Foreword EPC World SC eeu a ecru people to collect wood and don’t assian them tasks and work, but rather teach Ca emu Rae eee eae ry eee ene sete tag India driven by aspirations of tens of Cosa een ee eg ee ce ‘opportunity to build on their dreams. Hidden in the string Ono ae Re a Me Pree Teneo te et es potential fr India to forge its most successful partnership Se nea Pre Were ecue terse crs norms and protocol, let us never forget the unique ability of this industry to transform india. Even though we five in the: Pen Cara cea ceased Pr a ee es ee co the world and the largest middle class consumer base in the Reese as Dee ea ene eae) eee ed Ce ee en eee aA tT ‘a more than impressive surge, GDP growth rate has dipped to. disappointing 5%a year. Both the fiscal and current ee eee) en ie te Soren ete eer ae eee we ea tae Ue er cof how investors and entrepreneurs are holding back when pee ee en eo en eee) Peete oes ne eed , 4 PC SE Perret testimony to the tyranny of the present. Yet, as famous poet: Ce ee ae Cee oa eet ea a Global rating and consulting institutions are unanimous, Ter eee Cee nec ee ted ‘one fact ~ when the famous BRICS report released early this century predicted that india will become the second: eee een se the assumption that GDP growth rates will average 5% to ‘6% a year. The factis, india wil build infrastructure across, Pees eee participate in this significant endeavor, just as they have done in China since the late 1980s. The sheer numbers are {00 tempting for a smart investor to ignore. Ido not want to Cee ee eee er a just one number. If india is to use a modest 10% of its GDP to invest in Infrastructure, we are talking of annual investment Creede ee ee) een ar ete Rees Crue nes ee tee etsy trilion a year. As India builds more to feed more dreams, both GDP and infrastructure investment will keep growing. Cone gene en ee a Sere ee recy eee ee gee ee show, almost all the bottlenecks faced by the EPC industry ‘an be swept away by more nuanced policies emerging ee eee et a es the EPC industry will not only build a swanky, modern and Cee Ne ae ena ‘youngsters who will enter the work force every year.ae Ds The Government of India's continued focus Ser ee eeu eee eed eed trilion in the Twelfth Five Year Plan. Out Seo nS een cee Reece ere geen ata in the infrastructure segment, the EPC sector is ikely to be benefited. The EPC market of india has been witnessing consistent changes over the last few years with increased project size and complexity, increasing private cients and Seer ete anes Inthe current market landscape, EPC contractors have a healthy mix of both government and private sector clients, pee eee et es clients until a few years ago. The concept of EPC has been Cem eer Ee) Ree ene ae ee aa Fee eee a ee there is an EPC opportunity for market players. Currently, Clents prefer to go with a single point responsibility thereby, ee ioe eee Cm eer Rae ey eee ere ete is considering to award more projects on the EPC model. Specialized EPC sectors such as marine, tunneling, hydro, Cee ete ten ae ec) projects in the EPC mode. When the Tenth Five Year Plan calle for inclusion of “Chapter on Construction” inthe National Pan, the success Se ele eed ee ee eg ete et ret ee nee ee ce Tea ee UM ene Sn) significantly. Euphoria continued atthe beginning of eee ee eens Pere eee en | Ruy eae investors, but the global construction majors made strategic eam ae ee Ca ‘The increase in EPC activity is evident from increasing order Cee eR eee eee a ecm once ie ti ee en eee eer ny ee eR ace tee a COR eerie oa Tt sc and aggressive bidding positions taken by a few of market players. With increasing working capital requirements and fee ener ee ee left with limited opportunity to raise further capital to fuel ‘growth in the current scenario. PE funds too are cautious Re ese eee er errs Cre eee eee nee een eS ee Lenn i ts’ depreciation, has increased the level of uncertainty in project See ee ees liquidity constraints. eee eee have to realign their scaling strategies and focus on innovation, project management and profitable growth as ‘compared to order book and revenue growth. Only those ‘who can survive the headwinds will be able to capitalize on Ce ea a ao Cee eee ce this juncture. “Profits” and “projects” need to be managed Seen Cn aE an ‘and needs to undergo a high level of transformation if future Pes ie eee ead place are expected to improve with consolidation on the horizon. Consolidation is aso likely to relieve pressure and Dees eee ee a acs Tee eee en een sustainability and possible ways to overcome the challenges. We hope you enjoy reading this report and find it insightfulContents Introduction Opportunities for EPC business in India Sector trends Key challenges Overcoming challenges Conclusion ‘Supplemental AbbreviationsIntroduction1.1 Understanding EPC From contracting to EPC - Why? Over the years, the infrastructure by siven way to new modalities with the pr have evalved from item r project management oEPC p essed several forms of contracting. The old models ofc becoming more complex and risk leveraging adopt s. Contracts lump sum, fixed-price, fixed-time binding contracts. ily, the onus of per to the contractor. There is a visible shift from owner-managed 1 the risk of time and cast averruns has been transferred to the contractor, along with the urement h standard clauses a valle, ntraet me evolved to ‘owner developer and the contractor. This form of contract even protects the interest rate fluctuations. Unite other contracts where procurement and design re -ontracts they are done simultaneously, reducing ferll duration of the project. Initially nancial capabilities to take overall responsibiltie ages. Gradually the EPC cont rs began to award them complete p ject: therefore, expertise and be: Global outlook Globally, EPC ha come an accepted form of contract by the EPCM - engineer tion industry and the EPC contractor procurement and tion management. The E by managing the project from design to EPC com have transformed into so ners of the world with production hubs strategically phisticated project management and risk management techniques, which tly across different locations. It has been observed that some of the 0 acquire a strategic stake in the equity of the project, which express their commitment as well a confidence to the owners and investors. located in several he nto monitor and manage proj layers al Engineering rocuremant and Construction (EPC): eovng =How is EPC different from other models? Several models of contract co-exist in the business and each is unique and fits to the requirement ofthe client. While some are item rate-based contracts, athers provide pass-through escalations and inflation protection to the contractor. Some contracts include the client's design requirements, while others place the onus of designing on the contractor. Such contracts, with varying but specific pre-defined terms anc conditions, may be categorized as package based contracts. Contracts ‘where the onus to deliver the project for 2 guaranteed price within a fixed period and with performance on the basis of pre- committed standards, lies with the contractor are categorized as turnkey contracts also known as design and build or EPC. This form of contract is attractive for customers, since the liability for the end product, including design and construction, lies with tne contractor. Customers may alsa choose the turnkey model for only part ofthe project, which will then transfer the coordination role to the customer. Under the package-based model, time and cost overrun risks may le with the owner or developer. However, under the ‘turkey model, falure to comply with any of the requirements will necessarily have an adverse impact on the contractor. This model has gained popularity, since it places the responsibilty for designing, procurement and construction as well as. successful project delivery on the contractor. Hence, it ensures efficiency and mitigates project completion time and costs, ‘Turnkey contract vs. packaged-besed contract criteria ee eed Price Guaranteed price for execution No guarantee on the price Time Guaranteed timeline for completion No guarantee on the time Procurement Undertaken solly by the contractor According to agreement batween the two parties Engineering/design Responsibility ofthe contractor Responsibility ofthe ovmer(ceveloper Responsibility Contractor has complete responsolty Contractor has defined responsibilty Point of contact Contractors single point of contact for all matters for | Ownerf/developer haste coordinate with several the project developer participants along withthe contractors Levelof Contractors ree to wark with limited supervision ‘Owner /developer to undertake a day-torday supervision Involvement etvering according to agreed milestones and ‘of most of tne activitias spectiations Risk Slantcant risks are transteraa tothe contractor Slgnficant risks retained withthe owner/ceveloper EPCMis believed to be similar to EPC contracts, In EPCM the contractor takes the responsibility of the entire project integration as well as the management control on the project. However, itis nat responsible directly for the project cost and ‘Schedule. Its a professional services contract, which has a different risk allocation as well as different legal consequences. In EPCM contract, land acquisition, local issues, operation and maintenance and sale of goods after completion of project lies withthe project owner. In EPCM the contractor designs, procures and manages the construction process on the owner's, behalf; however, the construction is dane by ather parties. n large projects, EPCM contractor breaks the entire project and awards separate EPC projects in small packages. Engineering. Procurement and Construction EPC) Srovingthehesswnes|Contractual relationship of EPC and EPCM model EPC model EPCM medal a ry eee Ea In the ongoing Twelfth five year plan, the Government of India (CoD has set up an ambitious target of INRS.3 triton for Infrastructure development’. The Government funding fr a plan of such a considerable size was net sufficient and therefore, it has relaxed policies and encouraged private parties to participate in nca’s infrastructure development through the public private partnership (PPP) made. The most common model in PPP is tuild-own-transfer (BOT) andis used in several road, transmission, ports, water and airport projects PPP is quite different from EPC contracts as the developer invests to bull the asset as well as owns and operates it.The developer ultimately awards the contract to an EPC contractor and on completion, ‘operates fora fixed duration before transferring it back tothe government. The viabity of EPC or PPP mode for infrastructure projects has aivays been atopic of debate; however, the dynamics are cfferent from segment to segment and penettofbrond eguty ofthe Contrl marie in ind. existing player > Indecember 2010, Llghton International Lined ad Wetspun Acausonat vantage exstng resource | Soupforme estate J tpusve ERC opportunites, Neepun tnicianenty * 28 od acquired o 35% stoke in Leohton Controcters (nc) Pt Ld. or > Scale of operations achievable IRS T billor Seegeens > 1.2010, Te Sus Ladin coup (6) of Sau arab accured a 20% stake in Mayas inrastructure Lt (MIL for INF. lon > InNovember 2011, 2 Germany-based company acquired a small & (Gas EPC company? > Indanuary 2012, Vine! entered the Indian market by buying @ 100% stoke in NAPC®. > In Apri 2042, Hochtot entered an agreement with Coastal Projects Limited to jointly bid for projects in Inca The sector, strongly upheld by the infrastructure story, has a strong potential to grow further with the Twelfth five year plan (FYP) targeting infrastructure spend of INRS6.3 trillion. Even in future, infrastructure development is likely to remain the focus area of the Gol 2 “Shriram EPC forms venture wit Belgian Group," Indian Busines Insight, 18 February 2007, va Factiva © 2012 Informatics (ida Lt, 3. "Welspun, Leighton forms JV for infra business,” DNA -Daly News & Analysis, 25 December 2010, via Factiva, © 2010. Diligent Media Corporation Lt “BG buys 20% stake In Maytas Infra,” Mist News, 4 August 2010, via Factiva, © 2010 Misr Information Services and Trading “German engineering firm acquires Surat construction company,” The Times of Inca, 4 April 2012, via Factive © 2012 The Times of Inia Group “French company Vine buys MAPC," The Hindu, 12 January 2012, va Factiva, @ 2012 Kasturi & Sons Ltd "7 “octet enters into agreement with Coastal Projects for technology asistance,” The Economic Times, 10 Apr 2012, va Factiva, © 2012 The Times of India Group Engineering. Procuremant and Construction EPC):Seovng te hssninds 1Comparison of investments in FYPS ‘Tenth FYP (2002-07) Daina Cia INR Plannedinvestments 8.7 206 563 Actualinvestments | 9.2 Ey NA EPC opportunity 45 m4 26.7 Sectoral mix Power: 30% Power: 33% Power: 32% Roads: 17% Roads: 198 Roads: 178 Telecom: 16% Telecom: 16% Telecoms 174 Railways: 11% always: 5 Reitways: 5% Isigation: 13% ivigation: 108 Irigation: 94 Ports: 38 Ports: 34 Ports: 3% O18 Gas: 2% 18 Gas: 25 Cig Gas: & Others: a4 others: 9% thers: 94 “20% spendon power ard | Power ane roads consistently Increased thrust on roods~ above targeted ‘amounting te ~50% of planned telecommunications ~ increased achievement in power sector | expenciture~ added tocus on expenaiture on pots i and telecom ‘28 ppetines Source: Eleventh and Twetfth Five year plan, Planning Commission However, the scenario in the construction industry has changed in the last few years. The sector is facing a significant liguicty crunch, whichis forcing leading companies to wait and watch before taking up major work. The recent financial ‘turmoil and the rupee depreciation have added to the uncertainty faced by the industry. The sector is also facing some major bottlenecks. Issues pertaining to project take-off, particularly those relating to land acquisition and environmental clearances, delay due to regulatory changes and indecision call for immediate attention of the government to reduce execution delays ‘and thereby control cost overruns. With such delays and uncertainty round the construction commencement, EPC pricing loses its validity. Furthermore cash stress situation, weakening financial strength of bath contractors and developers, along with volatility in material price has made project execution cifficult. Due to unrealistic bids by new entrants in the industry and also by the established players due to intense competition, several projects are stuck in between, ‘The EPC companies have to respond looking at the above challenges, “projects” and “profits” need tobe managed well in the existing projects and right selection of projects along with comfortable quotes in bidding will be the key to success in future projects. Managing working capital will be crucial for the EPC companies and will aiso decide the fate of their survival in these tough times. Apart from construction capabilities domestic players have to transform and raise capabilities in engineering and project management with the right technological alliances. 12 Engineering, Procurerent and Construction (EPC): royng the heswinsOpportunities for EPC business in India2.1 Opportunity in the Twelfth Five Year Plan (Twelfth FYP) ‘The Twelfth FYP envisages investment of approximately INRS6.; trilion in Indian infrastructure between 2012 and 2017. This, in tur, is expected to offer significant opportunities for EPC across various sectors® During the period, the Construction opportunity in the infrastructure sector is estimated to be around INR26.7trilion (approximately 47% of planned investments). Significant investments in infrastructure projects, along with the revival in the real estate sector and growth in industrial capex are fkely to boost the construction industry and act as catalyst for growth of EPC companies in ince’ While EPC contractors continue to be the ultimate beneficiaries of infrastructure investments, the advent of new models has changed the clientele base for them ~ from government authorities to a mix of public and private clients. Planned investments in infrastructure in the Twelfth FYP: INRS6,316.9 bill 3s Power 1» Ports and inland Weter Transport 54 1 Roads & Bridges 018 Gas 328 1» Telecommunications 5 Macs Repla Transit System ” Raliways = Arports Irrigation and Watershed 1 Storage 1 Water supp and Sanitation 17% 17% ce: Twolfth Five Year Plan document, Planning Commission & “Twolfth Five Year Plan 2012-2017 - Faster, More Inclusive and Sustainable Growth (Volume D,” Planning Commission website, htp:// planningcommisson.nic in/plans/plane/Tweltthplan/pa/vol_t pal, accessed 25 October 2013, “Report of the working group on construction far the Eleventh tive year plan¢2007-2012),” Planing Commision wees planningcommission.nic infaboutus/committes/wrkgrpt 1/wglt_ constr pdt, accessed on 04 November 2013. nt:/) Engineering. Procuremant and Construction (EPC): Seovng tc heasninds 15Construction opportunity in the Twelfth FYP. _ Se Seer eo) Roads ana orages 9,694.1 Ralways 5.2180 Mass Rapid Transit System (MTS) 12816 Ports and nana water Transport V7) 13778 sos 08.9 Airports ara 2% 368.4 Water supply and sanitation 25495 66 1,682.7 Irrigation and watershea 5,043.7 75% 3.7828 Power ts.202.4 388 o9169 “Telecommunicetions* 9,439.0 108 3.9 storage” 5044 508 22 ola Gas 1469.3 258 3723, Source: Tweift Five Year Plan document, Planning Commission, EY research, Engineerino, Procurement and Construction (EPCX Driving growth effcionty, EY, 2011; “Construction intensity is assumed with comparison te buldings as per dato evailable in the Planning Commissions report. Inthe case of ‘telecom, construction intensity of 10% has been assumed, The construction intensity, which varies significantly across infrastructure sectors, impacts the opportunity for EPC players more directly than the investment planned. While construction intensive sectors such as roads, ralvays and MTS together ‘account for 28% of infrastructure investments, they contribute nearly 42% to the total EPC opportunity. On the other hand, the telecom sector, which has the third-largest investment in infrastructure, accounts for only 3.5% of the total EPC ‘opportunity. Planned infrastructure investments The Gol has been strengthening its focus on infrastructure development to drive the growth of the economy at a sustainable pace. ithas increased its infrastructure spend as a percentage ofthe country’s GDP from 5.2% during the Tenth Five Year Plan 2002-07 (Tenth FYP) to 7.6% during the Eleventh Five Year Plan 2007-12 (Eleventh FYP). This infrastructure spend is ‘expected to increase to more than % of the GDP during the Twelfth FYP 2012-17 ‘Since the beginning of the Twelfth FYP, the Central and state governments have been particularly pushing the mega infrastructure and industrial projects (exceeding investments of INR10 billion), through several legislative and regulatory measures. Such projects are broken dawn into various phases into smaller projects to simplify the planning and execution, 10 “Report ofthe working group on construction forthe Eleventh tv year plan(2007-201.2)," Planning Commission website, ntp:// planningcommission.nc.nfaboutus/committee/wrkgrp1 1/wL.1_constr.pdt, accessed on 04 November 2013. 111. "Report ofthe working group on construction forthe Eleventh five year plan(2007-2012),” Planning Commission weosite,nit:// planningcommission.ni.nfaboutus/committee/wrkgrpl/waL.t_ constr.pdt, accessed on O4 November 2013; EY research 12 “Nid-Term Appraisal Eleventh Five Year Plan 2007-2012." Planing Commission website, htp:/fplanningcommission.nic.in, acces 25 October 2013, p.293-295; “Column: Target 93 growin. Riders aplenty,” Financial Express, © September 2011, viaFactWva, @ 2013 Indian Express Online Media PV. Lt 16 Engineering, Procurement and Construction (EPC): rayng the heswinsthereby, increasing the number of opportunities for companies to grab", As of 34 May 2013, approximately 207 such projects, amounting to INR7,835.0 billion, identified by the Gol were in progress in the country. The Gol has more than doubled its investment in infrastructure to INRS6.3 trilion during the Twelfth FYP from INR20.6 trilion during the Eleventh FYP period, and more than six times the planned infrastructure investments of INRB.7trilion during the Tenth FYP period. In both Tenth and Eleventh FYP, the actual investments had exceeded the planned investments ‘Comparison of segment-wise composition of infrastructure expenditure 354 308 258 208 158 108 ss on : 8 g s 53 FE OS g g 5 s 2 g a8 fe oS BS 2 2 é Fg fe 8 a = g a ee é 8 . eg icine ne9.2 bon) LAIINFYPHRZSSDiion| Lz FYPCRVINESE 3 Dion ‘Source: Twelfth Fhe Year Plan and Eleventh Five Vesr Plan Planning Commission (©) planned figures fr the Tweltth FYP The telecom sector has been witnessing increasing investment over the past 10 years. During the Twelfth FYP period, almost To investments, expected to be invested in this sector, is estimated to witness a CAGR of ~10% trom 2012 to 2017. ‘Another sector, which has gained increasing prominence is the MRTS segment - with the Gos spend on the sector expected to increase from 0.3% of its total infrastructure spend during the Tenth FYP to 2.2% in the Twelfth FYE. 13 “Panel to fast track mega projects gets Govt'snod,"Potical and Business Dally, 13 December 2012, via Factiva © 2012 pba Import norms eased for mega projects,” Business Standard, 9 August 2013, via Factiva © 2013 via Factiva © 2013 Business Standard Li. 14, “4sth Flash Report on Maga Projects,” Minty o Statistics ana Programme implementation, May 2013, htp://www.cspm.gov-inf engistymp/ap_MAY_2013.pdt, accessed 25 October 2013. “Twelfth Flv Year Pian 2012-2017 ~ Faster, More Inclusive and Sustainable Growth (Volume 0," Planning Commission website, tp:/ planningcommisson.nc.in/plans/planrel/Tweltthelan/oat/vo_1.pdt, ccossed 25 October 2013, 16. “Twalith Fe Year Plan 2042-2017 - Faster, More Inclusive and Sustainable Growth Volume" Planning Commission; “Eleventh Five Year Plan 2007-2012,” Panning Commission, 17 EY research; “TweitthFlve Vear Plan 2012-2017 ~ Economic Sectoxs (Volume it)” Panning Commission website, nitpe// Planningcommission.nic.in/plans/planrel/Twelfthplan/pat/vol2-pal, accessed 25 October 2013, 15 Engineering Procuremant and Construction EPC): Seovng tc hssninds 172.2 Key infrastructure sectors: investment scenario Roads and bridges Ingia’s road network spans 4.7 millon km andi the second largest in the word, behing the US, and accounts for nprorimately 65% of freight and 80% passenger trafic inthe country. The sector witnessed investment of INRA trilon in the Eleventh FYP, which was approximately thrice the investment made inthe Tenth FYP Investments in roads and bridges (INR Bilin) 12,000 + 10,000 2,000 6,000 | 4,000 2,000 Iz ° r tnFYP aitnFYP 12mnFYP®) Private mStates mi Centre Source: Tweln Fhe Year Pian and Eleventh Five Year Plan, Panning Commission ()- Planned With a planned investment of INR9.7 trlion and construction intensity of 65%, the sector offers construction opportunities worth INR6.3 trilfon in the Twelfth FYP. During the Twelfth FYP period, around INR3.3 trillion of investments are expected from the private sector, out of which INR2.4 trilion is planned to be awarded through National Highway Development Programme (NHDP) projects and the balance through state project awards. ‘The Gol has continued with NHOP with a planned expenciture of INR2.4 trilion. It seeks to award 29,000 km of national highways during FY12-15, including 8,800 km in FY13 ( actual awarded 20% or 1,760 km) and 9,000 km in FY 14" 18 Ministry of Road Transport and Highways (MORTH) 2013 annual report; "ina Road Network,” HHA wensite, np: //ww.nhal.ora/ roadnetworkintm, accessed 20 Noversber 2013; "Twelfth Five YeerPlan 2012-2017 - Economic Sectors Volume I)" Planning te, rtt:/fetanningcomrnission.nic.in/lansplanrel/Twetfthlan/pat/vol_2.pdt, accessed 25 October 2013 419° “Twalfth Flve Year Plan 2042-2047 ~ Economic Sectors (Volume I," Planning Commission website, htp://planningcommission.nic.in plans/pianrl/12thplan/pa/vol2 pa, accessed 25 October 2013, ‘20 “Road ministry Txes 9,000 Km national highway target fr ths cal,” The Economie Times, 17 Apr 20413, va Factiva © 2013 The ¥, 2011 Times of Indi Group; EPC: Driving growth efficiently 18 Engineering. Procurement and Construction (EPC) yng the hesPhysical progress of NHOP, in kms., at the end of October 2013, Particu ner progress To be awarded Total Golden Quacriateral 5846 ° ° 5.846 Phase 6a77 646 372 7.295 Phase 5,750 4762 1,685 12397 Phase 324 4268 10.242 14834 Phase V 1.653, 2.856 2419 6528 Phase Vil 2 2 659 702 Port connectivity 374 8 ° 382 Source: National Highway Authority of Incl At the end of October 2013, approximately 42% ofthe total 47,684 km of NHDP roads was completed, while another 26% 1was in progress". In order to develop the north-eastern states, the Gol has proposed construction of 6,418 km of highways with an investment of INR226.9 billion under the Special Accelerated Road Programme for North East (SARDP-NE) during the Twelfth FYP. Under the Pradhan Mantri Gram Sadak Yojana, an expenditure of INR91S billion has been incurred tll FY12, out ofa total of INR3,277.9 billion sanctioned. Railways Ingian Railways network spans more than 64,600 km, making it the world's fourth-largest rail network in terms of size. In _adcition it s the largest passenger carrier and the fourth-largest ral freight carrier globally. in the Twelfth FYP, the total investment for railways is estimated to be INRS.2 trillion. Construction intensity in railways is around 78%, which will result in ‘opportunities worth INR4.t trilion during the Twelfth FYP®, Investments in railways (INR billion) 6.000 5,009 4,000 3,009 2.000 000 | | s02nFYe sine S20 AYP) Private m Centre ‘Source: Twelfth Five Year Plan and Eleventh Five Year Plan, Planning Commission tional Highway Development Project (NHOP)," NKAI website, http://www.nhal.ora/WHATITIS asp, accessed 20 November 2013, 22. “Northeast witnesses spate of hichway construction,” Indian Business Insight, 30 September 2013, via Factiva © 2033 Informatics (nda) Lt; “Twelfth Five Year Plan 2012-2017 - Economic Sectors (Volume ID" Panning Commission website, tpl / planningcommission.nic in/plans/planrel/£2thplan/pai/vol2 pdt, accessed 25 October 2013, 23. “Indian Raitways: Statistical Summary,” Indian Reivays website, np: aww inalanallways.qov Injralwayboard/uploacs/airectorate/ stat_econ/pal/Summary420Sheet_Eng pat, accessed 17 October 2013 Engineering. Procuremant and Construction EPC):Seovng te hssninds 19In the Eleventh FYP, INR2.0 trillion was invested in always as compared to a target of INR2.5trilion. Rail projects in Inca have been typically the domain of the publi sector. However, based on the success of PPP in other infrastructure sectors, the Indian Ravay's has jst begun to take steps to explore the PPP route, and aims to award INRI.O trilion through the PPP route in the Twelfth FYP™ Physical progress, (in kms.), during the Tenth FYP and Eleventh FYP. Tenth FYPCactua Eleventh FY Cestimated) Pima New tines 920 2,000 2.205 (Gauge conversion 4.289 10,000 5.290 Doubing 1.300 6,000 2756 Faliway electrification 1.810 3.500 4501 Source: Twelfth Five Year Plan document, Planning Commision The Ministry of Railways (MoR) and the Department of Industrial Policy and Promotion (DIPP) has proposed! 100% FD in rail infrastructure projects, such as the INR215 ilion Mumbai elevated ral corridor and the dedicated freight corridors®. The Indian Railways has als identified 22 stations across the country that willbe modernized into world-class fcites™ The MoR launched the High Speed Rail Corporation of India Ltd, (HSRO), a subsidiary of Rall Vikas Nigam Ltd. (RVNL), in ‘order to consider high-speed rail projects as a vital part of the upcoming rail infrastructure projects. The trains on these projects will be able to achieve speeds of 160 to 200 kmph, thereby, making it feasible to increase the frequency of trains and ‘consequently the capacity of railways. A preliminary study of the Mumbai-Aimedabad high-speed rail route has estimated its cost tobe around INR650 billion’. Mass Rapid Transit System (MRTS) The Gol has been focussing on developing MRTS over the last decade, As of June 2013, three metro rail projects and four bus rapid transit (BRT) projects are operational. During the Twelfth FYP period, private sector spending is expected in MRTS ‘systems in cities such as Ahmedabad, Bengaluru, Hyderabad, Chandigarh, Chennai, Delhi, Jaipur, Kochi, Kolkata, Mumbai Patna, Pune and Surat™, MRTS projects, such as metro rail are usually deployed in cities with population of more than 2 million, The number of such million-plus cities increased from 35 in 2001 to 53 in 2011, and is expected to go up to 85 by 2051", ‘24 “Twelfth Five Year Plan 2012-2017 ~ Economic Sectors (Volume Ih” Panning Commission website, hit//planningcommislon.nic.in/ plans/pianre/12tnplan/paf/vol2 pat, accessed 25 October 2013: “Rallway Ministry wants changes in DIPP's FI pan," The Economic Times, 18 October 2013, via Factiva © 2013 The Times of India Group. 25, “IPP proposes 1004 FDIin allway projacts,” The Ecanamie Times, 26 September 2013, via Factiva 2013 The Tina of nla Group: Rolmays seeks FDI in ral infrastructure projects,” The Economic Times, 3 October 2013, via Factiva © 2013 The Times of India Group. 26. EPC: Driving Growth Eicienty, EY, 2011; "Twelfth Five Year Plan 2012-2017 - Economic Sectors (Volume ID" Panning Commision website, htp://planningcommission nic v/plans/planre/12tholan/pat/vol 2p, accessed 25 October 2013. 27. “Railway Minister Launches High Speed Ral Corporation of Inca Limited (HSRC),” Press Information Bureau website, htte//ob.ricin/ nevsit/erelease.aspx?relid=100308, accessed 31 October 2013. 28 “Metra systems in Inia: Case study DMC," United ations Environment Programme website, http/Twww.unep.orgftransport owcarbonyStaketolders_ 2011, NewDehil/Oct8i2020/Session¥20V /Metro420Systems42Oink2 Onda. Casel20Study'<200MAC._Tiwar. pat, accessed 29 Octoner 2013; “ART projects in ncn ties as Inclusive transport systems?” United Nations Environment Programme wensita,ntp://wwe.unep.ora/transpor'fiowcarbon/StakeHolders_201 1_NewDehl/Ot%2020/Sessions2OV/BRTAZOProjacts20 Ini2oIncians2OCtiesk20ash20Incusive20Trensporti20Systems,Darshini_ Josh.pa, accessed 29 October 2013; “Twelth Five ‘Year Plan 2012-2017 - Economic Sectors (Volume ID" Planning Commission website, htp://planningcommission.nicn/plans/planre/ ‘Twelfhplan(pdt'vol_2.pat,accossed 25 October 2013. 29. "Model Guidelines for Urban Land Policy,” Ministry of Urban Development website, hitp://tepamud.govja/Divclone/MUTP/MODEL_ GGUIDELINES_FOR_UREAN LAND POLICY pat, accessed 29 October 2013; “FDI in real to Louch only 13.3% of population,” The Times cf inia~ Mumba ction, 23 February 2013, via Factiva © 2013 The Times of India Group, 20. Engineering. Procurement and Construction EPC) Srovingthehesswnes|Ports and inland water transport (IWT) India has an extensive coastline of more than 7.515 km and 14,500 km of navigable waterways, with an infrastr 13 majer ports (all administered by the Ministry of Shipping, 12 gaverned by Major Port Trusts Act, 1963 and one governed by the Companies Act, 1956), 199 minor ports, and 6 national waterways situated along its length. Merchandize trade contributes more than 50% of the country's real GOP and 95% of this merchandize trade (by volume) is transported through maritime transport, Investments in ports and IWT (INR billion) 2,000 1.500 1,000 s0tn FY. sttneye s2tnFvP ®) Private mStates mi Centre ‘Twelfth Five Year Pan and Eleventh Five Year Ptan, Planning Commission The planned investment of INR2.0 trilion in the Twelfth FYP is approximately three times the actual investment in the ‘sector in the Tenth FYP and Eleventh FYP combined. The private sector is expected to contribute 87% to the Twelfth FYP investments, The sector is expected to result in a construction opportunity worth INR4.0 trillion, given the construction intensity of 50! ing a global maritime Twelfth Five Year Plan 2012-2017 - Economic Sectors (Volume I,” tanning Commision website, nt /planningcommission.nc.in plans/planrl/Twelthpian/pat/vol 2 22. Engineering. Procurement and Construction EPC) BrainThe cargo traffic handled at major and minor ports increased at a CAGR of 5.2% during FYO8-FY13 to 934 million metric tonnes (MMT), while the cargo traffic handled in the national waterways doubled during FYO8-FY2 to 7.1 MMT. Itis expected that the capacity and traffic at the ports will increase to 3,130 MMT and 2,495 MMT, respectively by 2020™, Development projects for major ports, Maritime Agenda 2010-2020 SS STEP TS ETET ETS cord ce constuction bers andes us ut 2236 Eau precramet 7 mt Deepening cara aber | 2 20 Fatoas come % 38 ne Source: Maritime Agenda 2010-2020 ‘A total of 352 projects have been identified for implementation at majar ports under the Maritime Agenda 2010-2020. Approximately 31% of the total projects are largely construction or reconstruction of berths and jetties. Key projects include the fourth container terminal and 330 meter extension of the container berth at Jawaharlal Nehru port terminal, the iron ore terminal at Mormugao port, the coal-handling faclty and container terminal at New Mangalore port, and the mega container terminal, dry port and multimodal logistics hub at Chennai port The Gol has also decided to develop two new major ports in West Bengal and Andhra Pradesh at an estimated cost of INR160 billion, as well as IWT projects worth INR10S bilfion™ or (31,03.2013).” Transport Research Wing, Ministry of Shipping, Road Transport and Highways, June 2012; Ilana Waterways Authority af India 2013 annual report; "Maritim agenda: 2010 - 2020, Ministry of Shipping, January 2011 35 “Update on indian port sector (31.03.2013),” Transport Reseacen Wing, Mins ot Shipping, Road Transport ana Highways, June zor tistics of Inia 2010-11," Transport Research Wing, Ministry of Shipping, Road Transport an! Highways, Apr 2012; 2020, Ministry of Shipolna, Janu 36. “dia to sot up two more malor ports," National Turk, § August 2043, hit://www natlonalturk.com/en/indla-o-setup-two more major pots-41 268; “Govt exploring ways to increase inland waterways,” he Economic Times, 15 February 2013, via Factiva © 2013 The Times of india Group; “Tweltn Five Year Pian 2 7 - Economie Sectors (volume I),” Planning Commission weosite, hp planningcommission.nic.n/plans/planel/22thplenfpdi/vol 2p, accessed 25 October 2013, Engineering Procuremant and Construction EPC): avngAirports The Airport Authority of India (AAI) manages 125 airports. including 11 infecnational. 61 domestic, © customs airport and 27 cil enelaves. During FYO3-FY23, total passenger anc cargo trafic through nian airports increased at a CAGR of 6.4% and 5% to 159.3 milion and 2.2 MMT, respectively". The passenger traffic is expected to touch 300 millon by 2020 Investments in airports (INR billion) 1,000 200 800 10mm FYP unthFYP 12th FYP®) Private States ll Centre Source: Twafth Five Year Plan and Eleventh Five Year Plan, Planing Commission Total investment is estimated ‘be INR877 billion in the Twelfth FYP (OX by the private sector). Construction intensity in airports is around 42%, which is expected to result in construction opportunity worth INR368 billion The Gol has proposed to build 17 new airports in 11 states, including under-penetrated states such as Arunachal Pradesh, ‘Jharkhand and Rajasthan, as well as 100 airports in smaller cities™. The Ministry of Civil Aviation (MoCA) has approved new ‘greenfield airports ata total investment of INR320 billion®. The passenger terminal capacity in all airports put together is expected to be 370 milion by 2017 from 230-240 milion in 2012, Private players are now allowed to acquire 100% equity stake at the six airports developed on PPP mode* Power EPC in the power sector is broadly divided in two parts ~ power generation and transmission and distributio ‘generation is further civided into boler, turbine, generator (BTG) and balance of plant (BoP). Contractors specializing in the BTG works usually take up supply, erection and commissioning of the BTG as well as related civil works. The BoP contracts include construction and commissioning of coal handling, ash handling and water treatment systems, as well as. related civil works. A majority of incian BTG manufacturers have forayed into the EPC segment as 2 forward integration of their capabilities, particularly in the boilers segment. Most Indian BP players have evolved from general civil contractors, leveraging their expertise in civil works. Foreign players, especially Chinese and Korean, have adopted the JV route to bid for super critical bolers in the indian power EPC market. (T8D). Power 37 “Organization,” Aiport ntp://wwn. aa. aero/publicnotices/aaste_test/orignso, ctober 2013; "Trafic summar website, htp://waw.aehaeroftralic_news/mar2kBannext pat, accessed 29 octover ratte summar Inga website, nt. aa aero/trattc_news/mar2k1 annext pat, accessed 19 October 2 ‘Govt unvells 100 airports in smaller cities," NBM & CW, 24 September 2013, via Factiva © 2013 NEM Media, 39 In smaller ets," NBM & CW, 24 Soptember 2013, va Factiva © 2013 NBM Mecha, 0 new airports in 11 states,” The Times of Inca, 8 August 2013, vi Factiva he Times of Inia ‘41. "Govt open to ottering 100 % stake to private partes at six airports,” Te Hindu, 30 August 2013, via Factiva, 2 Indian EPC Market: consolidation an horizon, EY, 2012; "Twelfth Five Year Plan 2012-2027 - Economic Sectors (Volume It,” Planning Engineering, Procurement and Construction (EPC) Sroving he hesswinescm = 2.000 Zz — ° Nowrenewatle | Renewable | Nonvenewacie | Renewable | Nowrenewable | Renewable ron FYP uimrve ranFre®) Private m States mi Centre Source: Twat Fiv .r Plan an Eleventh Five Year Plan, Planning Commission Note: investments by the centre, stotes ond private sectors for renewebie energy segment are not aiven seporately in the Tenth plan During he period, the total expenditure incurred by te puble sector In renewable energy was INR bilion, ‘Commission website, htp:/planningcommission. nic n/plans/planraTwelftnplan/pat/vol 2a, 2550025 ber 2013, 43. “Monthly Alina installed generation capacity report,” Central Electricity Authority, http://cea.nic.in/reports/monthly/nst_capac cep. accessed 17 October 2012; Sactor focus: power,” Indian Infrastructure, August 2011 “Tweth Five Year Plan 2012 Economic Sectors (¥olume If,” Planning Commission wensit,ntp://panningcommission ic in/plans/planrel/L2thplan/pat/vel_2 pat accessed 25 October 2013; EPC: Driving growth eficienty, EY, 20; Engineering. Procurement and Construction (EPC): Eravngthe hessvinds 25The power generation capacity increased by 54,964 MW during the Eleventh FYP. In the Twelfth FYP, total investment in the poner sector is estimated to be INR18,202 billion, with a planned non-renewable generation capacity adcition of 88,537 MW and renewable generation capacity addition of 30,000 MW. Construction intensity in the power sector is around 38% currently and is expected to result in construction opportunity worth INR6,917 billion“. The Gos increased focus on renewable energy sources is expected to raise the share of renewables in power generation from around 6 in 2012 to 9%in 2017 and 16% in 2030. The planned renewable energy capacity addition comprises 15,000 MW in wind energy, 10,000 MWW in solar energy, 2,100 MMW in small hydro eneray, while the balance Is primarily planned from biomass“, Around 13,000 MW of captive power capacity is planned to be added during the Twelfth FYP, from which surplus power, it any, is fed into the grid In adcition, the Twelfth FYP also provides for 110,340 ckm of transmission lines and 270,000 MVA of substations". Power generation capacity addition during Eleventh FYP and Twelfth FYP, in MW pee i CMCC pra) Hydro Therm 12,700 | 14030 | 21,720 Nuclear 880 ° o Total 15.220 16,732 | 23,012 15530 46,825 Planning Com ource: Twoith Five Year Plan document Jon The private sector participation is expected to be 47.5% and 88% for non-renewable and renewable sectors, respectively in the Twelfth FYP". Private sector investment is expected to increase with the announcement of 14 ultra-mega power projects (UMPPs). Out of these, four UMPPs (Sasan, Mundra, Krishna Patnam and Tilaiya) have already been awarded to private players®. However, the hydro-electric power generation potential from the north-eastern region still remains untapped, with ‘only 7% of the potential capacity developed. ‘44 “Twelfth Five Year Plan 2012-2017 - Econamle Sectors (Volume I,” Plan Jon website, htp:/planningcommissor plans/pianre/Twelthplan/pat/vol 2. pa, accessed 2013. ‘45, “Twolfth Five Year Plan 2012-2017 - Economic Sactors (Volume I)" Panning Commission website, itp: /planeingcammisson.nicin plans/pianrl/Twaltnpian/pat/vol_2.pa, accessed 25 October 2013. 4 “Twaift Five Year Pian 2012-2017 - Economie Sectors (Volume I,” Planning Commision websit, hits /planningcommission.e: plans/pianrel/Tweltnplan/pat/vol_2, pat, accessed 25 October 2013. ‘AT. “Twoftn Five Year Plan 2012-2017 - Econemlc Sectors (Volume I)” Panning Commission we p:/planningcomm plans/pianre/Twelthplan/pat/vol_ 2. pa, accessed 25 October 2013. 48 EPC: Driving grown efficiently, EY, 2011 149. “Twit Five Year Plan 2012-2017 - Economie Sactos (Volume I)" Panning Commission website tp /planningommisson.nican plans/planrl/Twelthplan/pat/vol2.peif, accessed 25 October 2013. 28 Engineering. Procurement and Construction (EPC) Erving the headwindsThe Jawaharlal Nehru National Solar Mission (JNNSM) launched by the Got in 2010 plans to deploy 10,000 MW of gric-connected solar power by 2017 and 20,000 MW by 2022. The Indo-German “green energy" corridors involves an investment of INR430 billion to ‘add 30,000 MW to the national grid by 2020 Oil & Gas The Oil & Gas sector is divided into three major components ~ upstream (exploration and production (E&P), midstream (transportation, by pipeline, rail or truck, and storage) {and downstream (refining and processing). India's Oil & Gas incustry continues to grow steadily, boosted by enhanced investments, increased production and an increase in private participation, Investments in oil and gas (INR billion) 1,600 5 1A 1,200 1,000 00 600 >| sone eho Private mises m Contre Sure: wath Fe Yer Pan alert ive Year lan, PannaComnsin Total investment is estimated to be INR1,489 billion in the Twelfth FYP. Construction intensity in il and gas is around 254, which is expected to result in construction ‘opportunities worth INR372 tillion. Crude oll production was 177 MMT and gas production was 213 BCM in the Eleventh FYP, which are expected fo rise to 216 MMT ‘and 341 billion cubic metres (BCM) in the Twelfth FYP® TMNRE sets target of 10,000 mu of solar power by 2017.” The Economic Times, 25 September £2013, via Factiva © 2013 The Times of Inala Group; “Green corridor to $20 wind a ol ‘arms in Rajasthan, Tail Nadu,” The Eeonomic Times, 9 13, via Factiva © 2013, The Times of india Group; “Twelth Five Year Plan 2012-20 nomic Sectors (Volume 0, nto: planningcommission.nic.n/plans/planrel/12tnplan/pat/ 5 Octover 2013, 5 2012-2017 - Economie Sectors (Volume Ip," Planning Commission ission.ni.n/plans/planrel/Twetnplan/pat/vol_2.par, accessed Engineering. Procurement and Construction (EPC): Seong he handsCrude oil and gas production during Eleventh FYP and Twelfth FYP, and refining capacity at the end of Eleventh FYP and Twelfth FYP. porter) pra CCR CR) parnee) ‘Crude ol production jour) ces production ec ning capacity JomTPay Source: Twelfth Five Year Plan document, Planning Commission Major downstream projects in the cil and gas segment include a 9 milion metric tonnes per ‘annum (MMTPA) refinery by Hindustan Petroleum Corporation Limited (HPCL) in Rajasthan worth INR373 billion, a 15 MMTPA refinery being set up by the Indian Oil Corporation Limited ((OCL) in Orissa worth INR298 billion, and a 12 MMTPA refinery by Nagarjuna Ol Corporation Limited (NOCL) worth INR250 billion. Midstream projects include LNG regasifcation projects with a total capacity of $2 MMTPA and estimated cost of INRA70 billion and pipetine-laying projects of approximately 10,000 km worth INR38é6 billion. Inthe upstream segment, the Gol cleared 25 exploration and production blocks out of the 31 blocks where work had been stalled on account of security restrictions imposed by the Ministry of Defence. This was worth approximately INR250 billion investments. The New Exploration Licensing Policy (NELP)is another major initiative aimed at attracting private investment into oil and natural gas. There have been nine rounds of bidding, entailing a total investment of IN722 billion, made by various operators in E&P tll FY11. Out of 235 production sharing contracts (PSC3), 73 were signed curing the Eleventh FYP. Oil PSUs (OVL, OIL, GAIL, IOCL, BPCL and HPCL) had invested INF521 billion til FY11. Overseas oil and gas blocks account for approximately 10% of India’s domestic production. There are nine major production assets in Russia, Sudan, Brazil, Syria, Vietnam, Venezuela and Colombia. During the Twelfth FYP, ONGC, OIL and private/JV companies are expected to shoot 2D seismic surveys covering 138,974 km (75% by private sector) and 2D surveys covering 82,488 sq. km. of land, Furthermore, 1,310 exploratory wells are likely to be driled during the Twelfth Plan period 52 GSPL 2012 annual report Mitul Thakkar, 5,080 crore finance with consortium of 14 banks,” The Economic Times, 30 June 2012, vi Factiva, © 2012 The Times of nda Group" Jagalshpur Hala plpeline work to begin next October,” Finance! Chronicle, 27 September 2011, via Factiva © 2011 Deccan Chronick Ltd; “Bihar to sign MoU with GAIL for Jagdishpur Haldia gas pipeline" Metis Energy jorat State Petronet Ltd sians agreement fr ‘oldngs 2 January 2013, va Factiva © 2013 Metis Business Solutions Pvt. Ltd. “Kochi Mangalore ga Pipeline turning inte mirage,” Metis Energy insider, 29 March 2013, ia Factiva © 2013 Metis Business Solutions PL. Lt: “OMCs, EIL wish to join GA's Sural-Odisha pipeline," Metis Eneray tex) mu.toccom Abou sunderimplementation. aspx, accessed 15 October 2013; W0C invites bids for construction of LNG import terminal, ite, 29 Mateh 2013, via Factiva © 2012: "RIL gets licence to lay pipeline 3M gas from Shogapur,” The Hindu, 15 July 2013, via Factiva, Line we 53 "Twelith Five Year Plan 2 7” Economie Sectors (Value i,” Planning CommissionWater supply and sanitation ‘The water suppl situation in India is marked by inadequate coverage (64% ofthe urban population is covered by individual connections and stancposts), intermittent supply (national average duration of water supply ranges from 1 hour to 6 hours, with per capita water supply in cities ranging from 37 Ipcd to 298 Ipd fora limited duration) low output pressure, and poor service quality (water leakages are 70%, nor-revenue water (NRW) accounts for 50% of water production) Imes ont sisi nd santo GN iy | ‘Source: Twaith Five Year Plan and Eleventh Five Year Plan, Planning Commission Till now, the services provided for by the private sector have been contractual in nature and were confined to one or two segments of the service delivery value chains. Total investment is estimated to be INR2,550 billion in the Twelfth FYP, approximately 111% ‘more than the actual amount invested in the Eleventh FYP. The construction intensity in water supply and sanitation is around 6¢i%, which is expected to result in construction opportunity worth INR1,683 billion”: Private sector participation is currently very low in these sectors. However, itis expected to increase from 0.1'sin the Eleventh FYP to 2.5% in the Twelfth FYP. The Gol has periodically introduced various policies such as JNNURM to enable city-wide planning for water and waste ‘management and enhance private participation® ‘website, htp//planninacommission ncan/plans/planre/12thplan/pdt/vol 2p, accessed 25 October 2013; "CC! nad 0 13 power projects, 25 ol blocks," The nolan Express, 23 April 2013, via Factiva 2013 Inolan Express Online Meas Put. ts. 195 = INRAE 34 “Report on urban infrastructure and services by the high powered expert committee," National Institute of roan Affairs website, htp://www.nlua.org/projects;npec(tinalreporthpec. pat, accessed 29 October 2013, weittnFlve Year Plan 2012 tp: //planningcommission.c.n/ Report on urban infrastructure and services by the high powered expert commit Institute of roan Affairs website, htp://www.nlua.org/projects;npec(tinalreporthpec. pat, accessed 29 October 2013; "Twelfth Five Year Plan 2 lsnning ol 2, 017 - Economie Sectors (Volume I,” Planning Com ns/planrel/Tweltnplan/pat/vol_2pat, accessed 2.2017 - Economic Sectors (Volume I fe, htp:/planningcommissionnic.splans/planrel2thplan/pat 25 October 2013 Engineering. Procurement and Construction (EPC): Eravngthe hessvinds 29Timeline of government policies introduced/amended for water supply and sanitation Municipal Solid Waste Rules JaNURM Programme 2000 2011 002 fa ‘Tath Constitutional Nationa ister Policy National Water Mission Review of NWP att 2012 [Amendment Act > Increased private + Framewerktoincrease > Water as an econom patticpat he efficiency of water ne > Priority given to suppy of usage by 204 . of usage & drinking wate . ot Wat iepricing » Privatization ciency formed » estabisnment of water equation autnotti owards ffi JNNURM was the first major in h encouraged PPP in the urhan sector. Under the PPP framework, 49 px involving total project cost of ar Sectors such as solid waste, water supply, sewag urban transport in which private concessionaires brought in investment of INR1.1 billion. Private investment int fo grow with large upcoming {as PPP-based, ewaste processing unit in Mumbai and the incia’s first waste recycling Zone in Gujarat to be developed jointly by the Japan Development Institute (JOD, and the Government ofBuildings inca is witnessing a sharp change ints demeograohic composition. There ia significant growth in urba 1 including rapid economic growth an migration ofthe rural population to urban areas. Both government anc endentanalyées estimate significant urbanization figures forthe next decade. Urbanization aso expected to lead a structural shit in the ngian economy. Increased urbenizatin is expected te lead to emergence of more megactis and increased popuiaton clusters, wh ve impact on the number of EPC projects being amiarded. The top 20-30 cities are projected to attract a significant portion of the rural population, who migrate in search of job opportunities™. ization levels du tof tion projection up to 2050, in million Urban population and urban 1000 . 60% ‘550 million people will need to be accommodated in urban centers over, The urbanization trends suggest that approxin the next 40 years. It is estimates that by 2017, the urban population Is exgected to increase to more than 440 milion and the urban floor space per capita will increase to 120.7 sq.ft, while the rural population will increase to more than 870 million and the rural floor space per capita willincrease to 107.2 sa. ft. if remedial action is nol infrastructure constraints and the situation will only get wor for the Twelfth FYP (2012-17) in the urban area has been estimated at 18.8 million units These areas are already facing sex taken, The total housing shortag ‘and for rural areas at 43.7 milion units 58 “Urban Agglomerations/ites naving population 1 lakh and above,” Census naka wedsite,htp://www.censusinla.gov.inf2011-p sfpaper2-vole/data_ries/inala2/Table 3. PRUA kn_and_Above. pat, accesse ember, 201 Report on urban infrastructure and services by the high powered expert committee,” National institute of Urban Atal website hit: //wrw.nlua.cra/projects/npec/tinareport‘nooc-pa, accessed 29 October 2013; “Twatth Five Year Ptan Sectors (Volume I," Planning Commission website, bttp://planningcommission.nk:in/plans/planrol/12thplarVpa/vol_2.pa, a 25 October 2013; Repot of the Technical Group on Population Projections Constituted by the National Commission on Population, Mi 2 us of Ingia201 1, Urban agalomerations/Cities having population lakh and above; National Sample Survey Report No, 535 Housing Contin and Amenities in Ini: uty, 2008 June, 2008; EY research Engineering. Procuremant and Construction EPC): SanaTier-wise™ construction area requirement for residential, commerci {and industrial buildings (bilion sq. ft.) 0 2 = > al $1 2 2 = 3 ; ma ft . = —_— = Tas | Tore mo Tort vines os peste connect | samt mz013 = z015 = z017 Source: NSS Report No. 535: Housing Concition and Amenities In Ina: uly, 2008 June, 2008: United Nations; Department of Economic {2nd Social Aas; "Report on Urban infrastructure and Service,” High Powered Expert Commitee for estimating investment requirements for urban infrastructure services, MoUD, March 2011; EY resoarch “Thrs are areas defined according to population (Py Ter 1: P>S milion, Tler 2: 1 miltonAnnuity>EPC Raiways ERCOPPP Ports PPPSERC Airports EPC>PPP Urban intrastructure 020 EPC tnited PEP Building construction Bulbing construction 20280 Cash contracts ERC oli & Gas EPC Olgas 80:20 Fc Power EPC Power 2080 FC Specaized EPC Marine eC Hyer | ec Industri eC Source: EY research * assumed However, apart from the maturity ofa sector and level of investment ini, the construction opportunities are also affected by the dependency of the sector on the intensity of EPC in various projects in the sector, the kind of projects planned and their ‘quantities. While roads, railways, MRTS, irrigation and water supply and sanitation have construction intensity of more than 50%, sectors such as poveer, oll and gas, storage and telecom have low construction intensities. The EPC dependency of a sector is also affected by the prevailing scenario in the sector. The construction industry, which has been eatlier in a space dominated by large EPC players and a few infrastructure developers, is now witnessing multiple participants, each set on carving out a piece of the EPC pie®. {63 EPC Driving Growth Etficiently, EY, 2012 38 Engineering, Procurement and Construction EPC) Srovingthehesswnes|Prev fing conditions in various sectors Ce a ed role os ee i rest Fonds v x v Z sre Railways: x x v x x x Pons £ y J + v Aerts x v £ 2 v ey ’ y ‘ * SuidingPC | Bling y x x x y » o1a.caserc | @ll&eas x J v + + 4 PowerPC | Power y x x v Y orine x 2 = Hero x E / + + * inausr + + x Sectors such as roads, air infrastructure have bec for both domestic and foreign investors. This may be due to relatively low entry bari these markets, a strong project pipetin Access te latest technology and equipment > Access to global project management and rsk management capabilies > Elimination of outdated practices; improved qualty and work practices due to increased competition > ‘Opportunity for indian players to diversify into new sectors by partnering with foreign players, who have relevant sector expertise Players have adopted different methods to enter and establish themselves in India, While a few global construction giants from France, Germany, the Middle East have chosen the acquisition route through 100% buy-outs of existing india companies, some have considered forming joint ventures on a sector-specific or project-specific basis. Inorganic growth strategies such as acquisitions have been perceived to be successful in global markets and hence, have been replicated in the incian market as well. Acquisition of NAPC by a France-based group is @ classic example in the Indian EPC sector Moreover, the market witnessed a strategic acquisition of a minority stake by a Middle East-based Group in IL@FS Engineering’ Few project-specific joint ventures have been formed by Middle-East companies, particulary in the building construction ‘segment in India. For example, the project named “World One” in Mumbai, being constructed by Simplex Infra in JV witha Middle-East-based construction giant”. Furthermore, there are a large number of global companies that have set up their own subsidiaries in India and are bidding directly for projects in India. Few such players are Samsung (Korea), Leighton (Australi), Bechtel Corporation (US), Unde (Germany), Tecnimonte (italy), Marti Group (Switzerland), CECI (Taiwan). One interesting precedent is Leighton India that has not only grown and established business but also divested a strategic stake to Welspun Group’®. This was an entry strategy by 8 large Indian business group through association with a foreign entity having a pedigree presence in the country Another remarkable trend witnessed in the sector is the expansion of Incian companies in overseas markets through acquisitions and joint ventures. This has helped the Indian players in securing specialized mega projects and venture into new areas and segments. The classic example is Afcons infrastructure Lta., a premier EPC company of ShapoorjiPallonj Group, has entered strategic alliances/partnerships with various global players including Strabag, Bechtel, Gunanusa ang Ballast Nedam®, 76 “French company Vinci buys NAPC,” The Hindu, 12 January 2012, viaFactva, © 2012 Kastutl & Sons Ltd 77 “Mayas intra hopes for revival va Jeadah JV," The Economie Times, 1 July 2010, via Factiva, © 2010 The Times of inca Group, 78 “Simplex infra JV to bulls tallest residential Dulin,” Project Monitor, 24 January 201, ia Factiva © 2011 Economic Research Inia Pt, Lt. 79. “*Welspun infra Projects acquires 35K stake In Leighton Contractors (Incla)," Datamonitor's Financial Deals Tracker, 29 April 2011, ©2011 Datamonitor Lt 80. “Partners in Success,” Afcons company website, hitp://awr.afcons.com/033.partners hil, accessed O1 December 2013, 42 Engineering, Procurement and Construction EPC) Srovingthehesswnes|3.3 Private equity (PE) in pure-play EPC companies ‘An analysis of PE investment deals from 2004 to October 2013 indicates that there has been a significant slowdown in PE activity in the sector during the recent years. The number of PE deals has dectined from the &-year high of 15 in 2007 to only 5 in 2012, Deal value has also declined from US$B70 milion in 2007 to US$69 milion in 2032. The average de size has also declined (deals valued at more than USS100 million reduced to nil in 2012 from four in 2007), though infrastructure projects have grown bigger in size and more complex in nature. ‘Year-wise quantum of PE deals No of deals ‘Value (US$ mition) Average ceal size (US$ milion) Source: £Y research and Asian Ventur ital Journal AVC) ‘Year-wise quantum of PE deals 4,000 6 3 2 + bia 5 a00 + z . 2 B 700 4 = 600 0 z & Z so04 + ces & ° £ % 400 . 300 . ® 4 2 200 . 100 - i o— =, || 200 2005 2006 2007 «2008-2009 aon ztz «2013+ 1m Total PE investments (USS millon) * No.of deals Source: EY research and Asian Venture Capital Journal AVC) “As of September 2013 Engineering. Procurement and Construction (EPC): ravings hessvinds 43PE transactions: key trends. Yea fe 2004-08: first movers —funds_| PE invested in the largest construction groups ofthe country, IVRCL, Pun Lioye Ltd, ana Gammon chasing large players Inia Lia: the majority of dealswere inthe nature of private placements. This period marked the beginning of euphoria inthe sector. 2006-08: perfect competition | Conslderatle PE sctvity In midsized companies; focus diversified from infrastructure chl contracting high capital infusion into tne to niche and specialized sectors. Few exarmpes are Shriram EPC, Gayatri Projects, Ashoka Bullion, sector Coastal Frojcts ana Ramay intra, 2010 onward: sowdawn in PE_| Select cats, with Investors focusing on PIPE deals as stacks began trading at reduced valuations. activity EPC companies resorted to Torming infrastructure/asset holding companies to seek aatform level funding detalledin next section, 3.4 Formation of infrastructure holding companies by EPC players EPC companies face the challenge of raising funds to meet equity commitments given the large funding requirements of infrastructure projects. Hence, the companies began to consider alternate modes of financing in order to restrict equity dilution at the parent level The concept involved bundling of infrastructure assets and transferring them to a wholly owned subsidiary of the parent EPC ‘company. Since the infrastructure assets are self-sustained in terms of long-term cash generation, the concept was accepted ‘well by the investor community, particulary infrastructure-focused funds. Such investments were primarily witnessed in highway sectors that were quite prevalent until recent times, The industry also witnessed various project (BOT) level investments leading to cash generation for EPC companies, Fund raising at muttipe levels Fung raising at malts levels sev seve. SPv3, However, several foreign investors are wary of investing in india given the recent volatility in exchange rates. Furthermore, many PE funds have not been able to exit their portfolios due to weak financial conaitions and, hence, funds for new investments may be imited in future. The ext challenges in current investments poses considerable challenge for future investments. 24 Eninering. Procurement and Construction EPC) Erving thehesswnes|Key PE investments in infrastructure holding companies formed by EPC players ion Infrastructure noting company of LAT# 1 Gayatrt ntra Vent bsidary of Gayatri P Saathay Infrastructure Project, subsidlary of Sacthay Engineering? HCC Concessions Li, subsidiary of HCC Infrastructure Co Lia KOC Infrastructure Ld, subsidiary of AMC Construction Highway holaing company of Soma Enterprise Limited 2011 Highway holding company of Supreme infrastructure” 2012 Highway holding company of Ashoka Bul 2012 Navayuga Road Projeets Pvt. Ltd, subsiclary oF Navayuga Engi " 2013 81. "VC, private equity firms seal deals worth $1.6 bn,” The Econom activa © The India Group. 82 "Gayatri Projects Limi Market Ine (e Datamonitor C 2013, via Fact 3 Marken ~ 3 acthav intra,” Realty Pus, 26S ctiva, © 2010 Adsert Web Solutions Pv {84 “HOC Concessions concludes equity transaction with The Xander Group.” HCC press release, http://www. heckdla.com/nce_ adi cata_content/pat_ttes/25tnSeptember1 pat, 29 September 201 IS “SRMC seals Re. SOOcr ina dea,” NEM & CW, 4 April ia Factiva 2011 NBM Media J.P. Morgan infuses $110 min to buy minority stave in nca's Soma Enterprise,” Inca investment News, (O11, via Factiva rtiy.co 87 “3iinvest cr in Supreme Ine oad portflio," Hindu Business Line, 30 January 2042, via Factiva “Ashoka Buildeonsubsigiary a jn from Sal Macquarie Joint Venture” The Tes of Ina, 13 August 201 -NRPL GETS RSSSO CRORE FUNDING FROM PIRAMAL ENTERPRISES (via debent san Business Insight, 14 Apri ja Factiva ©2013 Informatics (Inca) Lt. Engineering. Procuremant and Construction EPC): SanaCapital markets EPC companies have typically accessed capital markets to raise funds for their projects and to meet their working capital requirements, The year 2010 witnessed the maximum activity in the sector, with funds to the tune of INRSO.7 billion flowing into the sector™. Funds raised through IPOs of construction companies eo 50.7 50- 40 20 INR ition 20 10 52 42 ; To — eo 2005 2006 2007 2008 209 2010 zor 2012 Source: Dealogic While there are many companies that would have considered an IPO to provide exit to PE investor, the current stock market isnot conducive enough, with stocks tanking to alltime lows, Hence, we see a significant slowdown in the IPO activity during 2011 and 2012 with no IPO tll date in 2013. here would be a host of EPC companies listing on the stock market ifthe stock markets have been favourable, since all the PE investments that took place during 2006-09 are due for an exit. Finally how many of these will take the IPO route is yet to be witnessed. ‘90. Industry IPO data, via Deslogic 25. _Ennering. Procurement and Construction EPC) Srovingthehesswnes|3.5 Evolution of the market landscape For the purpose of our analysis, we have considered select listed EPC companies, according to the categorization mentioned below: > Laroe-sized companies: FY13 revenue of more than INRa0.0 billion > Mid-sized companies: FY13 revenue between INR10.0 billion and INR40.0 billion. > smaltsized companies: FY13 revenue less than INR10.0 billion. Category Large-sized companies Mecium-sizes companies ‘Smalsized companies No ot companies 10 at 2 1341 aaa 127 List of large-sized, mid-sized and small-sized (by revenue) companies SS Larsen & Toubro Lt PunjLioya Lt, Hindustan Construction Company Lt (Gammon ind Lt NOC Lt. Valpstaru Power Transmission Lt Simplex infrastructure Lc. Era intra Engineering Lt RCL Lt. Patel Engineering ta. eo Ramky Infrastructure Lt "National Building Construction Lt oti Structures Led. MeNaly Bharat Engineering Company Ltd. IMC Projects (nai Lt Engineers inda Ltd. Unity infrastructures Lt ‘Supreme infrastructure incla Limited ILAFS Engineering & Construction Company Ltd Sechay Encineering Ltd. Consolidated Construction Consortium Lie Gayatri Projects Lt, Shriram EPC Lt. ‘Ashoka Bulldcon Lt, Pratibha Industries Lt. TD Cementation Ina Lt BL Keshyap & Sons Lt ‘Ahluwalia Contracts (ne) Lt (MBL infrastructures Lt. CAC Constructions Co. Lt ‘SPML infra Lt. Se Hindustan Dorr-Olver Lt J Kumar Infraprojects Lt [AZZ Maintenance & Engineering Services Lia ‘ARGS Infrastructure Projects Lt {KR Constructions Lt Valecna Engineering Lt Vascon Engineering Lt, Techno Electric & Engineering Company La. Tentia Construction Ltd, aihind Projects Lt, UB Engineering Lid. /on Engineering Construction Lt ‘Simplex Proects Ltd, Man Infraconstruction Ltd \Welspun Projects Lt. PBA Infrastructure Lt, Kalincee Rall Nirman Engineers) Lt. Tarmat Lt. Coromandel Engineering Company Ltd Atlanta Lt Marg Lt Engineering Procuremant and Construction (EPC): Seovng te hssninds 47Market evolution 30 2 z os 25 24 2 22 8 20 Ss 5 2 18 19 Bos y 2 0 5 2 20 5 7 5 of FV08 Fvi0 Pit rz mis ‘Not araesiced companies m No.of medium szed comparies No.of small sized comparies Note: The above graph rettects tne shit in tne revenue profile of companies over the years (considered fr the purpose of aur analysis) Market size and profitability Particulars Large-szed companies 038 922 1054 1.249 1341 Midsize companies 254 307 376 254 Smat-sized companies @ 132 146 39 Large-szea companies 40 6 50 45 sizes companies 2 3B 18 6 nL ‘Smail-sized companies 5 9 7 | @ a Source: Company annual reports and Capitaine, EY research based on companies mentioned in list of large-size, mic-sizea ana smalt-sizea (by revenue) companias Total revenues have grown at a CAGR of 13.0% during FYO9-FY13; however, total PAT decreased at a CAGR of -5.4%. This indicates that revenues have multiplied at the cost of ultimate profitability. Many companies have reparted negative PAT uring FY13, thereby distorting market economics. This trend reflects irrational bidding to secure order book, delay/non recovery of receivables, leading to increased working capital. Ths will result in increase in debt requirements, as well as a delay in the execution of projects, rendering the bid price invalc 3. Engineering, Procurement and Construction EPC) Srovingthehesswnes|Market capitalization performance 3005 2s0 | 200 aso 100-4 50 o - + - 1 Fos | Fyos | FyiD. |) Fd. —FYI3.—FYAGHL Mid ——sinai ——targe ~ Sensex Source: company annual reports & Capitalne, EY research based on companies mentioned in Isto large-sized, mid-sized and smaltsized (by reven During FY08-FY12, most of the EPC stocks, particularly the large- and! midsized ones, moved in tandem with the Sensex. However, after FY12, the correlation reversed, and EPC stacks have been witnessing a negative trend since then. The stocks have actually touched alltime lows curing FYL3-14, While the Sensex has yielded a positive mavement of around 17% during LHFY14 from F¥O8, EPC companies’ market cap has reduced by 25%-50%, We see the market capitalization of small-sized stocks rising during FY3 1; this is due to the impact of fresh listing of small cap, ‘companies on the stock market. Debt/market capitalization’ 8.00 7.00 6.00 5.00 4.90 3.00 Debtimarket cap 0) 2.00 1.00 Fv09 Frio Fvit Fvi2 Fvia — Large sized companies ---=+ Mid sized companies —— Small sized companies Source: company annul reports & Caritoine, EY research based on companies mentioned in Ist of large-sized, midsized and smalFsized (by revenue) companies ‘91 The calculation i based onthe total debt/market cap ratio an considers median number forthe purpose of analysis and comparison. Fr example, FYOS numbers are calculated as total debt as on 31 March 2009/average market cop during FY20. Engineering. Procurement and Construction (EPC): Eravngthe hessvinds 49The above graph, highlighting the ratio of total debt/market capitalization, indicates the deteriorating financial health of companies. Debt pressures have been increasing, adversely impacting companies’ profitability. It's remarkable to note that the debt component, which was ust a fraction of the market capitalization during FYO9, has now become a multiple of ~ 6-7 times the market capitalization, Market capitalization/revenue®? 4.00 oso oso 4 070 0.60 oso 040 030 020 oo 4 0.00 Fn Fvit Fviz Fvis panies Mia sizea companles Source: Company Annual Reports & Capitaine EY research based on companies mentioned in ist of argesized, mic-sized and smalFsized (by revenue) companie companies The trend as indicated in the graph above indicates the extent to which the trading market cap of the companies is reflecting their revenues, When compared with FYO8, we see a clearly decreasing trend. This is due to the hit on profitability (highlighted in table on market size and profitability) even though revenues have increased substantially ‘92 The calulation is based on Market Cap/Revenue rato. For example, YOO numbers are calculated as market 350m 31 March 2009. -ap during FY 10/Reven 50. Engineering. Procurement and Construction EPC) Brainhe aa Sen a Al Key challengesopportunities a s without providing comm they may drain nancial health are caused by force majeure factors. in of a project, prio ‘unt of aggressi bidding, is essential to mitigate any unexpected fut pment. Man} red losses. tis therefore pertinent te ind uncertainties suct ‘ation while roject. Facto th n sector in the past. Dur toat 89, The co ntractors in jeopardy. The impact turbine etc. Furthermore, fore of low LIBOR? ation groune luctuatio we rat rmultiple time focusing on th adequate market toscruti ations is crucial. Moreover, itis important for compan ‘order books. mploying to ensure the quality of projects, whileDO srstrecomns nn a Political stability of the country; Delay in approvals and land i change in governments ‘acauisition Insufficient preliminary research on Design changes/ inadequacies: Unfamiaty with topography scope, resource avalaiiy, resoutee avalablity: ste conditions terrain: resettlement and carers ‘technology requirement leading to ‘enabittation; uty ting Inaccurate time and cost estimations Economic downturn ‘Delay in payments from c ‘unavalaity of resources ae = pe aad Rick associated with extemal hazards, including storms, foods, earthquakes, vandalism, sabotage and terrorisms civil unrest Sg 4.2 Where is the cash? EPC projects have become large, complex and as a result cost intensive. Therefore, in the backdrop of market turmoil, fears ‘of a slowdown and a crecit crunch, one of the key challenges for the sector is the ability to raise adequate financing required to fund the execution of existing order books and achieve sustainability for future, Currently, majority of EPC companies are leveraged to such an extent that their cash flows do not permit additional borrowing support. In addition to this, project delays, cost overruns, delayed payment mechanisms and tigations add to an increased requirement for working capital. The only financial respite they get is the mobilization advance that bridges short-term hurcles; however, it elongates the problem further in the long term. Capital constraints Promoters of large construction companies do not own stakes of more than 50%-60% in their companies, thereby restricting their ability to raise further funds through equity dilution, without loss of contro. In order to release their blocked capital and then redeploy it for new projects, many construction companies have resorted to equity dilution in public markets, private ‘equity and other global as well as domestic funds in the recent past. 54 Engineering. Procurement and Construction EPC) Srovingthehesswnes|Majority of large-sized companies (FY13 revenue > INRAO billion) have a promoter stake of less than 50%, Out of 10 large sized companies considered for analysis, 5 companies have promoter stakes of less than 511%, Similarly, for mid and small sized categories (that have been considered for analysis), more than haif of companies are exhibiting such trend. Hence, there is no scope for fund raise through further equity cilution at the parent level 4.3 Debt to equity equation has reversed. How will debt be serviced? Total debt to book equity ratio 2505 g DobLicpity 00 8 Fy09 Fv10 Fv Fviz Fv3 — Laree sized companies Mid sized companies —=Smallsized companies Source: Company annual reports & Capitaine Note: The above aranh reflects median number for the purpose of analysis and comparison The above analysis clearly indicates the burgeoning debt pressures on the books af the company. When compared with FYO8, the FY13 debt to equity ratio has increased significantly, The increase in debt for large-sized companies can be attributed due {cits exposure to BOT business. Net debt/EBITDA 7.00 - Not debvEBTDAG) Fv09 FvI0 Fyn rye Fyas — Large sized companies Mid sized companies —= Small ized companies Source: Company Annual Reports & Capitaine Note: The above graph reflects median number for the purpase of analysis and comparison Engineering. Procuremant and Construction EPC):Seovng te heasninds 98The above araph of Net Debt/EBITDA indicates the adequacy of EBITDA, which is the operating cash flow available for servicing debt. If we observe the above trend, the multiple has been increasing consistently, highlighting the increase in debt without any corresponding increase in profitability or operational cash flow. This cleary reflects the issues that the sector is currently facing, The increasing interest rates have also posed a challenge for EPC players. The interest coverage ratio of many large infrastructure construction players has declined to less than 1.8 times, which indicates that they wil ind it eitficutt to mest interest costs and service debt. For smaltsized companies, thi rato has further dectined to 1.0. Many companies have begun to offload assets (especially non-core assets), despite the fact that asset valuations are not high. Thiss done purely to restructure the capital and reduce the debt-burden otf the balance sheets™ The lenders have also been keen on financing infrastructure projects despite the fact that NPAs and restructured assets in this space have increased quite substantially lately. The infrastructure has been a priority sector for the lenders, as the ‘commercial bank infrastructure lending increased from INR72.43 billion in FYO0 to INK7860.45 billion in FY13. As of FY3. infrastructure accounts for more than one-third of the total bank credit ta the industrial sector. However, gross NPAS have increased considerably, from INR46 billion in FYO9 to INR114.1 billion in FY13, This has been largely on account of poor project appraisal techniques, lack of accountability, post-disbursal supervision, and external factors such as clearance delay: High erosion of book value Market capitalization to book equity™ 3.00 250 2.00 150 + 1.00 Marit cap/book eave) 050 0.00 Fvo9 Fv10 Fyn rue Fv3 — Large sized companies — Midsized companies — Small sized companies Source: Company Annual Reports & Capitaline ‘The above analysis indicates that there isa clear deterioration in the valuation ascribed by the market. The stocks are trading not even at book value of equity, but at a rather significant discount to book value. However, in comparison, during FYO9- FY0, the stocks were trading at a premium to their book equity. In particular, large-sized companies commandes significant premium, 194 “Inastructure ts se assets to reduce deb,” MintAsla 12 October 2012, via Factwa © 2013 HT Meta Lt 195. “Infrastructure Financing By Banks in Inala: Myths and Realities,” RB website, htt://.tb.or9 Iv/scripts/BS._ SpeechesView. aspx7id-83181, accessed 11 November 2033; "The ualy story of infrastructure companies, banks, Incscriminate lencing and cipping bac cebts,” Fortune Indie, October 2013, vol. isu 4, p. 70; RI relaxes prudential norms fr infrastructure,” The Econom Times, 418 March 2013, va Factiva ® 2013 The Times of India Group. 196 The calculation Is based on Average Market Cap/ Book Equity rao. For example, FYOS numbers are calculated as Average Markt Cap uring FY 10/Tota Book Equity as.0n 31 March 2008. 58 Engineering. Procurement and Construction EPC) Srovingthehesswnes|4.4 How will PE investors exit? Most mid-sized unlisted companies have private equity investors who had invested capital during 2006-2011. However, due ton adverse capital market situation, companies have not been able to resort to the exit strategy/IPO route. The sector did witness few successful exits historically in large companies, such as Gammon India Ltd, Punj Lloyd Ltd. and Shriram EPC Ltd. However, the trend did not continue for an extended period. PE investments and exits, 2006-2013 Exit del value figh, PE investments Ets value lon, overall PE ‘overall PE investment andexts growing ‘Investments decining 1,000 ecining 1 as sco oe 4 soo | 8 2 z 7e0 . 8 coo | +0 § £0 2% 3 5 2 x0 ‘ © 300 4 4 200 100 | 2006 2007 2008; 209 "2010" 2011 aoe "2013 = Total PE investment (USS milion) mam Total PE exis (USS milion) + No.of investment deals eH No. of ext deals Source: EY research After 2011, the industry witnessed a dectine in the number of exis. Stock markets crashed alter 2010, and so did the valuations. Although companies were keen to provide an exit option to such investors, existing capital markets have nat been conducive for an initial public offering (IPO), Few companies ai list on the stock markets at attractive valuations during 2007- 110 thus creating an exit opportunity for the investors. However, few investors chose not to exit with 2 view to realise higher returns later. Unfortunately, the markets have assumed a continuously downward trend with no correction so far. 53. Enginering. Procurement and Construction (EPC) Srovingthehesswnes|4.5 Attention to alleviating time and cost overruns itis a welhestablished fact that most construction projects have to face the risk of time and cost overruns ~ statistics re~ enforce this fact. As of July 2013, out ofa total of 694 ongoing infrastructure projects awarded by Central Government authorities (INR billion and above), 290 such projects were delayed, Status of infrastructure projects Delayea Projects on schedule/ahead of Sschedule/ao xed date of commissioning ‘Source: Flas report on central sector projects INR50 crore and above, Ministry of Statistics and Programme Implementation, July 2013, With inflationary pressures plaguing the Indian economy, such delays in project completions lead to an effective cost escalation. The 290 delayed projects have an incremental cost of INR1.68 tilion, or a 19% cost escalation. The highway sector has seen the maximum number of delayed projects, predominantly due to land acquisition and Right of Way issues. Other key sectors plagued by cost overruns are power and the railways. ‘cost overrun in various segments” = ed Soe ‘overrun INR bition) Roads and transport 9 2-108; 19.4(1.9) Power 50 102 183.9730) Railways 35 3-240 1053.9 66.44) Urban infrastructure 1 8 5270190) Coal 28 1272 309.1%) other 85 335.7404) 97°25 delayed projects ed to cost overrun of Rs 68K crore.” Realty Pus, 23 February 2011, via Factiva, ©2011 Ad Solutions Put. Ltd. Engineering Procuremant and Construction EPC): Seovng tc hessninds 98ey ‘Some key issues and their impact of delay in time and cost overruns. eed Exposes proect to inflationary cost cexcalations| vera increaseIn project cost due to idle time of several resources eral increase In project cost due to Idle time of several resources Issue Impact on time Land acquisition challenges Delay in project completion “Ambiguity indesign and engineering | Delay in arrival of detalled drawings by specifications consultant Delay in procurement and delivery of | Impacts several actives, depending on critical equipment the need for equipment inthe critical path Shortage of construction materials, Delay In dependent actvties impacting subsequent activities as well Cchange of scope Impacts overall project time ine and resource utilization Lack of coorsination between various le m2 of savera resources participants (vendors, sub-contractors, ete.) Delay in regulatory clearance Deral projects indetnitely Impacts cost ana working capital eyes die tothe extra work xtra east incurraa veto reaucea productivity nd increased idleness Exposes project to infatonary cast escalations~ especialy ted costs of equipment andlator Inetticient project oudgeting ana lack of Delay due to arrangement ot ariage contingency funds financing Rise nthe cost of raw materials Delay in payments by the owner Likely to delay the profectf unable to fi the gap created by the delay in payments Cost of project signiticantly deviates trom budget Impacts margins as cost escalation clause may only cover some ofthe casts Contractor may have toralse funds through adattonal equity or debt to fund working capital SS Enginering. Procurement and Construction (EPC) Saving the headwindsEngineering. Procurement and Construction (EPC) Saving thehesswnds 61Overcoming challenges 2 Enginsering, Procurement and Construction (EC): Sroyng the hens5.1 Sector and role diversification Traditionally, EPC players have developed skill sets in the core sub-sectors of transport, energy, buildings and urban infrastructure. Building a niche in a particular sub-sector could pase challenges to growth of erganizations in future as competition in any particular segment iskely to increase, impacting margins. Therefore, itis equally necessary to have ‘competence in other subsectors. Large global companies have diversified their operations with reference to sectors they serve as well as the services they offer. Although indian companies have started moving toward new avenues, the pace of diversification and the coverage is still low as compared to their global peers, who cater to 8 wide choice of sectors. Although subsectors such as cil & gas, mining and energy (including renewable and nuclear) have witnessed significant investments recently, there are still some segments, which are less explored including steel and metals, communications, defense and aerospace Sector reference: size, complexity and competition 5 always 0 Gas 3 storone @ . e@ e@ @ @ fos water Renewables lng 1 Power TAD Buln: ° r 0 0s 245 25 38, 4 45 5 35 Competition Engineering Procuremant and Construction EPC): angDiversification is legitimate if it de-risks the business, provides synergy to current operations and results in a positive cost benelit analysis. Every sector has its own issues, investments, profit margins anc gestation periods. However, a clear strategy and effective implementation will help mitigate risks associated with a particular sector. EPC companies have expanded their role from being a basic EPC contractor into consultants (for design and project management), developers and suppliers. However, many global construction anc’ engineering players also provide > Consultancy in pre-project activities, sustainability, environmental impact assessment, supply-chain management and ‘operations and maintenance > Financial assistance in the form of credit support, risk allocation, project financing and asset management > Specialized services such as weather forecasting, radiation detection, emergency management and personnel training at various levels ‘The construction industry has witnessed many EPC players shitting into PPP projects over the last decade, However, lately various players have been selling stakes or completely exiting n their BOT assets to shed the debt Developer off their balance sheets, especially in roads. Therefore, while diversitying the offerings keeps the companies in pace with global players and makes them eligible for large contracts, they have to be prudent in balancing their service portfolio ahead of any debt ridden situation where it may have to go for corporate debt-restructuring, Inter-changing roles ‘Most global EPC players give project management utmost importance ‘and demonstrate their capabilities through superior project designing and effective project management. The resources deployed on a project can be outsourced, but to have an overall control through an experienced project ‘management team is considered to be key to mitigating time and cost ‘overrun risks. While Indian companies have been traditionally outsourcing such services, many are now moving toward owning such capabilities in- house. Highlights > rigation companies ae dverstying int other sectors asthe Go's focus on rigaton has dectned over the years. > There is considerable competition in the highway space leading to reluctance amona the players to participate, Hence, players are considering diversification into new sectors such as transmission etc. > Few boiler manufacturing companies such 2s BGR Energy Systems Limited, and Cethar Lte., have forayed into the power EPC space. > Many civil contracting companies are entering sectors such as power transmission & distribution, ol & gas, industrial etc., and undertaking the civil component of these contracts. > Large construction companies and developers are moving along the value chain and creating inrhouse PMC and high value engineering divisions, > New sectors such as renewable energy, solid waste management, water have emerged in urban infrastructure 64 Engineering, Procurement and Construction EPC) Srovirgthehesswnes|