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| 53 |
EPC Industry in India: Issues and Challenges
TECHNOLOGY & INNOVATION
Chemtech Foreword
KPMG Foreword
Executive Summary
Acronyms Used
Methodology
Acknowledgements
About Chemtech
S
trong infrastructure and industry are critical for India as the country
sees leapfrogging growth. As far as both these sectors are
concerned, India is in a sweet spot, which has created multitude of
opportunities in the fields of engineering, capital goods and construction.
We sincerely hope that this report would be a useful information tool for
both industry as well as statutory bodies to gear up for the challenges for
the Indian EPC sector during this decade.
T
he Engineering Procurement and Construction (EPC) services
industry in India is faced with a large and unique opportunity due to
galloping Indian economy, and investments in public and industrial
infrastructure. The 11th five year plan has been an inflection point in
Infrastructure investments, with them contributing upto 9 percent of India’s
GDP.
The 12th plan envisages a total investment in the region of USD 1 trillion,
contributing upto 10 percent of India’s GDP. Similarly, there are large
investments expected in industrial infrastructure, whether it be Oil and Gas,
Metals and Mining and other industries.
Arvind Mahajan
Executive Director
KPMG Advisory Services Pvt Ltd This large and fast build out of industrial and plant infrastructure requires
a robust and growing engineering, procurement and construction services
industry for spreading and management of risks, efficiency and productivity
in engineering and construction and supplementing the management
bandwidth of project developers.
This report in line with the theme for Chemtech’s EPC conference, takes a
forward looking view on the future of the EPC industry in India, based on
current issues and challenges identified for the industry.
We hope that the collective insights shared in this report contribute towards
shaping future business strategies and government enablement that drive
India’s long term growth in this sector.
The EPC industry as defined here is the performance of a “unit” or the whole multiple routes, with engineering
different from the pure engineering plant. The scope of work would include companies, equipment suppliers,
or construction industry. We define engineering, supplies, construction or construction companies and project
the EPC industry as comprising of construction management, erection developers morphing in to EPC service
companies who are involved in and commissioning and providing providers by filling in the gaps.
executing projects involving multiple performance guarantees. The EPC
engineering companies in India are evolving from
disciplines with overall responsibility for
Expectations
As a fallout of the USD 1 trillion to benefit from this wave. However, the Similarly, customers now expect EPC
investment expected in infrastructure expectations far exceed the historical service providers to ramp up their
and industrial growth keeping pace, performance delivered and the EPC financial and execution capabilities
there is heightened interest among the service providers need to step up their to be able to execute larger projects,
investor community from engineering ability to win and deliver business to in time and with ever improving cost
and construction companies who stand meet structures.
these expectations.
Acronyms Used
EPC Engineering, Procurement & Construction
GDP Gross Domestic Product
PPP Public Private Partnership
TSR Total Shareholder Returns
EPCM Engineering,Procurement &Construction Management
PMC Project Management Consultant
FEED Front End Engineering Design
O&M Operation & Maintenance
JV Joint Venture
BOP Balance of Plant
BTG Boiler Turbine Generator
BOT Build,Operate & Transfer
BOOT Build,Own,Operate & Transfer
DBO Design Build & Operate
The most likely route for diversification Lastly, risk management and “no-surprises”
is through penetration in new end-use go a long way in improving investor
industries or taking the developer route, perception, and materially bringing down
which in fact is an imperative for growth in financing costs for the EPC companies.
External Internal
The key external challenges faced by the EPC industry are as The key internal challenges are about managing scale and
follows:- building capabilities to address issues emanating out of this:-
Continuously evolving contracting models and relatively slower Project Manager Empowerment, especially in Indian
adoption of the EPC-LSTK concept, especially where customers companies
are large public sector companies with in-house teams, and Balancing speed and cost control in the Procurement
large private sector developers, who have significant in-house function
project management capabilities. Creating a robust engineering organization and balancing
Order book uncertainty brought about by purely price based between efficiency and effectiveness
procurement decision making of customers, which has led to Adoption of leading Risk Management practices
the emergence of large number of hitherto unknown companies
winning relatively large contracts. While this is essential for The challenges are accentuated for two sets of companies a)
capacity building, it has led to uncertainty of order book for the International entrants and b) mid-size companies looking to
incumbent service providers. It also makes making investment scale up.
decisions more difficult for companies.
Shortage of skilled manpower for managerial as well as site Policy making can help mitigate some of the issues related to
labour. The country has its task cut-out in terms of creating skill enabling private sector for building a skilled workforce, develoing
work force for the industry. However, the onus really lies on the speedier mechanisms for speedier resolution of contractual
private sector and the EPC companies to undertake initiatives to disputes, and clarifying taxation regulations related to the
address this “supply-chain” issue. industry.
The perception on the sanctity of contracts remains divergent,
especially between Indian companies and International entrants.
There is a need to establish faith in our ability to enforce
contracts by standardization, following international practices
and setting
right dispute resolution mechanisms.
Also, they are varied and bring out the nuances of the EPC
sector across most aspects. Specific issues related to EPC
services for other end use sectors like Roads, Railways,
Metals and Mining etc are not detailed as part of this report,
though
|8 |
EPC Industry in India: Issues and Challenges
EPC or Engineering, Procurement and Construction industry not undertake turnkey construction of a plant or packages
is referred to by various terms like Construction industry, within a plant are not considered as EPC companies by this
Engineering and Construction, Contracting or just definition. It is difficult to draw a strict boundary in terms
engineering industry. Here we define the EPC industry as of what constitutes an EPC firm vis-à-vis construction or
consisting of service providers who are capable of executing engineering firms. One way to distinguish between a
projects on a turnkey basis, including detailed engineering, classical EPC company from a primarily civil construction
procurement, construction, commissioning and performance company is the construction intensity of the end-use
testing. sector, defined by Crisil as the percent of construction
spend in the overall investment towards creating an
We concern ourselves with players who are able to infrastructure or industrial asset. For example, Roads is
aggregate multiple engineering disciplines like process estimated to be close to 100 percent, while a thermal power
engineering, mechanical, structural, civil and electrical. plant is 20 percent.
Examples of such companies in India are Larsen and
Toubro, Punj Lloyd, Tata Projects, Essar Projects etc. The rest is towards equipment, mechanical fabrication,
Players who only operate in the civil construction and electrical and non-construction engineering spend.
structural engineering domain and would
|9 | EPC Industry in India: Issues and Challenges
EPC Report New.indd 9 2/20/2011 8:13:38 PM
Setting
The CONTEXT
Route 1 Route 3
Expanding scope from being engineering companies to Expanding scope from equipment supply to EPC companies.
EPC companies. The most prominent example of this route This route has been more commonly followed in the
Engineers India Limited, which is India’s leading engineering engineering and capital goods segment. Companies
company, especially in the Hydrocarbons segment and now manufacturing major pieces of equipment for a particular
offers EPC services. However, successful instances of this manufacturing process have upgraded themselves to execute
route are limited. projects around their equipments. Examples are Elecon, TRF
who are suppliers of material handling equipment and
Route 2 undertake projects in Power Balance of Plant packages
Expanding scope from being construction companies to supplying entire Coal handling systems or in industrial plants
EPC companies. This is the more commonly followed route, involving large material handling components.
wherein companies have added engineering and
procurement capabilities to their existing expertise in Route 4
mechanical and civil construction. The leading example of A relatively new development has been of project developers
this route has been Larsen and Toubro, which moved from backward integrating and setting up their own EPC divisions.
being a fabrication and construction company in to one of the This has been motivated by a desire to leverage their in-
largest and most respected EPC companies in India. house project management capabilities, and to capture the
margins typically belonging to contractors.
The 11th plan was an inflection point for the Indian policies in various sectors, policies around creating
infrastructure story. The 11th plan laid the foundation for investment clusters, land acquisition and environmental
large scale investments in infrastructure in India. Of the USD clearances. However, the chain is only as strong as the
500 billion planned to be invested in the infrastructure, at the weakest link.
current rate, it is expected that the plan will be met to 94
percent. This would amount to 9 percent of India’s GDP and Achieving this rate of infrastructure build-out calls for massive
is expected to go up to 10.25 percent of GDP. capacity building down the chain in terms of manufacturing
capacities for equipments, raw material and commodity
Mid-Term Appraisal of 11th Five Year capacities (e.g. steel, cement, fuels etc) and human
Plan
resources. Similarly, it calls for massive capacity building in
In order to achieve this plan, various pieces of the puzzle
the engineering and construction sector in terms of
need to come together, and would require all stakeholders,
reasonable number of large to mid-size contracting or EPC
the government, public sector undertakings, private sector to
companies available to be able to undertake Lump-Sum-
contribute their achievements in a co-ordinated manner. It is
Turn-Key (LSTK) and sub-contracting jobs in the country.
expected that the private sector would contribute 50 percent
by way of financing to achieve this plan. The obvious policy
Purely from a construction perspective, investment in
focus has been on building financing capacity, formulation
construction is estimated to double to INR 16,809 billion over
of PPP
1
Source: Crisil “Construction-Opinion August 2010”
The EPC industry has gained prominent share of media, largely on account of future expectations. Similarly, the large
investor and entrepreneurial attention in the last 3-5 years. investment plans have raised expectations of customers from
The stock markets have handsomely rewarded companies this industry.
operating in the infrastructure, construction and EPC space,
Investor Expectations
During the period of 2008-2010, the Total Shareholders ratios, whereas the CAGR growth demonstrated in the last 3
Return2 (TSR) by the EPC companies has been ~31 percent. years has been around 28 percent for the set of companies
TSR for the more broad-based Infrastructure index in the considered below3.
corresponding period has been only ~ 9 percent. KPMG
analysis indicates that the expectations embedded in the Hence the stock market expectation of growth of EPC
current valuations indicate that investors are expecting the companies appears to be very high. Private equity interest
leading EPC companies to grow their order books and has also been high in the industry.
revenues at a rate of ~65 percent if they
continue to maintain current profitability and capital turnover
2
TSR computation has been done for last 3 years data for companies which have been publicly listed in the last 3 years and
may be classified as engineering and construction companies
3
Source of data for analysis is Prowess, CMIE
| 13 | EPC Industry in India: Issues and Challenges
Companies
the plant / facility being built. In and perceived risks within here that given the customer
expectations and the consequent
exchange for that, the project a project, than other service
EPC business model, an EPC
developers are willing to pay providers in the pure company takes on a much
a premium for the integration Engineering, Consulting or higher level of real and
services provided. Over a period Project Management space. perceived risks within a
of time, customers have come
project, than other
to expect a reduction in the total cost of putting up the plant service providers in the pure engineering, consulting or Project
and the time schedule through the EPC route, compared Management space.
EPC
EP Report
Repor New.indd
New.ind 15 2/20/2011 8:13:41 PM
EPC game is
The
competitive,
while
EPCM game The p u r e Given its business model, an EPC Company hence has to
e n g i n e e r i n g , target profitability from each contract, since the value at risk
consulting o r in the case of overruns is very high, in proportion to its
is about PMC se rvice s expected margins. Further, the nature of the customer
trust models around against time and effort overruns delays on account of the
profitable developer and a plethora of other risks that might take them
c u s t o m e r off their initial estimates. At the same time, customers want to
relationships, and ensure that they get their plant or facility up and running, with
the desired quality
do not necessarily need profitability in each project that they in time and with no extra claims raised by the contractor.
undertake.
The “project level” value creation driver in terms of b) Manage the entire ecosystem of customers, vendors,
profitability for an EPC company is its ability to regulators, engineers and sub-contractors, to deliver within
a) Correctly estimate the detailed costs and time schedules those estimates.
of a project and
Performance improves for an EPC company with scale, as investment in world-class tools and techniques.
it is able to leverage efficiencies in procurement, overheads,
relationship building with vendors and sub-contractors. Also, The other two important aspects for value creation are
there are scale opportunities created when companies are “Growth to create future prospects” and Risk Management
able which are covered subsequently.
to invest in standardization of designs, value engineering and
D
of growth, and will be There are many other examples, of aggressive top line growth. Such
aggressively pursued in India. such strategies being followed by vertical expansion into Construction and
It is driven companies all over the country. Project Execution by publicly listed
not only from the point of growth, but manufacturing or engineering
also from the perspective of managing Route companies, is also driven by the higher
volatility in order booking. Presently, the 2 earnings multiples currently associated
established EPC companies operating V E R T I C A L E X PA N S I O N S o m e with such “high potential” businesses.
in a limited set of industries in India, companies are expanding to control The market recognizes that
are also perceiving a high risk to their more of the investment value of the construction and project management
order booking levels due to the large project, by becoming system integrators. service providers will be in short supply
number of new entrants into the EPC A large proportion of these companies and high demand in the short to
space, as well as a perceived dilution are equipment vendors, who believe medium term.
in qualification criteria from many that they have the ability to execute
customers that appears to be providing contracts on a turnkey basis. Examples As a note of caution, however, it is
a level playing field to the new entrants. of this route being followed being worth mentioning that companies who
Hence diversification has become a prevalent largely enter the Projects business from
popular mode of seeking both growth in the Power Generation equipment product manufacturing or engineering
and stability in revenue streams of EPC side. For example companies like services backgrounds, need to
companies. Elecon, TRF which were earlier carefully built the required
primarily material handling equipment capabilities for project
Route 1 vendors are now competing for turnkey
HORIZONTAL EXPANSION material handling systems
Existing EPC companies are packages. Similarly, there are
diversifying in to new end-use industry engineering companies like DIVERSIFICATION
sectors, inspired by the large EIL, who are now offering
investments coming up in these EPC/ LSTK services to their
PROMISES GROWTH
sectors. For example, Punj Lloyd, a clients.
& STABILITY IN
player in the Oil and Gas space,
expanded in to the Power Generation The vertical expansions have REVENUE STREAMS
EPC market and has recently won been driven by the desire to
orders enhance the top line and to
in the Balance of Plant EPC space. control a larger share of the EXPANSION MODES
Similarly, Tata Projects has entered in investment pie. Engineering
to
a JV with EIL to form a TEIL, to services contribute not more Horizontal
address the investments in the Oil and than 5-10 percent of the total Vertical
Gas space. The JV leverages EIL’s plant investments, and while
Backward Integration
engineering know-how, client engineering services have
relationships in the Oil and Gas sector higher margins and relatively
and the LSTK contract
International Expansion
COMPANIES WHO ENTER
International expansion for growth international level in this field. Hence
THE PROJECTS BUSINESS
has really not been a focus area for companies like Larsen and Toubro,
FROM PRODUCT
most Indian EPC companies given the Punj Lloyd, Essar Projects have won
MANUFACTURING OR growth in the domestic sector, and the business at the international level
ENGINEERING SERVICES stiff competition posed internationally and should continue to do well in the
BACKGROUNDS, NEED TO by the global majors. However, hydrocarbons space. Similarly, sub-
there remain certain sectors where contractors in this space (e.g. Petron
CAREFULLY BUILD THE
international expansion is likely. The Engineering) may also be able to
REQUIRED CAPABILITIES
Indian Oil and Gas plant engineering compete internationally, as they have
FOR PROJECT EXECUTION, and construction market has all the been working as sub-contractors to
AND IDENTIFY AND global majors present in India. Hence, global companies in India.
MANAGE THEIR RISK Indian companies competing with
EXPOSURE IN A HIGHER them have raised their game to the On the other hand, there are niche
EPC RISK
Industry inBUSINESS IN A
India: Issues and Challenges | 20 |
CALIBRATED MANNER.
EPC Report New.indd 20 2/20/2011 8:13:42 PM
EPC segments, with limited market size are quite stringent for entry.
in India, which has prompted Indian
GLOBAL ACQUISITIONS
companies in these domains to go Ta t a P ro je ct s acq u ire d
BY INDIAN COMPANIES
global. Examples of this are to be found A rt so n
Engineering, while entering into a JV
Contracting Models
The demand for the EPC industry is driven by the contracting models adopted by customers. Theoretically, the EPC industry
is driven by the need to reduce the risk for the developer, at the same time leveraging the expertise of the EPC player to
reduce
the overall execution period and cost. Some of the prevalent contracting models are mentioned below:
Package EPC
PROJECTS in
executive of a large EPC company
However, a few general trends can be suggested that it is not a healthy trend
drawn based on the above drivers, as at all. “It is leading to contracts being
follows: bagged by companies with limited the medium to long run
In the infrastructure segments, the capabilities, which will affect projects
uncertainty is the appetite for
contracting models are moving in the medium to long run”. While the
investment
towards transferring more risk to extent of truth in this prophecy can only
in manufacturing or in-house value
contractors, including operating risks be borne out over time, it is a fact that
addition. The BTG manufacturing
in the form of BOT, BOOT models. this phenomenon has increased the capacities of private sector companies
In the industrial segment, it is order book uncertainty for the
in India like that of L&T, Bharat Forge,
expected that the EPCM or even incumbents.
Thermax, BGR etc are faced with the
lesser risk models will continue to
prospects of being under utilized as
dominate. Strategic planning methods based most main plant equipment orders have
What will tilt the balance in on projected capital expenditure and
been won by BHEL and the Chinese
favour of turnkey models in the historical market shares do not throw up
companies.
industrial segment is the entry reliable revenue projections, and there
of new developers, especially is scramble to hedge risks by
This phenomenon was also seen in the
in the mid-scale segments, who diversifying and being present in as
Roads sector, where there is
have limited internal capabilities to many sectors as possible. There are
consequently now a cap on how many
execute projects without LTSK type numerous examples around this; a look
orders can be placed on a single
contracts. at the portfolio of the top 10 company, and also in the Balance of
construction companies in India Plants in Power space, where multiple
illustrates this point. companies have sprung
IIM, all we need is some land allocation and of some such high quality Project
Management schools.
the industry can do the rest”
– Senior Executive of an EPC
company
In the latest rankings5 for ease of doing business, India is ranked 134th in the world.
134 165
Source: World Bank Group, Ease of Doing Business Rankings, 2011
India scores particularly poorly in the who see the immense potential of India, design engineering and consultancy
establishment of new business and as also reflected in the FDI flowing firms, while evolving it strategy for
construction, closure of businesses, in to the country. However, for many emerging markets recently, found these
and enforcement of contracts. While, global companies contemplating entry rankings to be particularly forbidding in
one may argue that these rankings into India, these are not encouraging its evaluation of India’s attractiveness
mean little to investors and companies indicators. One of the world’s leading as
a business location.
Risk Assessment of aggressive delivery periods, the primary they will have to accept terms from
Typical Contracts reason for such evaluations, we found, the customer. Interestingly, as a senior
During a recent engagement for an were the typical contractual clauses, executive in in an EPC firm told us,
Indian EPC client, we studied the risk including payment and retention terms the ability to manage within a weakly
evaluation frameworks in use by which detract international companies enforced regulatory framework is a
international majors. We found that from taking up large contracts in India. competitive advantage for Indian EPC
many international companies would Moreover, many EPC companies find companies who have learnt to operate
rate typical Indian projects as “No-Go”. arbitration as a lengthy process in India, under these conditions. For example,
While the reasons would typically also and hence the risk averse companies these companies have realized that
include issues related to logistics assume that in case of any disputes, Liquidated Damages are rarely
constraints and overly enforced
by Public Sector clients. Further,
new infrastructure developers, when
“Managing within a weakly enforced regulatory
dealing with large experienced EPC
framework is a competitive advantage for firms operating in India, find it
Indian companies” difficult to prevent extra claims, and
- Senior Executive at an EPC costs from escalating.
company
5
http://www.doingbusiness.org/rankings
BROAD PARAMETERS TO
ANALYZE CONSTITUTION OF
AOP
TWO OR MORE PERSONS
VOLUNTARY COMBINATIONS
A COMMON PURPOSE OR
COMMON ACTION WITH OBJECT
TO PRODUCE PROFITS OR GAINS
SHARING OF PROFITS AND
LOSSES
JOINT AND SEVERAL LIABILITY OF
THE MEMBERS; AND
SOME KIND OF SCHEME FOR
COMMON MANAGEMENT
| 28 |
EPC Industry in India: Issues and Challenges
The key internal challenge facing the the director of one of India’s leading Most mid-size fast growing EPC
Indian EPC industry today is issue of engineering and construction company. companies in India are facing issues
being able to manage scale and The glue that binds all these together related to empowerment of Project
diversity, with the rapid growth in is Project Management . Project Managers and the primacy of the
business and diversification into new Management is a science, with its own Project Management function in an EPC
business areas. Other issues around school of tools and techniques, both firm.
improving the quality and value in the scientific and the behavioural
addition of engineering, domain. As a result, projects are de facto mana-
implementing leading practices in ged by Business Unit Heads or other
project management, implementing very senior professionals,
modern construction methods are “E+P+C is not equal to reducing the designated
also specific challenges facing the EPC” project managers to co-
industry players, but we believe these “In our company, project managers ordination roles, and resulting in senior
will get addressed in natural course are GODs” is the common refrain management being involved in day to
as the EPC industry matures in India. in international EPC or engineering day project issues.
However, the core challenge facing the
companies. However, this is not the
mid-size, fast growing companies are case in Indian EPC companies, as Further, with business growth, senior
around effective project management, is evident from various perspectives executive time available for a specific
management of growth and scalability provided by Indian companies as well project becomes limited, resulting in
without compromising on project and as developers. A leading Hydrocarbon loss of execution control. We suggest
business risks, and developing systems major, in an industry forum, called upon that fast growing mid-size companies
and processes to make companies the EPC companies in India to develop relook at their organization structures
more scalable and less dependent on better project management talent, and and policies to ensure that their project
individuals. especially requested the Indian offices managers are empowered. They should
of global firms to rotate local talent have accountability for project cost and
Project Management through global assignments to develop time control, and adequate control over
“E+P+C is not equal to EPC” said these skills. decisions related to the project.
ORGANIZATION
As we discussed earlier in evolution of Engineering which being a knowledge EPC companies, who would like to
EPC companies, most EPC companies based function requires careful design balance efficiency with effectiveness.
are likely to evolve fromthe of organization structures, career paths For example, companies tend to
construction or the developer route. In and development strategies, and a ce n t ra liz e “e nd - us e / p ro ce ss ”
both the cases, the key capability gaps different approach to performance independent engineering disciplines
would remain in the domain of assessment and management as like civil, structural and electrical, while
engineering. While
Project compared to the other functions in the the other disciplines are de-centralized.
Management is the execution arm, organization. However, there is no right answer, it
engineering does and should function needs to be carefully assessed in light
as the brain, adding competitive Also, with rapid diversification, the of the company’s portfolio, strategy and
advantage centralization vs. decentralization culture.
in terms of standardization, value question stares at managements of
engineering and technology leadership.
Risk Management
Less than one third of the survey respondents in KPMG-PMI Infrastructure report,
had confidence in their risk management capabilities.
The EPC business model revolves risks. Hence it is absolutely critical for processes for risk identification and risk
around taking ownership of project EPC companies to establish robust management. Such a process would
address risks identified
at both the sales and
execution stages of the
project.
Power Generation
Power Generation Units – especially term. The thermal power and nuclear equipment sourcing, engineering and
thermal power plants are likely to be power units both have relatively lower integration management as compared
amongst the largest opportunities for civil construction component and to other infrastructure classes like
EPC players in the short to medium require superior capabilities in terms of Roads,
Ports etc.
Demand Outlook
By 2015, India would need to increase significantly across regions and is additions was conducted based on a
its current generation capacity of 152 estimated as 62 GW in Western variety of sources such as the CEA
GW to 205 GW (an increase of 53 GW) Region, database for upcoming additions,
till year 2014-15 for meeting the base 62 GW in Northern Region, 54 in the industry reports and KPMG’s internal
load capacity requirement to support Southern Region, 24 GW in the assessment. Only those plants which
growth of economy at 8 percent and Eastern Region and 3 GW in the North have reached an appropriate state
address unavailability of power in many Eastern Region of India in the year of readiness for commencement of
parts of the country. To meet the peak 2014-15. This projection implies an commercial operations within the period
load capacity requirement, the installed average annual generation capacity FY 2010-15 have been considered
capacity requirement would need to be addition at the rate of 16 GW per year for capacity addition. Effective supply
more than 270 GW. during the period addition for each year of the period
2007-08 to 2016-17 (covering two 5 (FY 2010-15) was calculated based on
The generatio n capacity gap to Year Plan periods in India viz. XIth and the total capacity addition. We expect
meet baseload requirements varies XIIth). During the IXth (1997-2002) and a total capacity addition of 99 GW in
Xth (2002-2007) 5 Year Plan periods, this period. Assuming a similar rate,
the average annual generation capacity
addition in the
Expected Capacity Addition (GW)
country has been this translates in to an approximate
3.6 GW and 4.2 opportunity size of INR 500,000 crore
GW respectively. (i.e. over USD 100 Billion) towards
The poor capital expenditure for these plants.
performance in the The majority of this investment will be
past is attributed towards thermal power plants, of which
to implementation 80 GW are likely to be commissioned
d e l a y s 6 b y t h e by
public sector utilities 2015. The opportunities for EPC
coupled with hitherto players, equipment vendors are for
limited private sector projects which are likely to get
participation. commissioned beyond
2012-13 as they are the ones which are
Source: KPMG Research and Analysis A bottom up mostly likely yet to be tendered out - for
analysis of balance of plant equipment if not main
6
And not necessarily poor planning
expected plant plant equipment.
The thermal power industry has the entire sector is favourably inclined generation projects in their planned
been one of the fastest to adopt the towards contracting project execution portfolio.
EPC model on a LSTK basis. The current
landscape While complete power plant as a single
The Power Generation industry has indicates that large public or private EPC/ LSTK package is still rare in the
seen one of the fastest adoption rates sector generation companies like Indian scenario. Moreover, the trend
in terms of EPC contracting model. NTPC, given their internal of not awarding the entire EPC job (i.e.
Prior to the reforms in the power sector engineering and project management both BoP and BTG of a power plant) to
and the policies around public private talent pool, will continue to buy one single service provider has been
partnership models, power plants were individual packages, keeping the driven by:
integration to themselves.
being constructed by the state level However, they may combine multiple Distinct set of competencies required
generation companies and NTPC. The power plants in their portfolio, going for for the BTG and BoP packages.
tariff regime and operating models of combined bids to get the best prices While BTG is technology, equipment
some these power generation entities at and reducing transactional bidding and manufacturing intensive, BoP
that time did not require utmost costs. NTPC floated a tender for requires complex integratio n
attention to projection completion on different packages for 11 units of 666 capabilities of sub-systems to be
schedule and to cost budgets. MW each, the award of which is likely sourced, erected and commissioned
However, with the competitive power by first quarter of 2011. With this move, from different sources.
pricing policy PPP bids, - wherein one NTPC is expecting to bring down the A single LSTK package would amo-
can participate in developing power, cost/MW of setting up power plants, unt to a range of around INR 6000
only if you are the most efficient on which many experts believe today is crores for a typical 2X660 MW
capital cost as well as operating cost - at about 5.5 project, requiring EPC companies
has led to increased focus on crore/MW . State level generation
7
with large balance sheet and risk
executing projects on time and within companies, most of whom are currently bearing capability. It will be difficult
budget. Most projects are being on the twin package mode (BTG and to find enough number of such
financed by project finance companies BoP), may continue to procure in that contractors to get a competitive bid.
and financial institutions, who demand manner.
that developers manage the project
budget escalation risks. The trends in the private sector are
interesting, where a distinction needs to
Internal teams at even established be made between large business
generation companies are stretched, groups like Reliance ADAG, Essar
and at the same time, there have been Group, JSW Group, Sterlite Group,
a large number of new power sector GMR Group, Lanco etc who are likely
entrants, some with limited background to build large portfolio of power projects
in executing large projects. Hence in the future, vis-à-vis smaller
players with fewer
7
Source: http://www.sify.com/finance/ntpc-likely-to-float-rs-18-000-cr-tender-news-equity-km4bvDidjib.html
9
Report of the Committee to study Design Features of Boilers and Auxilaries being sourced from Chinese Manufacturers,
September 2008
Demand Outlook
on the
importance of this segment to the VII Plan VIII Plan IX Plan X Plan XI
Plan*
Indian economy.
Actual expenditure as
Planned Expenditure Actual Expenditure
% of planned outlay
*XI plan actual expenditure is only up to August 2009
Oil and gas is one of the few sectors Source: Planning Com m ission
which
exceed the investment targets as laid increase in planned expenditure. This is and private companies have announced
out in the Government’s five year mainly because of aggressive their investment plans in the various
plans. For instance, in tenth five year investment plans by oil and gas streams of the oil and gas sector such
plan, the actual expenditure was 112 companies in India. The actual as exploration and production, oil and
percent of planned outlay at INR expenditure during the first two years gas pipelines, petroleum refineries,
1,08,003 crores. Similarly, during the and 4 months of eleventh plan (up to liquefied natural gas, city gas
midterm appraisal of eleventh plan, August 2009) is INR 1,08,625.91 crores distribution and petrochemicals. All
government has to revised its planned which is 47.38 per cent of the plan these investment plans would create a
outlay to INR 2,69,461 crores from INR approved Outlay. The Oil and gas robust opportunity for EPC companies.
2,29,278 crores, a 17 percent sector is poised for growth. Many public The total value of
the EPC10 opportunity in India for Oil
EPC Investment opportunity in Oil & Gas Sector and
Gas sector can be pegged at USD 60
Investment (in USD Billion)
2 60-6 5
70
3-4
60 21-23
3 - 65 billion in the next five years. On the
50 USD 18 - 20 billion has been envisaged
in the next five years for development
12
30 of offshore fields and laying pipelines.
18 -20 1 A substantial part of this investment
20
is expected to be done by ONGC in
10
developing the east coast gas
0
discoveries and maintaining production
from existing discoveries. Moreover, the
government is
11
Including offshore engineering centers supporting global projects
12
Not an exhaustive list of projects, examples provided only to demonstrate instances of work executed in India
Technology
Typical Contract
Mode
Opportunity Area
Wastewater Treatment
Water Management
Agricultural Demand
Contract Definition
Turnkey Contract to
Management Private se
Contract
The global plant market was valued at player participation19. form the largest portion of the market. A
USD 1.6 trillion dollars as of 2009, of chart representing the breakup between
which nearly USD 730 Billion dollars Of this power, water treatment and oil various sectors in the construction
worth of projects were open to foreign exploration and production (E&P) industry is given below.
activity
20
Going forward, the “international trillion dollars by 2015. Asia Pacific and expected to contribute to about 58 % of
bidders eligible” component of the the Middle East in particular will be the all orders generated globally.
global plant key growth drivers for this region and
market is expected to increase to 1.11 are
19
Techpetro Asia Newsletter (April 5, 2010)
20
Techpetro Asia Newsletter (April 5, 2010)
21
http://cdiver.net/news/south-korean-firms-taking-work-in-the-middle-east/
| 45 | EPC Industry in India: Issues and Challenges
22
http://www.khl.com/magazines/international-construction/detail/item61017
Key Enablers for Korean Construction Companies and Comparison with Indian Industry
23
http://www.koreanewswire.co.kr/?job=news&no=345887,
http://www.businessweek.com/investor/content/oct2007/pi20071010_252795_page_2.htm
http://www.investkorea.org/InvestKoreaWar/work/journal/content/content_main.jsp?code=4580101
25
Source: Company Websites
Apart from the above, we sincerely thank the members of CHEMTECH Advisory Board for their initial direction, our clients
in the Infrastructure and Industrial Markets sectors who provided validation on specific issues in the report.
This report also would not have been possible without the commitment and contribution of certain individuals within KPMG.
The initiative for this report was led by Vishal Mehta, under the guidance of Biswanath Bhattacharya and was supported
by Abhijeet Deshmukh.
Finally, we thank CHEMTECH FOUNDATION team for continual support in facilitating and participating in industry
interviews.
KPMG Contacts
Arvind Mahajan
Executive Director and Head
Business Performance Services
e-Mail: arvindmahajan@kpmg.com
Tel: +91 22 30901740
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