Akhil Gupta, a post graduate in Systems & Management from IIT Delhi has 30 years experience in Corporate Management and Project Management and currently the Managing Director of Petron Civil Engineering Pvt. Ltd. Petron Civil Engineering Pvt. Ltd is involved with all kinds of construction works under sectors such as cement, power, petrochemical, refinery, water transmission and sewage treatment plants, etc. In an interaction with Jibran Buchh, he gives a broader outlook on the EPC sector in India.
Can you share your outlook for the EPC sector in India?
Engineering, Procurement and Construction are poised for a major growth. EPC growth will be driven by power, water, public health schemes, roads and highways, railways, and oil and gas sectors. The order books of numerous players are bulging and the sector is attracting the increased interest of global majors, as well as infrastructure developers.
However, the sector is not without its set of problems that include shortage of labour, materials, delays in land acquisition, difficulty in organising funding etc. The central government has set a target of investing $1 trillion in the infrastructure space in five years beginning FY13. Of the total targeted investment, private sector is expected to invest $500 billion— with around $350 billion through debt and $150 billion of equity over next five years. The government and central bank need to take major steps forward in fusing liquidity in the market, correcting policies that enlarge investment. The public sector, particularly, thinks that oil and gas companies can contribute to EPC sector by investing in upstream project.
India has potential to perform better, if the central government succeeds in getting its act together. A unique weapon at the disposal of the government is its ownership of many cash-rich public sector companies, which can be used to generate cash if needed. If implemented, it can go a long way in managing the impact of global slowdown on the Indian economy. EPC companies at this time of economic uncertainty need to remain watchful and prudent in risk evaluation and management practice
What are the significant aspects of a detailed project report?
The detailed project report is a base document for appraisal, planning and implementing the project. The document needs to be prepared with technical and financial expertise to ensure appraisal, approval and subsequent project implementation in a timely and efficient manner. The following significant points should be reflected upon:
Broad project rationale: This would include sector background context, project definition, concept, scope, framework and its long-term benefits to the company. It would also include examination of technological parameters available to the company and selection of suitable process and technology for timely completion of projects with highest quality standards and no cost overruns. Financial structuring, profitability and cost analysis of project are an integral part of this rationale.
Resources: Evaluation of the existing resources and facilities available. Planning for manpower, materials, machines, additional capex and other resources required for the development of the project.
Process description: Methodology for execution is described here. Process description and layout plans for the project are formulated. Master construction schedules are prepared. Comprehensive construction schedules highlighting the critical paths are defined. Budgets highlighting the profitability are highlighted here.
Planning and implementation of the project: Schedules prepared are reviewed periodically and corrective actions are taken for timely completion of project within budgets and maintaining highest safety and quality standards.
What are the challenges while securing long-term funding of infrastructure projects?
Unlike other sectors, infrastructure financing needs long-term tenure debt of more than 10 years. This leads to an asset-liability mismatch since the monies raised by banks have a shorter maturity of about three-five years. In order to mitigate this problem the government has set up Indian Infrastructure Finance Corporation Ltd.
The government is increasingly looking at using the public-private partnership model to fund infrastructure projects. Private players have been involved in many infrastructure projects that are being implemented on a build, operate, transfer (BOT) or build operate, own and transfer (BOOT) basis. The PPP model is being used to finance the dedicated freight corridors like that on Delhi-Howrah and Delhi-Mumbai routes, greenfield airports in Bengaluru and Hyderabad, modernisation of Delhi, to name a few.
To secure long-term debt for infrastructure projects today may also use external commercial borrowings to raise resources. But there is a cap on the amount of ECBs that can be raised currently.
There is a need to widen the net further and look for more creative solutions for funding. One such idea was suggested by the finance minister in his budget speech: to use forex reserves for meeting long-term capital needs. However, the Reserve Bank of India is yet to take a decision on the same. Use of insurance and pension money is another source of funds. The long-term liability of insurance and pension funds is a natural fit for infrastructure projects that have a long gestation period. But this requires changes in investment norms. The development of a robust bond market will also aid in creating alternative avenues for financing of infrastructure.
MS gravity pipesWhat are the problems faced by EPC contractors in India? And what are the long-term solutions?
The EPC sector is facing major challenges, including inordinate delays in land acquisition, regulatory bottlenecks, statutory clearances (particularly environment and forest clearance) and difficulty in getting long-term and working capital funds.
The EPC sector is also faced with an acute shortage of manpower. This is most visible in the construction sector, where the shortage of skilled workers is very high. Availability of competent project management personnel is also an area of concern. On the rising incidence of cost overruns, fluctuating input prices like that of steel and cement are the major contributors to the problems faced by infrastructure companies apart from project delays.
Fund-raising is a key challenge for the EPC sector in the backdrop of market turmoil and fears of a slowdown are the ability to raise adequate financing required to fund the execution of existing large order books.
A major reason for the funding issues is the rising interest rates, adding the increasing interest rate burden does not boost the finances of companies. Companies which rely on sub-contractors for the execution of their projects are experiencing difficulties; as such sub-contractors are facing challenges in managing their working capital, due to the contraction in bank funding.
Do foreign EPC contractors enjoy a level playing field vis-àvis their Indian counterparts?
Apart from their low cost of funds, international EPC players really have no major advantage over Indian counterparts. The risk of currency fluctuation and exchange variation has been hedged by Indian clients by entering into multi-currency contracts. The taxation structure is more or less similar in terms of excise duty, import duty, service taxes etc. for foreign and Indian EPC contractors. On the other hand, foreign contractors have to consider the possibilities of PE tax in India.
The only advantage they have is less ‘financing cost’ during implementation in their countries and easy access to foreign vendors.
As far as EPC is concerned, Indian companies are equally competent and much more cost-effective. What we need is fine tuning of project and construction management techniques.
What are some of the current EPC contracts Petron Civil Engineering is executing?
Petron Civil Engineering Pvt. Ltd is one of the leading construction company operating for more than three decades in India and abroad and has successfully completed more than 350 projects, having expertise and proven record in the specialised fields.
PCEPL undertakes EPC and civil construction works in the industrial and infrastructure sectors. The company acts as a turnkey solution provider for strategic business sectors such as cement, power, refinery, petrochemicals, fertiliser and metallurgy, ports, water and wastewater treatment and pipeline, realty (commercial, residential and industrial parks), flyovers, bridges and roads among others.
PCEPL in the recent past has bagged several projects, such as, greenfield cement plant for Ultratech Cement (5,000 tpd), balance of plant work for 2×600 MW thermal power plant at Angul for Jindal Power, construction of cargo berth for Kandla Port Trust, and construction of ash dyke for Talwandi Saboo, Vedanta.
Just last month we bagged an order to execute Nagaur Lift Project, Package IV, Phase-I, for PHED Ajmer for a contract value of 189.48 crore.
What is your company’s strategy for the next five years?
Petron Civil has achieved a CAGR of 22 per cent over the last four years, since it was acquired by KSS Group. Last fiscal year we achieved a turnover of 820 crore. Our emphasis is to maintain a growth level that is sustainable. We feel a growth rate of 25 per cent to 30 per cent can be maintained over next five years.
In order to ensure these targets, Petron is enlarging its basket of projects and fields that it operates in. We have recently diversified into port sector in the coming months; we shall focus on entering into railways, mass housing and metro sector. This is important particularly looking at the volatility in the infrastructure sector that India has witnessed over last three to four years.
We are also focusing on strong and efficient project delivery system being put in place for improved execution of projects within time and cost parameters. Training of human resources at all levels is need of the hour and Petron is investing in this effort to have desired level of professionalism in whatever we do.
We are confident of achieving ₹2,000 crore in next threefour years.