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 testimony to the tyranny of the present. Yet, as famous poet people to collect wood and don’t assign PB Shelley suggested more than two hundred years ago: “If them tasks and work, but rather teach winter comes, can spring be far behind?” them to long for the immensity of the sea.” Global rating and consulting institutions are unanimous We belong to and represent an industry in saying that the longer-term prospects for the Indian that is literally building a new 21st century economy remain extremely bright. And let us not forget India driven by aspirations of tens of one fact — when the famous BRICS report released early millions who seek a better life, a better livelihood and more this century predicted that India will become the second- opportunity to build on their dreams. Hidden in the string largest economy of the world by 2050, it was based on of highways, factories, airports, ports, metro rail networks, the assumption that GDP growth rates will average 5% to dams, commercial towers and nuclear power plants is the 6% a year. The fact is, India will build infrastructure across potential for India to forge its most successful partnership the board and both domestic and foreign investors will ever — that between entrepreneurs and workers. As the EPC hYjla[ahYl]afl`akka_faÕ[Yfl]f\]Yngj$bmklYkl`]q`Yn] industry moves toward more maturity and more established done in China since the late 1980s. The sheer numbers are norms and protocols, let us never forget the unique ability of too tempting for a smart investor to ignore. I do not want to this industry to transform India. Even though we live in the deluge you with statistics right here; so allow me to quote age of information and information technology, it is bricks bmklgf]fmeZ]j&A^Af\aYaklgmk]Yeg\]kl)(g^alk?<Hlg and mortar that will craft the second-largest economy of invest in Infrastructure, we are talking of annual investment the world and the largest middle class consumer base in the in excess of US$200 billion a year. It has been estimated world in a decade or two. that India’s GDP will touch US$10 trillion by 2020. That translates into infrastructure investment of at least US$1 There is always the temptation to be swayed and spooked by trillion a year. As India builds more to feed more dreams, the present. To that extent, the present state of the Indian both GDP and infrastructure investment will keep growing. economy does appear cloudy and depressing. After years of a more than impressive surge, GDP growth rate has dipped G^[gmjk]$^gjl`]k]dgf_%l]je\j]YeklgZ]j]Ydar]\$hgda[q lgY\akYhhgaflaf_-Yq]Yj&:gl`l`]Õk[YdYf\[mjj]fl makers will need to play a more proactive role to become Y[[gmfl\]Õ[alkl`j]Yl]flg\]jYadl`]_jgol`ege]flme& catalytic agents. As this intensively researched report will NajlmYddq\gmZd]%\a_al[gfkme]jafÖYlagfakeYcaf_da^] show, almost all the bottlenecks faced by the EPC industry \a^Õ[mdl^gj[alar]fk&9f\l`]e]\aYakh]hh]j]\oal`j]hgjlk can be swept away by more nuanced policies emerging of how investors and entrepreneurs are holding back when from Delhi and state capitals of the country. If that happens, it comes to letting their money talk with India. Problems the EPC industry will not only build a swanky, modern and j]dYl]\lg\]dYqk$[gklgn]jjmfk$ÕfYf[aYd[dgkmj]Yf\ forward-looking India, but also harness the skills of 10 million hjgÕlYZadalql`Yl[gf^jgfleYfq`a_`hjgÕd]=H;hjgb][lkYj] youngsters who will enter the work force every year. Mr. Tejasvi Sharma Managing Director EY Dear Reader, afn]klgjk$Zmll`]_dgZYd[gfkljm[lagfeYbgjkeY\]kljYl]_a[ investments, further fuelling the growth story. The Government of India’s continued focus on developing India’s infrastructure has The increase in EPC activity is evident from increasing order resulted in an ambitious target of INR56.3 ZggckYf\j]n]fm]kg^l`]dYj_]%Yf\ea\%kar][gfkljm[lagf trillion in the Twelfth Five Year Plan. Out players. However, the sector is currently facing headwinds of this amount approximately 50% of the from several directions. We have observed that the growth in investments are to be contributed by the j]n]fm]kakfglljmdqj]Ö][lan]afl`]Zgllgedaf]$hjaeYjadq hjanYl]k][lgj&;gfka\]jaf_l`akeYbgjhgl]flaYdghhgjlmfalq \m]lgka_faÕ[Yfl[gklgn]jjmfk$j]_mdYlgjqZglld]f][ck in the infrastructure segment, the EPC sector is likely to and aggressive bidding positions taken by a few of market Z]Z]f]Õl]\&L`]=H;eYjc]lg^Af\aY`YkZ]]foalf]kkaf_ players. With increasing working capital requirements and consistent changes over the last few years with increased the resultant increase in leverage, the EPC players are hjgb][lkar]Yf\[gehd]palq$af[j]Ykaf_hjanYl][da]flkYf\ left with limited opportunity to raise further capital to fuel entry of several foreign players. growth in the current scenario. PE funds too are cautious with their new investments as there is limited opportunity of In the current market landscape, EPC contractors have a exit due to unfavorable capital markets. Furthermore, the healthy mix of both government and private sector clients, j][]fllmjegadafl`]ÕfYf[aYdk][lgj$af[dm\af_l`]jmh]] as compared to their heavy dependence on government \]hj][aYlagf$`Ykaf[j]Yk]\l`]d]n]dg^mf[]jlYaflqafhjgb][l clients until a few years ago. The concept of EPC has been ]p][mlagf&L`]j]^gj]$l`]k][lgjakj]]daf_mf\]jka_faÕ[Yfl evolving over the last few years and has emerged as a liquidity constraints. preferred form of contracting by clients along with PPP eg\]dk&=n]fo`]fhjgb][lkYj]YoYj\]\gf:GLZYkak$ In this turbulent market situation, the contracting companies there is an EPC opportunity for market players. Currently, have to realign their scaling strategies and focus on clients prefer to go with a single point responsibility thereby, affgnYlagf$hjgb][leYfY_]e]flYf\hjgÕlYZd]_jgol`Yk reducing the interface and the overall duration. This has compared to order book and revenue growth. Only those been further strengthened by the fact that the highway o`g[Yfkmjnan]l`]`]Y\oaf\koaddZ]YZd]lg[YhalYdar]gf sector, after several years of operating in the PPP mode, the opportunity being provided in the Twelfth Five Year Plan. ak[gfka\]jaf_lgYoYj\egj]hjgb][lkgfl`]=H;eg\]d& JYlagfYdarYlagfafl`]Za\\af_hjg[]kkakimafl]kk]flaYdYl Kh][aYdar]\=H;k][lgjkkm[`YkeYjaf]$lmff]daf_$`q\jg$ l`akbmf[lmj]&ÉHjgÕlkÊYf\Éhjgb][lkÊf]]\lgZ]eYfY_]\ industrial, and oil and gas continue to prefer awarding ]^Õ[a]fldq&;mjj]fldq$l`]eYjc]lakafY^jY_e]fl]\klYl] hjgb][lkafl`]=H;eg\]& and needs to undergo a high level of transformation if future sustainability is to be assured. M&A activities in the market When the Tenth Five Year Plan called for inclusion of place are expected to improve with consolidation on the “Chapter on Construction” in the National Plan, the success `gjargf&;gfkgda\YlagfakYdkgdac]dqlgj]da]n]hj]kkmj]Yf\ klgjq`Y\bmklZ]_mf&L`]]jYoalf]kk]\hjanYl]]imalq provide exit options to a set of investors. investments in some of the largest construction groups of our country. The companies, with fresh capital infusion, This report discusses the potential opportunity; recent ]p`aZal]\ka_faÕ[YfllmjfYjgmf\koal`j]n]fm]kemdlahda]\ trends witnessed by the sector, challenges for re-enforcing ka_faÕ[Yfldq&=mh`gjaY[gflafm]\Yll`]Z]_affaf_g^ sustainability and possible ways to overcome the challenges. l`]=d]n]fl`Õn]q]YjhdYfo`]fea\%kar]\[gehYfa]k O]`gh]qgm]fbgqj]Y\af_l`akj]hgjlYf\Õf\alafka_`l^md& klYjl]\lgYlljY[lafn]klgjkÌafl]j]kl&Fglgfdql`]ÕfYf[aYd Sushi V. Shyamal Partner, Transaction Advisory Services Contents Introduction 06 Opportunities for EPC business in India 14 Sector trends 38 Key challenges 52 Overcoming challenges 62 Conclusion 70 Supplemental 72 Abbreviations 78 Heading 1 Introduction 6 Engineering, Procurement and Construction (EPC): Braving the headwinds 1.1 Understanding EPC From contracting to EPC – Why? Over the years, the infrastructure business has witnessed several forms of contracting. The old models of contracting have _an]foYqlgf]oeg\Ydala]koal`l`]hjgb][lkZ][geaf_egj][gehd]pYf\jakcd]n]jY_af_Y\ghl]\Zql`]gof]jk&;gfljY[lk `Yn]]ngdn]\^jgeal]ejYl]hY[cY_]klgdmehkme$Õp]\%hja[]$Õp]\%lae]Zaf\af_[gfljY[lk&KdgodqZmlkl]Y\adq$l`]gfmkg^ hjgb][leYfY_]e]fl`Ykk`a^l]\^jgel`]gof]j'\]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 Gof]j'\]n]dgh]j`Yklg[ggj\afYl]oal`k]n]jYd l`]hjgb][l\]n]dgh]j participants along with the contractors Level of Contractor is free to work with limited supervision Gof]j'\]n]dgh]jlgmf\]jlYc]Y\Yq%lg%\Yqkmh]jnakagf Involvement delivering according to agreed milestones and of most of the activities kh][aÕ[Ylagfk 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$=H;E[gfljY[lgjZj]Yckl`]]flaj]hjgb][lYf\ YoYj\kk]hYjYl]=H;hjgb][lkafkeYddhY[cY_]k& 8 Engineering, Procurement and Construction (EPC): Braving the headwinds Contractual relationship of EPC and EPCM model EPC model EPCM model Owner Owner EPC EPCM contractor contractor Process Process Vendors Contractors Site Services Vendors Contractors engineering engineering Sub- Sub- contractors contractors Afl`]gf_gaf_Lo]d^l`Õn]q]YjhdYf$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& ) ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af' hdYfk'hdYfj]d'Lo]d^l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+ Engineering, Procurement and Construction (EPC): Braving the headwinds 9 1.2 EPC players in India Currently, the Indian EPC sector, with its rising prominence and changing dynamics, has more than 150 participants and a multitude of stakeholders. Players have carved out a niche for themselves and have developed their reputation, based on their sector focus. Some have also divested their operations in other sectors, thereby segregating the entire EPC space, based on operational segments. Segment Major domestic players Major foreign players Insight Infrastructure / Larsen & Toubro Limited, Hindustan Isolux Corsan, ITD Increasing opportunities in General Contracting Construction Co. Ltd., Gammon India, IVRCL, Cementation India Limited, the infrastructure sector Kaehd]pAf^jYkljm[lmj]Dl\&$?YqYljaHjgb][lkDl\&$ ABE Af\aY!Af^jYkljm[lmj] have attracted many new Patel Engineering Ltd., Era Infra Engineering Limited, Leighton, ACS domestic as well as new Dl\&$KY\Z`Yn=f_af]]jaf_Daeal]\$FY_YjbmfY Construction Group Ltd., entrants to this space. Construction Company Ltd. Vinci Construction Building DYjk]fLgmZjgDaeal]\$K`YhggjbaHYddgfba Arabian Construction KhY[]akmfgj_Yfar]\af construction — ;g&Dl\&$9`dmoYdaY;gfljY[lk Af\aY!Dl\&$:D Company, Leighton, nature and is dominated Residential and Kashyap & Sons Ltd, B. G. Shirke Construction Samsung Engineering primarily by local Commercial Technology Private Limited, B. E. Billimoria & contractors. Segments Co. Ltd., BSEL Infrastructure Realty Limited, Consolidated Construction Consortium Ltd., Mackintosh Burn Ltd., Man Infraconstruction Limited, Supreme Infrastructure India Ltd., Unity Af^jYhjgb][lkDl\&$NYk[gf=f_af]]jkDl\& Oil & Gas EPC DYjk]fLgmZjgDl\&$HmfbDdgq\Dl\&$H]ljgf Aker Solutions, Leighton Ka_faÕ[Yfl[geh]lalagf =f_af]]jaf_;gfkljm[lagfDaeal]\$=kkYjHjgb][lk Welspun Contractors Pvt. from foreign participants, Af\aY!Daeal]\$E[FYddq:`YjYl=f_af]]jaf_;g& Ltd., Bechtel Corporation, especially for offshore Ltd., Leighton, Engineers India Limited, Fabtech Linde Engineering India contracts; business Hjgb][lk=f_af]]jkDl\&$BYa`af\Hjgb][lkDl\& Pvt. Ltd., Tecnimont ICB, eg\]d^g[mk]\gfhjgb][l Samsung Engineering, Uhde management rather than India Limited, direct execution Power EPC Power EPC Doosan Power Systems, Market segmented into :@=D$DYjk]fLgmZjgDl\&$LYlYHjgb][lk Dongfang Electric niche areas; few players with General Power Ltd., BGR Energy Systems Ltd., Gammon India, Corporation, Harbin Power presence across both BTG EPC and Power ?YqYljaHjgb][lkDl\&$E[FYddq:`YjYl=f_af]]jaf_ Engineering Co. Ltd., and BoP Transmission Co. Ltd., Shriram EPC Ltd., Tecpro Systems Ltd., KEPCO, ThyssenKrupp Cethar Ltd. Industries India, Alstom T&D Dominated by equipment Af\aY$9dklgeHjgb][lkAf\aY manufacturers who have Power Transmission Limited, Mitsubishi Heavy forayed into EPC as forward EMC Ltd., Jyoti Structures Ltd., Hythro Power Industries, Toshiba Thermal integration Corporation Ltd., GET Power Pvt. Ltd., KEC and Hydro Power Systems International Ltd., Kalpataru Power Transmission Company, Ansaldo STS, Global players entered the Daeal]\$BE;Hjgb][lk Af\aY!Dl\&$L][`fg Babcock & Wilcox market in JV with Indian Electric & Engineering Company Ltd., Unitech players to enhance their Transmission equipment business Specialized EPC K`jajYe=H;Dl\&$;gYklYdHjgb][lkDl\&$ ABB India Ltd., Uhde India Comprises niche players Navayuga Engineering Company Ltd., Hindustan Ltd., Toyo Engineering in segments such as Marine, Industrial, Construction Co. Ltd., Patel Engineering India Ltd., Continental hydel tunneling, marine Railways, Ltd., Afcons Infrastructure Ltd., Simplex Engineering Corporation, construction, or industrial Tunneling, Mining Infrastructure Ltd., McNally Bharat Engineering Marti India Private Ltd., construction etc. Co. Ltd., Petron Engineering Construction Ltd., AG Group, Samsung CYdaf\]]JYadFajeYf =f_af]]jk!Daeal]\$9EJ Engineering, ITD Construction Ltd. Cementation India Ltd. 10 Engineering, Procurement and Construction (EPC): Braving the headwinds 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 Access to knowledge capital for In 2007, Shriram EPC formed a JV with a Belgium-based company. with existing India entry The JV enabled it to tap the fast-growing wet cooling and air pollution players :]f]Õlg^ZjYf\]imalqg^l`] control market in India2. existing player In December 2010, Leighton International Limited and Welspun Acquisition of Advantage of existing resource Group formed a strategic JV to pursue EPC opportunities. Welspun an Indian entity base `Y\Y[imaj]\Y+-klYc]afD]a_`lgf;gfljY[lgjk Af\aY!Hnl&Dl\&^gj INR4.7 billion3. Scale of operations achievable through acquisitions Af*()($L`]KYm\a:afDY\af?jgmh K:?!g^KYm\a9jYZaYY[imaj]\Y *(klYc]afEYqlYkAf^jYkljm[lmj]Dl\& EAD!^gjAFJ+&(Zaddagf4. In November 2011, a Germany-based company acquired a small Oil & Gas EPC company5. In January 2012, Vinci entered the Indian market by buying a 100% stake in NAPC6. Af9hjad*()*$@g[`la]^]fl]j]\YfY_j]]e]floal`;gYklYdHjgb][lk Daeal]\lgbgafldqZa\^gjhjgb][lkafAf\aY7. 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. * ÉK`jajYe=H;^gjekn]flmj]oal`:]d_aYf?jgmh$ÊAf\aYf:mkaf]kkAfka_`l$)0>]ZjmYjq*((/$naY>Y[lanY¡*()*Af^gjeYla[k Af\aY!Dl\& 3 “Welspun, Leighton forms JV for infra business,” DNA - Daily News & Analysis, 25 December 2010, via Factiva, © 2010. Diligent Media Corporation Ltd. 4 “SBG buys 20% stake in Maytas Infra,” Mist News, 4 August 2010, via Factiva, © 2010 Misr Information Serivices and Trading. - É?]jeYf]f_af]]jaf_ÕjeY[imaj]kKmjYl[gfkljm[lagf[gehYfq$ÊL`]Lae]kg^Af\aY$,9hjad*()*$naY>Y[lanY¡*()*L`]Lae]kg^ India Group 6 “French company Vinci buys NAPC,” The Hindu, 12 January 2012, via Factiva, © 2012 Kasturi & Sons Ltd. / É@g[`la]^]fl]jkaflgY_j]]e]floal`;gYklYdHjgb][lk^gjl][`fgdg_qYkkaklYf[]$ÊThe Economic Times, 10 April 2012, via Factiva, © 2012 The Times of India Group Engineering, Procurement and Construction (EPC): Braving the headwinds 11 Comparison of investments in FYPs Tenth FYP (2002–07) Eleventh FYP (2007–12) Twelfth FYP (2012–17) (INR trillion) (INR trillion) (INR trillion) Planned investments 8.7 20.6 56.3 Actual Investments 9.2 23.9 NA EPC opportunity 4.5 11.4 26.7 Sectoral mix Power: 30% Power: 33% Power: 32% Roads: 17% Roads: 19% Roads: 17% Telecom: 16% Telecom: 16% Telecom: 17% Railways: 11% Railways: 8% Railways: 9% Irrigation: 13% Irrigation: 10% Irrigation: 9% Ports: 3% Ports: 3% Ports: 3% Oil & Gas: 2% Oil & Gas: 2% Oil & Gas: 4% Others: 8% Others: 9% Others: 9% ~50% spend on power and Power and roads consistently Increased thrust on roads — above targeted amounting to ~50% of planned telecommunications — increased achievement in power sector expenditure — added focus on expenditure on ports, oil and telecom gas pipelines Source: Eleventh and Twelfth Five year plan, Planning Commission @go]n]j$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&<m]lgmfj]Ydakla[Za\kZqf]o]fljYflkafl`]af\mkljqYf\ YdkgZql`]]klYZdak`]\hdYq]jk\m]lgafl]fk][geh]lalagf$k]n]jYdhjgb][lkYj]klm[cafZ]lo]]f& L`]=H;[gehYfa]k`Yn]lgj]khgf\dggcaf_Yll`]YZgn][`Ydd]f_]k$Éhjgb][lkÊYf\ÉhjgÕlkÊf]]\lgZ]eYfY_]\o]ddafl`] ]paklaf_hjgb][lkYf\ja_`lk]d][lagfg^hjgb][lkYdgf_oal`[ge^gjlYZd]imgl]kafZa\\af_oaddZ]l`]c]qlgkm[[]kkaf^mlmj] hjgb][lk&EYfY_af_ogjcaf_[YhalYdoaddZ][jm[aYd^gjl`]=H;[gehYfa]kYf\oaddYdkg\][a\]l`]^Yl]g^l`]ajkmjnanYdafl`]k] tough times. Apart from construction capabilities domestic players have to transform and raise capabilities in engineering and hjgb][leYfY_]e]floal`l`]ja_`ll][`fgdg_a[YdYddaYf[]k& 12 Engineering, Procurement and Construction (EPC): Braving the headwinds Engineering, Procurement and Construction (EPC): Braving the headwinds 13 2 Opportunities for EPC business in India 14 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% 2%2%1% Power Ports and Inland Water Transport 3% 5% Roads & Bridges Oil & Gas 32% Telecommunications Mass Rapid Transit System 9% Railways Airports Irrigation and Watershed Storage 9% Water supply and Sanitation 17% 17% Source: Twelfth Five Year Plan document, Planning Commission 0 ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç>Ykl]j$Egj]Af[dmkan]Yf\KmklYafYZd]?jgol` Ngdme]A!$ÊPlanning Commission website$`llh2'' hdYffaf_[geeakkagf&fa[&af'hdYfk'hdYfj]d'Lo]d^l`hdYf'h\^'ngdW)&h\^$Y[[]kk]\*-G[lgZ]j*()+& 1 ÉJ]hgjlg^l`]ogjcaf__jgmhgf[gfkljm[lagf^gjl`]=d]n]fl`Õn]q]YjhdYf *((/%*()*!$ÊPlanning Commission website$`llh2'' hdYffaf_[geeakkagf&fa[&af'YZgmlmk'[geeall]]'ojc_jh))'o_))W[gfkljf&h\^$Y[[]kk]\gf(,Fgn]eZ]j*()+& Engineering, Procurement and Construction (EPC): Braving the headwinds 15 Construction opportunity in the Twelfth FYP 10 Sector Total planned investment in Construction intensity10 Construction opportunity Twelfth FYP (INR billion) (INR billion) Roads and bridges 9,694.1 65% 6,301.1 Railways 5,218.0 78% 4,070.0 Mass Rapid Transit System (MRTS) 1,241.6 78% 968.4 Ports and Inland Water Transport (IWT) 1,977.8 50% 988.9 Airports 877.1 42% 368.4 Water supply and sanitation 2,549.5 66% 1,682.7 Irrigation and watershed 5,043.7 75% 3,782.8 Power 18,202.4 38% 6,916.9 Telecommunications* 9,439.0 10% 943.9 Storage* 584.4 50% 292.2 Oil & Gas 1,489.3 25% 372.3 Total 56,316.9 26,687.7 Source: Twelfth Five Year Plan document, Planning Commission, EY research, Engineering, Procurement and Construction (EPC): Driving _jgol`]^Õ[a]fldq$ 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. Planned infrastructure investments The GoI has been strengthening its focus on infrastructure development to drive the growth of the economy at a sustainable pace. It has increased its infrastructure spend as a percentage of the country’s GDP from 5.2% during the Tenth Five Year HdYf*((*Ç(/ L]fl`>QH!lg/&.\mjaf_l`]=d]n]fl`>an]Q]YjHdYf*((/Ç)* =d]n]fl`>QH!&L`akaf^jYkljm[lmj]kh]f\ak expected to increase to more than 9% of the GDP during the Twelfth FYP 2012–1712. Since the beginning of the Twelfth FYP, the Central and state governments have been particularly pushing the mega af^jYkljm[lmj]Yf\af\mkljaYdhjgb][lk ]p[]]\af_afn]kle]flkg^AFJ)(Zaddagf!$l`jgm_`k]n]jYdd]_akdYlan]Yf\j]_mdYlgjq e]Ykmj]k&Km[`hjgb][lkYj]Zjgc]f\gofaflgnYjagmkh`Yk]kaflgkeYdd]jhjgb][lklgkaehda^ql`]hdYffaf_Yf\]p][mlagf$ 10 ÉJ]hgjlg^l`]ogjcaf__jgmhgf[gfkljm[lagf^gjl`]=d]n]fl`Õn]q]YjhdYf *((/%*()*!$ÊPlanning Commission website$`llh2'' hdYffaf_[geeakkagf&fa[&af'YZgmlmk'[geeall]]'ojc_jh))'o_))W[gfkljf&h\^$Y[[]kk]\gf(,Fgn]eZ]j*()+& 11 ÉJ]hgjlg^l`]ogjcaf__jgmhgf[gfkljm[lagf^gjl`]=d]n]fl`Õn]q]YjhdYf *((/%*()*!$ÊPlanning Commission website$`llh2'' hdYffaf_[geeakkagf&fa[&af'YZgmlmk'[geeall]]'ojc_jh))'o_))W[gfkljf&h\^$Y[[]kk]\gf(,Fgn]eZ]j*()+3=Qj]k]Yj[` 12 “Mid-Term Appraisal-Eleventh Five Year Plan 2007-2012,” Planning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af'$Y[[]kk]\ 25 October 2013, p.293–295; “Column: Target 9% growth. Riders aplenty,” Financial Express, 9 September 2011, via Factiva, © 2013 Indian Express Online Media Pvt. Ltd. 16 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. Comparison of segment-wise composition of infrastructure expenditure 32.7% 32.3% 30.0% 35% 30% 19.0% 25% 17.2% 16.8% 16.7% 16.1% 15.8% 20% 13.3% 11.0% 10.2% 15% 9.3% 9.0% 8.4% 6.6% 10% 5.1% 4.5% 3.5% 2.6% 2.6% 2.6% 2.4% 2.2% 1.9% 1.7% 1.6% 1.5% 1.0% 0.8% 0.8% 0.6% 0.3% 5% 0% Power Roads & Bridges Water supply and Sanitation Ports and Inland Telecommunications Railways Irrigation and Watershed Water Transport Oil & Gas Mass Rapid Transit System Airports Storage 10th FYP [INR9.2 billion] 11th FYP [INR23.9 billion] 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. 13 ÉHYf]dlg^Ykl%ljY[ce]_Yhjgb][lk_]lk?gnlÌkfg\$ÊHgdala[YdYf\:mkaf]kk<Yadq$)+<][]eZ]j*()*$naY>Y[lanY¡*()*hZ\&af3ÉKl]]d aehgjlfgjek]Yk]\^gje]_Yhjgb][lk$ÊBusiness Standard, 9 August 2013, via Factiva © 2013 via Factiva © 2013 Business Standard Ltd. 14 É,0l`>dYk`J]hgjlgfE]_YHjgb][lk$ÊEafakljqg^KlYlakla[kYf\Hjg_jYee]Aehd]e]flYlagf$EYq*()+$`llh2''ooo&[khe&_gn&af' ]f_dak`'eh'EHWE9QW*()+&h\^$Y[[]kk]\*-G[lgZ]j*()+& 15 ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç>Ykl]j$Egj]Af[dmkan]Yf\KmklYafYZd]?jgol` Ngdme]A!$ÊPlanning Commission website$`llh2'' hdYffaf_[geeakkagf&fa[&af'hdYfk'hdYfj]d'Lo]d^l`hdYf'h\^'ngdW)&h\^$Y[[]kk]\*-G[lgZ]j*()+& 16 ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç>Ykl]j$Egj]Af[dmkan]Yf\KmklYafYZd]?jgol` Ngdme]A!$ÊPlanning Commission; “Eleventh Five Year Plan 2007-2012,” Planning Commission. 17 =Qj]k]Yj[`3ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2'' hdYffaf_[geeakkagf&fa[&af'hdYfk'hdYfj]d'Lo]d^l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+& 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 11th FYP 12th FYP (P) Private States 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@<H!hjgb][lkYf\l`]ZYdYf[]l`jgm_`klYl]hjgb][lYoYj\k19. The GoI has continued with NHDP with a planned expenditure of INR2.4 trillion. It seeks to award 29,000 km of national `a_`oYqk\mjaf_>Q)*Ç)-$af[dm\af_0$0((ceaf>Q)+ Y[lmYdYoYj\]\*(gj)$/.(ce!Yf\1$(((ceaf>Q),20. 18 Eafakljqg^JgY\LjYfkhgjlYf\@a_`oYqk EGJL@!*()+YffmYdj]hgjl3ÉAf\aYJgY\F]logjc$ÊNHAI website$`llh2''ooo&f`Ya&gj_' jgY\f]logjc&`le$Y[[]kk]\*(Fgn]eZ]j*()+3ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af'hdYfk'hdYfj]d'Lo]d^l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+ 19 ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af' hdYfk'hdYfj]d')*l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+& 20 ÉJgY\eafakljqÕp]k1$(((CefYlagfYd`a_`oYqlYj_]l^gjl`akÕk[Yd$ÊThe Economic Times, 17 April 2013, via Factiva © 2013 The Lae]kg^Af\aY?jgmh3=H;2<janaf__jgol`]^Õ[a]fldq$=Q$*()) 18 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 Phase VII 21 22 659 702 Port connectivity 374 8 0 382 Total 20,145 12,162 15,377 47,684 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 K9J<H%F=!\mjaf_l`]Lo]d^l`>QH& 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 10th FYP 11th FYP 12th FYP (P) Private Centre Source: Twelfth Five Year Plan and Eleventh Five Year Plan, Planning Commission 21 ÉFYlagfYd@a_`oYq<]n]dghe]flHjgb][l F@<H!$ÊNHAI website$`llh2''ooo&f`Ya&gj_'O@9LALAK&Ykh$Y[[]kk]\*(Fgn]eZ]j*()+& 22 “Northeast witnesses spate of highway construction,” Indian Business Insight, 30 September 2013, via Factiva © 2013 Af^gjeYla[k Af\aY!Dl\&3ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2'' hdYffaf_[geeakkagf&fa[&af'hdYfk'hdYfj]d')*l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+& 23 “Indian Railways: Statistical Summary,” Af\aYfJYadoYqko]Zkal]$`llh2''ooo&af\aYfjYadoYqk&_gn&af'jYadoYqZgYj\'mhdgY\k'\aj][lgjYl]' klYlW][gf'h\^'KmeeYjq*(K`]]lW=f_&h\^$Y[[]kk]\)/G[lgZ]j*()+ 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) New lines 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 Source: Twelfth Five Year Plan document, Planning Commission L`]Eafakljqg^JYadoYqk EgJ!Yf\l`]<]hYjle]flg^Af\mkljaYdHgda[qYf\Hjgeglagf <AHH!`Ykhjghgk]\)((><AafjYad af^jYkljm[lmj]hjgb][lk$km[`Ykl`]AFJ*)-ZaddagfEmeZYa]d]nYl]\jYad[gjja\gjYf\l`]\]\a[Yl]\^j]a_`l[gjja\gjk25. The Af\aYfJYadoYqk`YkYdkga\]flaÕ]\**klYlagfkY[jgkkl`][gmfljql`YloaddZ]eg\]jfar]\aflgogjd\%[dYkk^Y[adala]k26. L`]EgJdYmf[`]\l`]@a_`Kh]]\JYad;gjhgjYlagfg^Af\aYDl\& @KJ;!$YkmZka\aYjqg^JYadNacYkFa_YeDl\& JNFD!$af gj\]jlg[gfka\]j`a_`%kh]]\jYadhjgb][lkYkYnalYdhYjlg^l`]mh[geaf_jYadaf^jYkljm[lmj]hjgb][lk&L`]ljYafkgfl`]k] hjgb][lkoaddZ]YZd]lgY[`a]n]kh]]\kg^).(lg*((ceh`$l`]j]Zq$eYcaf_al^]YkaZd]lgaf[j]Yk]l`]^j]im]f[qg^ljYafkYf\ consequently the capacity of railways. A preliminary study of the Mumbai-Ahmedabad high-speed rail route has estimated its cost to be around INR650 billion27. Mass Rapid Transit System (MRTS) L`]?gA`YkZ]]f^g[mkkaf_gf\]n]dghaf_EJLKgn]jl`]dYkl\][Y\]&9kg^Bmf]*()+$l`j]]e]ljgjYadhjgb][lkYf\^gmj ZmkjYha\ljYfkal :JL!hjgb][lkYj]gh]jYlagfYd&<mjaf_l`]Lo]d^l`>QHh]jag\$hjanYl]k][lgjkh]f\af_ak]ph][l]\afEJLK systems in cities such as Ahmedabad, Bengaluru, Hyderabad, Chandigarh, Chennai, Delhi, Jaipur, Kochi, Kolkata, Mumbai, Patna, Pune and Surat28&EJLKhjgb][lk$km[`Yke]ljgjYadYj]mkmYddq\]hdgq]\af[ala]koal`hghmdYlagfg^egj]l`Yf) 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 205129. 24 ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af' hdYfk'hdYfj]d')*l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+3ÉJYadoYqEafakljqoYflk[`Yf_]kaf<AHHÌk><AhdYf$ÊL`]=[gfgea[ Times, 18 October 2013, via Factiva © 2013 The Times of India Group. 25 É<AHHhjghgk]k)((><AafjYadoYqhjgb][lk$ÊThe Economic Times, 26 September 2013, via Factiva © 2013 The Times of India Group; ÉJYadoYqkk]]ck><AafjYadaf^jYkljm[lmj]hjgb][lk$ÊL`]=[gfgea[Lae]k$+G[lgZ]j*()+$naY>Y[lanY¡*()+L`]Lae]kg^Af\aY?jgmh& 26 =H;2<janaf_?jgol`=^Õ[a]fldq$=Q$*())3ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af'hdYfk'hdYfj]d')*l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+& 27 ÉJYadoYqEafakl]jDYmf[`]k@a_`Kh]]\JYad;gjhgjYlagfg^Af\aYDaeal]\ @KJ;!$ÊPress Information Bureau website$`llh2''haZ&fa[&af' f]okal]']j]d]Yk]&Ykhp7j]da\5)((+(0$Y[[]kk]\+)G[lgZ]j*()+& 28 “Metro systems in India: Case study DMRC,” United Nations Environment Programme website$`llh2''ooo&mf]h&gj_'ljYfkhgjl' dgo[YjZgf'KlYc]@gd\]jkW*())WF]o<]`da'G[l*(*('K]kkagf*(N'E]ljg*(Kqkl]ek*(af*(Af\aYW;Yk]*(Klm\q*(<EJ;WLaoYja& h\^$Y[[]kk]\*1G[lgZ]j*()+3É:JLhjgb][lkafAf\aYf[ala]kYkaf[dmkan]ljYfkhgjlkqkl]ek7$ÊMnited Nations Environment Programme website$`llh2''ooo&mf]h&gj_'ljYfkhgjl'dgo[YjZgf'KlYc]@gd\]jkW*())WF]o<]`da'G[l*(*('K]kkagf*(N':JL*(Hjgb][lk*( af*(Af\aYf*(;ala]k*(Yk*(Af[dmkan]*(LjYfkhgjl*(Kqkl]ekW<Yjk`afaWBgk`a&h\^$Y[[]kk]\*1G[lgZ]j*()+3ÉLo]d^l`>an] Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af'hdYfk'hdYfj]d' Lo]d^l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+& 29 ÉEg\]d?ma\]daf]k^gjMjZYfDYf\Hgda[q$ÊEafakljqg^MjZYf<]n]dghe]flo]Zkal]$`llh2''l[hgem\&_gn&af'<anakagfk'EMLH'EG<=DW ?MA<=DAF=KW>GJWMJ:9FWD9F<WHGDA;Q&h\^$Y[[]kk]\*1G[lgZ]j*()+3ÉË><Aafj]lYadlglgm[`gfdq)+&+g^hghmdYlagf$ÊThe Times of India - Mumbai Edition, 23 February 2013, via Factiva © 2013 The Times of India Group. 20 Engineering, Procurement and Construction (EPC): Braving the headwinds Investments in MRTS (INR billion) 1,400 1,200 1,000 800 600 400 200 0 10th FYP 11th FYP 12th FYP (P) Private States Centre Source: Twelfth Five Year Plan and Eleventh Five Year Plan, Planning Commission Investment in MRTS has increased from INR27.4 billion in the Tenth FYP to an estimated INR1,241.6 billion in the Twelfth FYP, with the private sector contributing 42%. With a construction intensity of 78%, the sector provides INR1.0 trillion of EPC opportunity. Apart from the seven operational MRTSs, seven more are likely to commence operations by 2017, while 15 egj]hjgb][lk`Yn]Z]]fhdYff]\$o`a[`af[dm\]e]ljgjYad$egfgjYad$:JLYf\da_`ljYadljYfkal DJL!30. The Ministry of Urban <]n]dghe]fl EgM<!]klaeYl]\YlglYd]ph]f\almj]g^AFJ*&(ljaddagf^gj\]n]dghaf_mjZYfhmZda[ljYfkhgjlZq*(+)& L`]EgM<akogjcaf_gfl`]klYf\Yj\arYlagfg^e]ljgjYadhjgb][lkafl`][gmfljq$Yf\`Yk^gje]\kapkmZ%[geeall]]kdggcaf_ Y^l]j\a^^]j]flYkh][lkg^l`]e]ljg&9dl`gm_`l`]EJLKhjgb][lkYj]dYj_]dq=H;[gfljY[lk$l`]?gA`YkYdkgZ]_mflg [gfka\]jl`]HHHeg\]d&@go]n]j$HHHhjgb][lk`Yn]Z]]f`alZqegj]jgY\Zdg[ckYf\\]dYqk&Af\aYÌkÕjklHHH%ZYk]\jYha\ metro rail in Gurgaon has been delayed by more than 10 months31. 30 “Report on urban infrastructure and services by the high powered expert committee,” National Institute of Urban Affairs website$`llh2'' ooo&famY&gj_'hjgb][lk'`h]['ÕfYdj]hgjl%`h][&h\^$Y[[]kk]\*1G[lgZ]j*()+3ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af'hdYfk'hdYfj]d'Lo]d^l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*- October 2013 31 “Gurgaon Rapid Metro misses deadline again,” The Indian Express, 7 October 2013, via Factiva; “Government to set standardised norms ^gjE]ljgJYadhjgb][lk$ÊThe Economic Times, 3 September 2013, via Factiva © 2013 The Times of India Group Engineering, Procurement and Construction (EPC): Braving the headwinds 21 Ports and inland water transport (IWT) India has an extensive coastline of more than 7,515 km and 14,500 km of navigable waterways, with an infrastructure of )+eYbgjhgjlk YddY\eafakl]j]\Zql`]Eafakljqg^K`ahhaf_$)*_gn]jf]\ZqEYbgjHgjlLjmklk9[l$)1.+Yf\gf]_gn]jf]\ Zql`];gehYfa]k9[l$)1-.!$)11eafgjhgjlk$Yf\.fYlagfYdoYl]joYqkkalmYl]\Ydgf_alkd]f_l`&E]j[`Yf\ar]ljY\] [gfljaZml]kegj]l`Yf-(g^l`][gmfljqÌkj]Yd?<HYf\1-g^l`ake]j[`Yf\ar]ljY\] Zqngdme]!akljYfkhgjl]\l`jgm_` maritime transport32. Investments in ports and IWT (INR billion) 2,500 2,000 1,500 1,000 500 0 10th FYP 11th FYP 12th FYP (P) Private States Centre Source: Twelfth Five Year Plan and Eleventh Five Year Plan, Planning Commission The planned investment of INR2.0 trillion 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 INR1.0 trillion, given the construction intensity of 50%33. 32 India Maritime 2012: Building a global maritime sector, EY, 2012 33 ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af' hdYfk'hdYfj]d'Lo]d^l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+& 22 Engineering, Procurement and Construction (EPC): Braving the headwinds L`][Yj_gljY^Õ[`Yf\d]\YleYbgjYf\eafgjhgjlkaf[j]Yk]\YlY;9?Jg^-&*\mjaf_>Q(0Ç>Q)+lg1+,eaddagfe]lja[ lgff]k EEL!$o`ad]l`][Yj_gljY^Õ[`Yf\d]\afl`]fYlagfYdoYl]joYqk\gmZd]\\mjaf_>Q(0Ç>Q)*lg/&)EEL&Alak ]ph][l]\l`Yll`][YhY[alqYf\ljY^Õ[Yll`]hgjlkoaddaf[j]Yk]lg+$)+(EELYf\*$,1-EEL$j]kh][lan]dqZq*(*(34. Development projects for major ports, Maritime Agenda 2010–2020 Category No. of projects Internal funding Private sector funding (INR billion) (INR billion) Construction/reconstruction of berths and jetties 115 117.5 429.6 Equipment procurement 72 32.1 17.3 Deepening of channels and berths 40 85.9 0.0 Rail-road connectivity 26 31.8 17.9 Other works 99 98.3 264.0 Total 352 355.6 728.8 Source: Maritime Agenda 2010-2020 9lglYdg^+-*hjgb][lk`Yn]Z]]fa\]flaÕ]\^gjaehd]e]flYlagfYleYbgjhgjlkmf\]jl`]EYjalae]9_]f\Y*()(Ç*(*(& 9hhjgpaeYl]dq+)g^l`]lglYdhjgb][lkYj]dYj_]dq[gfkljm[lagfgjj][gfkljm[lagfg^Z]jl`kYf\b]lla]k&C]qhjgb][lkaf[dm\] 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 facility and container terminal at New Mangalore port, and the mega container terminal, dry port and multi-modal logistics hub at Chennai port35. L`]?gA`YkYdkg\][a\]\lg\]n]dghlogf]oeYbgjhgjlkafO]kl:]f_YdYf\9f\`jYHjY\]k`YlYf]klaeYl]\[gklg^AFJ).( Zaddagf$Yko]ddYkAOLhjgb][lkogjl`AFJ)(-Zaddagf36. 34 ÉMh\Yl]gfAf\aYfhgjlk][lgj +)&(+&*()+!$ÊLjYfkhgjlJ]k]Yj[`Oaf_$Eafakljqg^K`ahhaf_$JgY\LjYfkhgjlYf\@a_`oYqk$Bmf] 2012; Inland Waterways Authority of India 2013 annual report; “Maritime agenda: 2010 – 2020, Ministry of Shipping, January 2011. 35 ÉMh\Yl]gfAf\aYfhgjlk][lgj +)&(+&*()+!$ÊLjYfkhgjlJ]k]Yj[`Oaf_$Eafakljqg^K`ahhaf_$JgY\LjYfkhgjlYf\@a_`oYqk$Bmf] 2012; “Basic port statistics of India 2010-11,” Transport Research Wing, Ministry of Shipping, Road Transport and Highways, April 2012; “Maritime agenda: 2010 – 2020, Ministry of Shipping, January 2011. 36 ÉAf\aYlgk]lmhlogegj]eYbgjhgjlk$ÊFYlagfYdLmjc$-9m_mkl*()+$`llh2''ooo&fYlagfYdlmjc&[ge']f'af\aY%lg%k]l%mh%log%egj]% eYbgj%hgjlk%,)*.03É?gnl]phdgjaf_oYqklgaf[j]Yk]afdYf\oYl]joYqk$Ê The Economic Times, 15 February 2013, via Factiva © 2013 L`]Lae]kg^Af\aY?jgmh3ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2'' hdYffaf_[geeakkagf&fa[&af'hdYfk'hdYfj]d')*l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+& Engineering, Procurement and Construction (EPC): Braving the headwinds 23 Airports L`]9ajhgjl9ml`gjalqg^Af\aY 99A!eYfY_]k)*-Yajhgjlk$af[dm\af_))afl]jfYlagfYd$0) domestic, 8 customs airports and 27 civil enclaves. During FY08–FY13, total passenger and [Yj_gljY^Õ[l`jgm_`Af\aYfYajhgjlkaf[j]Yk]\YlY;9?Jg^.&,Yf\-lg)-1&+eaddagfYf\ 2.2 MMT, respectively37&L`]hYkk]f_]jljY^Õ[ak]ph][l]\lglgm[`+((eaddagfZq*(*(38. Investments in airports (INR billion) 1,000 900 800 700 600 500 400 300 200 100 0 10th FYP 11th FYP 12th FYP (P) Private States Centre Source: Twelfth Five Year Plan and Eleventh Five Year Plan, Planning Commission LglYdafn]kle]flak]klaeYl]\lgZ]AFJ0//Zaddagfafl`]Lo]d^l`>QH 0(Zql`]hjanYl]k][lgj!&;gfkljm[lagfafl]fkalqaf airports is around 42%, which is expected to result in construction opportunity worth INR368 billion. The GoI has proposed to build 17 new airports in 11 states, including under-penetrated states such as Arunachal Pradesh, B`Yjc`Yf\Yf\JYbYkl`Yf$Yko]ddYk)((YajhgjlkafkeYdd]j[ala]k39&L`]Eafakljqg^;anad9naYlagf Eg;9!`YkYhhjgn]\f]o _j]]fÕ]d\YajhgjlkYlYlglYdafn]kle]flg^AFJ+*(Zaddagf40. The passenger terminal capacity in all airports put together is expected to be 370 million by 2017 from 230–240 million in 2012. Private players are now allowed to acquire 100% equity stake at the six airports developed on PPP mode41. Power =H;afl`]hgo]jk][lgjakZjgY\dq\ana\]\afloghYjlkÈhgo]j_]f]jYlagfYf\ljYfkeakkagfYf\\akljaZmlagf L<!&Hgo]j _]f]jYlagfak^mjl`]j\ana\]\aflgZgad]j$lmjZaf]$_]f]jYlgj :L?!Yf\ZYdYf[]g^hdYfl :gH!&;gfljY[lgjkkh][aYdaraf_ 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 j]dYl]\[anadogjck&9eYbgjalqg^Af\aYf:L?eYfm^Y[lmj]jk`Yn]^gjYq]\aflgl`]=H;k]_e]flYkY^gjoYj\afl]_jYlagfg^ their capabilities, particularly in the boilers segment. Most Indian BoP players have evolved from general civil contractors, leveraging their expertise in civil works. Foreign players, especially Chinese and Korean, have adopted the JV route to bid for super critical boilers in the Indian power EPC market42. 37 ÉGj_YfarYlagf$Ê9ajhgjl9ml`gjalqg^Af\aYo]Zkal]$`llh2''ooo&YYa&Y]jg'hmZda[Wfgla[]k'YYakal]Wl]kl'gja_f&bkh$Y[[]kk]\*1G[lgZ]j *()+3ÉLjY^Õ[kmeeYjq$Ê9ajhgjl9ml`gjalqg^Af\aYo]Zkal]$`llh2''ooo&YYa&Y]jg'ljY^Õ[Wf]ok'eYj*c0Yff]p)&h\^$Y[[]kk]\*1 G[lgZ]j*()+3ÉLjY^Õ[kmeeYjq$Ê9ajhgjl9ml`gjalqg^Af\aYo]Zkal]$`llh2''ooo&YYa&Y]jg'ljY^Õ[Wf]ok'eYj*c)+Yff]p)&h\^$Y[[]kk]\ 29 October 2013 38 “Govt unveils 100 airports in smaller cities,” NBM & CW, 24 September 2013, via Factiva © 2013 NBM Media. 39 “Govt unveils 100 airports in smaller cities,” NBM & CW, 24 September 2013, via Factiva © 2013 NBM Media. 40 “Government proposes to build 17 new airports in 11 states,” The Times of India, 8 August 2013, via Factiva © 2013 The Times of India Group. 41 “Govt open to offering 100 % stake to private parties at six airports,” The Hindu, 30 August 2013, via Factiva. 42 Indian EPC Market: consolidation on horizon$=Q$*()*3ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning 24 Engineering, Procurement and Construction (EPC): Braving the headwinds India’s total installed power generation capacity stood at 228.7 GW as of September 2013. Robust economic growth and ]f`Yf[]\af\mkljaYdY[lanalq`Ykka_faÕ[Yfldqaf[j]Yk]\l`]\]eYf\^gjhgo]jafl`][gmfljq$d]Y\af_lgYkem[`Yk)*h]Yc hour power shortages. This makes a compelling case for further large scale investments in the sector43. Investments in power (INR billion) 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Non-renewable Renewable Non-renewable Renewable Non-renewable Renewable 10th FYP 11th FYP 12th FYP (P) Private States Centre Source: Twelfth Five Year Plan and Eleventh Five Year Plan, Planning Commission Note: investments by the centre, states and private sectors for renewable energy segment are not given separately in the Tenth plan. During the period, the total expenditure incurred by the public sector in renewable energy was INR40 billion. Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af'hdYfk'hdYfj]d'Lo]d^l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+& 43 ÉEgfl`dq9ddAf\aYafklYdd]\_]f]jYlagf[YhY[alqj]hgjl$Ê;]fljYd=d][lja[alq9ml`gjalq$`llh2''[]Y&fa[&af'j]hgjlk'egfl`dq'afklW[YhY[alq' sep13.pdf, accessed 17 October 2013; Sector focus: power,” Indian Infrastructure, August 2011; “Twelfth Five Year Plan 2012-2017 – =[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af'hdYfk'hdYfj]d')*l`hdYf'h\^'ngdW*&h\^$ Y[[]kk]\*-G[lgZ]j*()+3=H;2<janaf__jgol`]^Õ[a]fldq$=Q$*()) Engineering, Procurement and Construction (EPC): Braving the headwinds 25 The power generation capacity increased by 54,964 MW during the Eleventh FYP. In the Twelfth FYP, total investment in the power sector is estimated to be INR18,202 billion, with a planned non-renewable generation capacity addition 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 billion44. The GoI’s 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 MW in solar energy, 2,100 MW in small hydro energy, while the balance is primarily planned from biomass45. Around 13,000 MW of captive power capacity is planned to be added during the Twelfth FYP, from which surplus power, if any, is fed into the grid. In addition, the Twelfth FYP also provides for 110,340 ckm of transmission lines and 270,000 MVA of substations46. Power generation capacity addition during Eleventh FYP and Twelfth FYP, in MW Type Eleventh FYP actual Twelfth FYP target Central State Private Total % of target Central State Private Total achieved Hydro 1,550 2,702 1,292 5,544 35% 6,004 1,608 3,285 10,897 Thermal 12,790 14,030 21,720 48,540 81% 14,878 13,922 43,540 72,340 Nuclear 880 0 0 880 26% 5,300 0 0 5,300 Total 15,220 16,732 23,012 54,964 70% 26,182 15,530 46,825 88,537 Source: Twelfth Five Year Plan document, Planning Commission The private sector participation is expected to be 47.5% and 88% for non-renewable and renewable sectors, respectively in the Twelfth FYP47&HjanYl]k][lgjafn]kle]flak]ph][l]\lgaf[j]Yk]oal`l`]Yffgmf[]e]flg^),mdljY%e]_Yhgo]jhjgb][lk MEHHk!&Gmlg^l`]k]$^gmjMEHHk KYkYf$Emf\jY$Cjak`fYHYlfYeYf\LadYaqY!`Yn]Ydj]Y\qZ]]fYoYj\]\lghjanYl] players48. However, the hydro-electric power generation potential from the north-eastern region still remains untapped, with only 7% of the potential capacity developed49. 44 ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af' hdYfk'hdYfj]d'Lo]d^l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+& 45 ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af' hdYfk'hdYfj]d'Lo]d^l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+& 46 ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af' hdYfk'hdYfj]d'Lo]d^l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+& 47 ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af' hdYfk'hdYfj]d'Lo]d^l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+& 48 =H;2<janaf__jgol`]^Õ[a]fldq, EY, 2011. 49 ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af' hdYfk'hdYfj]d'Lo]d^l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+& 26 Engineering, Procurement and Construction (EPC): Braving the headwinds L`]BYoY`YjdYdF]`jmFYlagfYdKgdYjEakkagf BFFKE!dYmf[`]\Zql`]?gAaf*()(hdYfk to deploy 10,000 MW of grid-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 202050. Oil & Gas L`]Gad?Ykk][lgjak\ana\]\aflgl`j]]eYbgj[gehgf]flkÈmhklj]Ye ]phdgjYlagfYf\ hjg\m[lagf =H!!$ea\klj]Ye ljYfkhgjlYlagf$Zqhah]daf]$jYadgjljm[c$Yf\klgjY_]! Yf\\gofklj]Ye j]Õfaf_Yf\hjg[]kkaf_!&Af\aYÌkGad?Ykaf\mkljq[gflafm]klg_jgo steadily, boosted by enhanced investments, increased production and an increase in private participation. Investments in oil and gas (INR billion) 1,600 1,400 1,200 1,000 800 600 400 200 0 10th FYP 11th FYP 12th FYP (P) Private States Centre Source: Twelfth Five Year Plan and Eleventh Five Year Plan, Planning Commission Total investment is estimated to be INR1,489 billion in the Twelfth FYP. Construction intensity in oil and gas is around 25%, which is expected to result in construction opportunities worth INR372 billion. Crude oil production was 177 MMT and gas production was 213 BCM in the Eleventh FYP, which are expected to rise to 216 MMT Yf\+,)Zaddagf[mZa[e]lj]k :;E!afl`]Lo]d^l`>QH51. 50 “MNRE sets target of 10,000 mw of solar power by 2017,” The Economic Times, 25 September 2013, via Factiva © 2013 The Times of India Group; “Green corridor to see wind and solar ^YjekafJYbYkl`Yf$LYeadFY\m$ÊL`]=[gfgea[Lae]k$1G[lgZ]j*()+$naY>Y[lanY¡*()+ L`]Lae]kg^Af\aY?jgmh3ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$Ê Planning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af'hdYfk'hdYfj]d')*l`hdYf'h\^' ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+& 51 ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af'hdYfk'hdYfj]d'Lo]d^l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\ 25 October 2013. Engineering, Procurement and Construction (EPC): Braving the headwinds 27 ;jm\]gadYf\_Ykhjg\m[lagf\mjaf_=d]n]fl`>QHYf\Lo]d^l`>QH$Yf\j]Ôfaf_ capacity at the end of Eleventh FYP and Twelfth FYP Type Eleventh FYP actual Twelfth FYP target ONGC OIL Private Total % of target ONGC OIL Private Total achieved Crude oil 124 18 35 177 86% 133 20 63 216 production EEL! Gas 114 12 86 213 83% 144 20 177 341 production :;E! J]Õfaf_ - - - 213 88% - - - 314 capacity EELH9! Source: Twelfth Five Year Plan document, Planning Commission EYbgj\gofklj]Yehjgb][lkafl`]gadYf\_Ykk]_e]flaf[dm\]Y1eaddagfe]lja[lgff]kh]j Yffme EELH9!j]Õf]jqZq@af\mklYfH]ljgd]me;gjhgjYlagfDaeal]\ @H;D!afJYbYkl`Yf ogjl`AFJ+/+Zaddagf$Y)-EELH9j]Õf]jqZ]af_k]lmhZql`]Af\aYfGad;gjhgjYlagf Daeal]\ AG;D!afGjakkYogjl`AFJ*10Zaddagf$Yf\Y)*EELH9j]Õf]jqZqFY_YjbmfY Gad;gjhgjYlagfDaeal]\ FG;D!ogjl`AFJ*-(Zaddagf&Ea\%klj]Yehjgb][lkaf[dm\]DF? j]_YkaÕ[Ylagfhjgb][lkoal`YlglYd[YhY[alqg^-*EELH9Yf\]klaeYl]\[gklg^AFJ,/( ZaddagfYf\hah]daf]%dYqaf_hjgb][lkg^YhhjgpaeYl]dq)($(((ceogjl`AFJ+0.Zaddagf52. In the upstream segment, the GoI cleared 25 exploration and production blocks out of the 31 blocks where work had been stalled on account of security restrictions imposed by the Ministry of Defence. This was worth approximately INR250 billion investments. The New =phdgjYlagfDa[]fkaf_Hgda[q F=DH!akYfgl`]jeYbgjafalaYlan]Yae]\YlYlljY[laf_hjanYl] investment into oil and natural gas. There have been nine rounds of bidding, entailing a total investment of IN722 billion, made by various operators in E&P till FY11. Out of 235 hjg\m[lagfk`Yjaf_[gfljY[lk HK;k!$/+o]j]ka_f]\\mjaf_l`]=d]n]fl`>QH&GadHKMk GND$GAD$?9AD$AG;D$:H;DYf\@H;D!`Y\afn]kl]\AFJ-1)Zaddagfladd>Q))&Gn]jk]Yk oil and gas blocks account for approximately 10% of India’s domestic production. There Yj]faf]eYbgjhjg\m[lagfYkk]lkafJmkkaY$Km\Yf$:jYrad$KqjaY$Na]lfYe$N]f]rm]dYYf\ ;gdgeZaY&<mjaf_l`]Lo]d^l`>QH$GF?;$GADYf\hjanYl]'BN[gehYfa]kYj]]ph][l]\lg k`ggl*<k]akea[kmjn]qk[gn]jaf_)+0$1/,ce /-ZqhjanYl]k][lgj!Yf\+<kmjn]qk covering 82,488 sq. km. of land. Furthermore, 1,310 exploratory wells are likely to be drilled during the Twelfth Plan period53. 52 ?KHD*()*YffmYdj]hgjl3EalmdL`YccYj$É?mbYjYlKlYl]H]ljgf]lDl\ka_fkY_j]]e]fl^gjJk -$(0([jgj]ÕfYf[]oal`[gfkgjlameg^),ZYfck$ÊThe Economic Times, 30 June 2012, via Factiva, © 2012 The Times of India Group; “ Jagdishpur-Haldia pipeline work to begin next October,” Financial Chronicle, 27 September 2011, via Factiva © 2011 Deccan Chronicle Holdings Ltd.; “Bihar to sign MoU with GAIL for Jagdishpur-Haldia gas pipeline,” E]lak=f]j_qAfka\]j, 29 January 2013, via Factiva © 2013 Metis Business Solutions Pvt. Ltd.; “Kochi-Mangalore gas pipeline turning into mirage,” E]lak=f]j_qAfka\]j, 29 March 2013, via Factiva © 2013 Metis :mkaf]kkKgdmlagfkHnl&Dl\&3ÉGE;k$=ADoak`lgbgaf?9ADÌkKmjYl%G\ak`Yhah]daf]$ÊE]lak=f]j_q Insider$)0EYj[`*()+$naY>Y[lanY¡*()+E]lak:mkaf]kkKgdmlagfkHnl&Dl\&3ÉHjgb][lkmf\]j Implementation,” Indian Oil website$`llh2''ooo&ag[d&[ge'9Zgmlmk'Hjgb][lkmf\]jAehd]e]flYlagf& aspx, accessed 15 October 2013; “IOC invites bids for construction of LNG import terminal,” The Hindu Business Line website, 29 March 2013, via Factiva © 2013; “RIL gets licence to lay pipeline to transport CBM gas from Shogapur,” The Hindu, 15 July 2013, via Factiva. 53 ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission 28 Engineering, Procurement and Construction (EPC): Braving the headwinds Water supply and sanitation L`]oYl]jkmhhdqkalmYlagfafAf\aYakeYjc]\ZqafY\]imYl][gn]jY_] .,g^l`]mjZYf hghmdYlagfak[gn]j]\Zqaf\ana\mYd[gff][lagfkYf\klYf\hgklk!$afl]jeall]flkmhhdq fYlagfYd average duration of water supply ranges from 1 hour to 6 hours, with per capita water supply af[ala]kjYf_af_^jge+/dh[\lg*10dh[\^gjYdaeal]\\mjYlagf!$dgogmlhmlhj]kkmj]$Yf\hggj k]jna[]imYdalq oYl]jd]YcY_]kYj]/($fgf%j]n]fm]oYl]j FJO!Y[[gmflk^gj-(g^oYl]j hjg\m[lagf!54. Investments in water supply and sanitation (INR billion) 3,000 2,500 2,000 1,500 1,000 500 0 10th FYP 11th FYP 12th FYP (P) Private States Centre Source: Twelfth 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 o]j][gfÕf]\lggf]gjlogk]_e]flkg^l`]k]jna[]\]dan]jqnYdm][`Yafk& 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 66%, which is expected to result in construction opportunity worth INR1,683 billion55. Private sector participation is currently very low in these sectors. However, it is expected to increase from 0.1% in the Eleventh FYP to 2.5% in the Twelfth FYP. The GoI has periodically introduced various policies such as JNNURM to enable city-wide planning for water and waste management and enhance private participation56. website$`llh2''hdYffaf_[geeakkagf&fa[&af'hdYfk'hdYfj]d')*l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j *()+3É;;Afg\lg)+hgo]jhjgb][lk$*-gadZdg[ck$ÊThe Indian Express, 23 April 2013, via Factiva © *()+Af\aYf=phj]kkGfdaf]E]\aYHnl&Dl\&3)MK5AFJ,.&,/ 54 “Report on urban infrastructure and services by the high powered expert committee,” National Institute of Urban Affairs website$`llh2''ooo&famY&gj_'hjgb][lk'`h]['ÕfYdj]hgjl%`h][&h\^$Y[[]kk]\ 29 October 2013 55 ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website, `llh2''hdYffaf_[geeakkagf&fa[&af'hdYfk'hdYfj]d'Lo]d^l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j 2013. 56 “Report on urban infrastructure and services by the high powered expert committee,” National Institute of Urban Affairs website$`llh2''ooo&famY&gj_'hjgb][lk'`h]['ÕfYdj]hgjl%`h][&h\^$Y[[]kk]\ *1G[lgZ]j*()+3ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af'hdYfk'hdYfj]d')*l`hdYf'h\^'ngdW*&h\^$ accessed 25 October 2013 Engineering, Procurement and Construction (EPC): Braving the headwinds 29 Timeline of government policies introduced/amended for water supply and sanitation Municipal Solid Waste Rules JnNURM Programme E‐waste management and Organizing house‐to‐house Reform linked to urban handling rules collection infrastructure investment reuse and recover useful Segregating recyclable material from e‐waste thereby materials reducing hazardous wastes 2000 2005 2011 1991 2002 2009 2012 74th Constitutional National Water Policy National Water Mission Review of NWP – draft 2012 Amendment Act Increased private Framework to increase Water as an economic Treat urban water as participation l`]]^Õ[a]f[qg^oYl]j need a state subject Priority given to supply of usage by 20% =^Õ[a]f[qg^mkY_] drinking water Bureau of Water volumetric pricing Privatization =^Õ[a]f[q^gje]\ establishment of water regulation authorities Focus towards funding of the urban infrastructure projects >g[mklgoYj\k]^Õ[a]f[qYf\[gklj][gn]jq Source: Planning Commission, Ministry of Urban Development, JNNURM BFFMJE%AoYkl`]ÕjkleYbgjafalaYlan]$o`a[`]f[gmjY_]\HHHafl`]mjZYfk][lgj&Mf\]jl`]HHH^jYe]ogjc$,1hjgb][lk afngdnaf_lglYdhjgb][l[gklg^Yjgmf\AFJ-&-Zaddagfo]j]afalaYl]\afk][lgjkkm[`Ykkgda\oYkl]$oYl]jkmhhdq$k]oY_]Yf\ urban transport in which private concessionaires brought in investment of INR1.1 billion. Private investment in the sector Yj]]ph][l]\lg_jgooal`dYj_]mh[geaf_hjgb][lkkm[`YkHHH%ZYk]\$]oYkl]hjg[]kkaf_mfalafEmeZYaYf\l`]Af\aYÌkÕjkl oYkl]j][q[daf_rgf]af?mbYjYllgZ]\]n]dgh]\bgafldqZql`]BYhYf<]n]dghe]flAfklalml] B<A!$Yf\l`]?gn]jfe]flg^ ?mbYjYl57. 57 “India’s urban awakening,” Urban India website$`llh2''mjZYfaf\aY&fa[&af'hjg_jYee]'mokk'E?AWaf\aYWmjZYfarYlagfW^mddj]hgjl&h\^$ accessed 31 October 2013. 30 Engineering, Procurement and Construction (EPC): Braving the headwinds Buildings Af\aYakoalf]kkaf_Yk`Yjh[`Yf_]afalk\]eg_jYh`a[[gehgkalagf&L`]j]akYka_faÕ[Yfl_jgol`afmjZYfarYlagfd]n]dk\m] to factors including rapid economic growth and migration of the rural population to urban areas. Both government and af\]h]f\]flYfYdqk]k]klaeYl]ka_faÕ[YflmjZYfarYlagfÕ_mj]k^gjl`]f]pl\][Y\]&MjZYfarYlagfakYdkg]ph][l]\lgd]Y\lg Ykljm[lmjYdk`a^lafl`]Af\aYf][gfgeq&Af[j]Yk]\mjZYfarYlagfak]ph][l]\lgd]Y\lg]e]j_]f[]g^egj]e]_Y[ala]kYf\ af[j]Yk]\hghmdYlagf[dmkl]jk$o`a[`akdac]dqlg`Yn]Yhgkalan]aehY[lgfl`]fmeZ]jg^=H;hjgb][lkZ]af_YoYj\]\&L`]lgh *(Ç+([ala]kYj]hjgb][l]\lgYlljY[lYka_faÕ[Yflhgjlagfg^l`]jmjYdhghmdYlagf$o`gea_jYl]afk]Yj[`g^bgZghhgjlmfala]k58. Urban population and urbanization projection up to 2050, in million 1000 60% 550 million additional population 55% 900 Urban population (million) 48% 50% 800 700 40% Urbanization (%) 40% 600 34% 28% 30% 500 30% 400 300 20% 200 10% 100 0 0% 2000 2010 2020 2030 2040 2050 Source: United Nations Population Division, 2007, EY research L`]mjZYfarYlagflj]f\kkm__]kll`YlYhhjgpaeYl]dq--(eaddagfh]ghd]oaddf]]\lgZ]Y[[geeg\Yl]\afmjZYf[]fl]jkgn]j the next 40 years. It is estimated that by 2017, the urban population is expected to increase to more than 440 million and the mjZYfÖggjkhY[]h]j[YhalYoaddaf[j]Yk]lg)*(&/ki&^l&$o`ad]l`]jmjYdhghmdYlagfoaddaf[j]Yk]lgegj]l`Yf0/(eaddagfYf\ l`]jmjYdÖggjkhY[]h]j[YhalYoaddaf[j]Yk]lg)(/&*ki&^l&59 These areas are already facing severe infrastructure constraints and the situation will only get worse if remedial action is not lYc]f&L`]lglYd`gmkaf_k`gjlY_]^gjl`]Lo]d^l`>QH *()*Ç)/!afl`]mjZYfYj]Y`YkZ]]f]klaeYl]\Yl)0&0eaddagfmfalk and for rural areas at 43.7 million units. 58 ÉMjZYf9__dge]jYlagfk';ala]k`Ynaf_hghmdYlagf)dYc`Yf\YZgn]$ÊCensus India website$`llh2''ooo&[]fkmkaf\aY&_gn&af'*())%hjgn% j]kmdlk'hYh]j*%ngd*'\YlYWÕd]k'Af\aY*'LYZd]W+WHJWM9W;ala]]kW)DYc`WYf\W9Zgn]&h\^$Y[[]kk]\*(Fgn]eZ]j$*()+ 59 “Report on urban infrastructure and services by the high powered expert committee,” National Institute of Urban Affairs website, `llh2''ooo&famY&gj_'hjgb][lk'`h]['ÕfYdj]hgjl%`h][&h\^$Y[[]kk]\*1G[lgZ]j*()+3ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[ K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af'hdYfk'hdYfj]d')*l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\ *-G[lgZ]j*()+3J]hgjlg^l`]L][`fa[Yd?jgmhgfHghmdYlagfHjgb][lagfk;gfklalml]\Zql`]FYlagfYd;geeakkagfgfHghmdYlagf$EYq *((.3;]fkmkg^Af\aY*())$MjZYfY__dge]jYlagfk';ala]k`Ynaf_hghmdYlagf)dYc`Yf\YZgn]3FYlagfYdKYehd]Kmjn]qJ]hgjlFg&-+-2 Housing Condition and Amenities in India: July, 2008-June, 2009; EY research Engineering, Procurement and Construction (EPC): Braving the headwinds 31 Tier-wise* construction area requirement for residential, commercial and industrial buildings (billion sq. ft.) 100 90 80 70 60 50 ,0 30 20 10 0 Tier 1 Tier 2 Tier 3 Tier , Urban Rural Residential Commercial Industrial 2013 2015 2017 Source: NSS Report No. 535: Housing Condition and Amenities in India: July, 2008-June, 2009; United Nations; Department of Economic and Social Affairs; "Report on Urban Infrastructure and Services," High Powered Expert Committee for estimating investment requirements for urban infrastructure services, MoUD, March 2011; EY research "La]jkYj]Yj]Yk\]Õf]\Y[[gj\af_lghghmdYlagf H!2La]j)2H6-eaddagf$La]j*2)eaddagf4H4-eaddagf$ La]j+2(&-eaddagf4H4)eaddagf$La]j,2H4(&-eaddagf In 2017, it is expected that the total demand for residential, commercial and industrial stock will be more than 150 billion ki&^l&$Ykkmeaf_[gee]j[aYdYf\af\mkljaYd[gfkljm[lagflg_jgohjghgjlagfYl]dqlgl`]j]ka\]flaYdk]_e]fl Ykkme]\lgZ] jYf_af_^jge)(Ç*(g^l`]j]ka\]flaYd[gfkljm[lagf\]eYf\!& The opportunity lies in the fact that the construction stock requirement for residential, commercial and industrial buildings oaddaf[j]Yk]\m]lgjYha\af[j]Yk]afmjZYfhghmdYlagfYf\ea_jYlagfg^h]ghd]lgmhh]jla]j[ala]k l`Yfl`]gf]kl`]qdan]af!& The commercial space will grow in future due to economic growth and favorable demographics of a large earning population. The industrial growth will be boosted by the construction of industry-centred cities on the industrial corridors, including seven f]o[ala]kYdgf_l`]<]d`aEmeZYaAf\mkljaYd;gjja\gj <EA;!Yko]ddYkl`][ala]khdYff]\gfl`];`]ffYa%:]f_YdmjmYf\ Bengaluru-Mumbai industrial corridors60. 60 =H;2<janaf_?jgol`=^Õ[a]fldq$=Q$*())3ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af'hdYfk'hdYfj]d')*l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+& 32 Engineering, Procurement and Construction (EPC): Braving the headwinds *&+=H;hdYq]jklgZ]l`]Za__]klZ]f]Õ[aYja]k Opportunities for EPC players HjanYl]k][lgjhYjla[ahYlagfafAf\aYfaf^jYkljm[lmj]hjgb][lkoYkYjgmf\**afl`]L]fl`>QH$o`a[`af[j]Yk]\lg+/afl`] Eleventh FYP and is expected to increase further to around 48% in the Twelfth FYP. This translates into an increase from INR2.0 trillion in the Tenth FYP to INR27.1 trillion in the Twelfth FYP. With such rapidly growing opportunities, there has been a substantial rise in the number of new entrants in the sector. Investment in infrastructure, % private of total investment Planned investment 60,000 INR56,316.9 billion 50,000 48% 40,000 Actual investment INR23,859.8 billion 30,000 Actual investment 20,000 37% INR9,161.8 billion 10,000 22% 0 10th Plan 11th Plan 12th Plan (P) Private Public Source: Twelfth FYP and Eleventh FYP, Planning Commission Furthermore, the increasing number of private sector clients has resulted in negotiated contracts as compared to the traditional competitive bidding format. The rise in number of such clients is expected to improve payment mechanisms and the working capital cycles of EPC contractors61. Model shift for private players However, private sector participation, via the PPP mode, has been on the decline in some sectors, in spite of the GoI’s ]^^gjlkafhmk`af_HHHhjgb][lkafnYjagmkk][lgjk\m]lgaf[j]Yk]afl`]fmeZ]jg^dYj_]Yf\[gehd]phjgb][lk$o`a[`[Ydd ^gjka_faÕ[Yflafn]kle]flk&DYj_]hjgb][lkYj]mkmYddqafn]kle]fl%afl]fkan]Yf\[jala[YdaffYlmj]$o`ad]:GLhjgb][lkl]f\lg be prone to time and cost overruns. Subsequently, with delays and liabilities, came increased risks, and the EPC companies became debt-heavy in their pursuit to become BOT developers. This situation has forced private players to pull out of large hjgb][lk&?jY\mYddq$l`]Za\\af_j]khgfk]lgf]ohjgb][lkZ][Ye]o]YcYf\eYfqhjanYl]hdYq]jkYffgmf[]\j]\m[lagfg^ l`]aj:GLhjgb][l]phgkmj]$Yf\^gddgoYfYkk]l%da_`lYhhjgY[`$hjaeYjadqlgj]\m[]l`]\]ZlZmj\]fgfÕfYf[aYdklYl]e]flk& 61 =H;2<janaf_?jgol`=^Õ[a]fldq$=Q$*())3ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af'hdYfk'hdYfj]d')*l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+& Engineering, Procurement and Construction (EPC): Braving the headwinds 33 Modes of project award Criteria EPC PPP Government Government EPC contract PPP contract award award EPC contractor Contract EPC contractor (owns asset) execution EPC contract award SPV Contract execution (operates and maintains asset) Ownership Government Private Model Contract Concession Lae]Yf\[gkl]^Õ[a]f[q Af]^Õ[a]flafj]\m[af_lae][gklgn]jjmf Accumulating interest costs, stringent contractual – especially due to external risks such as penalties, delay in revenue generation force a private land acquisition, regulatory approvals gh]jYlgjmf\]jYHHH[gfljY[llg[gehd]l]hjgb][l development within schedule and budget. =^Õ[a]f[qg^l`]^Y[adalq ;gfljY[lgjbgZklghkY^l]j[gfkljm[lagf HjanYl]hYjlq`Yklgjmfl`]^Y[adalqYf\af]^Õ[a]fl^Y[adalq and handover of the facility may dent its revenue, hence the facility is made more ]^Õ[a]fl& Returns :Yk]\gfhjgb][leYj_afk Returns on equity investments Upsides None Hjgb][leYq\]dan]jmhka\]k Hjgb][ljakc Only execution risk On the private player Market risk Contractor’s revenue is dependent only The revenue of the private player is generally dependent on the construction of the facility gfl`]keggl`jmffaf_g^l`]hjgb][l Operation and Maintenance Contractor is only responsible for Private partner is responsible for operation and constructing the facility maintenance of the facility Source: EY research >gjl`]ogjkl%Y^^][l]\jgY\k][lgj$l`]?gA\][a\]\lgj]na]ol`]^]YkaZadalqg^Yhjgb][llgZ]]p][ml]\gfYHHHZYkak$Yf\ Y\ghl]\l`]=H;eg\]^gjfYlagfYd`a_`oYqk$o`a[`Yj]fglnaYZd]gfYHHHZYkak&L`]=H;eg\]oaddfglgfdqeafaear] time and cost overruns but will also result in increased bidding by developers. The GoI released the draft of a model EPC Y_j]]e]fl$o`a[`oadd[gflYaf\]lYad]\\]ka_fk$]klaeYl]kg^imYflala]k^gj\a^^]j]flal]ekg^ogjc :addg^ImYflala]k!$kgmf\ contractual framework specifying the allocation of risks and rewards and the equity of obligations between the government authorities and contractors62. Kaf[]l`]Z]_affaf_g^>Q),$hjgb][lk`Yn]Z]_mflgYlljY[legj]Za\\]jkYf\j]_Yaf]\hY[]g^]p][mlagf&MhlgEYq*()+$ kapl]f\]jk`Yn]Z]]fj]d]Yk]\Zql`]F@9A$gmlg^o`a[`Õn]`Yn]Z]]fgfl`]=H;eg\]&L`]fmeZ]jg^Za\\]jk`YkjYf_]\ Z]lo]]f)(Yf\+(afYddg^l`]e&9jgmf\*($(((ceg^f]olog%dYf]fYlagfYd`a_`oYqhjgb][lk$lgZ]\]n]dgh]\mf\]j NHDP Phase-IV, have been brought under the EPC mode. Afgl`]jk][lgjk$o`]j]l`]HHHeg\]akkladd\geafYfl$hjgb][lgof]jkgj\]n]dgh]jkmdlaeYl]dqYoYj\ogjcYk=H; gj gl`]jlqh]g^![gfljY[lklg]al`]jl`]ajgof[gfljY[laf_]flala]kgfYfYjek%d]f_l`ZYkakgjlgl`aj\%hYjlq[gfljY[lgjk&L`] hjanYl]k][lgjak\janaf_l`ak_jgol`ghhgjlmfalqZqafn]klaf_]imalqafkm[`HHHaf^jYkljm[lmj]hjgb][lk&9f=H;[gfljY[lgjak l`]j]^gj]$]ph][l]\lgZ]f]Õl]al`]jl`jgm_`[gfljY[lkYoYj\]\Zq_gn]jfe]fl[da]flkgjhjanYl]\]n]dgh]jk& 62 =H;2<janaf_?jgol`=^Õ[a]fldq, EY, 2011 34 Engineering, Procurement and Construction (EPC): Braving the headwinds Engineering, Procurement and Construction (EPC): Braving the headwinds 35 Sectors with high EPC dependency Sectors such as roads, railways, and irrigation have comparatively more construction opportunities, since these segments have reached a relatively mature stage. On the other hand, sectors such as renewable power, water supply, waste management, MRTS and storage are gradually gathering steam. Client mix and models adopted by EPC-dependent sectors EPC market dependency EPC market dependency Clientele base* Order of models adopted sub-sector (government-private ratio) by Government Infrastructure construction Roads 50:50 PPP->Annuity->EPC Railways 80:20 EPC->PPP Ports 50:50 PPP->EPC Airports 50:50 EPC->PPP Urban infrastructure 80:20 EPC->limited PPP Building construction Building construction 20:80 Cash contracts->EPC Oil & Gas EPC Oil & gas 80:20 EPC Power EPC Power 20:80 EPC Specialized EPC Marine 20:80 EPC Hydro 80:20 EPC Industrial 20:80 EPC Source: EY research * assumed However, apart from the maturity of a sector and level of investment in it, the construction opportunities are also affected by l`]\]h]f\]f[qg^l`]k][lgjgfl`]afl]fkalqg^=H;afnYjagmkhjgb][lkafl`]k][lgj$l`]caf\g^hjgb][lkhdYff]\Yf\l`]aj quantities. While roads, railways, MRTS, irrigation and water supply and sanitation have construction intensity of more than 50%, sectors such as power, oil and gas, storage and telecom have low construction intensities. The EPC dependency of a sector is also affected by the prevailing scenario in the sector. The construction industry, which has been earlier in a space dominated by large EPC players and a few infrastructure developers, is now witnessing multiple participants, each set on carving out a piece of the EPC pie63. 63 =H;2<janaf_?jgol`=^Õ[a]fldq, EY, 2011 36 Engineering, Procurement and Construction (EPC): Braving the headwinds Prevailing conditions in various sectors EPC Market Sub-sector Competition Complexity Government Entry Opportunity Foreign role barriers size players (facilitator) interest Infrastructure Roads » X ± X » » EPC Railways X X » X X X Ports ± » » » ± » Airports X » ± » ± » Urban infrastructure » » » » ± ± Building EPC Building » X X X » ± Oil & Gas EPC Oil & Gas X » » ± ± » Power EPC Power » ± X X » » Kh][aYdar]\=H; Marine X » » ± ± ± Hydro X » » ± ± ± Industrial ± ± X X » ± High Medium Low » ± X Source: EY research Sectors such as roads, airport, power and urban infrastructure have become very attractive for both domestic and foreign investors. This may be due to relatively low entry barriers in l`]k]eYjc]lk$Ykljgf_hjgb][lhah]daf]Yf\ Y[gfka\]jYZd]ghhgjlmfalqkar]&Gfl`]gl`]j hand, sectors such as the railways and buildings are relatively low on the attractiveness scale — the railways await unbundling and buildings the recovery of the real estate sector. As a result, the market as a whole has become a mixed bag of opportunities in which different types of players are participating. Engineering, Procurement and Construction (EPC): Braving the headwinds 37 3 Sector trends 38 Engineering, Procurement and Construction (EPC): Braving the headwinds 3.1 Investment in niche areas on the rise >an]Q]YjHdYfk >QHk!`Yn]oalf]kk]\ka_faÕ[Yfl[`Yf_]kafk[gh]gn]jlae]&>gjafklYf[]$Zm\_]lYddg[Ylagf^gjkge] k][lgjk`Yn]\][daf]\ l`]k`Yj]g^ajja_Ylagf$oYl]jkmhhdqYf\kYfalYlagf`Yk\][j]Yk]\^jge*(afl`]L]fl`>QHlg)+&- afl`]Lo]d^l`>QH!&Gfl`]gl`]j`Yf\$kge]af^jYkljm[lmj]k]_e]flkkm[`Ykj]f]oYZd]]f]j_q$klgjY_]af^jYkljm[lmj]Yf\ transit-oriented development have come to the fore in the last decade, creating opportunities for EPC players64. Renewable energy:Afn]kle]flafj]f]oYZd]]f]j_q J=!kgmj[]k`Ykaf[j]Yk]\^jgeAFJ01*Zaddagfafl`]=d]n]fl`>QH ))g^l`]lglYdhgo]jk][lgjafn]kle]fl!lgl`]hdYff]\AFJ+$)0.Zaddagfafl`]Lo]d^l`>QH )0g^l`]lglYdhgo]j k][lgjafn]kle]fl!&L`akaf\a[Yl]kl`]?gAÌkaf[j]Yk]\^g[mkgf\]n]dghaf_Yf\mkaf_l`]YZmf\YflYf\mf\]j%lYhh]\J= resources. The RE sector provides construction opportunity worth INR1.2 trillion in the Twelfth FYP. Approximately 88% of the total investment in the Twelfth FYP is expected to come from private players. In addition, several government schemes and initiatives facilitate the entry of large independent power producers and encourage FDI in the sector. As a result, the sector provides a lucrative opportunity for EPC companies. The share of RE in the nation’s total installed power generation [YhY[alqo]flmh^jge)Yll`]Z]_affaf_g^l`]L]fl`>QHlg)*Yll`]Z]_affaf_g^l`]Lo]d^l`>QH ]p[]]\af_=d]n]fl` >QHlYj_]lk!&>mjl`]jegj]$l`]k`Yj]ak]klaeYl]\lgaf[j]Yk]lg)1Yll`]]f\g^l`]Lo]d^l`>QH&L`]Eafakljqg^F]o Yf\J]f]oYZd]=f]j_q EFJ=!lYj_]lkYfY\\alagfg^+(?OJ=[YhY[alql`jgm_`kgdYj$oaf\$ZageYkk$keYdd`q\jgYf\ ZY_Ykk][g_]f]jYlagfhgo]jhdYflk&;YhalYd[gklk^gjJ=`Yn]j]\m[]\gn]jlae] kgdYjeg\md]hja[]k\][daf]\Zq0(o`ad] oaf\lmjZaf]hja[]k\][daf]\Zq*-kaf[]*((0!Ydgf_oal`af[j]Yk]af]^Õ[a]f[q&L`akak]ph][l]\lg\jan]afn]kle]flhdYfk through the Twelfth FYP65. 64 ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af' hdYfk'hdYfj]d')*l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+ 65 É?]f]jYlagf:Yk]\Af[]flan] ?:A!$ÊIndian Power Sector website$`llh2''af\aYfhgo]jk][lgj&[ge'`ge]'lY_'_Za'$Y[[]kk]\*Fgn]eZ]j *()+$É@m_]hgl]flaYdlglYhj]f]oYZd]]f]j_q2G^Õ[aYd$ÊEconomic Times website$`llh2''Yjla[d]k&][gfgea[lae]k&af\aYlae]k&[ge'*()+% (,%(+'f]ok'+0*,0.)0W)Wj]f]oYZd]%hgo]j%hgo]j%_]f]jYlagf%[YhY[alq%ZY_Ykk]%[g_]f]jYlagf$Y[[]kk]\.Fgn]eZ]j*()+$ “Generation Based Incentive Scheme,” Press Information Bureau website$`llh2''ooo&haZ&fa[&af'f]okal]']j]d]Yk]&Ykhp7j]da\5/00*1$ Y[[]kk]\.Fgn]eZ]j*()+3ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2'' hdYffaf_[geeakkagf&fa[&af'hdYfk'hdYfj]d')*l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+ Engineering, Procurement and Construction (EPC): Braving the headwinds 39 Transit-oriented development: 9fgl`]j]e]j_af_Yj]Yg^afn]kle]flakljYfkal%gja]fl]\\]n]dghe]fl LG<!$km[`Yk af\mkljaYd[gjja\gjk$lgofk`ahkYf\[ala]k ZmadlYjgmf\eYbgj]phj]kkoYqk$jYad[gjja\gjk$Yajhgjlk$hgjlkYf\ljYfkal`mZk!& L`]?gA`YkhdYff]\af\mkljaYd[gjja\gjk$af[dm\af_l`])$,0+%ce<]d`aEmeZYaAf\mkljaYd[gjja\gj <EA;!Yf\l`]H]fafkmdYj J]_agfAf\mkljaYd<]n]dghe]fl;gjja\gj HJA<]!oal`alklogeYbgjd]_kÈl`])$(((%ceEmeZYa%:Yf_Ydgj]Af\mkljaYd ;gjja\gj E:A;!Yf\l`];`]ffYa%:Yf_Ydgj]Af\mkljaYd;gjja\gj ;:A;!&L`]k]hjgb][lkYj]]ph][l]\lgZjaf_YZgmlj]Yd]klYl] development and infrastructure across 150km to 200km on both sides of the alignment of the corridors, including integrated industrial townships66. The INR6,200 billion DMIC comprises 24 nodes, 11 investment regions and 13 industrial areas in <EA;$Yf\alk[gfkljm[lagfak]ph][l]\lgZ][gehd]l]\Zq*(*-&L`]?gA`YkYdkgZ]]fhmk`af_lg\]n]dghYajhgjl[ala]k YcY Y]jgljghgdak!afDm\`aYfY$EmeZYa$<]d`a$@q\]jYZY\$:]f_YdmjmYf\Cg[`a$khj]Y\Y[jgkkegj]l`Yf/$-((Y[j]k& Railways: Afn]kle]flkafl`]Af\aYfJYadoYqk AJ!ak]ph][l]\lgaf[j]Yk]lgAFJ-&*ljaddagfafl`]Lo]d^l`>QH$o`a[`ak YhhjgpaeYl]dqÕn]lae]kl`]afn]kle]flafl`]L]fl`>QH&L`akhjgna\]kY[gfkljm[lagfghhgjlmfalqg^YhhjgpaeYl]dqAFJ,&) ljaddagf&Afgj\]jlgYlljY[lhjanYl]afn]kle]flafl`]k][lgj$l`]?gA`YkdaZ]jYdar]\alk><Ahgda[a]k^gjjYadoYqaf^jYkljm[lmj] hjgb][lk$ZqZjaf_af_afl`]hYjla[ahYlgjqhgda[q^gj\ge]kla[Yf\_dgZYdhdYq]jklgafn]klafl`]hjgb][lk&Mf\]jl`akhgda[q$ )((><A`YkZ]]fh]jeall]\l`jgm_`l`]YhhjgnYd ^jgel`]>gj]a_fAfn]kle]flHjgeglagf:gYj\!jgml]^gjkh][aÕ[hjgb][lk such as elevated rail corridors, high speed rail networks and dedicated freight corridors, using participative models in rail [gff][lanalqYf\[YhY[alqYm_e]flYlagfhjgb][lk&Af[Yk]g^[gehgf]fleYfm^Y[lmjaf_$l`])((><AakYddgo]\mf\]jl`] automatic route. In the Twelfth FYP, IR seeks to achieve investment of INR1.0 trillion through the PPP mode, including freight terminals, port connectivity and redevelopment of stations. The GoI is expediting the INR630 billion hi-speed rail corridor between Mumbai and Ahmedabad and has also approved an investment of INR200 billion for development of rail transport in the North-East67. Special Manufacturing Zones:L`]?gA`YkYhhjgn]\faf]FYlagfYdAfn]kle]flYf\EYfm^Y[lmjaf_Rgf]k FAERk!mf\]jl`] National Manufacturing Policy 2011. The policy embodies single-window clearance and an easy exit policy for construction of the NIMZs. The Government of Karnataka plans to set up an NIMZ at Tumkur, which includes an integrated industrial township spread across 12,000 hectares at an estimated cost of INR300 billion, and has proposed two more NIMZs in the state. Furthermore, there are plans to set up four NIMZs in Kerala and two in Andhra Pradesh at an estimated cost of INR488 billion Yf\AFJ.((Zaddagf$j]kh][lan]dq&L`]k]eYfm^Y[lmjaf_rgf]kYj]]ph][l]\lgka_faÕ[Yfldqaf[j]Yk]\]eYf\^gjYddl`][gj] real estate asset classes such as residential, commercial, hotel and infrastructure68. 66 “Two corridors will be a boon for Bangalore,” The Times of India - Bangalore Edition, 2 March 2013, via Factiva © 2013 Bennett, ;gd]eYf;g&$Dl\&3É;]flj]k]]ck[gf[]hlfgl]gfH]fafkmdYjhjgb][l$ÊThe Hindu, 24 July 2010, via Factiva © 2010 Kasturi & Sons Ltd.; “Develop Chennai-Bangalore industrial corridor, says Karunanidhi,” The Hindu, 1 November 2007, via Factiva © 2007 Kasturi & Sons Ltd.; “Chennai-Bangalore industrial corridor to boost growth,” Indo-Asian News Service, 2 November 2007, via Factiva © 2007 HT Media Limited.; “Blueprint for Mumbai-Bangalore industrial corridor to take a year,” The Times of India - Pune Edition, 25 June 2013, via Factiva © 2013 Bennett, Coleman & Co., Ltd.; “In-principle nod for study on Mumbai-Bangalore corridor,” The Statesman, 17 EYj[`*()+$naY>Y[lanY¡*()+L`]KlYl]keYfDl\&3ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af'hdYfk'hdYfj]d')*l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+3É+&*,Zf^gj <EA;hjgb][lYhhjgn]\Zq_gnl$ÊHindustan Times websit3$`llh2''ooo&`af\mklYflae]k&[ge'Zmkaf]kk%f]ok'+%*,%Zf%^gj%\ea[%hjgb][l% Yhhjgn]\%Zq%_gnl'Yjla[d])%)(-.00+&Ykhp$Y[[]kk]\*-G[lgZ]j*()+ 67 ÉJYadoYqkk]]ck><Aafaf^jYhjgb][lk$Ê>afYf[aYd=phj]kk$,G[lgZ]j*()+$naY>Y[lanY¡*()+Af\aYf=phj]kkGfdaf]E]\aYHnl&Dl\&3 ÉJYadoYqkk]]ckJk)$(($(((%[jhjanYl]afn]kle]flafHHHhjgb][lk$Ê<geYaf%:$,G[lgZ]j*()+$naY>Y[lanY¡*()+L`]Af^gjeYlagf Company Pvt. Ltd.; “Feasibility Study for Hi-speed Train,” NBM & CW, 25 October 2013, via Factiva © 2013 NBM Media.; “North-East gets Rs. 20,000cr rail network,” NBM & CW, 3 November 2013, via Factiva © 2013 NBM Media. 68 ÉCYjfYlYcYlgk]lmh+eYfm^Y[lmjaf_rgf]k^gjf]oaf\mklja]k$ÊKYjcYjal]d$.Bmdq*()+$naY>Y[lanY¡*()+KYjcYjal]d3É*-$(((Y[j]k ^gjlogFAERhjgb][lk$ÊL`]@af\m$))EYq*()+$naY>Y[lanY¡*()+CYklmjaKgfkDl\&3ÉCYjfYlYcYkmZealkhdYf^gjaf\mkljaYdrgf] 40 Engineering, Procurement and Construction (EPC): Braving the headwinds
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