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Engineering Procurement & Construction (EPC) Braving the headwinds

EPC World

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p u b l i c a t i o n s ‡ a w a r d s ‡ c o n f e r e n c e s

Foreword EPC World “If you want to build a ship, don’t drum up people to collect wood and don’t assign them tasks and work, but rather teach them to long for the immensity of the sea.” We belong to and represent an industry that is literally building a new 21st century India driven by aspirations of tens of millions who seek a better life, a better livelihood and more opportunity to build on their dreams. Hidden in the string of highways, factories, airports, ports, metro rail networks, dams, commercial towers and nuclear power plants is the potential for India to forge its most successful partnership ever — that between entrepreneurs and workers. As the EPC industry moves toward more maturity and more established norms and protocols, let us never forget the unique ability of this industry to transform India. Even though we live in the age of information and information technology, it is bricks and mortar that will craft the second-largest economy of the world and the largest middle class consumer base in the world in a decade or two. There is always the temptation to be swayed and spooked by the present. To that extent, the present state of the Indian economy does appear cloudy and depressing. After years of a more than impressive surge, GDP growth rate has dipped lgY\akYhhgaflaf_-Yq]Yj&:gl`l`]Õk[YdYf\[mjj]fl Y[[gmfl\]Õ[alkl`j]Yl]flg\]jYadl`]_jgol`ege]flme& NajlmYddq\gmZd]%\a_al[gfkme]jafÖYlagfakeYcaf_da^] \a^Õ[mdl^gj[alar]fk&9f\l`]e]\aYakh]hh]j]\oal`j]hgjlk of how investors and entrepreneurs are holding back when it comes to letting their money talk with India. Problems j]dYl]\lg\]dYqk$[gklgn]jjmfk$ÕfYf[aYd[dgkmj]Yf\ hjgÕlYZadalql`Yl[gf^jgfleYfq`a_`hjgÕd]=H;hjgb][lkYj]

Mr. Tejasvi Sharma Managing Director

testimony to the tyranny of the present. Yet, as famous poet PB Shelley suggested more than two hundred years ago: “If winter comes, can spring be far behind?” Global rating and consulting institutions are unanimous in saying that the longer-term prospects for the Indian economy remain extremely bright. And let us not forget one fact — when the famous BRICS report released early this century predicted that India will become the secondlargest economy of the world by 2050, it was based on the assumption that GDP growth rates will average 5% to 6% a year. The fact is, India will build infrastructure across the board and both domestic and foreign investors will hYjla[ahYl]afl`akka_faÕ[Yfl]f\]Yngj$bmklYkl`]q`Yn] done in China since the late 1980s. The sheer numbers are too tempting for a smart investor to ignore. I do not want to deluge you with statistics right here; so allow me to quote bmklgf]fmeZ]j&A^Af\aYaklgmk]Yeg\]kl)(g^alk?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.

* 3 4 - 6 /

ÉK`jajYe=H;^gjekn]flmj]oal`:]d_aYf?jgmh$ÊAf\aYf:mkaf]kkAfka_`l$)0>]ZjmYjq*((/$naY>Y[lanY¡*()*Af^gjeYla[k Af\aY!Dl\& “Welspun, Leighton forms JV for infra business,” DNA - Daily News & Analysis, 25 December 2010, via Factiva, © 2010. Diligent Media Corporation Ltd. “SBG buys 20% stake in Maytas Infra,” Mist News, 4 August 2010, via Factiva, © 2010 Misr Information Serivices and Trading. É?]jeYf]f_af]]jaf_ÕjeY[imaj]kKmjYl[gfkljm[lagf[gehYfq$ÊL`]Lae]kg^Af\aY$,9hjad*()*$naY>Y[lanY¡*()*L`]Lae]kg^ India Group “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) (INR trillion)

Eleventh FYP (2007–12) (INR trillion)

Twelfth FYP (2012–17) (INR trillion)

Planned investments

8.7

20.6

56.3

Actual Investments

9.2

23.9

NA

EPC opportunity

4.5

11.4

26.7

Sectoral mix

Power: 30%

Power: 33%

Power: 32%

Roads: 17%

Roads: 19%

Roads: 17%

Telecom: 16%

Telecom: 16%

Telecom: 17%

Railways: 11%

Railways: 8%

Railways: 9%

Irrigation: 13%

Irrigation: 10%

Irrigation: 9%

Ports: 3%

Ports: 3%

Ports: 3%

Oil & Gas: 2%

Oil & Gas: 2%

Oil & Gas: 4%

Others: 8%

Others: 9%

Others: 9%

~50% spend on power and roads — above targeted achievement in power sector

Power and roads consistently amounting to ~50% of planned expenditure — added focus on telecom

Increased thrust on telecommunications — increased expenditure on ports, oil and gas pipelines

Source: Eleventh and Twelfth Five year plan, Planning Commission

@go]n]j$l`]k[]fYjagafl`][gfkljm[lagfaf\mkljq`Yk[`Yf_]\afl`]dYkl^]oq]Yjk&L`]k][lgjak^Y[af_Yka_faÕ[Yfl daima\alq[jmf[`$o`a[`ak^gj[af_d]Y\af_[gehYfa]klgoYalYf\oYl[`Z]^gj]lYcaf_mheYbgjogjc&L`]j][]flÕfYf[aYd lmjegadYf\l`]jmh]]\]hj][aYlagf`Yn]Y\\]\lgl`]mf[]jlYaflq^Y[]\Zql`]af\mkljq&L`]k][lgjakYdkg^Y[af_kge]eYbgj Zglld]f][ck&Akkm]kh]jlYafaf_lghjgb][llYc]%g^^$hYjla[mdYjdql`gk]j]dYlaf_lgdYf\Y[imakalagfYf\]fnajgfe]flYd[d]YjYf[]k$ delay due to regulatory changes and indecision call for immediate attention of the government to reduce execution delays and thereby control cost overruns. With such delays and uncertainty round the construction commencement, EPC pricing dgk]kalknYda\alq&>mjl`]jegj][Yk`klj]kkkalmYlagf$o]Yc]faf_ÕfYf[aYdklj]f_l`g^Zgl`[gfljY[lgjkYf\\]n]dgh]jk$Ydgf_ oal`ngdYladalqafeYl]jaYdhja[]`YkeY\]hjgb][l]p][mlagf\a^Õ[mdl&an]Q]YjHdYf Lo]d^l`>QH! The Twelfth FYP envisages investment of approximately INR56.3 trillion in Indian infrastructure between 2012 and *()/&L`ak$aflmjf$ak]ph][l]\lgg^^]jka_faÕ[Yflghhgjlmfala]k^gj=H;Y[jgkknYjagmkk][lgjk8. During the period, the [gfkljm[lagfghhgjlmfalqafl`]af^jYkljm[lmj]k][lgjak]klaeYl]\lgZ]Yjgmf\AFJ*.&/ljaddagf YhhjgpaeYl]dq,/g^hdYff]\ afn]kle]flk!&Ka_faÕ[Yflafn]kle]flkafaf^jYkljm[lmj]hjgb][lk$Ydgf_oal`l`]j]nanYdafl`]j]Yd]klYl]k][lgjYf\_jgol`af industrial capex are likely to boost the construction industry and act as catalyst for growth of EPC companies in India9. O`ad]=H;[gfljY[lgjk[gflafm]lgZ]l`]mdlaeYl]Z]f]Õ[aYja]kg^af^jYkljm[lmj]afn]kle]flk$l`]Y\n]flg^f]oeg\]dk`Yk changed the clientele base for them — from government authorities to a mix of public and private clients. Planned investments in infrastructure in the Twelfth FYP: INR56,316.9 billion 3%

3% 2%2%1%

5% 32% 9%

Power

Ports and Inland Water Transport

Roads & Bridges

Oil & Gas

Telecommunications

Mass Rapid Transit System

Railways

Airports

Irrigation and Watershed

Storage

Water supply and Sanitation

9%

17%

17%

Source: Twelfth Five Year Plan document, Planning Commission 0 1

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*()+& 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 Total planned investment in Twelfth FYP (INR billion)

Construction intensity10

Construction opportunity (INR billion)

Roads and bridges

9,694.1

65%

6,301.1

Railways

5,218.0

78%

4,070.0

Mass Rapid Transit System (MRTS)

1,241.6

78%

968.4

Ports and Inland Water Transport (IWT)

1,977.8

50%

988.9

877.1

42%

368.4

Water supply and sanitation

2,549.5

66%

1,682.7

Irrigation and watershed

5,043.7

75%

3,782.8

18,202.4

38%

6,916.9

9,439.0

10%

943.9

Storage*

584.4

50%

292.2

Oil & Gas

1,489.3

25%

372.3

Sector

Airports

Power Telecommunications*

Total

56,316.9

26,687.7

Source: Twelfth Five Year Plan document, Planning Commission, EY research, Engineering, Procurement and Construction (EPC): Driving _jgol`]^Õ[a]fldq$ EY, 2011; *Construction intensity is assumed with comparison to buildings as per data available in the Planning Commission’s report. In the case of telecom, construction intensity of 10% has been assumed.

L`][gfkljm[lagfafl]fkalq$o`a[`nYja]kka_faÕ[YfldqY[jgkkaf^jYkljm[lmj]k][lgjk$aehY[lkl`]ghhgjlmfalq^gj=H;hdYq]jk more directly than the investment planned. While construction-intensive sectors such as roads, railways and MRTS together account for 28% of infrastructure investments, they contribute nearly 42% to the total EPC opportunity. On the other hand, the telecom sector, which has the third-largest investment in infrastructure, accounts for only 3.5% of the total EPC opportunity11.

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.

35%

30.0% 32.7% 32.3%

Comparison of segment-wise composition of infrastructure expenditure

0.8% 1.5% 1.6%

0.6% 0.8% 1.0%

Airports

Storage

0.3% 1.7% 2.2%

2.6% 2.6% 2.6%

5%

2.4% 1.9% 3.5%

10%

6.6% 5.1% 4.5%

15%

13.3% 10.2% 9.0%

20%

11.0% 8.4% 9.3%

25%

15.8% 16.1% 16.8%

16.7% 19.0% 17.2%

30%

10th FYP [INR9.2 billion]

11th FYP [INR23.9 billion]

Mass Rapid Transit System

Oil & Gas

Ports and Inland Water Transport

Water supply and Sanitation

Irrigation and Watershed

Railways

Telecommunications

Roads & Bridges

Power

0%

12th FYP (P) [INR56.3 billion]

Source: Twelfth Five Year Plan and Eleventh Five Year Plan, Planning Commission H!ÇhdYff]\Õ_mj]k^gjl`]Lo]d^l`>QH

The telecom sector has been witnessing increasing investment over the past 10 years. During the Twelfth FYP period, almost 17% of investments, expected to be invested in this sector, is estimated to witness a CAGR of ~10% from 2012 to 2017. Another sector, which has gained increasing prominence is the MRTS segment — with the GoI’s spend on the sector expected to increase from 0.3% of its total infrastructure spend during the Tenth FYP to 2.2% in the Twelfth FYP17.

13 ÉHYf]dlg^Ykl%ljY[ce]_Yhjgb][lk_]lk?gnlÌkfg\$ÊHgdala[YdYf\:mkaf]kkdYk`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 Private

States

11th FYP

12th FYP (P)

Centre

Source: Twelfth Five Year Plan and Eleventh Five Year Plan, Planning Commission (P) – Planned

With a planned investment of INR9.7 trillion and construction intensity of 65%, the sector offers construction opportunities worth INR6.3 trillion in the Twelfth FYP. During the Twelfth FYP period, around INR3.3 trillion of investments are expected from the private sector, out of which INR2.4 trillion is planned to be awarded through National Highway Development Hjg_jYee] F@Q)*Ç)-$af[dm\af_0$0((ceaf>Q)+ Y[lmYdYoYj\]\*(gj)$/.(ce!Yf\1$(((ceaf>Q),20.

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$ÊThe Economic Times, 17 April 2013, via Factiva © 2013 The Lae]kg^Af\aY?jgmh3=H;2Q)*$gmlg^YlglYdg^ INR1,277.9 billion sanctioned22.

Railways Af\aYfJYadoYqkf]logjckhYfkegj]l`Yf.,$.((ce$eYcaf_all`]ogjd\Ìk^gmjl`%dYj_]kljYadf]logjcafl]jekg^kar]&Af addition it is the largest passenger carrier and the fourth-largest rail freight carrier globally. In the Twelfth FYP, the total investment for railways is estimated to be INR5.2 trillion. Construction intensity in railways is around 78%, which will result in opportunities worth INR4.1 trillion during the Twelfth FYP23. Investments in railways (INR billion) 6,000 5,000 4,000 3,000 2,000 1,000 0 Private

10th FYP

11th FYP

12th FYP (P)

Centre

Source: Twelfth Five Year Plan and Eleventh Five Year Plan, Planning Commission

21 ÉFYlagfYd@a_`oYqQH$AFJ*&(ljaddagfoYkafn]kl]\afjYadoYqkYk[gehYj]\lgYlYj_]lg^AFJ*&-ljaddagf&JYadhjgb][lkafAf\aY have been typically the domain of the public sector. However, based on the success of PPP in other infrastructure sectors, l`]Af\aYfJYadoYqk`YkbmklZ]_mflglYc]kl]hklg]phdgj]l`]HHHjgml]$Yf\YaeklgYoYj\AFJ)&(ljaddagfl`jgm_`l`]HHH route in the Twelfth FYP24. Physical progress, (in kms.), during the Tenth FYP and Eleventh FYP Tenth FYP (actual)

Eleventh FYP (estimated)

Eleventh FYP (actual)

920

2,000

2,205

Gauge conversion

4,289

10,000

5,290

Doubling

1,300

6,000

2,756

JYadoYq]d][ljaÕ[Ylagf

1,810

3,500

4,501

New lines

Source: Twelfth Five Year Plan document, Planning Commission

L`]Eafakljqg^JYadoYqk EgJ!Yf\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 Lan]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\^$Y[[]kk]\*-G[lgZ]j*()+& 48 =H;2an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$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 Private

States

11th FYP

12th FYP (P)

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 achieved

ONGC

OIL

Private

Total

Crude oil production EEL!

124

18

35

177

86%

133

20

63

216

Gas production :;E!

114

12

86

213

83%

144

20

177

341

-

-

-

213

88%

-

-

-

314

J]Õfaf_ 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$N]f]rm]dYYf\ ;gdgeZaY&QH$GF?;$GADYf\hjanYl]'BN[gehYfa]kYj]]ph][l]\lg k`ggl*an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$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 Private

States

11th FYP

12th FYP (P)

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  Organizing house‐to‐house collection  Segregating recyclable materials

JnNURM Programme Reform linked to urban infrastructure investment

2000 1991 74th Constitutional Amendment Act Treat urban water as a state subject

E‐waste management and handling rules  reuse and recover useful material from e‐waste thereby reducing hazardous wastes

2005

2011

2002 National Water Policy  Increased private participation  Priority given to supply of drinking water  Privatization

2009 National Water Mission  Framework to increase l`]]^Õ[a]f[qg^oYl]j usage by 20%  Bureau of Water =^Õ[a]f[q^gje]\

Focus towards funding of the urban infrastructure projects

2012 Review of NWP – draft 2012  Water as an economic need  =^Õ[a]f[qg^mkY_] volumetric pricing  establishment of water regulation authorities

>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`]BYhYfan]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

2013

2015

Commercial

Industrial

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`]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;2Annuity->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;2an]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 LGQH$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>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_$l`])((>Y[lanY¡*()+L`]KlYl]keYfDl\&3ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf&fa[&af'hdYfk'hdYfj]d')*l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+3É+&*,Zf^gj Q(0lg)(&1EELH9af>Q)+!70&L`]j]^gj]$l`]?gA`YkhdYff]\lgaf[j]Yk]l`]DF?j]%_YkaÕ[Ylagf[YhY[alqlg YhhjgpaeYl]dq-(EELH9af>Q)/$oal`_j]]fÕ]d\DF?l]jeafYdkhjghgk]\lgZ]k]lmhZqhjanYl]Yf\hmZda[k][lgj companies71. The GoI had also approved the long-awaited shale gas and oil exploration policy in September 2013, which will enable it to offer shale oil and gas blocks to other companies; however, the decision is pending cabinet approval72. In the pipeline EPC segment, the GoI has planned an investment of INR1.5 trillion for the Twelfth FYP. It is estimated that a length of 15,928 km of pipeline will be added in the Twelfth FYP73&L`]j]Õfaf_[YhY[alqak]klaeYl]\lgaf[j]Yk]ZqYhhjgpaeYl]dq,/ to 314 MMTPA by the end of Twelfth FYP74&AG;DhdYfklgafn]klAFJ-((Zaddagflg]phYf\alkj]Õfaf_[YhY[alqYf\k]llaf_mh Yf]oj]Õf]jqgfl`]o]kl[gYklg^Af\aY75.

69

70 71 72

73 74 75

near Bangalore,” Mint, 18 October 2012, via Factiva © 2012 HT Media Limited. “KERALA PLANS MEGA MANUFACTURING ZONES OAL@Jk,0$0*-%;JGJ=GMLD9Q$ÊAf\aYf:mkaf]kkAfka_`l$1G[lgZ]j*()+naY>Y[lanY¡*()+Af^gjeYla[k Af\aY!Dl\& “Report of Working Group on Warehousing Development and Regulation,” Planning Commission website$`llh2''hdYffaf_[geeakkagf&fa[& af'YZgmlmk'[geeall]]'ojc_jh)*'hh'o_WoYj]&h\^$Y[[]kk]\.Fgn]eZ]j*()+3É;YhY[alqYf\MladakYlagfg^OYj]`gmk]k Gof]\'@aj]\ ;gn]j]\!mf\]j;]fljYdOYj]`gmkaf_;gjhgjYlagfafAf\aY )11/%)110lg*())%*()*!$ÊIndiaStat website$`llh2''ooo&af\aYklYl&[ge' lYZd]'Y_ja[mdlmj]'*'[]fljYdoYj]`gmkaf_[gjhgjYlagfklYl]oYj]`gmkaf_[gjhgjYlagf'+*/*-'+1,..0'\YlY&Ykhp$Y[[]kk]\.Fgn]eZ]j *()+3ÉLo]d^l`>an]Q]YjHdYf*()*%*()/Ç=[gfgea[K][lgjk Ngdme]AA!$ÊPlanning Commission website$`llh2''hdYffaf_[geeakkagf& fa[&af'hdYfk'hdYfj]d')*l`hdYf'h\^'ngdW*&h\^$Y[[]kk]\*-G[lgZ]j*()+ “Import of LNG,” PPAC website$`llh2''hhY[&gj_&af'$Y[[]kk]\-G[lgZ]j*()+ ÉY[lanY¡*())=[gfgea[J]k]Yj[` India Pvt. Ltd. 79 ÉO]dkhmfAf^jYHjgb][lkY[imaj]k+-klYc]afD]a_`lgf;gfljY[lgjk Af\aY!$ÊafYf[aYdMFJGEHAJ9E9D=FL=JHJAK=K naY\]Z]flmj]k!$ÊAf\aYf:mkaf]kkAfka_`l$),9hjad*()+$ naY>Y[lanY¡*()+Af^gjeYla[k Af\aY!Dl\&

Engineering, Procurement and Construction (EPC): Braving the headwinds

45

Capital markets =H;[gehYfa]k`Yn]lqha[YddqY[[]kk]\[YhalYdeYjc]lklgjYak]^mf\k^gjl`]ajhjgb][lkYf\lge]]ll`]ajogjcaf_[YhalYd j]imaj]e]flk&L`]q]Yj*()(oalf]kk]\l`]eYpaemeY[lanalqafl`]k][lgj$oal`^mf\klgl`]lmf]g^AFJ-(&/ZaddagfÖgoaf_ into the sector90. Funds raised through IPOs of construction companies 60 50.7 50

INR billion

40

30

20

10

6.7

5.2

6.0

4.2 1.0

0.6

1.8

0 2005

2006

2007

2008

2009

2010

2011

2012

Source: Dealogic

While there are many companies that would have considered an IPO to provide exit to PE investor, the current stock market akfgl[gf\m[an]]fgm_`$oal`klg[cklYfcaf_lgYdd%lae]dgok&@]f[]$o]k]]Yka_faÕ[Yflkdgo\gofafl`]AHGY[lanalq\mjaf_ 2011 and 2012 with no IPO till date in 2013.There would be a host of EPC companies listing on the stock market if the stock markets have been favourable, since all the PE investments that took place during 2006–09 are due for an exit. Finally how many of these will take the IPO route is yet to be witnessed.

90 Industry IPO data, via Dealogic

46

Engineering, Procurement and Construction (EPC): Braving the headwinds

3.5 Evolution of the market landscape >gjl`]hmjhgk]g^gmjYfYdqkak$o]`Yn][gfka\]j]\k]d][ldakl]\=H;[gehYfa]k$Y[[gj\af_lgl`][Yl]_gjarYlagfe]flagf]\ below:

 DYj_]%kar]\[gehYfa]k2>Q)+j]n]fm]g^egj]l`YfAFJ,(&(Zaddagf  Ea\%kar]\[gehYfa]k2>Q)+j]n]fm]Z]lo]]fAFJ)(&(ZaddagfYf\AFJ,(&(Zaddagf&  KeYdd%kar]\[gehYfa]k2>Q)+j]n]fm]d]kkl`YfAFJ)(&(Zaddagf& Category

No of companies

Total revenue FY13 (INR billion)

Large-sized companies

10

1,341

Medium-sized companies

21

444

Small-sized companies

22

127

Total

53

1,912

List of large-sized, mid-sized and small-sized (by revenue) companies Large-sized players

Mid-sized players

Small-sized players

Larsen & Toubro Ltd.

Ramky Infrastructure Ltd.

Hindustan Dorr-Oliver Ltd.

HmfbDdgq\Dl\&

National Building Construction Ltd.

BCmeYjAf^jYhjgb][lkDl\&

Hindustan Construction Company Ltd.

Jyoti Structures Ltd.

A2Z Maintenance & Engineering Services Ltd.

Gammon India Ltd.

McNally Bharat Engineering Company Ltd.

EY\`m[gfHjgb][lkDl\&

NCC Ltd.

BE;Hjgb][lk Af\aY!Dl\&

9JKKAf^jYkljm[lmj]Hjgb][lkDl\&

Kalpataru Power Transmission Ltd.

Engineers India Ltd.

KNR Constructions Ltd.

Simplex Infrastructure Ltd.

Unity Infrastructures Ltd.

Valecha Engineering Ltd.

Era Infra Engineering Ltd.

Supreme Infrastructure India Limited

Vascon Engineering Ltd.

IVRCL Ltd.

IL&FS Engineering & Construction Company Ltd.

Techno Electric & Engineering Company Ltd.

Patel Engineering Ltd.

Sadbhav Engineering Ltd.

Tantia Construction Ltd.

Consolidated Construction Consortium Ltd.

BYa`af\Hjgb][lkDl\&

?YqYljaHjgb][lkDl\&

UB Engineering Ltd.

Shriram EPC Ltd.

Petron Engineering Construction Ltd.

Ashoka Buildcon Ltd.

Kaehd]pHjgb][lkDl\&

Pratibha Industries Ltd.

Man Infraconstruction Ltd.

ITD Cementation India Ltd.

O]dkhmfHjgb][lkDl\&

B L Kashyap & Sons Ltd.

PBA Infrastructure Ltd.

9`dmoYdaY;gfljY[lk Af\aY!Dl\&

CYdaf\]]JYadFajeYf =f_af]]jk!Dl\&

MBL Infrastructures Ltd.

Tarmat Ltd.

C&C Constructions Co. Ltd.

Coromandel Engineering Company Ltd.

SPML Infra Ltd.

Atlanta Ltd. Marg Ltd.

Engineering, Procurement and Construction (EPC): Braving the headwinds

47

Market evolution 30

27

27 24

Fgg^[gehYfa]k

25 20

20

26

22

21 18

22

18

15 10 5

6

10

9

8

7

0 FY09 Fg&g^dYj_]kar]\[gehYfa]k

FY10

FY11

Fg&g^e]\amekar]\[gehYfa]k

FY12

FY13

Fg&g^keYddkar]\[gehYfa]k

Fgl]2L`]YZgn]_jYh`j]Ö][lkl`]k`a^lafl`]j]n]fm]hjgÕd]g^[gehYfa]kgn]jl`]q]Yjk [gfka\]j]\^gjl`]hmjhgk]g^gmjYfYdqkak!

EYjc]lkar]Yf\hjgÔlYZadalq Particulars

FY 09

FY 10

FY 11

FY 12

FY 13

Large-sized companies

835

922

1,054

1,243

1,341

Mid-sized companies

254

307

376

454

444

82

132

146

139

127

1,172

1,360

1,576

1,836

1,913

40

45

50

45

36

Mid-sized companies

9

13

18

16

11

Small-sized companies

5

9

7

*!

,!

54

68

75

59

43

Revenue (INR billion)

Small-sized companies Total PAT (INR billion) Large-sized companies

Total

Kgmj[]2;gehYfqYffmYdj]hgjlkYf\;YhalYdaf]$=Qj]k]Yj[`ZYk]\gf[gehYfa]ke]flagf]\afdaklg^dYj_]%kar]\$ea\%kar]\Yf\keYdd%kar]\ Zqj]n]fm]![gehYfa]k

Total revenues have grown at a CAGR of 13.0% during FY09–FY13; however, total PAT decreased at a CAGR of -5.4%. This af\a[Yl]kl`Ylj]n]fm]k`Yn]emdlahda]\Yll`][gklg^mdlaeYl]hjgÕlYZadalq&EYfq[gehYfa]k`Yn]j]hgjl]\f]_Ylan]H9L \mjaf_>Q)+$l`]j]Zq\aklgjlaf_eYjc]l][gfgea[k&L`aklj]f\j]Ö][lkajjYlagfYdZa\\af_lgk][mj]gj\]jZggc$\]dYq'fgf% recovery of receivables, leading to increased working capital. This will result in increase in debt requirements, as well as a \]dYqafl`]]p][mlagfg^hjgb][lk$j]f\]jaf_l`]Za\hja[]afnYda\&

48

Engineering, Procurement and Construction (EPC): Braving the headwinds

Market capitalization performance 300 250 200 150 100 50 0 FY08

FY09

Large

FY10

Mid

FY11

Small

FY12

FY13

FY14H1

Sensex

Source: company annual reports & Capitaline, EY research based on companies mentioned in list of large-sized, mid-sized and small-sized (by revenue) companies

Q(0Ç>Q)*$egklg^l`]=H;klg[ck$hYjla[mdYjdql`]dYj_]%Yf\ea\%kar]\gf]k$egn]\aflYf\]eoal`l`]K]fk]p& However, after FY12, the correlation reversed, and EPC stocks have been witnessing a negative trend since then. The stocks have actually touched all-time lows during FY13–14. While the Sensex has yielded a positive movement of around 17% during 1HFY14 from FY08, EPC companies’ market cap has reduced by 25%–50%. O]k]]l`]eYjc]l[YhalYdarYlagfg^keYdd%kar]\klg[ckjakaf_\mjaf_>Q))3l`akak\m]lgl`]aehY[lg^^j]k`daklaf_g^keYdd[Yh companies on the stock market.91 Debt/market capitalization91 8.00

Debt/market cap (x)

7.00 6.00 5.00 4.00 3.00 2.00 1.00 FY09 Large sized companies

FY10

FY11 Mid sized companies

FY12

FY13

Small sized companies

Source: company annual reports & Capitaline, EY research based on companies mentioned in list of large-sized, mid-sized and small-sized (by revenue) companies

91 L`][Yd[mdYlagfakZYk]\gfl`]lglYd\]Zl'eYjc]l[YhjYlagYf\[gfka\]jke]\aYffmeZ]j^gjl`]hmjhgk]g^YfYdqkakYf\[gehYjakgf& >gj]pYehd]$>Q(1fmeZ]jkYj][Yd[mdYl]\YklglYd\]ZlYkgf+)EYj[`*((1'Yn]jY_]eYjc]l[Yh\mjaf_>Q)(&

Engineering, Procurement and Construction (EPC): Braving the headwinds

49

L`]YZgn]_jYh`$`a_`da_`laf_l`]jYlagg^lglYd\]Zl'eYjc]l[YhalYdarYlagf$af\a[Yl]kl`]\]l]jagjYlaf_ÕfYf[aYd`]Ydl`g^ [gehYfa]k&Q(1$`YkfgoZ][ge]Yemdlahd]g^v.Ç/ lae]kl`]eYjc]l[YhalYdarYlagf&92 Market capitalization/revenue92

Market cap /revenue (x)

1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00

FY09

Large sized companies

FY10

FY11 Mid sized companies

FY12

FY13

Small sized companies

Source: Company Annual Reports & Capitaline, EY research based on companies mentioned in list of large-sized, mid-sized and small-sized (by revenue) companies

The trend as indicated in the graph above indicates the extent to which the trading market cap of the companies is j]Ö][laf_l`]ajj]n]fm]k&O`]f[gehYj]\oal`>Q(1$o]k]]Y[d]Yjdq\][j]Ykaf_lj]f\&L`akak\m]lgl`]`algfhjgÕlYZadalq `a_`da_`l]\aflYZd]gfeYjc]lkar]Yf\hjgÕlYZadalq!]n]fl`gm_`j]n]fm]k`Yn]af[j]Yk]\kmZklYflaYddq&

92 L`][Yd[mdYlagfakZYk]\gfEYjc]l;Yh'J]n]fm]jYlag&>gj]pYehd]$>Q(1fmeZ]jkYj][Yd[mdYl]\YkeYjc]l[Yh\mjaf_>Q)('J]n]fm] as on 31 March 2009.

50

Engineering, Procurement and Construction (EPC): Braving the headwinds

Engineering, Procurement and Construction (EPC): Braving the headwinds

51

4 52

Key challenges

Engineering, Procurement and Construction (EPC): Braving the headwinds

,&)Akl`]hjgb][lZa\naYZd]7 Hjgb][lk]d][lagfZ][ge]kl`]c]qlgeYaflYafaf_hjgÕlYZadalqo`]fghhgjlmfala]kYj]Yhd]flqYf\[geh]lalagfakka_faÕ[Yfl& A^hjgb][lkYj]fglk]d][l]\bm\a[agmkdq$l`]qeYq\jYafj]kgmj[]koal`gmlhjgna\af_[gee]fkmjYl]j]lmjfk&L`]j]^gj]$fgl gfdq\g]kaehjgh]jhjgb][lk]d][lagfY^^][ll`]ÕfYf[aYd`]Ydl`g^Y[gehYfq$ZmlalYdkgf]_Ylan]dqaehY[lkalk_gg\oadd&O`ad] kge]\]dYqkYj]\m]lgj]_mdYlgjq`mj\d]k$gl`]jkYj][Ymk]\Zq^gj[]eYb]mj]^Y[lgjk& 9[Yj]^md]pYeafYlagfg^Yhjgb][l$hjagjlgZa\\af_$ak]kk]flaYdlgeala_Yl]Yfqmf]ph][l]\^mlmj]\]n]dghe]flk&EYfq contractors faced the brunt of aggressive bidding when their companies incurred losses. It is therefore pertinent to take into [gfka\]jYlagf_jgmf\j]Ydala]kYf\mf[]jlYafla]kkm[`Yk[mjj]f[q\]hj][aYlagfo`ad][gklaf_^gjl`]hjgb][l&>Y[lgjkkm[`Yk [mjj]f[qÖm[lmYlagfk`Yn]Y\n]jk]dqaehY[l]\l`][gfkljm[lagfk][lgjafl`]hYkl&9DDHMK@=KHJGB=;L;GKLK:QMHLG)-$Ê;gfkljm[lagfKh`]j]$+)9m_mkl*()+$`llh2''ooo&[gfkljm[lagfkh`]j]&[ge' af\]p&h`h'[gehgf]fl'c*'al]e'))+(%jmh]]%^Ydd%hmk`]k%hjgb][l%[gklk%Zq%mh%lg%)-$Y[[]kk]\gf)*G[lgZ]j*()+&3ÉAehY[lg^>gj]a_f ;mjj]f[qgfHjgb][lQ)+j]n]fm]6AFJ,(Zaddagf!`Yn]Yhjgegl]jklYc]g^d]kkl`Yf-(&Gmlg^)(dYj_] kar]\[gehYfa]k[gfka\]j]\^gjYfYdqkak$-[gehYfa]k`Yn]hjgegl]jklYc]kg^d]kkl`Yf-)&KaeadYjdq$^gjea\Yf\keYdd kar]\[Yl]_gja]k l`Yl`Yn]Z]]f[gfka\]j]\^gjYfYdqkak!$egj]l`Yf`Yd^g^[gehYfa]kYj]]p`aZalaf_km[`lj]f\&@]f[]$ there is no scope for fund raise through further equity dilution at the parent level.

4.3 Debt to equity equation has reversed. How will debt be serviced? Total debt to book equity ratio 2.50

Debt/equity (x)

2.00 1.50 1.00 0.50 FY09

DYj_]kar]\[gehYfa]k

FY10

FY11

Ea\kar]\[gehYfa]k

FY12

FY13

KeYddkar]\[gehYfa]k

Source: Company annual reports & Capitaline Fgl]2L`]YZgn]_jYh`j]Ö][lke]\aYffmeZ]j^gjl`]hmjhgk]g^YfYdqkakYf\[gehYjakgf

The above analysis clearly indicates the burgeoning debt pressures on the books of the company. When compared with FY09, l`]>Q)+\]Zllg]imalqjYlag`Ykaf[j]Yk]\ka_faÕ[Yfldq&L`]af[j]Yk]af\]Zl^gjdYj_]%kar]\[gehYfa]k[YfZ]YlljaZml]\\m] to its exposure to BOT business. Net debt/EBITDA

F]l\]Zl'=:ALgj]pYehd]$>Q(1fmeZ]jkYj][Yd[mdYl]\Yk9n]jY_]EYjc]l;Yh \mjaf_>Q)('LglYd:ggc=imalqYkgf+)EYj[`*((1&

56

Engineering, Procurement and Construction (EPC): Braving the headwinds

Financial snapshot of EPC companies Particulars

FY 09

FY 10

FY 11

FY 12

FY 13

EBIDTA %

9.4%

11.2%

10.8%

8.6%

8.1%

PAT %

3.6%

3.5%

3.0%

1.1%

0.8%

Interest/Revenue

4.8%

4.7%

5.8%

9.0%

9.6%

40.8%

41.1%

38.5%

34.2%

37.6%

10.0%

9.8%

11.9%

9.8%

10.8%

PAT %

4.6%

4.0%

3.9%

2.3%

1.3%

Interest/Revenue

4.2%

4.1%

4.5%

5.4%

7.5%

29.5%

40.3%

35.4%

39.0%

45.0%

EBIDTA %

9.9%

11.6%

9.9%

9.3%

12.2%

PAT %

4.5%

5.9%

4.3%

0.4%

0.1%

Interest/Revenue

4.2%

3.6%

4.4%

6.5%

8.6%

33.0%

30.3%

28.6%

47.6%

42.7%

Large-sized companies

Working Capital/Revenue Mid-sized companies EBIDTA %

Working Capital/Revenue Small-sized companies

Working Capital/Revenue

Note: The above table indicates the median number of the companies considered for analysis

Engineering, Procurement and Construction (EPC): Braving the headwinds

57

4.4 How will PE investors exit? Egklea\%kar]\mfdakl]\[gehYfa]k`Yn]hjanYl]]imalqafn]klgjko`g`Y\afn]kl]\[YhalYd\mjaf_*((.Ç*())&@go]n]j$\m] lgYfY\n]jk][YhalYdeYjc]lkalmYlagf$[gehYfa]k`Yn]fglZ]]fYZd]lgj]kgjllgl`]]palkljYl]_q'AHGjgml]& L`]k][lgj\a\oalf]kk^]okm[[]kk^md]palk`aklgja[YddqafdYj_][gehYfa]k$km[`Yk?YeegfAf\aYDl\&$HmfbDdgq\Dl\&Yf\ Shriram EPC Ltd. However, the trend did not continue for an extended period. PE investments and exits, 2006–2013 Exit deal value high, overall PE investment declining

1,000

PE investments and exits growing

Exits value low, overall PE investments declining

16 14

800

12

700 600

10

500

8

400

6

300

4

200

2

100 0

No. of deals

Total value, US$ million

900

2006

2007

Total PE investment (US$ million) No. of investment deals

2008

2009

2010

2011

2012

2013

0

Total PE exits (US$ million) No. of exit deals

Source: EY research

After 2011, the industry witnessed a decline in the number of exits. Stock markets crashed after 2010, and so did the valuations. Although companies were keen to provide an exit option to such investors, existing capital markets have not been [gf\m[an]^gjYfafalaYdhmZda[g^^]jaf_ AHG!&>]o[gehYfa]k\a\daklgfl`]klg[ceYjc]lkYlYlljY[lan]nYdmYlagfk\mjaf_*((/% 10 thus creating an exit opportunity for the investors. However, few investors chose not to exit with a view to realise higher returns later. Unfortunately, the markets have assumed a continuously downward trend with no correction so far.

58

Engineering, Procurement and Construction (EPC): Braving the headwinds

4.5 Attention to alleviating time and cost overruns AlakYo]dd%]klYZdak`]\^Y[ll`Ylegkl[gfkljm[lagfhjgb][lk`Yn]lg^Y[]l`]jakcg^lae]Yf\[gklgn]jjmfkÈklYlakla[kj]% ]f^gj[]l`ak^Y[l&9kg^Bmdq*()+$gmlg^YlglYdg^.1,gf_gaf_af^jYkljm[lmj]hjgb][lkYoYj\]\Zq;]fljYd?gn]jfe]fl Yml`gjala]k AFJ)&-ZaddagfYf\YZgn]!$*1(km[`hjgb][lko]j]\]dYq]\& Status of infrastructure projects

Delayed

42%

58% Projects on schedule/ahead of k[`]\md]'fgÕp]\\Yl]g^ commissioning

Source: Flash report on central sector projects (INR150 crore and above), Ministry of Statistics and Programme Implementation, July 2013

Oal`afÖYlagfYjqhj]kkmj]khdY_maf_l`]Af\aYf][gfgeq$km[`\]dYqkafhjgb][l[gehd]lagfkd]Y\lgYf]^^][lan][gkl ]k[YdYlagf&L`]*1(\]dYq]\hjgb][lk`Yn]Yfaf[j]e]flYd[gklg^AFJ)&.0ljaddagf$gjY)1[gkl]k[YdYlagf&L`]`a_`oYq k][lgj`Ykk]]fl`]eYpaemefmeZ]jg^\]dYq]\hjgb][lk$hj]\geafYfldq\m]lgdYf\Y[imakalagfYf\Ja_`lg^OYqakkm]k& Other key sectors plagued by cost overruns are power and the railways. Cost overrun in various segments97 Sector

Number of projects delayed

Delay period (months)

Cost overrun (INR billion)

Roads and transport

91

2–108

)1&, )&1!

Power

50

1–102

)0+&1 /&+!

Railways

35

3–240

)$(-+&1 0.&,!

1

8

-*&/ ))&1!

Coal

28

12–72

+(&1 0&)!

Other

85

-

++-&/ )(&,!

Urban infrastructure

97 É*1+\]dYq]\hjgb][lkd]\lg[gklgn]jjmfg^Jk.0C[jgj]$ÊJ]YdlqHdmk, 23 February 2011, via Factiva, © 2011 Adsert Web Solutions Pvt. Ltd.

Engineering, Procurement and Construction (EPC): Braving the headwinds

59

Some key issues and their impact of delay in time and cost overruns

60

Issue

Impact on time

Impact on cost

Land acquisition challenges

jYf[gLgkaE][[Yfa[Y /-&)!$KY\]dea -( klYc]!Yf\KgÕfl]jk&h&Y `gd\af_[gehYfqg^ 9fkYd\g;Yd\Ya]$-(klYc]!

In 2008, Gammon acquired a stake in three Italian companies — Franco Tosi Meccanica for INR2.5 billion, KY\]dea^gjAFJ(&-ZaddagfYf\KgÕfl]j^gjAFJ+&*-Zaddagf99.

Hindustan Construction Company

CYjdKl]af]j ..klYc]!

Af*()($l`akoYk@;;ÌkÕjklafl]jfYlagfYdY[imakalagfYkakaf line with HCC’s strategy to equip HCC with a “total solutions capability” for a facility at a single source100.

Simplex Infrastructure Ltd.

9keYddeafaf_[gehYfq )((klYc]!

In 2012, Simplex Infrastructure Ltd. acquired a subsidiary of US-based Joy Global, Inc., engaged in the business of underground coal mining services in India in 2012101.

11É?YeegfZmqk-(klYc]afAlYdaYf[gKgÕfl]j$ÊBusiness Line (The Hindu), 11 September 2008, via Factiva © 2008 The Hindu Business Line. 100 “Steiner AG,” HCC website$`llh2''ooo&`[[af\aY&[ge'cYjdWkl]af]jY_&h`h$Y[[]kk]\*(Fgn]eZ]j*()+ 101 “Simplex Infrastructures: Outcome of Board Meeting,” Indian Company News Bites – Stock Report, 15 May 2012, via Factiva, © 2012 News Bites Pty Ltd

66

Engineering, Procurement and Construction (EPC): Braving the headwinds

Af\aYf[gehYfa]k`Yn]Ydkg^gjYq]\aflggn]jk]YkeYjc]lkYf\Yj]Za\\af_^gjhjgb][lkl`]j]& Key recent overseas project bids by Indian companies 102, 103, 104, 105 Indian company

Country/ region

Project

EPC sector

Project/ bid/ contract amount (US$ million)

Details

Larsen & Toubro102

MiddleEast and Malaysia

Hydrocarbon

Oil & Gas

3,000

Larsen & Toubro seeks to increase its portfolio in overseas hjgb][lk\m]lgkdgo\gofafl`] domestic infrastructure sector and intense competition from peers. It has set up a separate subsidiary, L&T Hydrocarbon Engineering, for its hydrocarbon business.

Afcons Infrastructure Limited103

Jordan

4-MTPA New Rock phosphate terminal, Aqaba

Ports

200

L`]hjgb][lhjgna\]kYhdYl^gje for Afcons to further bid for port hjgb][lkafYddl`]?md^[gmflja]k&

Essar Projects104

Abu Dhabi

3.6 cubic metre per hour-Spent Caustic Treatment Plant,

Industrial

80

Korea

Carbon Black & Delayed ;gc]j ;:;GFKOAFK>AJKLHJGB=;LAFBGJY[lanY$¡*()(Af^gjeYla[k Af\aY!Dl\& 104É=kkYjHjgb][lkZY_kMK;D!af*((.lghjgna\]dgf_%l]jeÕfYf[]lgnaYZd] af^jYkljm[lmj]hjgb][lk107&KmZk]im]fldq$l`]?gAhjghgk]\af^jYkljm[lmj]\]Zl^mf\k Ak!lgZ]k]lmh]al`]jkljm[lmj]\YkY Fgf%ZYfcaf_>afYf[aYd;gehYfq F:>;!gjYkYemlmYd^mf\&Ak`Yn]Z]]f]fnakY_]\lgjYak]j]kgmj[]kYf\l`jgm_`lYc]% gmlÕfYf[]$[j]\al]f`Yf[]e]flYf\gl`]jaffgnYlan]e]Yfk$hjgna\]dgf_%l]je$dgo%[gkl\]Zl^gjaf^jYkljm[lmj]hjgb][lk& L`ak`YklgZ]Y[`a]n]\Zqmf\]jlYcaf_afn]kle]flaf\]Zlk][mjala]kg^af^jYkljm[lmj][gehYfa]k$af^jYkljm[lmj]ÕfYf[] [gehYfa]k A>;k!gjaf^jYkljm[lmj]hjgb][lkYf\KHNk& In addition to the above, restructuring the tariff framework for ports, seeking international cooperation from other countries for technical support in renewable energy to meet the power generation targets, allowing 100% private sector stake in the development of 17 airports in 11 states, MoUs between state governments and private players for setting up natural gas infrastructure, and allowing FDI of up to 100% under the automatic route in townships, housing, built-up infrastructure and [gfkljm[lagf\]n]dghe]flhjgb][lkYj]kge]g^l`]]pYehd]kg^l`]e]Ykmj]klYc]fZql`]?gAafl`]j][]flq]Yjk$o`a[`oadd continue to boost the EPC industry108. Although these key measures and initiatives taken by the GoI in the recent past is quite promising for the EPC market, it should consider taking some more measures looking at the headwinds faced by the sector.

 ?gn]jfe]flYml`gjala]kk`gmd\\]nak]egj]lYpZ]f]Õlk^gj=H;hdYq]jklgaf[j]Yk]l`]ajhYjla[ahYlagfafaf^jYkljm[lmj] building.

 Dgf_%l]jeaffgnYlan]n]`a[d]kk`gmd\Z]dYmf[`]\lghjgna\]]YkqÕfYf[]lg=H;hdYq]jk&  Y[lanY¡*()+L`]Hjafl]jk Eqkgj]! Private Ltd. 107 “HjgÕd]%AA>;D$Ê IIFCL website$`llh2''ooo&aa^[d&gj_';gfl]fl'hjgÕd]&Ykhp$Y[[]kk]\+(K]hl]eZ]j*()+& 108 “Govt unveils 100 airports in smaller cities,” NBM & CW, 24 September 2013, via Factiva © 2013 NBM Media.

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Engineering, Procurement and Construction (EPC): Braving the headwinds

-&,E]j_]jYf\Y[imakalagfk2[gfkgda\Ylagfakgfl`]`gjargf Several pure-play infrastructure developers, who did not have a construction presence, are now seeking to secure their hjgÕlYZadalqafl`][gfkljm[lagfZmkaf]kkafY\\alagflgl`]ajgofk]_e]flYf\`Yn]Z]]f]phdgjaf_hgkkaZadala]klg\]n]dgh the necessary expertise either organically or inorganically. The sector has witnessed plethora of private equity transaction, particularly during 2006–2011 when around 69 deals got consummated. However, similar track record for the PE exits is yet to be seen. Either the investor exits are held up with dipping stocks or investors chose not to exit at the time of IPO with a view to register aehjgn]\j]lmjfkaf^mlmj]&@go]n]j$l`]eYjc]lk`Yn]fgllmjf]\mho]ddafl`]aj^Yngj&>mjl`]jegj]$l`]j]YdÕfYf[aYd position of the companies has also deteriorated ain the recent past. On this deadlock situation created due to deteriorating balance sheets, the sector is bound to witness “consolidation” and foreign companies targeting Indian EPC companies as inbound transaction opportunities may emerge. Acquisitions will be on the radar to enable exit to private equity players invested in the sector and relieve the cash stress situation of the companies. Dipping valuations on stock markets will not help correct the situation in some time to come. In such circumstances, not many promoters will have the ability to offer buy-back option to PE investors. On the contrary, such promoters holding minority stakes due to multiple rounds of dilution may also consider exiting the business during these tough times, particularly in situations where succession planning by the promoters as the owners of the companies is not yet clear. The current scenario offers an opportunity to cash-rich industrial groups, both domestic and international, who will be keen gfeYbgjalq'[gehd]l]ZmqgmlklgY[`a]n]^mjl`]jk[Yd]g^]paklaf_gh]jYlagfkgjlg_Yaf]fljqaflgl`]k][lgj&L`akeYqYdkg ]fYZd]ljYfk^gjeaf_l`][mjj]flÉ^jY_e]fl]\ÊklYl]g^af\mkljqaflgYfÉgj_Yfar]\Êgf]&

Engineering, Procurement and Construction (EPC): Braving the headwinds

69

6 70

Conclusion

Engineering, Procurement and Construction (EPC): Braving the headwinds

The nation-building initiative of the GoI, the Twelfth FYP, promises a number of opportunities. The indication that 50% of the investments during this period will be contributed by private sector players has further bolstered demand for work to be executed by EPC contractors. However, along with opportunities, the initiative also brings also certain risk and challenges are inevitable, as is evident from the current market situation. The wide range of risks that EPC contractors ^Y[]\mjaf_l`]\]n]dghe]flYdh`Yk]g^Yhjgb][l$gh]jYlagfYdjakckg^jYakaf_ÕfYf[]k$ogjcaf_[YhalYdeYfY_]e]fl$ Õ_`laf_l`]afÖYlagfYjqhj]kkmj]Yf\\]dYqkaf_]llaf_YhhjgnYdk^jgel`][gmfl]jhYjlq$a&]$l`]_gn]jfe]fl$Yj]^mjl`]j l`j]Yl]faf_l`]]^Õ[a]f[qg^l`]k][gfljY[lgjkÌ[gfljY[leYfY_]e]fl[YhYZadala]k& In such a scenario, EPC contractors need to focus on sustaining margins by executing quality orders. This would result in YjgZmklZgllgedaf]Yf\ogmd\eYc]^gjegj]]^Õ[a]fl_jgol`kljYl]_q&Alak`a_`lae]l`Yl=H;[gfljY[lgjklYc]YhYmk] and design a growth strategy that has appropriate risk mitigation mechanisms in place to play a long haul in this highly ]f]j_ar]\af^jYkljm[lmj]k][lgj%d]\=H;eYjc]l& =H;[gfljY[lgjkja\af_l`]oYn]g^[gfka\]jYZd]gj\]jZggckeYq`Yn]lgÕpY^]ol`af_k&F]ohjgb][lkk`gmd\Z] targeted as long-term commitments to counterparty for on-time delivery and well within the budgeted costs with minimal escalations and claims. Competition can be beaten down by technical innovation, value engineering and, if required, strategic tie ups. EPC contractors cannot limit themselves to the singular role of planning, executing and delivery. They have to move from EPC to EPCM and engage in activities across the value chain. JYlagfYdarYlagfafl`]Za\\af_hjg[]kk^gj=H;[gfljY[lkakYemkl^gj]Y[`g^l`][gmfl]jhYjla]kÈl`]_gn]jfe]fl and the private sector. As a result of this deadlock situation, created due to deteriorating balance sheets, the sector is witnessing “consolidation” and emergence of foreign companies interested in acquiring Indian EPC companies. This is because inbound transaction opportunities may well be the way out, especially for businesses that may want to move on. >gjkge]$l`akeYq]n]fZ]Yfghhgjlmfalqlg[j]Yl]^mjl`]jkar]Yf\k[Yd]&E]j_]jkYf\Y[imakalagfkeYqYdkgljYfkdYl] into exit opportunities for private equity players that are invested in the EPC sector and are seeking exit options. To conclude, the sector needs to undergo a high level of transformation to ensure sustainability. The sector, strongly upheld by the infrastructure story, has great potential to grow further, with the Twelfth FYP targeting infrastructure kh]f\g^AFJ-.&+ljaddagf&@go]n]j$Éhjgb][lkÊYf\ÊhjgÕlkÊf]]\lgZ]eYfY_]\o]ddÈY[lmYd[Yk`j]YdarYlagf^jge hjgb][lkaklgZ]j][cgf]\&

Engineering, Procurement and Construction (EPC): Braving the headwinds

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7 72

Supplemental

Engineering, Procurement and Construction (EPC): Braving the headwinds

Know your tax 9[d]YjYf\]^Õ[a]fllYpYlagfj]_ae]akYemkl^gjYlljY[laf_^gj]a_fafn]kle]flkafl`][gmfljq&9dl`gm_`l`]?gA`YkZ]]f trying to provide clarity, the issues seem far from being settled. Taxability of EPC contracts in India has always had an array of tax issues. In India, taxation of EPC contracts revolves around the nature of activities of each contract. Generally, the EPC contract is Za^mj[Yl]\aflgkmhhdq$[gfkljm[lagf$]f_af]]jaf_k]jna[]k$afklYddYlagf'kmh]jnakgjqk]jna[]kYf\[geeakkagfaf_k]jna[]k& Af[Yk]g^gn]jk]Yk=H;[gfljY[lgj$l`][gfljY[lakZjgc]f\goflgÈg^^k`gj]hgjlagf a&]&$g^^k`gj]kmhhdqYf\g^^k`gj] k]jna[]k!Yf\gfk`gj]hgjlagf a&]&$gfk`gj]kmhhdqYf\gfk`gj]k]jna[]k!& Direct-tax controversies under EPC contract are in the like of taxability of offshore supply, payments for engineering designs, [gfkgjlamekn&9kkg[aYlagfg^H]jkgfk 9GH!$h]jeYf]fl]klYZdak`e]flYf\oal``gd\af_lYpgZda_Ylagfk]l[&

Direct taxes Taxing offshore supply (relevant in case of foreign EPC contractor) Af=H;[gfljY[lk$l`]c]q[gehgf]floaddZ]hjg[mj]e]flg^]imahe]fl'eY[`af]jqlgZ]afklYdd]\afl`]hjgb][l&Hj]% \geafYfldq$alakl`]^gj]a_fhYjlqg^l`][gfkgjlame$o`gogmd\Z]j]khgfkaZd]^gjkm[`hjg[mj]e]fl^jgegmlka\]Af\aY oal` ]p[]hlagfg^^]oeYbgjAf\aYfhdYq]jkkm[`Yk:@=D$DL]l[&!&Egj]gn]j$l`]g^^k`gj]kmhhdq[gehjak]kYeYbgj[gehgf]fl of the total contract value. In the idealistic scenario, parties would want offshore supply being not taxed in India since the same carry an increased margin as compared to other components of EPC contract. Usually, supply of such equipment will not be taxable in India provided all the components of sale of such equipment take place outside India and the contract for supply is on a principal-to-principal basis. @go]n]j$]n]foal`YnYadYZadalqg^bm\a[aYdhj][]\]f[]^Yngjaf_l`]fgf%lYpYZadalqg^g^^k`gj]kmhhdq$l`]akkm]g^alklYpYZadalq has been a matter of litigation for several companies. Accordingly, many foreign companies are applying to the Authority of Advance Ruling for certainty and clarity on tax implication on offshore supply.

Engineering, Procurement and Construction (EPC): Braving the headwinds

73

Offshore services and Royalty L`]lYpYZadalqg^l`]g^^k`gj]k]jna[]k`YkZ]]fY\]ZYl]gfY[[gmflg^bm\a[aYdhjgfgmf[]e]fl\]fqaf_l`]hgkalagfY\ghl]\ Zql`]Af\aYfJ]n]fm]9ml`gjala]k AJ9!lglYpkm[`af[ge]afAf\aY&Oal`YfYe]f\e]flafl`]\ge]kla[dYo$l`]?gA`Yk intended to clarify that the offshore services will be taxable in India. As regards the provision of engineering designs and drawings there has been ambiguity with regard to whether the same should be taxable as royalty should be regarded as service. Furthermore, by way of a recent amendment, the withholding tax rate on payments for royalty and fees for technical services has been increased to 25%. Having said so, one would need to evaluate the taxability of such services in light of the treaty protection available in the relevant DTAA.

Permanent Establishment (PE) Another dimension of the provision of services under the EPC contract would be providing supervisory and monitoring k]jna[]k\mjaf_l`]afklYddYlagfYf\]j][lagfh`Yk]&L`akoadd\]Õfal]dqj]imaj]hj]k]f[]g^]ph]ja]f[]\Yf\kcadd]\]ehdgq]]k of the foreign party in India. This could often result in continuous taxable presence in India, i.e., a permanent establishment H=!&9[gfklalmlagfg^H=^gjY^gj]a_fhYjlqafAf\aYoaddl`]fgh]f`gklg^lYpakkm]kkm[`YkYlljaZmlagfg^af[ge]lgkm[`H=$ compliance requirements etc. Hence, it would be advisable to carefully evaluate the need for a presence in India keeping in mind the availability of any treaty protection.

Taxing a consortium Lqha[Yddq$^gj]a_f[gehYfa]kZa\^gj=H;[gfljY[lkafAf\aYZq^gjeaf_bgafln]flmj]gj[gfkgjlameoal`gl`]j^gj]a_fgjAf\aYf companies. A lead member of the consortium is chosen who normally drives the awarded contract. However, the members lgl`][gfkgjlameeYqgjeYqfglZ]bgafldqYf\k]n]jYddqdaYZd]&L`akZ]af_l`][gee]j[aYdmf\]jklYf\af_$afl]jk]l`] [gfkgjlamehYjla]k$l`][`Ydd]f_][ge]ko`ad]afl]jhj]lYlagfg^l`]=H;[gfljY[lZ]lo]]f[gfkgjlameYf\l`]hjgb][lgof]j& More often than not, the EPC contract contains ambiguous terms with regard to scope of work, responsibility and fees toward ]Y[`hYjlqg^l`][gfkgjlame&>mjl`]jegj]$l`]hjgb][lgof]jkogmd\dac]lgeYc]Yddl`]e]eZ]jkg^l`][gfkgjlamebgafldq and severally liable for the performance under the EPC contract. Afna]og^l`]kYe]$l`]lYpYZadalqg^l`]=H;[gfljY[l`YkZ]]fkmZb][leYll]jg^dala_Ylagf&Fme]jgmkjmdaf_k`Yn]k]lgml various principles to determine the taxability of the consortium. However, after the Vodafone case, the Indian Revenue 9ml`gjala]k AJ9!`Yn]Z]]fafkaklaf_gfY\ghlaf_ÉdggcYlÊYhhjgY[`^gjl`]=H;[gfljY[ljYl`]jl`YfYÉdggc%l`jgm_`Ê approach. It suggests that the consortium contract should be read as a whole and construe all the clauses set forth in the [gfl]plg^l`]gZb][lYf\hmjhgk]kgm_`llgZ]Y[`a]n]\Zql`][gfljY[l& In absence of clear demarcation of responsibilities under the EPC contract, the consortium results in taxing the same as an AOP, rather than taxing the members independently, for their restricted scope. As a consequence, the income of the af\]h]f\]fle]eZ]j$]n]f^jgeg^^k`gj]hgjlagf$o`a[`gl`]joak]k`gmd\fglZ][`Yj_]YZd]lglYp[gmd\Z]kmZb][l]\lglYp in India. Therefore, depending upon the commercial feasibility, the consortium members will have to strike a balance between k]_j]_Ylaf_l`]k[gh]lgZ]mf\]jlYc]fZq]Y[`e]eZ]jnak%€%nakl`][ge^gjlj]imaj]\Zql`]hjgb][lgof]jnak%€%nakbgafl and several liabilities.

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Engineering, Procurement and Construction (EPC): Braving the headwinds

Indirect taxes L`]=H;k][lgjakkmZb][llgemdlahd]af\aj][llYp]k$Zgl`Yll`];]fljYdYf\klYl]d]n]dk&L`][memdYlan]aehY[lg^Yddkm[` levies comprises a substantial percentage of the total contract value and hence, it is important for companies executing EPC [gfljY[llgkljm[lmj]l`]aj[gflY[lkafYlYp%]^Õ[a]fleYff]jafY\nYf[]&9_aklg^c]qAf\aj][llYp]kYhhda[YZd]lgl`]=H; industry is as under: Tax/duty

Governing authority

Nature of levy

Customs Duty

Central Government