Challenges | 40 |


EPC Report New.indd 40 2/20/2011 8:13:49 PM
Water
Demand Outlook with for industrial purposes in developed
W ater Resource high demand are not well connected
countries as opposed to 80 percent for
Management with regions of high supply. Given
agricultural use in developing nations.
– A Critical Global Challenge the demand-supply mismatch and
and Both public utilities and private players
increasing emphasis on sustainability,
Burgeoning Opportunity operate in this space with private
water management is a sector expected
The Worldwide Plant market for water players accounting for 44 percent of the
to experience high growth.
treatment has been estimated at USD serviced water in Europe as opposed to
380 Billion Dollars as of 2009 13. Water only 12 percent in South East Asia14.
Structure of the Water
demand is increasing due to growing market
levels of industrialization and the spurt Nearly 50 percent of water use is
in global population. However regions
13
Techpetro Asia Newsletter (April 5,2010)
14
SAM group – Water - A Market for the future (2010)
Comparison of Global Water EPC Market with India
Key Characteristics
Industry Structure

Technology

End Use Consumers


Domestic opportunity

Typical Contract
Mode

Source: KPMG Research and Analysis


during the first decade of the 21st sanitation, including urban drainage
Indian Scenario: A growing
century, driven by increased central and solid waste management16. While
market with a lot of opportunity
government grants made available private sector interest in the sector
Due to the multiplicity of issues
under Jawaharlal Nehru National Urban has increased, critical barriers such as
plaguing the sector, the Central, State
Renewal Mission (JNURM) and funding poorly written contracting
and Local governments are investing
from development agencies such as documentation,
significant amounts of money in the
ADB, World Bank and JICA15. The 11th large timelines to project award and
sector. Add-
Five-year plan (2007–2012) foresees sub-optimal risk sharing mechanisms
itionally, funding to the water sector
investments of INR 127,025 crore continue to hinder the growth of private
by development banks is increasing
(USD sector investment in the water sector
manifold. Investment in urban water
28.6 billion) for urban water supply and in India17.
supply and sanitation has increased
15
ADB: www.adb.org/India/main.asp; World Bank: go.worldbank.org/E9RO7F96W0; JICA: www.jica.go.jp/india/english/activities/
16 17
Planning Commision of India ‘India Infrastructure at crossroads’ Thomas Reuters. September 24, 2010
| 41 | EPC Industry in India: Issues and Challenges
Water
EPC Report New.indd 41 2/20/2011 8:13:50 PM
Opportunity Drivers and Trends for EPC companies in Water Segment

Opportunity Area
Wastewater Treatment

Water Treatment and


Transimission
Industrial Water
Infrastructure
Desalination

Water Management

Agricultural Demand

Source: KPMG Research and Analysis

End-Use Industry Specific Issues


Structure of the Indian operations is mentioned below:
Private
Sector
A snapshot of some companies
operating in the sector along with
their area of

Source: KPMG Research and Analysis

EPC Industry in India: Issues and Challenges | 42 |


EPC Report New.indd 42 2/20/2011 8:13:51 PM
Contracting Models for Private Sector Participation in Water Projects

Contract Definition
Turnkey Contract to

Design-Build- Operate Contract to

Design-Build- Finance- Operate Private se

Management Private se
Contract

FBC (Fee- Based Contract) Private sec

Source: KPMG Research and Analysis


There is a need to standardize JNNURM the future mode of collaboration will tilt
contracts to a limited set of standard Increasing urbanization and lifestyle towards PPP model participation rather
models and a general set of services, in requirements for water than stand alone EPC contracts18
order to speed up contracting Major Power Generation and Steel
processes and the speed of award of Plant projects. Going forward, we expect several major
contracts. In summary, we expect the Water treatment can emerge as an business groups to foray in to the Water
water sector to become a major and additional revenue source & a sector, and indeed, several of India’s
attractive opportunity for EPC hedge against declines in other largest conglomerates have already
companies as well Infrastructure Industrial markets for domestic done so. Given the likely preference for
players in India, driven by: EPC firms. PPP / BOT, BOOT models to emerge in
Stricter enforcement of regulations Further, given the fact that a large this sector we are likely to see more
surrounding industrial waste number of contracts in the water space EPC companies becoming project
Pu b li c se ct o r in ve st me n t i n will be awarded by ULBs across the owners and developers as well in the
urban renewal programs like the country, given the finances of most water segment.
ULB’s in India,
18
Industry Inputs
| 43 | EPC Industry in India: Issues and Challenges

EPC Report New.indd 43 2/20/2011 8:13:51 PM


Snapshot of Some Relevant International Trends

The global plant market was valued at player participation19. form the largest portion of the market. A
USD 1.6 trillion dollars as of 2009, of chart representing the breakup between
which nearly USD 730 Billion dollars Of this power, water treatment and oil various sectors in the construction
worth of projects were open to foreign exploration and production (E&P) industry is given below.
activity

Breakup of Global Plant Market

20

Going forward, the “international trillion dollars by 2015. Asia Pacific and expected to contribute to about 58 % of
bidders eligible” component of the the Middle East in particular will be the all orders generated globally.
global plant key growth drivers for this region and
market is expected to increase to 1.11 are

19
Techpetro Asia Newsletter (April 5, 2010)
20
Techpetro Asia Newsletter (April 5, 2010)

EPC Industry in India: Issues and Challenges | 44 |


Snapshot of Some Relevant International Trends
EPC Report New.indd 44 2/20/2011 8:13:51 PM
Characteristics of the Global Construction Market21
The global construction market is essentially split into three major segments

Source: KPMG Research and Analysis

21
http://cdiver.net/news/south-korean-firms-taking-work-in-the-middle-east/
| 45 | EPC Industry in India: Issues and Challenges

EPC Report New.indd 45 2/20/2011 8:13:51 PM


The Growth of the Korean EPC Industry – Some Observations22
The Korean Construction industry biggest foreign market for construction the Oil and Gas and Petrochemical
picked up steam after the Korean war in activities though Korean companies space in the Middle East, a result
the 1950s, first by rebuilding essential have diversified into other regions of decades of project execution and
domestic industries and real estate recently. growing engineering and technological
destroyed during the war and then by prowess. Some key enablers for the
taking these skills and capabilities to Middle Eastern contracts accounted Korean construction industry have been
international projects. The Middle East for 73 % of total international contracts mentioned in the following table, along
with its oil revenues represents Korea’s in 2009. Korean companies have with comparison with India.
increasingly bid and won projects in

22
http://www.khl.com/magazines/international-construction/detail/item61017

Key Enablers for Korean Construction Companies and Comparison with Indian Industry

Key Enablers Korean Compan


Project Management Experience Large range of p

Government Favourable Eco


Support

Domestic Engineering Firms Korean Firms fo

Industry Bodies Industry bodies e

Skilled Large pool of b


Manpower

Domestic opportunity Historical infras

International A significant por


Leverage

Domestic Equipment ofte


Ancillary – domestic anci
Industry Support necessarily bee
construction indu

Source: KPMG Research and Analysis

EPC Industry in India: Issues and Challenges | 46 |

EPC Report New.indd 46 2/20/2011 8:13:52 PM


Support from Government and other bodies23
The Korean Ministry of Land, Transport Institute of Construction Technology was set up which helped stimulate the
and Maritime Affairs is the primary etc. Various research bodies like the domestic engineering services industry.
government body dealing with Korean Korean Institute of Construction In addition through the use of various
overseas construction activity through Technology (KICT), Korean Institute of treaties and regional agreements,
its arm the International Contractors Construction Safety Technology the Korean government assists in
Association of Korea. It provides (KICST),Korean Institute for promoting business for Korean firms
support in the form of providing a forum International Economics and Trade in other nations. Thus Korea posseses
for the industry to interact with the(KIET) etc exist to provide research a skilled set of manpower and has
government and through various and other support to the domestic industries capable of providing
initiatives like providing dedicated construction industry. Following the construction materials like steel, cement
construction training to Koran enactment of the Engineering Services at low cost to facilitate the rise of the
manpower, the opening of educational Promotion Law, the Korean Engineering Korean construction industry in the
courses through partnerships and Consulting Association – a non international arena.
with academic institutions like the profit group of engineering companies,
Korean

23
http://www.koreanewswire.co.kr/?job=news&no=345887,
http://www.businessweek.com/investor/content/oct2007/pi20071010_252795_page_2.htm
http://www.investkorea.org/InvestKoreaWar/work/journal/content/content_main.jsp?code=4580101

Future Growth Plans of the Korean Construction Industry24


The international growth of the Korean East. The graph below illustrates the operating both in the civil and industrial
construction industry has picked up rise in the international order book construction space. Large corporations
steam over the last decade with an of the Korean construction industry dominate and the Top 5 companies
increasing number of orders especially over the last 5 years. Most Korean accounted for over 60% of the total
in the oil and gas space in the Middle Construction Companies are order
diversified, book as of 2009.

Korean companies overseas plant Contracts ($ Billion)


Source: Techpetro Asia Newsletter (April 5, 2010)
24
Company Annual Reports , http://cdiver.net/news/south-korean-firms-taking-work-in-the-middle-east/
| 47 | EPC Industry in India: Issues and Challenges
EPC Report New.indd 47 2/20/2011 8:13:52 PM
Advantages of low cost of construction and are also expanding their activities concepts – Globalization, Expansion of
and the ability to take up risky fixed into other segments like nuclear power, Profit Pool and Transformation through
price contracts have won Korean water treatment etc in addition to their Innovation and other corporations have
companies contracts in the plant presence in civil works. There is also similar blueprints for growth25.
space in the last 5 years. Samsung a greater focus on the development of
Engineering is pursuing a strategy of technological and engineering skills to Thus the Korean Construction Industry
building up a strong base in the Middle enable Korean companies to operate in aims to have a spectrum spanning
East and then further expanding into
a wide range of business domains and presence with operations in various
Northern Africa. Korean companies industry sectors. For example, Daewoo industry segments through the buildup
are increasingly focusing on has prepared a long term action plan of technological ability and a credible
Sustainable Development called GET which includes three reputation.
as one of the key goals for the future strategic

25
Source: Company Websites

EPC Industry in India: Action Agenda for Sustained Growth


Wha t f o llo w s i s a su m ma r y o f and contribute in related capability data on each project executed, so
considerations by various stakeholders development initiatives, that more industry knowledge is
for the growth and development of the EPC industry participants in India publicly available as case studies
EPC industry in India. need to enhance the sensitivity and benchmarks for future planning
and focus on Environment, Health of projects and improving upon past
Overall Industry Level and Safety standards, and close performance.
Actions the gap between Indian and global Ne e d fo r imp ro ve d in du st r y
There are certain elements of an practices in this respect. Most collaboration and representation in
industry action agenda which have industry participants agree that the both Government and other for a on
been pointed out by various industry overall standards on safety need to issues related to the EPC industry.
participants as the need of the hour for be raised in India. While there are broader fora
the EPC industry. The Industry participants, either available
for the construction industry, the
EPC
The major EPC industry players jointly or individually need to industry per se is “under-networked”
may need to come together to help develop or invite independent and not adequately represented
in building a talent pool for the agencies for benchmarking of currently.
industry, projects, collect

EPC Industry in India: Issues and Challenges | 48 |


EPC Report New.indd 48 2/20/2011 8:13:52 PM
Policy Agenda
In recognition of the critical role played participation in such contracts, models, representing opportunities
by the EPC industry and related service as well as lengthens the contract and risks of very different types.
providers in enabling the growth of the bidding and award timelines. 2. A deep understanding of the local
Infrastructure and Industrial sectors of Unclear and poorly written market and regulatory environment
the country, concerned policy makers contracts also lead to greater is critical to long term success. To
should take note of the policy and levels of disputes and litigation, this end, international companies
regulatory imperatives for support and commonly resulting in project would find it important to take a
strengthening of this industry in India. delays. medium to long term and patient
As the Korean example indicates, there 3. Facilitate and encourage PPP approach to building their business
is an important role to be played by an models in vocational education for in India. Judicious selection of
active and supportive policy this sector, supporting the setting partners for specific segments /
environment in the success of the up training institutes and capacity markets would also help to build
construction industry in an economy. building in the skilled labour local market understanding quickly
Some of the key directions for action supply market for engineering 3. The attractiveness of various
would include: and construction industry. market segments within each of
1. Addressing the weaknesses of the 4. Clarit y and simp lif icatio n of the major end-use sectors may
present legal mechanisms in the taxation policies for EPC service be very different for International
area of practical “enforceability” of providers, which will enhance companies vis-à-vis Indian players.
construction contracts and setting global participation, and reduce International companies would find
up speedier dispute resolution transactional overheads and overall it beneficial to assess in detail, the
me ch an is m s in t h e ca s e o f cost of projects specific types of projects, packages
infrastructure construction projects. and customer types where their
This would give confidence to Some Considerations for International deeper technological and managerial
more competent global players to Entrants in the Indian Market capabilities can be a source of
participate in this sector in India, While it is well known that India’s competitive advantage, as well as
which in turn would make Indian need for Infrastructure and Industrial provide sufficient returns to offset
industry more competitive. capacity build out will represent a their higher cost structures vis-à-vis
2. Standardization and simplification of very large market for the foreseeable Indian counterparts.
EPC and related contracts for some future, International construction and
of the core infrastructure segments
engineering / EPC companies need to Some key considerations for Indian EPC
where Government entities are be aware of additional considerations companies:
the project owners or franchisors as they evaluate their plans for the 1. Indian EPC companies planning to
– for example, the Water sector. In Indian market: diversify into new segments / end-
several such sectors there exists 1. While large in aggregate, the Indian use industries, would need to select
today a number of different types of market is varied and complex. It is these industries with care depending
contracts of varying complexity, and highly segmented in terms of a wide on core capabilities, risk appetite,
perceived risk, which hinders range of business and contracting
broader

| 49 | EPC Industry in India: Issues and Challenges

EPC Report New.indd 49 2/20/2011 8:13:52 PM


and existing competition and trade offs between centralized vs
develop a differentiated value decentralized reporting of support
proposition to compete. Potential functions like procurement and
routes of such entry have been engineering can change with scale
described in an earlier section. and diversity of project types.
2. Mid-sized companies which have
growth quickly in the recent past, Finally, build control, efficiency and
may need to allocate management standardization into key project
attention and budgets towards management processes and technology
building core capabilities in the area platforms, which will allow efficient
of Project Management and Risk scaling up of the business while
Management, if they have not done managing risks and gaining from past
so already. experience.
3. To achieve a high degree of
scalability of their business in a fast
growth scenario, some of the
following initiatives should help the
Indian EPC companies:
Developing an empowered pool
of Project Managers, by putting in
places systems, processes, and
training and appropriate leadership
frameworks.
Developin g a robust Risk
Management framework, embedded
into the tendering and project
execution processes. Continuously
and consciously improve the ability
to measure, manage and exploit
risks over a period of time. An
adequate Knowledge management
system is a critical enabler for
enhancing this capability.
Revisit the organization structure
as the number and complexity of
projects under execution go up –
the

EPC Industry in India: Issues and Challenges | 50 |

EPC Report New.indd 50 2/20/2011 8:13:52 PM


Acknowledgements
We would sincerely like to acknowledge and thank the following industry leaders for providing their valuable views for this
report
(in alphabetical order)
K Venkataramanan, President, E&C Division, Larsen and Toubro
Leja Hattiangadi, Jacobs, Director, Business Development
Pothen Paul, India Country Manager, Aker Solutions
P D Samudra, Executive Director, Business Development, Uhde India
P K Chandra, Chief Operating Officer, McNally Bharat Engineering Company Limited
P K Johari, CEO, ONGC Petro additions Limited
R Jaishankar, Advisor, SNC-Lavalin Engineering India
Rajiv Mittal, CEO, VA Tech Wabag
Russel Waugh, Managing Director, Leighton Contractors India
SS Gangawati, President Strategic Planning, Walchandnagar Industries Ltd
Swarup Mukherjee, President, Projects, Walchandnagar Industries Ltd

Apart from the above, we sincerely thank the members of CHEMTECH Advisory Board for their initial direction, our clients
in the Infrastructure and Industrial Markets sectors who provided validation on specific issues in the report.

This report also would not have been possible without the commitment and contribution of certain individuals within KPMG.
The initiative for this report was led by Vishal Mehta, under the guidance of Biswanath Bhattacharya and was supported
by Abhijeet Deshmukh.

Finally, we thank CHEMTECH FOUNDATION team for continual support in facilitating and participating in industry
interviews.

KPMG Contacts
Arvind Mahajan
Executive Director and Head
Business Performance Services
e-Mail: arvindmahajan@kpmg.com
Tel: +91 22 30901740

Hemal Zobalia Executive Director Tax


e-Mail: hemalzobalia@kpmg.com
Tel: +91 22 30902706
EPC Report New.indd 51 2/20/2011 8:13:53 PM
About CHEMTECH
THE CHEMTECH FOUNDATION has connected the Chemical Water Management
Process Industry in India with a constant focus on innovations and For the entire value chain of water management - industrial,
technology. What started as a simple idea of a Trade Fair over 35 residential or commercial.
years continues to revolutionize the chemical industry today. Event: WaterEx

The Chemtech Group has a presence across all the 6 major Shipping, Marine and Ports
industry areas, connecting the entire value chain of the Chemical For those part of the Supply chain logistics and storage
Process industry. Events: Shipping, Marine & Port Expo | Publications: Shipping
Marine & Ports World
Its specialised media offerings of Events and Information Services
serve as platforms for the exchange of ideas and technology. Oil and Gas
For the entire ‘Upstream’ value chain related to Oil & Gas
exploration, production and transportation
Chemicals & Process Events: Oceantex | Publications: Offshore World
Industries
For equipment, services or developing processes for the Chemical
Power and Energy
and Process industries.
For opportunities in the renewable and non-hydrocarbon energy
Event: Chemtech World Expo | Publications:
sector
Chemical
Events: Enertech
Engineering World | Chemical Products
Finder
Industry Automation & Control
Pharma & For the process chain covering Industrial and Process Automation,
Biotech Instrumentation and Industrial Electronics
For avenues in manufacturing, packaging and formulation services Events: Industry Automation & Control
to Pharma and Biotech industry
Events: Pharma Bio World Expo | Publications: Pharma
Bio
World

About KPMG in India


KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 146 countries and have
140,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes
itself as such. KPMG in India, the audit, tax and advisory firm, is the Indian member firm of KPMG International Cooperative (“KPMG
International.”) was established in September 1993. As members of a cohesive business unit they respond to a client service environment
by leveraging the resources of a global network of firms, providing detailed knowledge of local laws, regulations, markets and competition.
We provide services to over 2,000 international and national clients, in India.

KPMG has offices in India in Mumbai, Delhi, Bangalore, Chennai, Hyderabad, Kolkata, Pune and Kochi. The firms in India have access to
more than 2000 Indian and expatriate professionals, many of whom are internationally trained. We strive to provide rapid, performance-
based, industry-focused and technology-enabled services, which reflect a shared knowledge of global and local industries and our
experience of the Indian business environment.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we
endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will
continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the
particular situation.

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG
International”), a Swiss entity

EPC Industry in India: Issues and Challenges | 52 |


EPC Report New.indd 52 2/20/2011 8:13:53 PM
AN ISO 9001:2008 CERTIFIED
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ChEMTECh
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Tel: +91-22-4037 3737, 2287 4758/59, Fax: +91-22-2287 0502
Email:
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