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Descripción: A construction engineering lecture notes.
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Engineering construction completion and turnover
Engineering Procurement & Construction (EPC) Braving the headwinds
EPC World
media group
p u b l i c a t i o n s a w a r d s c o n f e r e n c e s
Foreword EPC World “If you want to build a ship, don’t drum up people to collect wood and don’t assign them tasks and work, but rather teach them to long for the immensity of the sea.” We belong to and represent an industry that is literally building a new 21st century India driven by aspirations of tens of millions who seek a better life, a better livelihood and more opportunity to build on their dreams. Hidden in the string of highways, factories, airports, ports, metro rail networks, dams, commercial towers and nuclear power plants is the potential for India to forge its most successful partnership ever — that between entrepreneurs and workers. As the EPC industry moves toward more maturity and more established norms and protocols, let us never forget the unique ability of this industry to transform India. Even though we live in the age of information and information technology, it is bricks and mortar that will craft the second-largest economy of the world and the largest middle class consumer base in the world in a decade or two. There is always the temptation to be swayed and spooked by the present. To that extent, the present state of the Indian economy does appear cloudy and depressing. After years of a more than impressive surge, GDP growth rate has dipped lgY\akYhhgaflaf_-Yq]Yj&:gl`l`]Õk[YdYf\[mjj]fl Y[[gmfl\]Õ[alkl`j]Yl]flg\]jYadl`]_jgol`ege]flme& NajlmYddq\gmZd]%\a_al[gfkme]jafÖYlagfakeYcaf_da^] \a^Õ[mdl^gj[alar]fk&9f\l`]e]\aYakh]hh]j]\oal`j]hgjlk of how investors and entrepreneurs are holding back when it comes to letting their money talk with India. Problems j]dYl]\lg\]dYqk$[gklgn]jjmfk$ÕfYf[aYd[dgkmj]Yf\ hjgÕlYZadalql`Yl[gf^jgfleYfq`a_`hjgÕd]=H;hjgb][lkYj]
Mr. Tejasvi Sharma Managing Director
testimony to the tyranny of the present. Yet, as famous poet PB Shelley suggested more than two hundred years ago: “If winter comes, can spring be far behind?” Global rating and consulting institutions are unanimous in saying that the longer-term prospects for the Indian economy remain extremely bright. And let us not forget one fact — when the famous BRICS report released early this century predicted that India will become the secondlargest economy of the world by 2050, it was based on the assumption that GDP growth rates will average 5% to 6% a year. The fact is, India will build infrastructure across the board and both domestic and foreign investors will hYjla[ahYl]afl`akka_faÕ[Yfl]f\]Yngj$bmklYkl`]q`Yn] done in China since the late 1980s. The sheer numbers are too tempting for a smart investor to ignore. I do not want to deluge you with statistics right here; so allow me to quote bmklgf]fmeZ]j&A^Af\aYaklgmk]Yeg\]kl)(g^alk?
EY Dear Reader, The Government of India’s continued focus on developing India’s infrastructure has resulted in an ambitious target of INR56.3 trillion in the Twelfth Five Year Plan. Out of this amount approximately 50% of the investments are to be contributed by the hjanYl]k][lgj&;gfka\]jaf_l`akeYbgjhgl]flaYdghhgjlmfalq in the infrastructure segment, the EPC sector is likely to Z]Z]f]Õl]\&L`]=H;eYjc]lg^Af\aY`YkZ]]foalf]kkaf_ consistent changes over the last few years with increased hjgb][lkar]Yf\[gehd]palq$af[j]Ykaf_hjanYl][da]flkYf\ entry of several foreign players. In the current market landscape, EPC contractors have a healthy mix of both government and private sector clients, as compared to their heavy dependence on government clients until a few years ago. The concept of EPC has been evolving over the last few years and has emerged as a preferred form of contracting by clients along with PPP eg\]dk&=n]fo`]fhjgb][lkYj]YoYj\]\gf:GLZYkak$ there is an EPC opportunity for market players. Currently, clients prefer to go with a single point responsibility thereby, reducing the interface and the overall duration. This has been further strengthened by the fact that the highway sector, after several years of operating in the PPP mode, ak[gfka\]jaf_lgYoYj\egj]hjgb][lkgfl`]=H;eg\]d& Kh][aYdar]\=H;k][lgjkkm[`YkeYjaf]$lmff]daf_$`q\jg$ industrial, and oil and gas continue to prefer awarding hjgb][lkafl`]=H;eg\]& When the Tenth Five Year Plan called for inclusion of “Chapter on Construction” in the National Plan, the success klgjq`Y\bmklZ]_mf&L`]]jYoalf]kk]\hjanYl]]imalq investments in some of the largest construction groups of our country. The companies, with fresh capital infusion, ]p`aZal]\ka_faÕ[YfllmjfYjgmf\koal`j]n]fm]kemdlahda]\ ka_faÕ[Yfldq&=mh`gjaY[gflafm]\Yll`]Z]_affaf_g^ l`]=d]n]fl`Õn]q]YjhdYfo`]fea\%kar]\[gehYfa]k klYjl]\lgYlljY[lafn]klgjkÌafl]j]kl&Fglgfdql`]ÕfYf[aYd
Sushi V. Shyamal Partner, Transaction Advisory Services
afn]klgjk$Zmll`]_dgZYd[gfkljm[lagfeYbgjkeY\]kljYl]_a[ investments, further fuelling the growth story. The increase in EPC activity is evident from increasing order ZggckYf\j]n]fm]kg^l`]dYj_]%Yf\ea\%kar][gfkljm[lagf players. However, the sector is currently facing headwinds from several directions. We have observed that the growth in j]n]fm]kakfglljmdqj]Ö][lan]afl`]Zgllgedaf]$hjaeYjadq \m]lgka_faÕ[Yfl[gklgn]jjmfk$j]_mdYlgjqZglld]f][ck and aggressive bidding positions taken by a few of market players. With increasing working capital requirements and the resultant increase in leverage, the EPC players are left with limited opportunity to raise further capital to fuel growth in the current scenario. PE funds too are cautious with their new investments as there is limited opportunity of exit due to unfavorable capital markets. Furthermore, the j][]fllmjegadafl`]ÕfYf[aYdk][lgj$af[dm\af_l`]jmh]] \]hj][aYlagf$`Ykaf[j]Yk]\l`]d]n]dg^mf[]jlYaflqafhjgb][l ]p][mlagf&L`]j]^gj]$l`]k][lgjakj]]daf_mf\]jka_faÕ[Yfl liquidity constraints. In this turbulent market situation, the contracting companies have to realign their scaling strategies and focus on affgnYlagf$hjgb][leYfY_]e]flYf\hjgÕlYZd]_jgol`Yk compared to order book and revenue growth. Only those o`g[Yfkmjnan]l`]`]Y\oaf\koaddZ]YZd]lg[YhalYdar]gf the opportunity being provided in the Twelfth Five Year Plan. JYlagfYdarYlagfafl`]Za\\af_hjg[]kkakimafl]kk]flaYdYl l`akbmf[lmj]&ÉHjgÕlkÊYf\Éhjgb][lkÊf]]\lgZ]eYfY_]\ ]^Õ[a]fldq&;mjj]fldq$l`]eYjc]lakafY^jY_e]fl]\klYl] and needs to undergo a high level of transformation if future sustainability is to be assured. M&A activities in the market place are expected to improve with consolidation on the `gjargf&;gfkgda\YlagfakYdkgdac]dqlgj]da]n]hj]kkmj]Yf\ provide exit options to a set of investors. This report discusses the potential opportunity; recent trends witnessed by the sector, challenges for re-enforcing sustainability and possible ways to overcome the challenges. O]`gh]qgm]fbgqj]Y\af_l`akj]hgjlYf\Õf\alafka_`l^md&
Contents Introduction
06
Opportunities for EPC business in India
14
Sector trends
38
Key challenges
52
Overcoming challenges
62
Conclusion
70
Supplemental
72
Abbreviations
78
Heading
1 6
Introduction
Engineering, Procurement and Construction (EPC): Braving the headwinds
1.1 Understanding EPC From contracting to EPC – Why? Over the years, the infrastructure business has witnessed several forms of contracting. The old models of contracting have _an]foYqlgf]oeg\Ydala]koal`l`]hjgb][lkZ][geaf_egj][gehd]pYf\jakcd]n]jY_af_Y\ghl]\Zql`]gof]jk&;gfljY[lk `Yn]]ngdn]\^jgeal]ejYl]hY[cY_]klgdmehkme$Õp]\%hja[]$Õp]\%lae]Zaf\af_[gfljY[lk&KdgodqZmlkl]Y\adq$l`]gfmkg^ hjgb][leYfY_]e]fl`Ykk`a^l]\^jgel`]gof]j'\]n]dgh]jlgl`][gfljY[lgj&L`]j]akYnakaZd]k`a^l^jgegof]j%eYfY_]\ hjgb][lklg=H;hjgb][lkYf\l`]jakcg^lae]Yf\[gklgn]jjmfk`YkZ]]fljYfk^]jj]\lgl`][gfljY[lgj$Ydgf_oal`l`] responsibility of designing, procurement of material and construction. Although standard clauses and conditions prevailed, l`]=H;[gfljY[leg\]d`Yk]ngdn]\lgj]Ö][ll`]k`a^lafZYdYf[]g^jakcZ]lo]]fl`]gof]j'\]n]dgh]jYf\l`][gfljY[lgj& L`ak^gjeg^[gfljY[l]n]fhjgl][lkl`]gof]j'\]n]dgh]j^jge[mjj]f[qYf\afl]j]kljYl]Öm[lmYlagfk&Mfdac]gl`]j[gfljY[lk where procurement and design are considered separate processes, in EPC contracts they are done simultaneously, reducing l`]gn]jYdd\mjYlagfg^l`]hjgb][l&AfalaYddql`]j]o]j]gfdq^]o[gfljY[lgjko`g`Y\l`]j]imaj]\l][`fgdg_a[YdYf\ÕfYf[aYd [YhYZadala]klglYc]gn]jYddj]khgfkaZadala]kg^l`][gehd]l]hjgb][l3l`]j]^gj]$dYj_]hjgb][lko]j]\ana\]\aflgkeYdd=H; hY[cY_]k&?jY\mYddql`]=H;[gfljY[lgjk\]n]dgh]\l][`fa[Yd]ph]jlak]Yf\Z][Ye]ÕfYf[aYddq[geh]l]flYf\l`]hjgb][l gof]jkZ]_YflgYoYj\l`]e[gehd]l]hjgb][lkYkYkaf_d]dmehkmelmjfc]q[gfljY[l&
Global outlook Globally, EPC has become an accepted form of contract by the construction industry and the EPC contractors have adopted a modern variation called EPCM — engineering, procurement and construction management. The EPC contractors `Yn]]phYf\]\l`]ajjgd]kYf\`Yn]Y\ghl]\l`]jgd]kg^hjgb][l[gfkmdlYflkZqeYfY_af_l`]hjgb][l^jge\]ka_flg commissioning. This has limited the role of engineering consultants and large EPC companies have transformed into solution hjgna\]jk&?dgZYddq$dYj_]=H;hdYq]jkeYfY_]hjgb][lkaf\a^^]j]fl[gjf]jkg^l`]ogjd\oal`hjg\m[lagf`mZkkljYl]_a[Yddq dg[Yl]\afk]n]jYd[gflaf]flk&L`]q`Yn]`a_`dqkgh`akla[Yl]\hjgb][leYfY_]e]flYf\jakceYfY_]e]fll][`faim]k$o`a[` `]dhl`]elgegfalgjYf\eYfY_]hjgb][lk]^Õ[a]fldqY[jgkk\a^^]j]fldg[Ylagfk&Al`YkZ]]fgZk]jn]\l`Ylkge]g^l`] _dgZYdhdYq]jkYdkgY[imaj]YkljYl]_a[klYc]afl`]]imalqg^l`]hjgb][l$o`a[`]phj]kkl`]aj[geeale]flYko]ddYkhjgna\] [gfÕ\]f[]lgl`]gof]jkYf\afn]klgjk&
Engineering, Procurement and Construction (EPC): Braving the headwinds
7
How is EPC different from other models? K]n]jYdeg\]dkg^[gfljY[l[g%]paklafl`]Zmkaf]kkYf\]Y[`akmfaim]Yf\Õlklgl`]j]imaj]e]flg^l`][da]fl&O`ad]kge] Yj]al]ejYl]%ZYk]\[gfljY[lk$gl`]jkhjgna\]hYkk%l`jgm_`]k[YdYlagfkYf\afÖYlagfhjgl][lagflgl`][gfljY[lgj&Kge] contracts include the client’s design requirements, while others place the onus of designing on the contractor. Such contracts, oal`nYjqaf_Zmlkh][aÕ[hj]%\]Õf]\l]jekYf\[gf\alagfk$eYqZ][Yl]_gjar]\YkhY[cY_]%ZYk]\[gfljY[lk&;gfljY[lk o`]j]l`]gfmklg\]dan]jl`]hjgb][l^gjY_mYjYfl]]\hja[]oal`afYÕp]\h]jag\Yf\oal`h]j^gjeYf[]gfl`]ZYkakg^hj]% [geeall]\klYf\Yj\k$da]koal`l`][gfljY[lgjYj][Yl]_gjar]\Yklmjfc]q[gfljY[lkYdkgcfgofYk\]ka_fYf\Zmad\gj=H;& This form of contract is attractive for customers, since the liability for the end product, including design and construction, lies oal`l`][gfljY[lgj&;mklge]jkeYqYdkg[`ggk]l`]lmjfc]qeg\]d^gjgfdqhYjlg^l`]hjgb][l$o`a[`oaddl`]fljYfk^]jl`] coordination role to the customer. Under the package-based model, time and cost overrun risks may lie with the owner or developer. However, under the turnkey model, failure 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 responsibility for designing, procurement and construction as well as km[[]kk^mdhjgb][l\]dan]jqgfl`][gfljY[lgj&@]f[]$al]fkmj]k]^Õ[a]f[qYf\eala_Yl]khjgb][l[gehd]lagflae]Yf\[gklk& Turnkey contract vs. packaged-based contract Criteria
Turnkey contract
Packaged-based contract
Price
Guaranteed price for execution
No guarantee on the price
Time
Guaranteed timeline for completion
No guarantee on the timeline
Procurement
Undertaken solely by the contractor
According to agreement between the two parties
Engineering/design
Responsibility of the contractor
J]khgfkaZadalqg^l`]gof]j'\]n]dgh]j
Responsibility
Contractor has complete responsibility
;gfljY[lgj`Yk\]Õf]\j]khgfkaZadalq
Point of contact
Contractor is single point of contact for all matters for l`]hjgb][l\]n]dgh]j
Gof]j'\]n]dgh]j`Yklg[ggj\afYl]oal`k]n]jYd participants along with the contractors
Level of Involvement
Contractor is free to work with limited supervision delivering according to agreed milestones and kh][aÕ[Ylagfk
Gof]j'\]n]dgh]jlgmf\]jlYc]Y\Yq%lg%\Yqkmh]jnakagf of most of the activities
Risk
Ka_faÕ[YfljakckYj]ljYfk^]jj]\lgl`][gfljY[lgj
Ka_faÕ[Yfljakckj]lYaf]\oal`l`]gof]j'\]n]dgh]j
=H;EakZ]da]n]\lgZ]kaeadYjlg=H;[gfljY[lk&Af=H;El`][gfljY[lgjlYc]kl`]j]khgfkaZadalqg^l`]]flaj]hjgb][l afl]_jYlagfYko]ddYkl`]eYfY_]e]fl[gfljgdgfl`]hjgb][l&@go]n]j$alakfglj]khgfkaZd]\aj][ldq^gjl`]hjgb][l[gklYf\ schedule. It is a professional services contract, which has a different risk allocation as well as different legal consequences. Af=H;E[gfljY[l$dYf\Y[imakalagf$dg[Ydakkm]k$gh]jYlagfYf\eYafl]fYf[]Yf\kYd]g^_gg\kY^l]j[gehd]lagfg^hjgb][l da]koal`l`]hjgb][lgof]j&Af=H;El`][gfljY[lgj\]ka_fk$hjg[mj]kYf\eYfY_]kl`][gfkljm[lagfhjg[]kkgfl`]gof]jÌk Z]`Yd^3`go]n]j$l`][gfkljm[lagfak\gf]Zqgl`]jhYjla]k&AfdYj_]hjgb][lk$=H;E[gfljY[lgjZj]Yckl`]]flaj]hjgb][lYf\ YoYj\kk]hYjYl]=H;hjgb][lkafkeYddhY[cY_]k&
8
Engineering, Procurement and Construction (EPC): Braving the headwinds
Contractual relationship of EPC and EPCM model EPC model
EPCM model Owner
Owner
EPC contractor
Process engineering
Vendors
EPCM contractor
Contractors
Subcontractors
Site Services
Process engineering
Vendors
Contractors
Subcontractors
Afl`]gf_gaf_Lo]d^l`Õn]q]YjhdYf$l`]?gn]jfe]flg^Af\aY ?gA!`Ykk]lmhYfYeZalagmklYj_]lg^AFJ-.&+ljaddagf^gj Infrastructure development1&L`]?gn]jfe]fl^mf\af_^gjYhdYfg^km[`Y[gfka\]jYZd]kar]oYkfglkm^Õ[a]flYf\l`]j]^gj]$ it has relaxed policies and encouraged private parties to participate in India’s infrastructure development through the public hjanYl]hYjlf]jk`ah HHH!eg\]&L`]egkl[geegfeg\]dafHHHakZmad\%gof%ljYfk^]j :GL!Yf\akmk]\afk]n]jYdjgY\$ ljYfkeakkagf$hgjlk$oYl]jYf\Yajhgjlhjgb][lk&HHHakimal]\a^^]j]fl^jge=H;[gfljY[lkYkl`]\]n]dgh]jafn]klklgZmad\l`] asset as well as owns and operates it. The developer ultimately awards the contract to an EPC contractor and on completion, gh]jYl]kal^gjYÕp]\\mjYlagfZ]^gj]ljYfk^]jjaf_alZY[clgl`]_gn]jfe]fl&L`]naYZadalqg^=H;gjHHHeg\]^gj af^jYkljm[lmj]hjgb][lk`YkYdoYqkZ]]fYlgha[g^\]ZYl]3`go]n]j$l`]\qfYea[kYj]\a^^]j]fl^jgek]_e]fllgk]_e]flYf\ depend on the government’s priority to award the contracts. Some sectors, such as highways have reached a mature stage, o`]j]Ykgl`]jkkm[`Ykl`]jYadoYqkYf\mjZYfaf^jYkljm[lmj]Yj]q]llgjgddgmldYj_]hjgb][lhjg_jYekZYk]\gfHHHeg\]d&
Engineering, Procurement and Construction (EPC): Braving the headwinds
9
1.2 EPC players in India Currently, the Indian EPC sector, with its rising prominence and changing dynamics, has more than 150 participants and a multitude of stakeholders. Players have carved out a niche for themselves and have developed their reputation, based on their sector focus. Some have also divested their operations in other sectors, thereby segregating the entire EPC space, based on operational segments. Segment
Major domestic players
Major foreign players
Insight
Infrastructure / General Contracting
Larsen & Toubro Limited, Hindustan Construction Co. Ltd., Gammon India, IVRCL, Kaehd]pAf^jYkljm[lmj]Dl\&$?YqYljaHjgb][lkDl\&$ Patel Engineering Ltd., Era Infra Engineering Dl\&$KY\Z`Yn=f_af]]jaf_Daeal]\$FY_YjbmfY Construction Company Ltd.
Isolux Corsan, ITD Cementation India Limited, ABE Af\aY!Af^jYkljm[lmj] Limited, Leighton, ACS Construction Group Ltd., Vinci Construction
Increasing opportunities in the infrastructure sector have attracted many new domestic as well as new entrants to this space.
Building construction — Residential and Commercial Segments
DYjk]fLgmZjgDaeal]\$K`YhggjbaHYddgfba ;g&Dl\&$9`dmoYdaY;gfljY[lk Af\aY!Dl\&$:D Kashyap & Sons Ltd, B. G. Shirke Construction Technology Private Limited, B. E. Billimoria & Co. Ltd., BSEL Infrastructure Realty Limited, Consolidated Construction Consortium Ltd., Mackintosh Burn Ltd., Man Infraconstruction Limited, Supreme Infrastructure India Ltd., Unity Af^jYhjgb][lkDl\&$NYk[gf=f_af]]jkDl\&
Arabian Construction Company, Leighton, Samsung Engineering
KhY[]akmfgj_Yfar]\af nature and is dominated primarily by local contractors.
Oil & Gas EPC
DYjk]fLgmZjgDl\&$HmfbDdgq\Dl\&$H]ljgf =f_af]]jaf_;gfkljm[lagfDaeal]\$=kkYjHjgb][lk Af\aY!Daeal]\$E[FYddq:`YjYl=f_af]]jaf_;g& Ltd., Leighton, Engineers India Limited, Fabtech Hjgb][lk=f_af]]jkDl\&$BYa`af\Hjgb][lkDl\&
Ka_faÕ[Yfl[geh]lalagf from foreign participants, especially for offshore contracts; business eg\]d^g[mk]\gfhjgb][l management rather than direct execution
Power EPC
Power EPC :@=D$DYjk]fLgmZjgDl\&$LYlYHjgb][lk Ltd., BGR Energy Systems Ltd., Gammon India, ?YqYljaHjgb][lkDl\&$E[FYddq:`YjYl=f_af]]jaf_ Co. Ltd., Shriram EPC Ltd., Tecpro Systems Ltd., Cethar Ltd.
Doosan Power Systems, Dongfang Electric Corporation, Harbin Power Engineering Co. Ltd., KEPCO, ThyssenKrupp Industries India, Alstom T&D Af\aY$9dklgeHjgb][lkAf\aY Limited, Mitsubishi Heavy Industries, Toshiba Thermal and Hydro Power Systems Company, Ansaldo STS, Babcock & Wilcox
Market segmented into niche areas; few players with presence across both BTG and BoP
ABB India Ltd., Uhde India Ltd., Toyo Engineering India Ltd., Continental Engineering Corporation, Marti India Private Ltd., AG Group, Samsung Engineering, ITD Cementation India Ltd.
Comprises niche players in segments such as hydel tunneling, marine construction, or industrial construction
General Power EPC and Power Transmission
Power Transmission EMC Ltd., Jyoti Structures Ltd., Hythro Power Corporation Ltd., GET Power Pvt. Ltd., KEC International Ltd., Kalpataru Power Transmission Daeal]\$BE;Hjgb][lk Af\aY!Dl\&$L][`fg Electric & Engineering Company Ltd., Unitech Transmission Specialized EPC Marine, Industrial, Railways, Tunneling, Mining etc.
10
K`jajYe=H;Dl\&$;gYklYdHjgb][lkDl\&$ Navayuga Engineering Company Ltd., Hindustan Construction Co. Ltd., Patel Engineering Ltd., Afcons Infrastructure Ltd., Simplex Infrastructure Ltd., McNally Bharat Engineering Co. Ltd., Petron Engineering Construction Ltd., CYdaf\]]JYadFajeYf =f_af]]jk!Daeal]\$9EJ Construction Ltd.
Engineering, Procurement and Construction (EPC): Braving the headwinds
Dominated by equipment manufacturers who have forayed into EPC as forward integration Global players entered the market in JV with Indian players to enhance their equipment business
The Indian EPC sector has both Indian and international EPC contractors. While several international EPC players have already ]klYZdak`]\l`]ajhj]k]f[]afl`]Af\aYfeYjc]lafkh][aÕ[k]_e]flkg^[gfkljm[lagf$kge]`Yn]j][]fldq]fl]j]\Af\aYYf\ some are considering entering amid stagnant markets in Europe and the US. Although the EPC contract and its fundamentals are similar in India and abroad, the quality and strength of the players vary. Large global players have in-house research centers and possess state-of-the-art technologies. They have, over the years, transformed themselves into solution providers from being a contractor. It has been observed that global EPC players are n]jqkljgf_af]f_af]]jaf_Yf\\]ka_fo`ad]l`]ajAf\aYf[gmfl]jhYjlkYj]eYafdq^g[mkk]\gf[gfkljm[lagf&9eYbgjalqg^dg[Yd hdYq]jkafAf\aY`Yn]Ybgmjf]qlgeYc]^jgeË;Ìlg=H;afl`]j]Ydk]fk]& Foreign companies have entered India through different routes. Few have chosen to acquire Indian companies, while others `Yn]]fl]j]\bgafln]flmj]k&L`ak`Yk`]dh]\^gj]a_f[gehYfa]klg\aj][ldq_YafeYjc]lk`Yj]Yko]ddYk]paklaf_Ykk]lk Yf\hjgb][lk&L`akakYoaf%oafkalmYlagf^gj\ge]kla[hdYq]jkYko]dd&Bgafln]flmj]k]fYZd]Af\aYf[gehYfa]klgimYda^q^gj big ticket bids. There are several cases where domestic companies have tied up with foreign companies to bid for airport hjgb][lk$hgo]jhjgb][lkYf\jgY\hjgb][lk&Afl`]k]YjjYf_]e]flk$]f_af]]jaf_Yf\l][`fgdg_a]kYj]hjgna\]\Zql`]_dgZYd counterpart and on ground construction is taken care of by the Indian company. This has also given an opportunity to the Indian company to upgrade on technologies and engineering. Entry strategy of foreign EPC companies in India 2, 3, 4, 5, 6, 7 Modality
:]f]Ôlklgl`]hdYq]j
Precedence
Joint venture with existing players
Access to knowledge capital for India entry
:]f]Õlg^ZjYf\]imalqg^l`] existing player
In 2007, Shriram EPC formed a JV with a Belgium-based company. The JV enabled it to tap the fast-growing wet cooling and air pollution control market in India2.
Advantage of existing resource base
Scale of operations achievable through acquisitions
In December 2010, Leighton International Limited and Welspun Group formed a strategic JV to pursue EPC opportunities. Welspun `Y\Y[imaj]\Y+-klYc]afD]a_`lgf;gfljY[lgjk Af\aY!Hnl&Dl\&^gj INR4.7 billion3.
L`]k][lgj$kljgf_dqmh`]d\Zql`]af^jYkljm[lmj]klgjq$`YkYkljgf_hgl]flaYdlg_jgo^mjl`]joal`l`]Lo]d^l`Õn]q]YjhdYf >QH!lYj_]laf_af^jYkljm[lmj]kh]f\g^AFJ-.&+ljaddagf&=n]faf^mlmj]$af^jYkljm[lmj]\]n]dghe]flakdac]dqlgj]eYafl`] focus area of the GoI.
Engineering, Procurement and Construction (EPC): Braving the headwinds
11
Comparison of investments in FYPs Tenth FYP (2002–07) (INR trillion)
Eleventh FYP (2007–12) (INR trillion)
Twelfth FYP (2012–17) (INR trillion)
Planned investments
8.7
20.6
56.3
Actual Investments
9.2
23.9
NA
EPC opportunity
4.5
11.4
26.7
Sectoral mix
Power: 30%
Power: 33%
Power: 32%
Roads: 17%
Roads: 19%
Roads: 17%
Telecom: 16%
Telecom: 16%
Telecom: 17%
Railways: 11%
Railways: 8%
Railways: 9%
Irrigation: 13%
Irrigation: 10%
Irrigation: 9%
Ports: 3%
Ports: 3%
Ports: 3%
Oil & Gas: 2%
Oil & Gas: 2%
Oil & Gas: 4%
Others: 8%
Others: 9%
Others: 9%
~50% spend on power and roads — above targeted achievement in power sector
Power and roads consistently amounting to ~50% of planned expenditure — added focus on telecom
Increased thrust on telecommunications — increased expenditure on ports, oil and gas pipelines
Source: Eleventh and Twelfth Five year plan, Planning Commission
@go]n]j$l`]k[]fYjagafl`][gfkljm[lagfaf\mkljq`Yk[`Yf_]\afl`]dYkl^]oq]Yjk&L`]k][lgjak^Y[af_Yka_faÕ[Yfl daima\alq[jmf[`$o`a[`ak^gj[af_d]Y\af_[gehYfa]klgoYalYf\oYl[`Z]^gj]lYcaf_mheYbgjogjc&L`]j][]flÕfYf[aYd lmjegadYf\l`]jmh]]\]hj][aYlagf`Yn]Y\\]\lgl`]mf[]jlYaflq^Y[]\Zql`]af\mkljq&L`]k][lgjakYdkg^Y[af_kge]eYbgj Zglld]f][ck&Akkm]kh]jlYafaf_lghjgb][llYc]%g^^$hYjla[mdYjdql`gk]j]dYlaf_lgdYf\Y[imakalagfYf\]fnajgfe]flYd[d]YjYf[]k$ 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 dgk]kalknYda\alq&>mjl`]jegj][Yk`klj]kkkalmYlagf$o]Yc]faf_ÕfYf[aYdklj]f_l`g^Zgl`[gfljY[lgjkYf\\]n]dgh]jk$Ydgf_ oal`ngdYladalqafeYl]jaYdhja[]`YkeY\]hjgb][l]p][mlagf\a^Õ[mdl&
12
Engineering, Procurement and Construction (EPC): Braving the headwinds
Engineering, Procurement and Construction (EPC): Braving the headwinds
13
2 14
Opportunities for EPC business in India
Engineering, Procurement and Construction (EPC): Braving the headwinds
April 2008 A Newsletter from Ernst & Young
2.1 Ghhgjlmfalqafl`]Lo]d^l`>an]Q]YjHdYf Lo]d^l`>QH! The Twelfth FYP envisages investment of approximately INR56.3 trillion in Indian infrastructure between 2012 and *()/&L`ak$aflmjf$ak]ph][l]\lgg^^]jka_faÕ[Yflghhgjlmfala]k^gj=H;Y[jgkknYjagmkk][lgjk8. During the period, the [gfkljm[lagfghhgjlmfalqafl`]af^jYkljm[lmj]k][lgjak]klaeYl]\lgZ]Yjgmf\AFJ*.&/ljaddagf YhhjgpaeYl]dq,/g^hdYff]\ afn]kle]flk!&Ka_faÕ[Yflafn]kle]flkafaf^jYkljm[lmj]hjgb][lk$Ydgf_oal`l`]j]nanYdafl`]j]Yd]klYl]k][lgjYf\_jgol`af industrial capex are likely to boost the construction industry and act as catalyst for growth of EPC companies in India9. O`ad]=H;[gfljY[lgjk[gflafm]lgZ]l`]mdlaeYl]Z]f]Õ[aYja]kg^af^jYkljm[lmj]afn]kle]flk$l`]Y\n]flg^f]oeg\]dk`Yk 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: INR56,316.9 billion 3%
3% 2%2%1%
5% 32% 9%
Power
Ports and Inland Water Transport
Roads & Bridges
Oil & Gas
Telecommunications
Mass Rapid Transit System
Railways
Airports
Irrigation and Watershed
Storage
Water supply and Sanitation
9%
17%
17%
Source: Twelfth Five Year Plan document, Planning Commission 0 1
Engineering, Procurement and Construction (EPC): Braving the headwinds
15
Construction opportunity in the Twelfth FYP 10 Total planned investment in Twelfth FYP (INR billion)
Construction intensity10
Construction opportunity (INR billion)
Roads and bridges
9,694.1
65%
6,301.1
Railways
5,218.0
78%
4,070.0
Mass Rapid Transit System (MRTS)
1,241.6
78%
968.4
Ports and Inland Water Transport (IWT)
1,977.8
50%
988.9
877.1
42%
368.4
Water supply and sanitation
2,549.5
66%
1,682.7
Irrigation and watershed
5,043.7
75%
3,782.8
18,202.4
38%
6,916.9
9,439.0
10%
943.9
Storage*
584.4
50%
292.2
Oil & Gas
1,489.3
25%
372.3
Sector
Airports
Power Telecommunications*
Total
56,316.9
26,687.7
Source: Twelfth Five Year Plan document, Planning Commission, EY research, Engineering, Procurement and Construction (EPC): Driving _jgol`]^Õ[a]fldq$ EY, 2011; *Construction intensity is assumed with comparison to buildings as per data available in the Planning Commission’s report. In the case of telecom, construction intensity of 10% has been assumed.
L`][gfkljm[lagfafl]fkalq$o`a[`nYja]kka_faÕ[YfldqY[jgkkaf^jYkljm[lmj]k][lgjk$aehY[lkl`]ghhgjlmfalq^gj=H;hdYq]jk more directly than the investment planned. While construction-intensive sectors such as roads, railways and MRTS 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 opportunity11.
Engineering, Procurement and Construction (EPC): Braving the headwinds
thereby, increasing the number of opportunities for companies to grab13. As of 31 May 2013, approximately 207 such hjgb][lk$Yegmflaf_lgAFJ/$0)-&(Zaddagf$a\]flaÕ]\Zql`]?gAo]j]afhjg_j]kkafl`][gmfljq14. The GoI has more than doubled its investment in infrastructure to INR56.3 trillion during the Twelfth FYP from INR20.6 trillion during the Eleventh FYP period, and more than six times the planned infrastructure investments of INR8.7 trillion during the Tenth FYP period15. In both Tenth and Eleventh FYP, the actual investments had exceeded the planned investments16.
35%
30.0% 32.7% 32.3%
Comparison of segment-wise composition of infrastructure expenditure
0.8% 1.5% 1.6%
0.6% 0.8% 1.0%
Airports
Storage
0.3% 1.7% 2.2%
2.6% 2.6% 2.6%
5%
2.4% 1.9% 3.5%
10%
6.6% 5.1% 4.5%
15%
13.3% 10.2% 9.0%
20%
11.0% 8.4% 9.3%
25%
15.8% 16.1% 16.8%
16.7% 19.0% 17.2%
30%
10th FYP [INR9.2 billion]
11th FYP [INR23.9 billion]
Mass Rapid Transit System
Oil & Gas
Ports and Inland Water Transport
Water supply and Sanitation
Irrigation and Watershed
Railways
Telecommunications
Roads & Bridges
Power
0%
12th FYP (P) [INR56.3 billion]
Source: Twelfth Five Year Plan and Eleventh Five Year Plan, Planning Commission H!ÇhdYff]\Õ_mj]k^gjl`]Lo]d^l`>QH
The telecom sector has been witnessing increasing investment over the past 10 years. During the Twelfth FYP period, almost 17% of investments, expected to be invested in this sector, is estimated to witness a CAGR of ~10% from 2012 to 2017. Another sector, which has gained increasing prominence is the MRTS segment — with the GoI’s 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 FYP17.
Engineering, Procurement and Construction (EPC): Braving the headwinds
17
2.2 Key infrastructure sectors: investment scenario Roads and bridges India’s road network spans 4.7 million km and is the second largest in the world, behind the US, and accounts for YhhjgpaeYl]dq.-g^^j]a_`lYf\0(hYkk]f_]jljY^Õ[afl`][gmfljq&L`]k][lgjoalf]kk]\afn]kle]flg^AFJ,&-ljaddagfaf the Eleventh FYP, which was approximately thrice the investment made in the Tenth FYP18. Investments in roads and bridges (INR billion) 12,000 10,000 8,000 6,000 4,000 2,000 0 10th FYP Private
States
11th FYP
12th FYP (P)
Centre
Source: Twelfth Five Year Plan and Eleventh Five Year Plan, Planning Commission (P) – Planned
With a planned investment of INR9.7 trillion and construction intensity of 65%, the sector offers construction opportunities worth INR6.3 trillion 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 trillion is planned to be awarded through National Highway Development Hjg_jYee] F@Q)*Ç)-$af[dm\af_0$0((ceaf>Q)+ Y[lmYdYoYj\]\*(gj)$/.(ce!Yf\1$(((ceaf>Q),20.
Engineering, Procurement and Construction (EPC): Braving the headwinds
Physical progress of NHDP, in kms., at the end of October 2013 Particulars
Completed till 31 October 2013
In progress
To be awarded
Total
Golden Quadrilateral
5,846
0
0
5,846
Phase I, II
6,177
646
372
7,195
Phase III
5,750
4,762
1,685
12,197
Phase IV
324
4,268
10,242
14,834
Phase V
1,653
2,456
2,419
6,528
21
22
659
702
374
8
0
382
20,145
12,162
15,377
47,684
Phase VII Port connectivity Total Source: National Highway Authority of India
At the end of October 2013, approximately 42% of the total 47,684 km of NHDP roads was completed, while another 26% was in progress21. In order to develop the north-eastern states, the GoI has proposed construction of 6,418 km of highways with an investment g^AFJ++.&1Zaddagfmf\]jl`]Kh][aYd9[[]d]jYl]\JgY\Hjg_jYee]^gjFgjl`=Ykl K9JQH& Mf\]jl`]HjY\`YfEYflja?jYeKY\YcQgbYfY$Yf]ph]f\almj]g^AFJ1)-Zaddagf`YkZ]]faf[mjj]\ladd>Q)*$gmlg^YlglYdg^ INR1,277.9 billion sanctioned22.
Railways Af\aYfJYadoYqkf]logjckhYfkegj]l`Yf.,$.((ce$eYcaf_all`]ogjd\Ìk^gmjl`%dYj_]kljYadf]logjcafl]jekg^kar]&Af addition it is the largest passenger carrier and the fourth-largest rail freight carrier globally. In the Twelfth FYP, the total investment for railways is estimated to be INR5.2 trillion. Construction intensity in railways is around 78%, which will result in opportunities worth INR4.1 trillion during the Twelfth FYP23. Investments in railways (INR billion) 6,000 5,000 4,000 3,000 2,000 1,000 0 Private
10th FYP
11th FYP
12th FYP (P)
Centre
Source: Twelfth Five Year Plan and Eleventh Five Year Plan, Planning Commission
Engineering, Procurement and Construction (EPC): Braving the headwinds
19
Afl`]=d]n]fl`>QH$AFJ*&(ljaddagfoYkafn]kl]\afjYadoYqkYk[gehYj]\lgYlYj_]lg^AFJ*&-ljaddagf&JYadhjgb][lkafAf\aY have been typically the domain of the public sector. However, based on the success of PPP in other infrastructure sectors, l`]Af\aYfJYadoYqk`YkbmklZ]_mflglYc]kl]hklg]phdgj]l`]HHHjgml]$Yf\YaeklgYoYj\AFJ)&(ljaddagfl`jgm_`l`]HHH route in the Twelfth FYP24. Physical progress, (in kms.), during the Tenth FYP and Eleventh FYP Tenth FYP (actual)
Eleventh FYP (estimated)
Eleventh FYP (actual)
920
2,000
2,205
Gauge conversion
4,289
10,000
5,290
Doubling
1,300
6,000
2,756
JYadoYq]d][ljaÕ[Ylagf
1,810
3,500
4,501
New lines
Source: Twelfth Five Year Plan document, Planning Commission
Engineering, Procurement and Construction (EPC): Braving the headwinds
81
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