Issues and Challenges Facing India's EPC Industry

EPC Industry in India: Issues and Challenges| 53 |
EPC Report 4 Cover pages.indd 53 2/20/2011 8:19:18 PM

Chemtech Foreword 2
KPMG Foreword 3
Executive Summary 4
Acronyms Used 4
Methodology 8
Coverage and Scope 8
Setting the Context 10
Value Creation Strategies 17
Key External Drivers and Issues 22
Key Internal Issues 29
End-Use Industry Views 33
EPC Industry in India
Action Agenda for Sustained Growth 48
Acknowledgements 51
About Chemtech 52
About KPMG in India 52
Contents
EPC Report New.indd 1EPC Report New.indd 1 2/20/2011 8:13:28 PM2/20/2011 8:13:28 PM

EPC Industry in India: Issues and Challenges | 2 |
CHEMTECH Foreword
S
trong infrastructure and industry are critical for India as the country
sees leapfrogging growth. As far as both these sectors are
concerned, India is in a sweet spot, which has created multitude of
opportunities in the fields of engineering, capital goods and construction.
Though, India has witnessed significant investments in both industrial and
infrastructure space, the growth has remained restricted due to various
weaknesses of the Indian EPC industry and difficulties for the foreign players
to ply in the market.
At this juncture, it is an imperative to address the challenges, which restrict
the growth of this sector in India and will continue to repress industrial
development lest addressed.
CHEMTECH has made an attempt to address the issues faced by the
EPC industry through each edition of its international conference, EPC
World Expo. Renowned speakers from world over have deliberated over
the topical issues that must be resolved to accelerate the development of
India’s EPC sector, which would eventually lead to country’s sustainable
economic growth.
As we reach another milestone year with 25th edition of CHEMTECH series
of expositions and international conferences, Jasubhai Media and KPMG
have come together and taken the initiative address these issues through
this report. I wish to thank all the members of CHEMTECH Advisory Board
for EPC who despite their busy schedules shared their opinions and guided
the team to come up with the study report that aims to leverage the Indian
industry.
We sincerely hope that this report would be a useful information tool for
both industry as well as statutory bodies to gear up for the challenges for
the Indian EPC sector during this decade.
Jasu Shah
Founder & Chairman,
CHEMTECH Foundation

KPMG Foreword
T
he Engineering Procurement and Construction (EPC) services
industry in India is faced with a large and unique opportunity due to
galloping Indian economy, and investments in public and industrial
infrastructure. The 11th five year plan has been an inflection point in
Infrastructure investments, with them contributing upto 9 percent of India’s
GDP.
The 12th plan envisages a total investment in the region of USD 1 trillion,
contributing upto 10 percent of India’s GDP. Similarly, there are large
investments expected in industrial infrastructure, whether it be Oil and Gas,
Metals and Mining and other industries.
This large and fast build out of industrial and plant infrastructure requires
a robust and growing engineering, procurement and construction services
industry for spreading and management of risks, efficiency and productivity
in engineering and construction and supplementing the management
bandwidth of project developers.
This report in line with the theme for Chemtech’s EPC conference, takes a
forward looking view on the future of the EPC industry in India, based on
current issues and challenges identified for the industry.
We hope that the collective insights shared in this report contribute towards
shaping future business strategies and government enablement that drive
India’s long term growth in this sector.
Arvind Mahajan
Executive Director
KPMG Advisory Services Pvt Ltd

EXECUTIVE
SUMMARY
The EPC industry as defined here is
different from the pure engineering
or construction industry. We define
the EPC industry as comprising of
companies who are involved in executing
projects involving multiple engineering
disciplines with overall responsibility for
the performance of a “unit” or the whole
plant. The scope of work would include
engineering, supplies, construction or
construction management, erection
and commissioning and providing
performance guarantees. The EPC
companies in India are evolving from
multiple routes, with engineering
companies, equipment suppliers,
construction companies and project
developers morphing in to EPC service
providers by filling in the gaps.
Expectations
As a fallout of the USD 1 trillion
investment expected in infrastructure
and industrial growth keeping pace,
there is heightened interest among the
investor community from engineering
and construction companies who stand
to benefit from this wave. However, the
expectations far exceed the historical
performance delivered and the EPC
service providers need to step up their
ability to win and deliver business to meet
these expectations.
Similarly, customers now expect EPC
service providers to ramp up their
financial and execution capabilities
to be able to execute larger projects,
in time and with ever improving cost
structures.
EPC Engineering, Procurement & Construction
GDP Gross Domestic Product
PPP Public Private Partnership
TSR Total Shareholder Returns
EPCM Engineering,Procurement &Construction Management
PMC Project Management Consultant
FEED Front End Engineering Design
O&M Operation & Maintenance
JV Joint Venture
BOP Balance of Plant
BTG Boiler Turbine Generator
BOT Build,Operate & Transfer
BOOT Build,Own,Operate & Transfer
DBO Design Build & Operate
DBOOT Design,Build,Own,Operate & Transfer
ITI Industrial Training Institute
MRP Material Requirements Planning
PNGRB Petroleum & Natural Gas Regulatory Board
PCPIR Petroleum,Chemicals & Petrochemicals Investment
Regions
MENA Middle East & North Africa
CGD City Gas Distribution
ADB Asian Development Bank
JNNURM Jawaharlal Nehru National Urban Renewal Mission
JICA Japan International Cooperation Agency
ULB Urban Local Body
E&P Exploration & Production
Acronyms Used

Value Creation Strategies and
Routes to Growth
EPC companies can improve their wealth
creation profile by focusing on performance,
prospects and managing risks and financing
costs. While performance is about improving
margins by way of correct estimations,
procurement and project management
capabilities, and focusing on adding higher
margin components to the services provided,
prospects is about continuously adding
newer avenues of revenue growth.
The most likely route for diversification
is through penetration in new end-use
industries or taking the developer route,
which in fact is an imperative for growth in
sectors like Water, Roads involving BOT,
BOOT contracts. International expansion by
EPC companies is likely to be limited largely
due to global competitive intensity and the
large domestic demand.
We expect increasing number of acquisitions
in this industry, as companies look to
enter new end-use industries by buying
qualifications.
Lastly,riskmanagementand“no-surprises”go
a long way in improving investor perception,
and materially bringing down financing costs
for the EPC companies.

Key Challenges
The key external challenges faced by the EPC industry are as
follows:-
Continuously evolving contracting models and relatively slower
adoption of the EPC-LSTK concept, especially where customers
are large public sector companies with in-house teams, and large
private sector developers, who have significant in-house project
management capabilities.
Order book uncertainty brought about by purely price based
procurement decision making of customers, which has led to
the emergence of large number of hitherto unknown companies
winning relatively large contracts. While this is essential for capacity
building, it has led to uncertainty of order book for the incumbent
service providers. It also makes making investment decisions more
difficult for companies.
Shortage of skilled manpower for managerial as well as site labour.
The country has its task cut-out in terms of creating skill work force
for the industry. However, the onus really lies on the private sector
and the EPC companies to undertake initiatives to address this
“supply-chain” issue.
The perception on the sanctity of contracts remains divergent,
especially between Indian companies and International entrants.
There is a need to establish faith in our ability to enforce contracts
by standardization, following international practices and setting
right dispute resolution mechanisms.
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External Internal
The key internal challenges are about managing scale and building
capabilities to address issues emanating out of this:-
Project Manager Empowerment, especially in Indian
companies
Balancing speed and cost control in the Procurement
function
Creating a robust engineering organization and balancing
between efficiency and effectiveness
Adoption of leading Risk Management practices
The challenges are accentuated for two sets of companies a)
International entrants and b) mid-size companies looking to scale
up.
Policy making can help mitigate some of the issues related to
enabling private sector for building a skilled workforce, develoing
speedier mechanisms for speedier resolution of contractual
disputes, and clarifying taxation regulations related to the
industry.
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There are macro level learnings to be derived from Korea’s EPC
growth story, which may be replicated by the Indian industry
Government support in terms of ministerial oversight for the
industry, followed by active promotion of the industry overseas
Capacity building initiatives in terms of institutions for developing
construction industry talent
Engineering firms working in collaboration with construction
majors, facilitated by not-for-profit engineering industry
associations
Apart from the above, the report discusses specific end-use industry
issues and demand outlook for Power, Oil and Gas and Water,
bringing out nuances in terms of differences in contracting models,
profile of service providers and key challenges.
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Learnings from the
Korean Construction Industry

The report has been prepared by KPMG Advisory Services
Private Limited in association with Chemtech. Leading
executives from the industry were interviewed to seek inputs
for the report. The representation included project developers,
EPC companies, engineering consultants and construction
companies.
We have collected insights based on numerous engagements
with nodal agencies, infrastructure companies, engineering and
construction firms, and foreign players looking to enter India
and equipment suppliers.
Secondary research was conducted using published reports,
news analysis and usage of standard financial databases
subscribed to by KPMG. We have leveraged the expertise and
relationships of our advisory teams in the area of Infrastructure
and Government and Industrial Markets spread across the
country.
Taxation related inputs have been provided by our Tax team
based on their working experience with clients in the area of
infrastructure and engineering and construction.
The report covers primarily the EPC services industry from
the perspective of the following end-use industries - Power,
Refining and Petrochemicals, Water and Water Treatment.
These industries have large investments planned in the country
for the next 5 to 10 years, and involve technological complexity
apart from being complex from a project management
perspective.
Also, they are varied and bring out the nuances of the EPC
sector across most aspects. Specific issues related to EPC
services for other end use sectors like Roads, Railways, Metals
and Mining etc are not detailed as part of this report, though
many of the generic EPC industry issues identified in this report
would also apply to EPC services for these other industries.
Methodology
Coverage & Scope

EPC or Engineering, Procurement and Construction industry
is referred to by various terms like Construction industry,
Engineering and Construction, Contracting or just engineering
industry. Here we define the EPC industry as consisting of
service providers who are capable of executing projects on a
turnkey basis, including detailed engineering, procurement,
construction, commissioning and performance testing.
We concern ourselves with players who are able to aggregate
multiple engineering disciplines like process engineering,
mechanical, structural, civil and electrical. Examples of such
companies in India are Larsen and Toubro, Punj Lloyd, Tata
Projects, Essar Projects etc. Players who only operate in the
civil construction and structural engineering domain and would
not undertake turnkey construction of a plant or packages
within a plant are not considered as EPC companies by this
definition. It is difficult to draw a strict boundary in terms
of what constitutes an EPC firm vis-à-vis construction or
engineering firms. One way to distinguish between a classical
EPC company from a primarily civil construction company
is the construction intensity of the end-use sector, defined
by Crisil as the percent of construction spend in the overall
investment towards creating an infrastructure or industrial
asset. For example, Roads is estimated to be close to 100
percent, while a thermal power plant is 20 percent.
The rest is towards equipment, mechanical fabrication,
electrical and non-construction engineering spend.
Defining
EPC Industry

Route 1
Expanding scope from being engineering companies to
EPC companies. The most prominent example of this route
Engineers India Limited, which is India’s leading engineering
company, especially in the Hydrocarbons segment and now
offers EPC services. However, successful instances of this
route are limited.
Route 2
Expanding scope from being construction companies to
EPC companies. This is the more commonly followed route,
wherein companies have added engineering and procurement
capabilities to their existing expertise in mechanical and civil
construction. The leading example of this route has been
Larsen and Toubro, which moved from being a fabrication
and construction company in to one of the largest and most
respected EPC companies in India.
Route 3
Expanding scope from equipment supply to EPC companies.
Thisroutehasbeenmorecommonlyfollowedintheengineering
and capital goods segment. Companies manufacturing major
pieces of equipment for a particular manufacturing process
have upgraded themselves to execute projects around their
equipments. Examples are Elecon, TRF who are suppliers of
material handling equipment and undertake projects in Power
Balance of Plant packages supplying entire Coal handling
systems or in industrial plants involving large material handling
components.
Route 4
A relatively new development has been of project developers
backward integrating and setting up their own EPC divisions.
This has been motivated by a desire to leverage their in-house
project management capabilities, and to capture the margins
typically belonging to contractors.
Setting
The CONTEXT

Relevance of the EPC industry to the
India Growth Story
The 11th plan was an inflection point for the Indian infrastructure
story. The 11th plan laid the foundation for large scale
investments in infrastructure in India. Of the USD 500 billion
planned to be invested in the infrastructure, at the current rate,
it is expected that the plan will be met to 94 percent. This would
amount to 9 percent of India’s GDP and is expected to go up
to 10.25 percent of GDP.
Mid-Term Appraisal of 11th Five Year Plan
In order to achieve this plan, various pieces of the puzzle
need to come together, and would require all stakeholders,
the government, public sector undertakings, private sector to
contribute their achievements in a co-ordinated manner. It is
expected that the private sector would contribute 50 percent by
way of financing to achieve this plan. The obvious policy focus
has been on building financing capacity, formulation of PPP
policies in various sectors, policies around creating investment
clusters, land acquisition and environmental clearances.
However, the chain is only as strong as the weakest link.
Achieving this rate of infrastructure build-out calls for massive
capacity building down the chain in terms of manufacturing
capacities for equipments, raw material and commodity
capacities (e.g. steel, cement, fuels etc) and human resources.
Similarly, it calls for massive capacity building in the engineering
and construction sector in terms of reasonable number of large
to mid-size contracting or EPC companies available to be able
to undertake Lump-Sum-Turn-Key (LSTK) and sub-contracting
jobs in the country.
Purely from a construction perspective, investment in
construction is estimated to double to INR 16,809 billion over

1
Source: Crisil “Construction-Opinion August 2010”
the next five years (2010-11-20114-15), from INR
8,895 billion recorded during the last five years1
.
Within this the infrastructure segment, would
comprise 85 per cent of the total construction
investment. Within infrastructure segment, the
roads, power, irrigation and urban infrastructure
sectors would contribute around 73 percent of total
construction investment. The opportunity for EPC
players varies by industry given the contracting
models and construction intensity of each class of
infrastructure or industrial asset. CRISIL Resarch
estimates that investments in the industrial sector
would be 1.2 times in the next 5 years as compared
to the previous five years while in infrastructure it
would be 1.9 times, bringing the total growth to
be 1.7 times.
Projected Infrastructure Investments in 12th Plan
Base Yr
(2011-12) 2012-13 2013-14 2014-15 2015-16 2016-17
GDP (USD Billion) 1,595 1,738 1,895 2,065 2,251 2,454
GDP Growth (%) 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%
Infrastructure
Investment
(% of GDP) 9.00% 9.25% 9.50% 9.75% 10.00% 10.25%
Infrastructure
Investment
(USD Billion) 144 161 180 201 225 252
Total Investments (USD Billion) 1,019
Source: Planning Commission

2
TSR computation has been done for last 3 years data for companies which have been publicly listed in the last 3 years and
may be classiﬁed as engineering and construction companies
3
Source of data for analysis is Prowess, CMIE
Expectations from the EPC Industry
The EPC industry has gained prominent share of media,
investor and entrepreneurial attention in the last 3-5 years.
The stock markets have handsomely rewarded companies
operating in the infrastructure, construction and EPC space,
largely on account of future expectations. Similarly, the large
investment plans have raised expectations of customers from
this industry.
Investor Expectations
During the period of 2008-2010, theTotal Shareholders Return2
(TSR) by the EPC companies has been ~31 percent. TSR for
the more broad-based Infrastructure index in the corresponding
period has been only ~ 9 percent. KPMG analysis indicates that
the expectations embedded in the current valuations indicate
thatinvestorsareexpectingtheleadingEPCcompaniestogrow
their order books and revenues at a rate of ~65 percent if they
continue to maintain current proﬁtability and capital turnover
ratios, whereas the CAGR growth demonstrated in the last 3
years has been around 28 percent for the set of companies
considered below3
.
Hence the stock market expectation of growth of EPC
companies appears to be very high. Private equity interest has
also been high in the industry.
RECENT EXAMPLES OF PRIVATE EQUITY DEALS CONCLUDED
CONSORTIUM OF PRIVATE EQUITY FIRMS, INCLUDING BARING, SEQUOIACAPITAL, FIDELITYAND
DEUTSCHE BANK,ACQUIREDA16 PERCENTSTAKE IN INFRASTRUCTURE-EPC COMPANYCOASTAL
PROJECTS FOR $54.8 MILLION1
AVIGO INVESTED $14 MILLION IN DELHI-BASED NAFTOGAZ INDIA PVT LTD, AN EPC PLAYER IN
THE O&G SECTOR.
DELHI-BASED UEM GROUP, SPECIALISING IN WATER & WASTE WATER COLLECTION, TREATMENT
AND DISPOSAL, MOPPED UP ` 90 CRORE FROM INDIA VALUE FUND
CHENNAI-BASEDAQUADESIGNS INDIA,AWATER MANAGEMENTENGINEERING COMPANY, RAISED
` 55 CRORE FROM PEEPUL CAPITAL
CONCORD ENVIRO SYSTEMS, A WATER MANAGEMENT ENGINEERING COMPANY, RAISED $10
MILLION FROM SAGE CAPITAL FUNDS IN DECEMBER 2009
A2Z MAINTENANCE & ENGINEERING SERVICES LTD (BACKED BY IEP, BEACON INDIA
PRIVATE EQUITY FUND AND MR RAKESH JHUNJHUNWALA), IS PRESENT IN POWER
DISTRIBUTION EPC BUSINESS.
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Total Shareholder Returns of Select Engineering and Construction
Companies
86.3%
74.5%
50.7%
38.9%
33.6%
32.3%
32.3%
31.5%
23.3%
23.2%
20.3%
17.1%
14.7%
14.1%
13.0%
12.4%
8.6%
8.5%
7.0%
4.5%
2.3%
Ͳ3.7%
Ͳ13.5%
Ͳ20.0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0%
Era Infra Engg. Ltd.
Engineers India Ltd.
SadbhavEngineering Ltd.
JaiprakashAssociates Ltd.
McnallyBharat Engg. Co. Ltd.
Bharat HeavyElectricals Ltd.
Larsen& Toubro Ltd.
Ahluwalia Contracts (India) Ltd.
Gayatri Projects Ltd.
Thermax Ltd.
HindustanConstruction Co. Ltd.
Patel Engineering Ltd.
Alstom Projects India Ltd.
Madhucon Projects Ltd.
Punj Lloyd Ltd.
UnityInfraprojects Ltd.
Nagarjuna Construction Co. Ltd.
IonExchange (India) Ltd.
I V R C L Infrastructures & Projects Ltd.
J M C Projects (India) Ltd.
GammonIndia Ltd.
S P M L Infra Ltd.
EleconEngineering Co. Ltd.
Source: KPMG Analysis, ﬁnancial data from Prowess, CMIE
In summary, the expectations from the investors are much higher
than the pace at which companies have delivered performance in the
recent past. This is an indicator of the strongly positive expectations
surrounding the sector, and hence the need for the industry to deliver
a consolidated performance in line with what is expected of them.

The value proposition offered by the EPC industry is based
on the concept of risk sharing or risk transfer from the
project developer to the EPC
Company, at least to the tune
of the capital cost of the project
and to a limited extent to the
initial operating performance of
the plant / facility being built. In
exchange for that, the project
developers are willing to pay
a premium for the integration
services provided. Over a period
of time, customers have come
to expect a reduction in the total cost of putting up the plant
and the time schedule through the EPC route, compared
to exectution by the developer organization or the more
traditional route of procuring equipment, services and
engineering services separately
and owning the integration and
the project management.
It is important to point out
here that given the customer
expectationsandtheconsequent
EPC business model, an EPC
company takes on a much higher
level of real and perceived risks
within a project, than other
service providers in the pure engineering, consulting or Project
Management space.
Customer Expectations
EPC company takes on a
much higher level of real
and perceived risks within
a project, than other service
providers in the pure
Engineering, Consulting or
Project Management space.

T h e p u r e
e n g i n e e r i n g ,
consulting or
PMC services
companies build
their business
models around
p r o f i t a b l e
c u s t o m e r
relationships, and
do not necessarily need proﬁtability in each project that they
undertake.
However, the services of an EPC contractor are supposed
to be based on comprehensive contracts with little room for
interpretation and ambiguity, whereas pure engineering or
EPCM service providers do not take on most of the project cost
or time overrun risks which remain with the developer.
Given its business model, an EPC Company hence has to
target proﬁtability from each contract, since the value at risk in
the case of overruns is very high, in proportion to its expected
margins. Further, the nature of the customer relationship
continues to be “arms-length” over the period of the contract,
as EPC companies look to protect themselves against time
and effort overruns delays on account of the developer and
a plethora of other risks that might take them off their initial
estimates.At the same time, customers want to ensure that they
get their plant or facility up and running, with the desired quality
in time and with no extra claims raised by the contractor.
APART FROM THIS BASIC CUSTOMER EXPECTATION, DURING OUR
DISCUSSIONS WITH PROJECT DEVELOPERS SEVERAL OTHER EXPECTATIONS
FROM EPC COMPANIES WERE COMMONLY MENTIONED
EPC COMPANIES NEED TO IMPROVE THEIR FINANCIAL AND BALANCE SHEET STRENGTH TO BE
ABLE TO TAKE ON LARGER JOBS,AND NOT DEPEND ONADVANCESAND FAST TRACK PAYMENTS
FROM DEVELOPERS TO BE ABLE TO PROGRESS
INDIAN EPC COMPANIES NEED TO SIGNIFICANTLY IMPROVE THEIR ENGINEERING CAPABILITIES,
ESPECIALLY ON THE FRONT END SIDE. THIS IS ESPECIALLY TRUE FOR THE ENGINEERING
COMPANIES WHICH ARE RESPONSIBLE FOR PREPARING THE FEED (FRONT END ENGINEERING
DESIGN) PACKAGE SO THAT LSTK BIDDING CAN BE FACILITATED.
DEPLOY LATEST CONSTRUCTION METHODOLOGIES AND TECHNIQUES, BOTH MANAGERIAL AS
WELL AS TECHNICAL TO EXECUTE PROJECTS FASTER AND TO BETTER QUALITY.
DEVELOP EMPOWERED PROJECT MANAGERS, SO THAT THEY CAN ACT AS MORE THAN JUST
COORDINATORS, AND CAN INTERFACE WITH THE SENIOR MOST LEVELS IN THE CLIENT
HIERARCHY AND TAKE DECISIONS TO RESOLVE PROJECT ISSUES.
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The EPCgame is
competitive,
while
EPCMgame
is about
relationship&
trust

Value Creation Strategies
The “project level” value creation driver in terms of profitability
for an EPC company is its ability to
a) Correctly estimate the detailed costs and time schedules
of a project and
b) Manage the entire ecosystem of customers, vendors,
regulators, engineers and sub-contractors, to deliver within
those estimates.
Sources of Long Term Value Creation
However, long term value creation requires EPC companies
to improve in all three aspects that impact the market value
of a company – performance, prospects, and financing. While
performance is enhanced both through revenue and profit
growth, future prospects are enhanced when the EPC company
is positioned well to serve high growth segments and profitable
customers. Financing component of value creation involves a
reduction in the risk premium and discount rate associated with
future cash flows of the company. This can be achieved by a
combination of a reduction in actual cost of borrowing and the
“expected” cost of equity through improved risk management
practices and reduced volatility of revenue streams.

Scale and other Value Drivers for EPC companies
Performance improves for an EPC company with scale, as
it is able to leverage efﬁciencies in procurement, overheads,
relationship building with vendors and sub-contractors. Also,
there are scale opportunities created when companies are able
to invest in standardization of designs, value engineering and
investment in world-class tools and techniques.
The other two important aspects for value creation are “Growth
to create future prospects” and Risk Management which are
covered subsequently.

D
iversiﬁcation is a key element of
growth, and will be aggressively
pursued in India. It is driven
not only from the point of growth, but
also from the perspective of managing
volatility in order booking. Presently, the
established EPC companies operating
in a limited set of industries in India,
are also perceiving a high risk to their
order booking levels due to the large
number of new entrants into the EPC
space, as well as a perceived dilution
in qualification criteria from many
customers that appears to be providing
a level playing ﬁeld to the new entrants.
Hence diversification has become a
popular mode of seeking both growth
and stability in revenue streams of EPC
companies.
Route 1
HORIZONTAL EXPANSION Existing
EPC companies are diversifying in to
new end-use industry sectors, inspired
by the large investments coming up in
these sectors. For example, Punj Lloyd,
a player in the Oil and Gas space,
expanded in to the Power Generation
EPC market and has recently won orders
in the Balance of Plant EPC space.
Similarly, Tata Projects has entered in to
a JV with EIL to form a TEIL, to address
theinvestmentsintheOilandGasspace.
The JV leverages EIL’s engineering
know-how, client relationships in the Oil
and Gas sector and the LSTK contract
execution capabilities of Tata Projects.
There are many other examples, of such
strategies being followed by companies
all over the country.
Route 2
VERTICAL EXPANSION Some
companies are expanding to control
more of the investment value of the
project, by becoming system integrators.
A large proportion of these companies
are equipment vendors, who believe that
they have the ability to execute contracts
onaturnkeybasis.Examplesofthisroute
being followed being prevalent largely
in the Power Generation equipment
side. For example companies like
Elecon, TRF which were earlier primarily
material handling equipment vendors
are now competing for turnkey
material handling systems
packages. Similarly, there are
engineering companies like
EIL, who are now offering EPC/
LSTK services to their clients.
The vertical expansions have
been driven by the desire to
enhance the top line and to
control a larger share of the
investment pie. Engineering
services contribute not more
than 5-10 percent of the total
plant investments, and while
engineering services have
higher margins and relatively
lower risks, it doesn’t provide aggressive
top line growth. Such vertical expansion
into Construction and Project Execution
by publicly listed manufacturing or
engineering companies, is also driven
by the higher earnings multiples currently
associated with such “high potential”
businesses. The market recognizes that
construction and project management
service providers will be in short supply
and high demand in the short to medium
term.
As a note of caution, however, it is worth
mentioning that companies who enter
the Projects business from product
manufacturing or engineering services
backgrounds, need to carefully built
the required capabilities for project
Routes to Growth
DIVERSIFICATION
PROMISES GROWTH
& STABILITY IN
REVENUE STREAMS
EXPANSION MODES
Horizontal
Vertical
Backward Integration
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execution, and identify and manage their
risk exposure in a higher risk business in
a calibrated manner. Several traditional
manufacturing companies have faced
financial difficulties in managing their
project businesses in the recent past.
Route 3
BACKWARD INTEGRATION Many
Indian entrepreneurs have typically
wanted to control as much of the value
chain as possible.The story is being now
repeated in the EPC industry - Reliance
ADAG has Reliance Infrastructure,
while Essar Group has Essar Projects.
GMR has its own EPC division, while
the Tata Group has Tata Projects. Many
other business houses have established
strong internal project execution teams.
Moreover they believe they can derive
substantial benefits on procurement
activities through in-house procurement.
Further, as an executive from one of the
leadingplayersintheindustrypointedout
large business houses making significant
investments believe that there isn’t
enough expertise and scale within the
existing EPC companies for assuming
and managing their project risks.
In the Power Sector, for example, the
only large full service EPC company that
comes to mind is Larsen and Toubro,
which can offer full EPC, BTG package,
BoP package and also individual
equipments and sub-systems. There
are few others capable of simultaneously
executinganumberoffullEPCprojectsin
the Power Sector. One private developer
mentioned that the available set of EPC
companies does not inspire confidence
in their being able to deliver projects on
time and with the initial estimated cost.
Typically in such scenarios, the risk of
both schedule and cost is transferred
back to the developer in forms of claims
and counter claims on who is responsible
for delays and escalations. As a result,
the developer feels compelled to manage
his projects on his own if he has the
organization and resources to do so,
and a large enough pipeline of projects
to utilize these in-house resources
efficiently.
International expansion for growth
has really not been a focus area for
most Indian EPC companies given the
growth in the domestic sector, and the
stiff competition posed internationally
by the global majors. However,
there remain certain sectors where
international expansion is likely. The
Indian Oil and Gas plant engineering
and construction market has all the
global majors present in India. Hence,
Indian companies competing with
them have raised their game to the
international level in this field. Hence
companies like Larsen and Toubro,
Punj Lloyd, Essar Projects have won
business at the international level
and should continue to do well in the
hydrocarbons space. Similarly, sub-
contractors in this space (e.g. Petron
Engineering) may also be able to
compete internationally, as they have
been working as sub-contractors to
global companies in India.
On the other hand, there are niche
International Expansion
COMPANIES WHO ENTER
THE PROJECTS BUSINESS
FROM PRODUCT
MANUFACTURING OR
ENGINEERING SERVICES
BACKGROUNDS, NEED TO
CAREFULLY BUILD THE
REQUIRED CAPABILITIES
FOR PROJECT EXECUTION,
AND IDENTIFY AND
MANAGE THEIR RISK
EXPOSURE IN A HIGHER
RISK BUSINESS IN A
CALIBRATED MANNER.

EPC segments, with limited market size
in India, which has prompted Indian
companies in these domains to go
global. Examples of this are to be found
in Walchandnagar for sugar and biomass
based power plants, KEC International
for EPC in transmission and distribution
space. Some of these expansions have
been facilitated by global acquisitions
as well – for example the acquisition
of the mineral beneficiation equipment
businessofcementmajorKHDHumboldt
Wedag by McNally Bharat Engineering
has provided them a foothold in the
international market. Similarly, the
acquisition of Sembawang and its
subsidiarySimonCarveshassignificantly
improved the international profile of the
Punj Lloyd. KEC International acquired
SAE Towers’ business, a leading
manufacturer of steel lattice structures
for transmission towers with subsidiaries
in Brazil, Mexico and US.This is the most
plausible route that Indian companies
are likely to take acquiring companies
in niche areas globally to create large
multi-country EPC businesses. There
are no large acquisitions of note in the
main plant EPC market, other than Punj
Lloyd’s acquisition of Sembawang.
In the domestic market, diversification
in to newer areas by EPC companies
has been accompanied by acquisitions
or JVs - particularly in the Hydrocarbons
space, wherein the qualification criterion
are quite stringent for entry.
Tata Projects acquired Artson
Engineering, while entering into a JV
with EILfor its Oil and Gas foray. IVRCL
acquired Hindustan Dorr-Oliver to
strengthenitsWaterTreatmentbusiness
and gain a foothold in the mineral
beneficiation plant construction market.
We expect the acquisitive activities
of Indian EPC companies to intensify
over the next 3-5 years. Opportunities
for partnering or acquisition will arise
as smaller, niche EPC companies find
it difficult to compete against large
companies.Additionally, the recent bout
of aggressive bidding by Indian EPC
companies is likely to throw up winners
and losers in the next 3 to 5 years. This
will likely lead to consolidation in the
industry.
GLOBAL ACQUISITIONS
BY INDIAN COMPANIES
Mineral beneficiation
equipment business
of cement major KHD
Humboldt Wedag
by McNally Bharat
Engineering
Sembawang and its
subsidiary Simon Carves
by Punj Lloyd
SAE Towers’ business,
a leading manufacturer
of steel lattice structures
for transmission towers
with subsidiaries in Brazil,
Mexico and US by KEC
International
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Contracting Models
Model Role of EPC company Drivers / Highlights
Engineering
Procurement
and Construction
Management
(EPCM)
System engineering, optionally
detailed engineering
Detailed cost estimation
Package and sub-contract
structuring
Managing bid / vendor selection
process
Quality management ( including
drawing approvals of vendors, sub-
contractors)
Supervision of construction, erection,
commissioning, performance testing
Project Management ( sometimes
an additional Project Management
agency)
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Commonly practiced in process industry
Players like Engineers India Limited, Uhde, Foster
Wheeler, Technip, Technimont ICB etc
Contract values are small as compared to LSTK,
however high margin
Minimal risk for EPCM companies, however customers
now insist on incentives based on project cost and
schedule as compared to original estimates
Places responsibility of managing risks, cost control
and procurement on the project developer
Preferred in the Indian context due to in-house
capabilities of Indian entrepreneurs and willingness
to take risks, and save margins
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EPC - Lump Sum
Turn Key (LSTK)
Engineering, procurement,
construction, commissioning
The extent of information provided
varies, typically all the drawings and
designs are provided to construction
companies to bid, while in some cases
only the conceptual design may be
provided
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Complete risk transfer to EPC company
Very large contract sizes, equal to the project
investment
HigheradoptioninIndiaofthismodelintheinfrastructure
segments ( Roads, Water, Hydro Power etc)
Limited adoption in the industrial segment
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Package EPC Engineering, procurement,
construction and commissioning of a
particular unit
Most likely to involve mechanical,
electrical, instrumentation, utilities civil
and structural scope
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Project developer splits the project in “system” or unit
packages
Most commonly used method in Process plants, power
plants – especially by the public sector. E.g. NTPC
breaks the Power plant in to packages like BTG, Coal
Handling, Ash Handling, Water Treatment etc
Contract sizes can be as large as INR 2000 Crores
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Contracting Models and their Drivers
The demand for the EPC industry is driven by the contracting models adopted by customers. Theoretically, the EPC industry is
driven by the need to reduce the risk for the developer, at the same time leveraging the expertise of the EPC player to reduce
the overall execution period and cost. Some of the prevalent contracting models are mentioned below:
Source: KPMG Research and Analysis, Industry inputs
Key External Drivers and Issues

The choice of the contracting models are
driven by multiple factors
Internal capabilities of the project
developer
Influence of financial institutions
Availability of enough number of
quality LSTK suppliers
Prevailing market conditions,
includingsupplierpower.Inacapacity
constrained scenario, contracting
models move towards shifting the
risks on to the project developers.
However, a few general trends can be
drawn based on the above drivers, as
follows:
In the infrastructure segments, the
contracting models are moving
towards transferring more risk to
contractors, including operating risks
in the form of BOT, BOOT models.
In the industrial segment, it is
expected that the EPCM or even
lesser risk models will continue to
dominate.
What will tilt the balance in
favour of turnkey models in the
industrial segment is the entry
of new developers, especially
in the mid-scale segments, who
have limited internal capabilities to
execute projects without LTSK type
contracts.
Order Book Uncertainty
One significant trend in industry,
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especially where projects are being
awarded through the competitive bidding
in the public sector, is the emergence
of a large number of relatively small,
unknown players bagging significantly
large contracts.
While it is important from a capacity
building and competitive stand point,
it has led to order book uncertainty for
the incumbents. At the risk of sounding
anti-competition, a senior management
executive of a large EPC company
suggested that it is not a healthy trend
at all. “It is leading to contracts being
bagged by companies with limited
capabilities, which will affect projects
in the medium to long run”. While the
extent of truth in this prophecy can only
be borne out over time, it is a fact that this
phenomenon has increased the order
book uncertainty for the incumbents.
Strategic planning methods based
on projected capital expenditure and
historical market shares do not throw up
reliable revenue projections, and there is
scramble to hedge risks by diversifying
and being present in as many sectors as
possible. There are numerous examples
around this; a look at the portfolio of the
top 10 construction companies in India
illustrates this point.
Another ramification of this order book
uncertainty is the appetite for investment
in manufacturing or in-house value
addition. The BTG manufacturing
capacities of private sector companies
in India like that of L&T, Bharat Forge,
Thermax, BGR etc are faced with the
prospects of being under utilized as
most main plant equipment orders have
been won by BHEL and the Chinese
companies.
This phenomenon was also seen in the
Roadssector,wherethereisconsequently
now a cap on how many orders can be
placed on a single company, and also in
the Balance of Plants in Power space,
where multiple companies have sprung
up to take advantage of the under-
capacity scenario.
CONTRACTS
being bagged by
COMPANIES
with LIMITED
CAPABILITIES
will affect
PROJECTSin
the medium to long run

4
NSDC report on Human Resource and Skill Requirements in Building, Construction Industry and Real Estate Services
Human Resources
The shortage of skilled manpower is
most acutely being felt in the construction
industry. The construction industry
currently employs 32 million people in
the country. It is estimated that 1 percent
increase in GDP translates to 1 percent
increase in jobs for the construction
industry. With the accelerated investment
in infrastructure, this is only going to
increase. If the 12th plan envisages
doubling of infrastructure investment
from the 11th plan, it calls for doubling
of requirement for the construction
industry, which indicates a large shortage
of resources. While mobilization of
unskilled labour at construction sites
may be of relatively lesser concern, the
need for doubling the skilled resources
available in the country is being acutely
felt. Anecdotal evidences indicate that
construction managers with 15+ years
of experience in building high quality
roads are now drawing compensation
in the same range as their peers in
advanced countries, which was unheard
of in the Indian context. Industry leaders
are worried about the shortage of skilled
workers like carpenters, fitters, welders,
but what they lament the most is the
lack of Project Managers with adequate
experience and skill levels to execute
the ever increasing size and complexity
of projects.
The11thplanenvisagesthedevelopment
of a National plan for Human Resource
development through training and
certification of construction personnel.
However, industry participants feels
that this large capacity building will
require significant private sector effort,
for establishing training institutes, setting
course material and reducing trainee
career risks by providing absorption.
While the need for upgrading the current
setofITIsandvocationaltraininginstitutes
is felt, more importantly, there is a need
to establish training centers with private
participation at major labour centers in
the country, in the semi-urban and rural
areasThe challenge is accentuated due
to the demand centers and the supply
centers being different. The supply
is likely to be driven predominantly
by states like Orissa, West Bengal
and Bihar, especially at the minimally
skilled levels4
. Centum Learning, a joint
venture between Bharti Group’s Centum
Learning and NSDC is one initiative,
to skill and train 1.2 crore Indians on
workskills in sectors like Telecom, Retail,
Building and Construction. However,
there is need for many more, especially
from the Construction Industry itself.
Hence there is an urgent imperative for
collaborative action by the Engineering
and Construction companies in investing
in skill building at the supply centers, in
a non-competitive environment. In the
meantime, the government may have
to refrain from disallowing the use of
foreign labour for project
execution, till such time as
skilled labour shortages are
addressed.
While, the skilled resource
“The existing public school infrastructure can be
upgraded through private participation with minimal
additional expenditure with after-school hours used for
providing vocational skills”
- Senior Executive at an EPC company
IncrementalHumanResourceRequirement
(including skilled workforce) in 000s
Profile of People Incremental
Requirement
Project Managers and
Engineers
473
Supervisors 473
Foremen 946
Crane Operators 7
Electricians 473
Weleder 473
Source: National Skill Development
Corporation and IMaCs study on Human
Resource skill gaps in Building, Construction
and Real Estate

requirement at the Engineer and
Supervisor levels is a constraint as well,
we feel that it is easier addressed as over
a period of time through private sector
participation in engineering education,
as this is financially rewarding even
with limited or no government support.
What may be needed though is more
specialized curriculum development
(for example Power Plant engineering).
A second requirement is for cross-
functional engineering skills and
exposure. The EPC industry needs a set
ofprofessionalstoactasintegrators,who
can act as engineering coordinators and
are comfortable with various engineering
disciplines and not just one specific
discipline. It is only with the availability
of such talent, that companies can
innovate, carry out value engineering
to improve the overall productivity of a
capital project.
The second of critical challenges apart
from technical and skilled labor, lies in
developing managerial talent. There
are few institutes focusing on teaching
Project Management, especially for
the construction industry in the country.
In the absence of specialist ﬁnishing
schools for Project Management, the
industry relies on in-house training, and
on-the-job training programs. While
those are important, there is a need to go
beyond the generic project management
credits introduced in business schools
or engineering institutions. It is strongly
believed that the development mandate
given to the Construction Industry
Development Council and the National
Institute of Construction Management
and Research (NICMAR) needs to be
supplemented by the establishment
of some such high quality Project
Management schools.
“There is a need for building a high proﬁle project
management school along the lines of an IIT/
IIM, all we need is some land allocation and the
industry can do the rest”
– Senior Executive of an EPC company

5
http://www.doingbusiness.org/rankings
Ease of Doing Business Ranking for India
(i) Ease of doing business in India
In the latest rankings5
for ease of doing business, India is ranked 134th in the world.
Contracts
Ease of
Doing
Business
Starting a
business
Dealing with
construction
permits
Registering
property
Getting
Credit
Protecting
investors
Paying
taxes
Trading
across
borders
Enforcing
contracts
Closing a
business
134 165 177 94 32 44 164 100 182 134
Source: World Bank Group, Ease of Doing Business Rankings, 2011
“Managing within a weakly enforced regulatory
framework is a competitive advantage for Indian
companies”
- Senior Executive at an EPC company
India scores particularly poorly in the
establishment of new business and
construction, closure of businesses,
and enforcement of contracts. While,
one may argue that these rankings
mean little to investors and companies
who see the immense potential of India,
as also reflected in the FDI flowing
in to the country. However, for many
global companies contemplating entry
into India, these are not encouraging
indicators. One of the world’s leading
design engineering and consultancy
firms, while evolving it strategy for
emerging markets recently, found these
rankings to be particularly forbidding in
its evaluation of India’s attractiveness as
a business location.
Risk Assessment of
Typical Contracts
DuringarecentengagementforanIndian
EPC client, we studied the risk evaluation
frameworks in use by international
majors. We found that many international
companies would rate typical Indian
projects as “No-Go”. While the reasons
would typically also include issues
related to logistics constraints and overly
aggressive delivery periods, the primary
reason for such evaluations, we found,
were the typical contractual clauses,
including payment and retention terms
which detract international companies
from taking up large contracts in India.
Moreover, many EPC companies find
arbitration as a lengthy process in India,
and hence the risk averse companies
assume that in case of any disputes,
they will have to accept terms from
the customer. Interestingly, as a senior
executive in in an EPC firm told us,
the ability to manage within a weakly
enforced regulatory framework is a
competitive advantage for Indian EPC
companies who have learnt to operate
under these conditions. For example,
these companies have realized that
Liquidated Damages are rarely enforced
by Public Sector clients. Further,
new infrastructure developers, when
dealing with large experienced EPC
firms operating in India, find it difficult
to prevent extra claims, and costs
from escalating.

We feel, the industry requires that nodal
agencies in various government sectors,
take up these issues, to align the project
contractual clauses to international
standards, particularly if they wish to
receive enough number of bids in the
International Competitive Bidding routes,
reduce the number of disputes and raise
the trust levels in the industry between
project developers and engineering and
construction companies.
Taxation
Direct tax
A typical EPC contract will have the
following scope of work in a single
project:
Supply of equipment (offshore and
onshore);
Installation / commissioning
Services (offshore and onshore)
Software / Technology transfer
(offshore and onshore)
Under a typical EPC contract, a non-
resident contractor performs multitude
of activities. The scope of work under
EPC contract:
Offshore: Offshore supplies and
offshore services
On-shore: Onshore supplies and
onshore services (installation,
commissioning, etc.)
Taxability of payments received by
foreign companies in respect of EPC
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contracts, especially in respect of off-
shore supply of goods / services under
a composite contract, has become a
matter of great debate and litigation.
Equally important is the issue in relation
to withholding tax on such payments.
The onshore supplies and services are
normally taxable in India.
There has been a lot of litigation in
relation to taxability of offshore supply
and offshore services. However, the
controversy in relation to offshore
servicesisnowrestedwithanamendment
in the domestic law and accordingly
offshore services are now taxable in
India if they are utilised in India.Ageneral
principle which was emerged out of the
judicial precedents is that profit from
offshore supplies would not be taxable
in India provided following conditions
are satisfied:
Principal to principal transaction
Title (i.e. risk and ownership) in the
offshoresuppliespassedtothebuyer
outside India
Sale consideration is received
outside India
Sale is at arm’s length
Although the above rulings suggest that
offshore supply may not to be taxed in
India, the taxability depends of facts
of each case. Further, the revenue
authorities have not accepted the above
rulings and hence, it is still a matter of
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controversy and litigation. Hence, it
is advisable to structure contracts in a
tax-efficient manner after taking into
account the peculiar facts of each case.
Further, there as several provisions
under the Proposed Direct Taxes Code,
2010 such as General Anti – Avoidance
Rules, etc. that will have to be taken into
consideration while entering into EPC
contracts.
Permanent Establishment (‘PE’)
Issues
Deputation of personnel for erection /
installation / commissioning / designing
/ training activities is a common
phenomenon in case of EPC contracts.
The ambit of the domestic law of India is
very wide and it tries to tax income from
all the activities which give rise to some
business connection in India. Based
on the tax treaty, the business income
of foreign companies would be subject
to tax in India only if they have a PE in
India.There are various types of PEs like
fixed base PE, agency PE, service PE or
construction / installation PE.
Practically,inanEPCContracts,activities
take a long duration to complete, and
hence PE clause (especially fixed base,
construction / installation PE and service
PE) comes into play in this industry more
often. This would imply that a foreign
company rendering services in India for
more than the specified period would

be taxed in India in addition to being
taxed in the country of residence only
by virtue of the fact that services are
being rendered in India for more than
the specified number of days or they
have a virtual presence in India. Hence,
it is important for the EPC contractor to
structure their operations and contracts
to mitigate PE exposure.
Association of Persons (AOP)
Generally, two or more EPC contractors
come together to bid for EPC contracts
in the form of a consortium. In such
a situation, an AOP exposure would
arise. The term AOP is not specifically
defined in theAct. One has to rely on the
ordinary meaning and the law emerging
out of the judicial decisions to determine
what constitutes an AOP. Whether
AOP exist or not is a very vexed issue
and much depends upon the facts and
circumstances of each case.
Following are the consequences of
constituting an AOP:
Applicability of Maximum Marginal
Rate;
Issues in relation to carry forward
of losses;
Issues in relation to Foreign Tax
Credit;
Taxation at two level due to
applicability of Minimum Alternate
Tax on profit distribution from AOP
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BROAD PARAMETERS TO
ANALYZE CONSTITUTION OF
AOP
TWO OR MORE PERSONS
VOLUNTARY COMBINATIONS
ACOMMONPURPOSEORCOMMON
ACTIONWITHOBJECTTOPRODUCE
PROFITS OR GAINS
SHARING OF PROFITS AND
LOSSES
JOINT AND SEVERAL LIABILITY OF
THE MEMBERS; AND
SOME KIND OF SCHEME FOR
COMMON MANAGEMENT
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Key Internal Issues
The key internal challenge facing the
Indian EPC industry today is issue of
being able to manage scale and diversity,
with the rapid growth in business and
diversification into new business areas.
Other issues around improving the
quality and value addition of engineering,
implementing leading practices in
project management, implementing
modern construction methods are
also specific challenges facing the
industry players, but we believe these
will get addressed in natural course
as the EPC industry matures in India.
However, the core challenge facing the
mid-size, fast growing companies are
around effective project management,
management of growth and scalability
without compromising on project and
business risks, and developing systems
and processes to make companies
more scalable and less dependent on
individuals.
Project Management
“E+P+C is not equal to EPC” said
the director of one of India’s leading
engineering and construction company.
The glue that binds all these together
is Project Management. Project
Management is a science, with its own
school of tools and techniques, both
in the scientific and the behavioural
domain.
“In our company, project managers
are GODs” is the common refrain
in international EPC or engineering
companies. However, this is not the
case in Indian EPC companies, as
is evident from various perspectives
provided by Indian companies as well
as developers. A leading Hydrocarbon
major, in an industry forum, called upon
the EPC companies in India to develop
better project management talent, and
especially requested the Indian offices
of global firms to rotate local talent
through global assignments to develop
these skills.
Most mid-size fast growing EPC
companies in India are facing issues
related to empowerment of Project
Managers and the primacy of the Project
Management function in an EPC firm.
As a result, projects are de facto mana-
ged by Business Unit Heads or other
very senior professionals,
reducing the designated
project managers to co-
ordination roles, and resulting in senior
management being involved in day to
day project issues.
Further, with business growth, senior
executive time available for a specific
project becomes limited, resulting in
loss of execution control. We suggest
that fast growing mid-size companies
relook at their organization structures
and policies to ensure that their project
managers are empowered. They should
have accountability for project cost and
time control, and adequate control over
decisions related to the project.
“E+P+C is not equal to EPC”
RESPECT FOR SENIORITY IN INDIA LEADING TO PROJECT MANAGER
EMPOWERMENT ISSUES
THE OTHER DIMENSION OF THE CHALLENGE IS THE RESPECT FOR SENIORITY IN THE INDIAN
CULTURE. WHILE PROJECTMANAGERSARE DE-FACTO CEOS OFAPROJECT,THEYMAYNOTALWAYS
BE MOSTSENIOR INTHE PROJECTORGANIZATION’S HIERARCHY.THE PROJECTTEAM MAYCONSIST
OF ENGINEERING COORDINATORS, CONSTRUCTION MANAGERS WITH MANY MORE YEARS OF
EXPERIENCE – WHO WOULD BAULK AT REPORTING TO THE DESIGNATED PROJECT MANAGER DUE
TO THEIR CULTURAL CONDITIONING.

Organization Design & Management:
Building the Engineering
ORGANIZATION
As we discussed earlier in evolution of
EPC companies, most EPC companies
are likely to evolve from the construction
or the developer route. In both the cases,
the key capability gaps would remain in
the domain of engineering. While Project
Management is the execution arm,
engineering does and should function as
the brain, adding competitive advantage
in terms of standardization, value
engineering and technology leadership.
Engineering which being a knowledge
based function requires careful design of
organizationstructures,careerpathsand
development strategies, and a different
approach to performance assessment
and management as compared to the
other functions in the organization.
Also, with rapid diversification, the
centralization vs. decentralization
question stares at managements of
EPC companies, who would like to
balance efficiency with effectiveness.
For example, companies tend to
centralize “end-use / process”
independent engineering disciplines
like civil, structural and electrical, while
the other disciplines are de-centralized.
However, there is no right answer, it
needs to be carefully assessed in light
of the company’s portfolio, strategy and
culture.
Source: PMI-KPMG Study on drivers for success in infrastructure projects 2010 - Managing for change
Risk Management
Less than one third of the survey respondents in KPMG-PMI Infrastructure report,
had confidence in their risk management capabilities.
The EPC business model revolves
around taking ownership of project
risks. Hence it is absolutely critical for
EPC companies to establish robust
processes for risk identification and risk
management. Such a process would
address risks identified
at both the sales and
execution stages of the
project.
While the ideal situation
would be for EPC
companies to be able to
identify,mitigateorprovide
forallrisksatthetendering
stage, this is usually not
practical, given the need
to complete bids within
a specified deadline, and
to not rely indiscriminately
on additional contingency
margins that may impair

Source: PMI-KPMG Study on drivers for success in infrastructure projects 2010
- Managing for change
The KPMG-PMI study in 2010 also
highlighted the some concerns on the
comprehensiveness of risk identification
by companies, given the high incidence
of projects having suffered due to risks
that were hitherto unidentified and hence
not mitigated. Critical improvements are
also required to acquire a robust level
of sophistication and maturity in risk
mitigation. Routinely used mitigation
the competitiveness of the bids. Hence
whilekeyrisksareidentifiedandmitigated
during the bidding stage, a large number
of additional or minor unmitigated risks
may need to be addressed during
ongoing project execution. Most leading
international EPC companies, process
all enquiries / tenders through a risk
identification process based on which,
go-No-go decisions are taken, and risk
ratings are assigned to each project or
proposal.
The more sophisticated systems also
have contingencies and margin policies
based on risk ratings. Similarly, the
portfolio of projects is weighted based
on risk categories as strategic planning
inputs. Another common element is
Independent review of risks by personnel
not directly involved in Project Sales or
Execution. With the rapid growth in
order books, and a senior management
stretched for time, it is essential that
Indian companies also rely less on
individual or subjective experience
and expertise, and more on agreed
risk management tools and objective
frameworks which can be used even
by less experienced people with the
help of knowledge and experience that
is codified into these tools. These risk
assessment frameworks, customized
and developed with the inputs from
senior management of the company, can
flag off critical risks in the tenders, and
ensure awareness and more informed
decision making during bidding. Also,
nuanced and differentiated processes of
project execution, monitoring and control
and staffing of projects based on the risk
assessment will help in focusing the
best and most careful decision making
capacity towards the most risky of the
projects in a company’s portfolio.
strategies are either ‘reduce’, transfer or
avoid. While “accept risk” type strategies
are used infrequently, ‘exploit’strategies
are rarely used. The industry thus is
yet to reach maturity levels at which
mitigation strategies are leveraged to
exploit project risks and are used as
means to maximize project income
potential.
Risk reporting and monitoring are the
remaining links in the risk management
process that are critical for its
effectiveness. Evolving information
systems can make timely and accurate
project information for reporting
purposes. The information reported
should comprise early warning indicators
and provide content that facilitates
decision making.

Procurement
Procurement can be a vital element
influencing timely and profitable project
delivery in EPC projects. In projects with
low construction intensity like Power
projects, Refining and Petrochemical
complexesandotherindustrialplants,just
the standard “bought-out” components
may comprise anywhere between 30-50
percent of the project value, apart from
other procured items like construction
materials and sub-contracted services.
There are several reasons leading to
complexity in the procurement function
of an EPC company:
Number of individual items to
be procured for a large project,
within specific and often varying
deadlines.
Cost targets for Procurement are
usually set at individual component
level, not at an overall Procurement
budget level – since senior
management usually does not
l
l
disclose overall project cost budgets
for confidentiality and flexibility
purpose.
The constant trade-offs between
procurement time and procurement
costs to meet the often conflicting
goals of cost control vis-a-vis
schedule control on a project.
It requires companies to evolve strong
sourcing teams, capable of vendor
discovery and price discovery on a
larger scale than would be required
in a manufacturing set-up. In most
manufacturingcompanies,ratecontracts,
differentiated procurement processes for
minor vs. major items, and MRP based
procurement processes reduce the
transactional overhead significantly.
Moreover, most public sector units have
made, depending on how one looks
at it, the job easier or more difficult for
contracting companies by providing
vendor lists. This has resulted in vendor
development take a backseat as the
l
burden of that job has been transferred
to developer or the consultant.
This is however, not the case with private
sector clients, especially new entrants.
EPC companies we believe, would
benefit significantly from an increased
focus on vendor development, including
supportinghighqualityemergingvendors
in getting themselves accredited with
PSUs.
Given this context, we feel Procurement
capability can emerge as a strategic
differentiator for improving performance
and winning business in the EPC
industry. It requires efforts on the part
of engineering, procurement and client
facing personnel to discover, qualify
new suppliers and convince customers
to include them in their approved lists or
allow deviations on the projects. We feel
however, in the emerging high growth
but hyper competitive scenario for EPC
companies, this would be a worthwhile
investment to make.
EFFICIENCY IMPROVEMENT INITIATIVES FOR PROCUREMENT
FUNCTION
REDUCE CYCLE TIME, BY DESIGNING THEIR PROCUREMENT PROCESSES FOR INCREASING
DECISION MAKING SPEED
REDUCING THE NUMBER OF TRANSACTIONS BY STANDARDIZATIONAND IDENTIFYING COMMON
ITEMS ACROSS PROJECTS EXECUTED IN THE PAST
IMPROVE THE COMPETITIVENESS OF THEIR SUPPLIER BASE BY CASTING THEIR NET WIDER,
INCLUDING ELEMENTS OF GLOBAL SOURCING IN THEIR STRATEGY
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6
And not necessarily poor planning
End-Use Industry Views
Power Generation Units – especially
thermal power plants are likely to be
amongst the largest opportunities for
EPC players in the short to medium
term. The thermal power and nuclear
power units both have relatively lower
civil construction component and
require superior capabilities in terms of
equipment sourcing, engineering and
integration management as compared to
other infrastructure classes like Roads,
Ports etc.
Demand Outlook
By 2015, India would need to increase
its current generation capacity of 152
GW to 205 GW (an increase of 53 GW)
till year 2014-15 for meeting the base
load capacity requirement to support
growth of economy at 8 percent and
address unavailability of power in many
parts of the country. To meet the peak
load capacity requirement, the installed
capacity requirement would need to be
more than 270 GW.
The generation capacity gap to
meet baseload requirements varies
significantly across regions and is
estimated as 62 GW in Western Region,
62 GW in Northern Region, 54 in the
Southern Region, 24 GW in the Eastern
Region and 3 GW in the North Eastern
Region of India in the year 2014-15. This
projection implies an average annual
generation capacity addition at the rate
of 16 GW per year during the period
2007-08 to 2016-17 (covering two 5
Year Plan periods in India viz. XIth and
XIIth). During the IXth (1997-2002) and
Xth (2002-2007) 5 Year Plan periods,
the average annual generation capacity
addition in the
country has been
3.6 GW and 4.2 GW
respectively. The
poor performance in
the past is attributed
to implementation
delays6
by the
public sector utilities
coupledwithhitherto
limitedprivatesector
participation.
Abottomupanalysis
of expected plant
additions was conducted based on a
variety of sources such as the CEA
database for upcoming additions,
industry reports and KPMG’s internal
assessment. Only those plants which
have reached an appropriate state
of readiness for commencement of
commercial operations within the period
FY 2010-15 have been considered
for capacity addition. Effective supply
addition for each year of the period
(FY 2010-15) was calculated based on
the total capacity addition. We expect
a total capacity addition of 99 GW in
this period. Assuming a similar rate,
this translates in to an approximate
opportunity size of INR 500,000 crore
(i.e. over USD 100 Billion) towards
capital expenditure for these plants.
The majority of this investment will be
towards thermal power plants, of which
80 GW are likely to be commissioned by
2015.The opportunities for EPC players,
equipmentvendorsareforprojectswhich
are likely to get commissioned beyond
2012-13 as they are the ones which are
mostly likely yet to be tendered out - for
balance of plant equipment if not main
plant equipment.Source: KPMG Research and Analysis
Expected Capacity Addition (GW)
Power Generation

7
Source: http://www.sify.com/finance/ntpc-likely-to-float-rs-18-000-cr-tender-news-equity-km4bvDidjib.html
End-Use Industry Specific Issues
The thermal power industry has been
one of the fastest to adopt the EPC
model
The Power Generation industry has
seen one of the fastest adoption rates
in terms of EPC contracting model.
Prior to the reforms in the power sector
and the policies around public private
partnership models, power plants were
being constructed by the state level
generation companies and NTPC. The
tariff regime and operating models of
some these power generation entities at
that time did not require utmost attention
to projection completion on schedule
and to cost budgets. However, with the
competitive power pricing policy PPP
bids, - wherein one can participate in
developing power, only if you are the
most efficient on capital cost as well as
operating cost - has led to increased
focus on executing projects on time and
within budget. Most projects are being
financed by project finance companies
and financial institutions, who demand
that developers manage the project
budget escalation risks.
Internal teams at even established
generation companies are stretched,
and at the same time, there have been
a large number of new power sector
entrants, some with limited background
in executing large projects. Hence
the entire sector is favourably inclined
towards contracting project execution
on a LSTK basis. The current landscape
indicates that large public or private
sector generation companies like NTPC,
given their internal engineering and
project management talent pool, will
continue to buy individual packages,
keeping the integration to themselves.
However, they may combine multiple
power plants in their portfolio, going for
combined bids to get the best prices and
reducing transactional bidding costs.
NTPC floated a tender for different
packages for 11 units of 666 MW each,
the award of which is likely by first
quarter of 2011. With this move, NTPC
is expecting to bring down the cost/MW
of setting up power plants, which many
experts believe today is at about 5.5
crore/MW7
. State level generation
companies, most of whom are currently
on the twin package mode (BTG and
BoP), may continue to procure in that
manner.
The trends in the private sector are
interesting, where a distinction needs to
be made between large business groups
like Reliance ADAG, Essar Group, JSW
Group, Sterlite Group, GMR Group,
Lanco etc who are likely to build large
portfolio of power projects in the future,
vis-à-vis smaller players with fewer
generation projects in their planned
portfolio.
While complete power plant as a single
EPC/ LSTK package is still rare in the
Indian scenario. Moreover, the trend
of not awarding the entire EPC job (i.e.
both BoP and BTG of a power plant) to
one single service provider has been
driven by:
Distinct set of competencies required
for the BTG and BoP packages.
While BTG is technology, equipment
and manufacturing intensive, BoP
requires complex integration
capabilities of sub-systems to be
sourced, erected and commissioned
from different sources.
A single LSTK package would amo-
unt to a range of around INR 6000
crores for a typical 2X660 MW
project, requiring EPC companies
with large balance sheet and risk
bearing capability. It will be difficult
to find enough number of such
contractors to get a competitive bid.
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8
Economic Times, 23rd January 2011
Typical Outsourced Package Structure by
Thermal Power Plant Developer Segments
The large business houses like Tata,
Reliance, JSW, Adani have significant
in-house capabilities as far as project
execution goes. Moreover they have
substantial leverage with equipment
vendors and sub-contractors due to
their large portfolios. (Reliance has
demonstrated this by entering in to
an agreement with Shanghai Electric
Company for main plant equipment
supply for all its thermal power plants,
and in the process also getting access to
cheap funds. Estimates put the savings
on financing cost alone at INR 6500 Cr.
for just the Sasan UMPP project being
developed by Reliance Power8
.
With that kind of leverage, it is hard
to imagine, large private companies
wanting to outsource setting up of power
plants to EPC companies on a turnkey
basis. If EPC companies are looking
to capture this private sector market in
utility power plants, we believe they will
have to bring a value proposition which
reduces power plant capital expenditure
costs by at least 10 – 15 percent over the
currently prevailing benchmarks, through
efficient global procurement and strong
project execution capability.
“Do the EPC companies really deliver for us?”
- Power Plant Developer
Central Sector PSU State Sector PSUs Private Sector UMPPs
EPC Contract
for Entire Plant
(BTG + BOP)
· Not Applicable Rajasthan Rajya Vidyut
Utpadan Nigam Ltd
(RRVUNL) Projects
· Companies like GMR,
Jaypee, Essar, Indiabulls
which have their own
Project companies
Not Applicable
* Balance of
Plant – EPC
DVC projects to be
tendered as single
BOP package·
NLC also expected to
go for BOP in the NLC
TPS – III
· Some state generating
c o m p a n i e s l i k e
Maharashtra, Madhya
Pradesh, Chattisgarh are
going for the BOP route
The new entrants and
small-to-mid size players
in the IPP market may go
for BoP
BOP route unlikely given
the scale of orders and also
due to the fact that most
large power developers
have EPC companies
Coal Handling
Plant (CHP)
· N T P C , N L C
– separate CHP
package
S t a t e g e n e r a t i n g
companies going for split
packages have CHP
separate
· Companies going for
split packages have CHP
separate
Tata Power Mundra UMPP
awarded CHP separately
to Krupp: Reliance Infra
undertaking Sasan UMPP
on EPC basis
Ash Handling
Plant (AHP)
· N T P C , N L C
– separate AHP
package
Some state generating
companies combineAHP
with Main Plant but that is
slated to change
· Companies going for
split packages have AHP
separate
S e p a r a t e p a c k a g e s
expected from the UMPPs
W a t e r
Packages
· NTPC and NLC –
separate packages
S t a t e g e n e r a t i n g
companies of West
Bengal, ie, WBPDCLand
DPL will give complete
water packages; rest will
split
· Water packages will
be split
Water packages will be
split
Source: KPMG Research, News Analysis

9
Report of the Committee to study Design Features of Boilers and Auxilaries being sourced from Chinese Manufacturers,
September 2008
Hence in terms of contracting model,
the following trends are likely to sustain
/ materialize
Majority of the public sector projects
or projects of new developers are
likely to be on twin package route
(BTG and BoP)
Most large business houses in
the Thermal Power business will
manage their projects in-house to
leverage their portfolio, faith in their
internal project management and
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l
procurement capabilities, and hence
will place smaller sub-contracting or
equipment orders.
In the BTG segment, the Chinese
companies will likely continue to
have the second largest market
share, after BHEL. It may be difﬁcult
for Indian companies in JV with
foreign partners to make inroads in to
thismarketduetothecostadvantage
offered by the Chinese players due
to overcapacity in their domestic
market. While quality concerns
l
regarding Chinese supplies have
beenexpressed,weunderstandfrom
our interview respondents that there
is no conclusive evidence to this
effect. In fact a CEA study9
in 2008
found no material reason to doubt the
quality or the technology offered by
the Chinese suppliers. On the other
hand, BHEL is the most established
player in Indian with ~60 percent
market share and with recently
augmented capacity should continue
to protect its market share.

10
Refers to opportunities for engineering and construction companies as well as equipment
suppliers, not restricted to those on offer through the EPC-LSTK model
Refining and Petrochemicals
Demand Outlook
Oil and gas constitutes about 65 percent
of the global and 40 percent of the
Indian primary energy consumption. In
the Indian context, the primary energy
consumption over the last five years
has increased by over 6.5 percent
CAGR as compared to global increase
of about 1.7 percent CAGR. The overall
contribution and pace of growth of oil
and gas provides a perspective on the
importance of this segment to the Indian
economy.
Oilandgasisoneofthefewsectorswhich
exceed the investment targets as laid out
in the Government’s five year plans.
For instance, in tenth five year plan, the
actual expenditure was 112 percent of
planned outlay at INR 1,08,003 crores.
Similarly, during the midterm appraisal of
eleventh plan, government has to revised
its planned outlay to INR 2,69,461 crores
from INR 2,29,278 crores, a 17 percent
increase in planned expenditure. This is
mainlybecauseofaggressiveinvestment
plans by oil and gas companies in India.
The actual expenditure during the first
two years and 4 months of eleventh plan
(up to August 2009) is INR 1,08,625.91
crores which is 47.38 per cent of the
plan approved Outlay. The Oil and gas
sector is poised for growth. Many public
and private companies have announced
their investment plans in the various
streams of the oil and gas sector such as
exploration and production, oil and gas
pipelines, petroleum refineries, liquefied
natural gas, city gas distribution and
petrochemicals. All these investment
plans would create a robust opportunity
for EPC companies. The total value of
the EPC10
opportunity in India for Oil and
Gas sector can be pegged at USD 60
- 65 billion in the next five years. On the
upstream side, an investment of about
USD 18 - 20 billion has been envisaged
in the next five years for development
of offshore fields and laying pipelines.
A substantial part of this investment
is expected to be done by ONGC in
developingtheeastcoastgasdiscoveries
and maintaining production from existing
discoveries. Moreover, the government is
Five year plans Planned Expenditure vs Actual Expenditure
0
50
100
150
200
250
VII Plan VIII Plan IX Plan X Plan XI Plan*
Planned Expenditure Actual Expenditure
Actual expenditure as
% of planned outlay
127
169
67
112
-
*XI plan actual expenditure is only up to August 2009
Source: Planning Commission
Investment(inINRthousandcrores)
EPC Investment opportunity in Oil & Gas Sector
60-652
3-4
3
21-23
12
118-20
0
10
20
30
40
50
60
70
U
pstream
O
ilPipelinesG
as
Pipelines
RefineriesLN
G
Term
inalsCG
D
N
etw
orkPetrochem
icals
Total
Investment(inUSDBillion)
Source: KPMG Analysis

11
Including offshore engineering centers supporting global projects
12
Not an exhaustive list of projects, examples provided only to demonstrate instances of work executed in India
also planning to offer shale gas blocks
in second half of 2011, which will create
more opportunity over and above the
aforesaid investments. The midstream
segmentwouldseeaspurtininvestments
given that the PNGRB is in the process
of awarding four key pipelines segments
more than 4,000 kms. Further there has
been plan to launch additional pipeline
such as Asansol-Howrah, Chennai-
Nellore and other pipeline segments
as part of national gas grid. This would
mean an EPC opportunity of about
USD 12 billion in natural gas pipelines.
Additionally around USD 1 billion
investment opportunity exists in crude
oil and petroleum products pipelines.
Further, to meet the domestic gas supply
constraint, LNG regasification terminals
have been planned at Kochi, Mundra
and Ennore which would require the
capex investments of about USD 3 billion
by 2015. In the downstream segment,
refinery sector has seen number of
announcements by companies for
expansion of existing plants and setting
up of Greenfield refineries. The new
refineries are expected to increase the
India’srefinerycapacityby55mtpa.Given
that refineries are highly capital intensive,
the EPC opportunity can be pegged
at about USD 21 - 23 billion. Besides
this, some companies have announced
firm additions in their petrochemical
production capacity which would mean
an EPC opportunity of USD 2 billion. In
addition, the Ministry of Chemicals and
Fertilisers has approved proposals of
about USD 35 billion in three regions
under its flagship Petroleum, Chemicals
and Petrochemicals Investment Regions
(PCPIR) policy. These three PCPIRs are
— Visakhapatnam and East Godavari
districts in Andhra Pradesh, Bharuch
in Gujarat and East Midnapore in
West Bengal. We have not included
investments in PCPIR in our overall
estimate. City Gas Distribution (CGD)
is another downstream segment which
is set to see a spurt in investment
opportunities, due to new domestic gas
discoveries and bidding by PNGRB.
The regulator has already completed
the bidding for 13 geographical areas
in first two rounds and plans to have
offer further 16 cities in next two rounds.
Thus even if one were to assume a
conservative spread per city, the EPC
opportunity in CGD network is about
USD 3-4 billion in the next 5 years.
End-Use Industry
Specific Issues
The Hydrocarbons industry is unique in
terms of player profiles as the very best
in the world have a presence in India.
Here is just a sample list of companies
operating in India, not just by means of
having offshore engineering centers, but
having won & executed projects in India.
Our discussions with these companies
indicate that they have at least 20
percent of their India center manpower
deployed on Indian projects.
Source: Company Websites and News Reports
Company India Offices11
Examples of India Projects12
Foster
Wheeler
Chennai, Kolkata
and Gurgaon
IOCL Paradip Refinery FEED package
Uhde India Mumbai, Pune PMC for Refinery Units of BPCL, Mahul,
Jacobs
India
Ahmedabad,
Vadodara, Mumbai,
Delhi
PMC and EPCM for Manali Refinery Resid
Upgradation
Technip Chennai EPC for Ethylene Storage System of
Chemplast Sanmar
Tecnimont
ICB
Mumbai, New Delhi EPC for Polypropylene plants at IOCL
Panipat
Linde Vadodara Hydrogen Plant at IOCL Barauni
Aker
Solutions
Mumbai Engineering, Procurement, Project Mana-
gement and construction/commissioning
assistance for Reliance Polypropylene plant
Examples of International Engineering Companies Presence in India
in Oil and Gas

It is a phenomenon very unlike the other
sectors discussed like Power Generation
or other infrastructure segments. One
of the differentiating factors is the
engineering and equipment intensity, put
together as the technological intensity of
the projects. This is an area where the
relative strengths of the international
companies are believed to be superior.
Moreover, the qualification criteria
are stringent and past experience in
a particular type of unit / package is
demanded. As a result, it has been
observed that international companies
have established their niches. Amongst
Indian companies, the key players
include Larsen and Toubro, Punj Lloyd
and recently Essar Projects, which has
received large size orders in the recent
IOCL refinery project.
The industry is also unique in terms
of the prevalent contracting models,
with very little being given out as LSTK
contracts. The various reasons cited for
this phenomenon are as follows
Limited set of LSTK contractors
in the Oil and Gas sector, capable
or willing to execute large turnkey
contracts.WhiletheEPCcompanies
believe that process plants are
too complex and the quality of
front end and basis engineering
which will provide the solid ground
for firm estimation is lacking, the
l
user industry feels that the EPC
companies are just not willing to
take large risks in this sector. While
L&T and Punj Lloyd are among the
few Indian companies capable of
taking up large LSTK packages,
the international companies do not
have Indian balance sheets of the
size wherein they can afford to take
such large risks. The international
parent companies hesitate taking
up large projects in India on account
of their internal risk assessment
policies. Additionally, there is
ambiguity related to various taxation
issues, which results in limited
number of bids being received in an
international competitive bid route.
One of the state-run refining and
marketing company highlighted the
lack of enough number of global
bids received, when they did break
their contracting pattern to attempt
awarding large LSTK packages.
KPMG’s tax experts believe there
are ambiguities in Indian taxation
laws related to importing of capital
equipment for projects, and also in
taxation on work performed in India
for global companies, which force
these companies to either not bid,
or bid very conservatively.
The complexity of the process
industrymakesitdifficulttoprepare
detailedandcomprehensivefixed-
cost bids. The preparation of the
l
FEED, so that it is good enough
to give it out for LSTK itself takes
about a year, followed by bidding
and contracting for another year.
This process adds a good two
years to the 3 odd years of project
execution cycle. Moreover, Indian
user companies seem reluctant to
spend that kind of man-hours and
cost towards front end engineering.
Majority of the capital expenditure
is being done by the state run
oil marketing companies, ONGC
or Reliance. While the state-run
companies have their large in-
house teams developed over the
years to take on the integration
challenge, companies like Reliance
are well-equipped to assume the
project risks on their own, given their
entrepreneurialhistoryandesteemed
project management capabilities. In
that light, the LSTK model or larger
packages would be possible only in
the event that the internal teams of
Petroleum companies are stretched
on account of a large number of
capital expenditure projects ( which it
appears, is not the case), or there are
mid-size refining and petrochemical
companies setting up plants in India.
The answer in terms of encouraging
mid-sized players to invest in India
seems to have been found in the
form of PCPIRs being set up in the
country which will encourage foreign
l

as well as domestic investment, with
the feedstock being supplied by the
anchor investor. Though not exactly
falling in this bracket, ONGC’s
petrochemicalsventure,OPaL,being
set up in the Dahej PCPIR is a case
in point. ONGC has limited in-house
expertise in petrochemicals, and
hence there is a clear difference
in the way it has gone about its
procurement. The EPC order for the
ethylene cracker has been placed on
a consortium of Linde and Samsung
Engineering India. This is one of the
largest EPC contracts awarded in
India in the Oil & Gas sector. Also, it
marks the entry of the famed Korean
EPC companies to India.
Contracting Models:
Medium Term Outlook
As far as the hydrocarbons and the
process industry is concerned, it will
likely continue to see the dominance
of the EPCM model of contracting.
However, to reduce the complexity
of procurement and integration, the
individual packages being procured for
a Greenfield refinery or similar plant, are
likely to come down from the current 20-
25 to may be 10-15 packages and even
less going forward.
IndianEPCcompanieslookingtoenterthe
Hydrocarbons sector, have to overcome
the challenge of qualification.
The routes adopted by them to build their
credentials have included
a) acting as sub-contractors to
international companies,
b) bidding in consortiums or
c) acquiring small companies which
have partial qualifications.
However, as compared to EPC in other
industries or infrastructure segments, it
is a more gradual process to establish
oneself in the Oil & Gas sector in India.

13
Techpetro Asia Newsletter (April 5,2010)
14
SAM group – Water - A Market for the future (2010)
15
ADB: www.adb.org/India/main.asp; World Bank: go.worldbank.org/E9RO7F96W0; JICA: www.jica.go.jp/india/english/activities/
16
Planning Commision of India 17
‘India Infrastructure at crossroads’ Thomas Reuters. September 24, 2010
Water
Demand Outlook
Water Resource Management
– A Critical Global Challenge and
Burgeoning Opportunity
The Worldwide Plant market for water
treatment has been estimated at USD
380 Billion Dollars as of 200913
. Water
demand is increasing due to growing
levels of industrialization and the spurt
in global population. However regions
with high demand are not well connected
with regions of high supply. Given
the demand-supply mismatch and
increasing emphasis on sustainability,
water management is a sector expected
to experience high growth.
Structure of the Water market
Nearly 50 percent of water use is
for industrial purposes in developed
countries as opposed to 80 percent for
agricultural use in developing nations.
Both public utilities and private players
operate in this space with private players
accounting for 44 percent of the serviced
water in Europe as opposed to only 12
percent in South East Asia14
.
Key Characteristics Description India
Industry Structure Global move towards consolidation has led
to the formation of multinational corporations
like Veolia, Suez etc having presence in more
than a number of nations and latest reported
revenues of over 10 billion USD
Growing opportunity in the Indian market has led
to the growth of Indian ﬁrms in partnerships with
global majors, intending to participate in the planned
privatization of the water utilities market in India.
Technology Patented In-house technologies possessed
by most companies. No one technology
dominates
Procurement of technology through tie-ups with foreign
majors
End Use Consumers Industry consumes nearly 50 % of all water Agriculture consumes over 80 % of total water
Domestic opportunity Historical infrastructural activity surrounding
heavy industry development and emphasis
on sustainability provided the necessary
project management experience.
Very little penetration of the Domestic market.Large
opportunity going forward
Typical Contract
Mode
DBO/BOT (Design Build Operate,Build
Operate Transfer). Focus on both building
and operation of the facility
EPC (Engineering Procurement and Construction).
Also DBO/BOT basis contracts.
Source: KPMG Research and Analysis
Comparison of Global Water EPC Market with India
Indian Scenario: A growing market
with a lot of opportunity
Due to the multiplicity of issues plaguing
the sector, the Central, State and Local
governments are investing signiﬁcant
amounts of money in the sector. Add-
itionally, funding to the water sector
by development banks is increasing
manifold. Investment in urban water
supply and sanitation has increased
during the first decade of the 21st
century, driven by increased central
government grants made available
under Jawaharlal Nehru National Urban
Renewal Mission (JNURM) and funding
from development agencies such as
ADB, World Bank and JICA15
. The 11th
Five-year plan (2007–2012) foresees
investments of INR 127,025 crore (USD
28.6 billion) for urban water supply and
sanitation, including urban drainage
and solid waste management16
. While
private sector interest in the sector
has increased, critical barriers such as
poorlywrittencontractingdocumentation,
large timelines to project award and
sub-optimal risk sharing mechanisms
continue to hinder the growth of private
sector investment in the water sector
in India17
.

Opportunity Drivers and Trends for EPC companies in Water Segment
Opportunity Area Drivers and Trends
Wastewater Treatment Stringent enforcement of sewage disposal norms
Shortage of Water for Industrial use
Opportunity in building sewage collection infrastructure and Treatment plants
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Water Treatment and
Transimission
Increasing Urbanization
Opportunity in the form of EPC / BOOT model including metering and collections
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Industrial Water
Infrastructure
Large capacity additions in Power and Steel
EPC is the preferred Contracting model
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Desalination Reducing cost of desalinated Water, couple with water shortage
Medium term adoption in the industrial sector
l
l
Water Management Leakage reduction programs by Municipal bodies
Small projects, opportunity for engineering and equipment suppliers
l
l
Agricultural Demand Irrigation projects and driving efﬁciency of water usage to agricultural consumers. Limited
opportunity for EPC players
l
End-Use Industry Specific Issues
Structure of the Indian Private
Sector
Asnapshotofsomecompaniesoperating
in the sector along with their area of
operations is mentioned below:

Issues and Challenges Facing India's EPC Industry

Issues and Challenges Facing India's EPC Industry

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Issues and Challenges Facing India's EPC Industry