Happy Days Ahead – EPC Sector in India
“The future depends on what we do in the present”– Mahatma Gandhi
“The best way to predict future is to create it” -Peter Drucker
In India, the construction industry has evolved from item rate packages to lump-sum contracts and then to EPC contracts over the years. It has resulted in a visible shift from owner-managed projects to projects where the risk of time and cost overruns has been transferred to the contractor, along with the responsibility of designing, procurement of material and construction. This form of the contract even protects the owner/developer from currency and interest rate fluctuates. With the development of EPC contractor’s financial and technological capabilities, the project owner began to award the project on a lump-sum turnkey contract.
Five key infrastructure sectors include:
1) Extraction: Oil & Gas, Mining, Metals and minerals
2) Utilities: Power generation; transmission; distribution, gas, water, telecom
3) Manufacturing: Refineries, chemicals, automobiles, pharmaceuticals and metals
4) Transport: Rail, road, airport and ports
5) Social: Hospital and Schools.
As per a recent article by PWC, India (an emerging economy), is likely to add another 500 million to its urban population over the next four decades, spurring additional infrastructure spending in such major sectors like energy and telecommunications. Because of the ongoing development of India’s technology services sector and growing consumer demand, spending for telecommunications infrastructure is expected to increase to $130 billion by 2025, up from $27 billion in 2013. In addition, growing per capita income in emerging markets will mean a larger middle class that will translate into infrastructure for manufacturing sectors that provide the raw materials for consumer goods and for more and better roads. The economic rebalancing should eventually reach a tipping point as emerging markets continue to expand their global reach and influence (as shown in Figure A).
What is the Future of EPC Sector :
Ø Internet of Things (IoT)
Ø Smart Buildings
Ø Artificial Intelligence
Figure B – Internet of Things (IoT)
The above figure.B depicts a common solution for controlling Building Management Systems. We can control the Human Comfort using HVAC Management Systems. The solution also offers state-of-the-art Lighting Control system that provides the right amount of illumination based on occupancy and ambient daylight.
It enables an easy-to-use Conference room management system that automatically sets the scene according to the activity in the room. Parking Management System manages traffic flow in dedicated office multi-level car parks. It also brings together solutions for workspace management such as Asset Tracking, and Seat assignment.
EPC companies are preparing to build smarter facilities by becoming technically proficient. EPC sectors are restructuring themselves with a focus on customers and technology. Such shifts are already noticeable with advances such as visualization (versus modelling), robotics (versus construction), production using 3D printing (versus procurement), and the IoT (versus project monitoring and controls). There are technologies that can even install or construct based on plans derived from the 3D models. In many projects, drones are being used to monitor the project progress status.
Characteristic that will define the EPC Firms
Ø Focused on design outcomes
Ø Agile, high-velocity businesses
Ø Talent magnets
Ø Economically savvy at all levels of the organization
Ø Relentlessly collaborative.
Impact due to COVID
As per the December’19 report published by the Ministry of Statistics and Program Implementation (MoSPI). There are nearly INR 111 trillion worth of projects in the National Infrastructure Pipeline (NIP), predominantly in the roads, gas, rural housing, renewable energy, etc (refer Exhibit A). The COVID-19 crisis is expected to hit labour-
The 40-day lockdown in effect since 25 March 2020, which was further extended up to 03 May 2020 and subsequently to 17 May 2020, led to reverse migration with workers leaving cities and going back to their villages. It is estimated that around 6 lakh workers walked on foot to villages, and around 10 lakh workers are in relief camps, who are employed across multiple sectors.
As reported by the business world, the revenue and earnings before interest, taxes, depreciation and amortisation (EBITDA) margin of engineering, procurement and construction (EPC) companies will decline around 15 per cent year-on-year in the current financial year as COVID-19 led lockdowns reduced the project execution pace, according to India Ratings and Research (Ind-Ra). However, demand drivers seem to be healthy.
The order book of the top 18 EPC players declined 6 per cent year-on-year in FY20 after registering extraordinary growth during FY16 to FY19, in which it almost doubled to Rs 2.1 lakh crore from Rs 1.2 lakh crore. Players with focus on road, building and metro registered significant growth in their order book.
While growth in the road segment was supported by government plans to increase the pace of road construction in the country to 30 km per day in FY19 from 15 to 16 km per day in FY16, the building and housing segment was supported by Pradhan Mantri Awaas Yojana (PMAY) scheme.
Urban infrastructure's share in the order book also grew to 9 per cent in FY20 from 3 per cent in FY16. The road and building segment, which accounted for the major share of 63 per cent in the overall order book, fell 10 per cent in FY20, impacting segment players. Players with focus on housing and metro projects registered significant growth in FY20. Overall, the order book and revenue, though declined to 2.6x in FY20 from the peak of 3.28x in FY18, remained healthy.
Debtor days increased slightly in FY20 to around 113 days from 107 days in FY19. However, the overall working capital requirement in the industry exacerbated due to the lockdown in March increased which was mainly funded by debt. The extended lockdown in Q1 FY21 and related restriction are likely to significantly impact the operating performance of the construction players in FY21. Basis Ind-Ra discussions with sector players, the situation improved in July with almost all the project sites having commenced operations.
An increase in central and state government fiscal deficit in FY21 can impact both order inflow and collection in the sector and it remains a key monitorable for the sector outlook, said Ind-Ra.
Reimagining for the next normal
Companies have already started focusing on the first two steps: Resolving the immediate issues and building resilience. Slowly we can see the Construction sites have started to open by following the COVID Protocols.
Methods to adapt to the new normal:
Ø Accelerate rollout and adoption of digitization :
More focus on the remote way of working and moving forward. Contractors should use a digital model of communication and transfer of works and remote collaboration at the production sites. Distributors should start thinking of adapting to use E-Commerce platforms for which sales teams could work and handle customer contracts, sales or ordering remotely with digital tools. Engineering consultants might strengthen their BIM capability and other collaboration tools. Finally, building materials manufacturers may need to ensure updated BIM, market access through e-commerce, as well as effective, digitally-enabled remote sales.
Ø Invest in the culture and skills needed to operate in the next normal.
Balancing performance and health is critical at any point in time—and it’s that much more important in these turbulent times. Industry players must invest proportionately in culture to erode not only risks related to remote work but also apprehension across the workforce regarding job security and productivity.
Ø Establishing a central monitoring function:
Resource allocation will pose a significant challenge for construction in the coming months. It will involve making trade-offs between projects and assets and will rely on accurate progress data across the portfolio. Therefore, companies should establish a central monitoring function that can rapidly identify and respond to resource-allocation needs across the portfolio. In addition to systematic assessment of the parts of the portfolio that may be affected by COVID-19, these capabilities can include real-time transparency on project process, material inventory, subcontractors, services, and costs.
Ø Identify opportunities to shift work off-site.
Suppliers and subcontractors should identify elements and subsystems that can be preassembled in a controlled environment. Longer-term, players can look for more significant elements of construction to modularize or build off-site (for example, frames and volumetric modules). Such shifts could help building-materials manufacturers collaborate on designing new product features that could facilitate building-site activities. Furthermore, off-site construction could contribute to sustainability goals by reducing materials waste, noise, and air dust as well as enabling circular building systems.
Ø Getting closer to customers:
Customer preferences are undergoing a step change—toward online retail, remote working, and more sustainable communities, to name just a few examples. It is not yet clear what other shifts might emerge, but we can assume many of those will likely become ingrained and normalized in customer preferences, permanently. Therefore, it’s more important than ever to stay close to the current (and future) customers.
E&C has been far slower than many other industries to adopt new technology and is only now beginning to undergo a modern transformation. Its labour productivity, static for decades, is on the increase at last and should surge once the new digital technologies are more widely adopted. The industry has also been slow to adapt its business strategies, but companies are now starting to pay more attention to a building’s total life-cycle cost, for instance, and to be more amenable to partnering with other companies. Project owners and investors will have an important part to play here.
The new era in construction will bring great benefits: for the wider society, by reducing construction costs and adverse social effects; for the environment, by improving the efficient use of scarce materials or by reducing the adverse environmental impact of buildings over time; and for the economy, by narrowing the global infrastructure gap and boosting economic development in general. This potential will blossom very soon, and very dramatically. In fact, profound changes are already taking place, though not yet on a sufficiently wide scale. More remains to be done.
Covid-19 Pandemic has impacted the EPC Industry but this TOO WILL PASS. Life has to go on and by following the Government protocols and procedure the EPC Industry will move on for now slowly and steady as we say SLOW & STEADY WINS THE RACE.