New trends in industrial projects
By Prashant Dhanpawde
Recessionary trends, volatility in the capital markets, uncertainties in other markets due to demand-supply imbalances and difficulties in raising funds has virtually put a brake on small projects over the last four-five years. Small or medium scale projects through grassroots plants or expansion and diversification projects are not coming through. This has resulted in slow-down and low capacity utilisation with equipment manufacturers, engineering consultants, and intermediate component manufacturers. More and more buyers are preferring the LSTK route where emphasis is more on contractual terms like bank guarantees, performance guarantees, legal obligations, penalties, payment terms etc., rather than technical features and technical superiority. Since buying is highly centralised, LSTK contractors and suppliers with strong financial back-up are more successful than financially weak suppliers with good products. Getting and losing orders in case of bulk buying also has an impact on factory load making and has a cascading effect down the line in manufacturer supplier.
Project finance and marketing
Generally, big plants are put up with upfront borrowings from financial institutions rather than internal resources. Hence, exposure of FIs is more in such projects. When the project gets stuck midway they suffer more. That is the reason FIs and FIIs prefer the LSTK/EPCC route rather than the conventional route since their exposure is firm and known. LSTK contract has made project marketing a bit complex and made it a "big boys" game. Alliances and ventures are made during the bidding stage. Foreign contractors also tie up with Indian contracting companies to handle site construction, domestic purchase and liasioning whereas process equipments and critical equipments are done by them. Raw material sourcing like structural steel, pipes, valves etc., used to be done from foreign market. These were available cheaply due to dumping by Far East and Western countries. This has had an adverse impact on domestic manufacturers. In the Indian scenario, companies like Larsen & Toubro bagged many contracts because of their financial strength. It now has a virtual monopolistic hold.
I feel that there is a need for a proper blend of commercial projects and LSTK projects with a special push for small and medium projects. This will initiate growth impulses in the Indian economy and make it healthy and vibrant.
(Prashant Dhanpawde is Senior Regional Manager, Chemical Industries Consulting Bureau. [CICB-Elliott is engaged in the business of centrifugal compressors, process compressors, steam turbines, turbogenerators, airdryers and gassifiers]. The author has wide experience in LSTK projects, and conventional projects with supply or turnkey execution of the contracts.)