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EPC-LSTK Mode is Gaining Momentum
P D Samudra, Executive Director & Member of the Board Uhde India Pvt Ltd has around 37 years of strong experience in the engineering industry. He has played a vital role in arranging world class technologies for the Indian chemical industry from Uhde GmbH and other foreign licensors. In an exclusive interview with Mittravinda Ranjan, he shares his views on the opportunities and challenges for Indian EPC sector.

The EPC-LSTK mode of implementing projects is sometimes considered a more viable option for both Clients and Contractors. Kindly elaborate.
Typically this has more to do with the business philosophy of the project owners. The classical EPCM route provides the project owners the opportunity to take financial decisions for procurement of all the components of the plant and construction work, at all stages of the project. Also, the project owners believe that the market cost fluctuation during implementation of the project, which depend upon international cost factors and workload fluctuations in workshops, can be leveraged to realise cost advantages for them. Of course, project owners have to take over the risks for schedule and project costs themselves, in the EPCM route.
This is in contrast with the EPC-LSTK mode of implementation, where the contract for Engineering, Supplies and Construction for the complete project is signed in the initial stage itself, thereby transferring the risks for Project, cost fluctuations, delays in schedule and quality issues entirely to the EPC-LSTK contractor. More and more clients are realizing the advantages for EPC-LSTK mode which ensures single point responsibility in the hands of the EPC contractor and are increasingly opting for EPC-LSTK mode, also in India. Financial Institutions, Banks and the Managements of Project Owners are preferring EPC-LSTK mode, as this helps them to assess correctly, the financial viability and cash flow requirements for the project in the initial stages itself.

What are the major risks involved in the EPC business?
A pre-requisite for successful EPC-LSTK implementation is a well defined "tender enquiry" with proper specification in the form of Front End Engineering (FEED) package alongwith the lists of appropriate vendors/contractors. This enables the EPC-Contractor to provide the best possible prices, with minimum provisions for 'Risks'’. In absence of proper design packages and detailed tender enquiry, the risks of the overruns in the cost and schedule are very high; leave apart the continuous negotiations for settlement of change orders between the Project Owner and EPC Contractors, which sometimes can be painful.
On the other hand, EPC-LSTK contractors have to face higher risks, arising due to price increases in Materials, labour, transportation cost etc., also for the additional costs arising due to errors in engineering, delays on part of the vendors and site contractors, suspension or stoppages of projects, sometimes due to delays in receiving payments from the Project Owners; bankruptcy or closure or strikes by the vendors/contractors, changes in tax structure, statutory rules & regulations (not covered under provision for variation of contract prices) etc. etc.
Also, improper Proposal Engineering Work during “bidding phase” may result into “under estimation” of plant cost giving rise to project cost over runs for the EPC contractor. Such risks must be properly assessed by the EPC contractor and mitigation plans must be continuously monitored during implementation.

How critical is it to define the scope of the project at the bidding stage from owner’s as well as contractor’s perspective for EPC contracts?
This is a very important issue for both the Project Owner and EPC Contractor. It is the essence of successful EPC-LSTK bidding process and the award of Contract. The Project Owner on their part, have to spend at least 5 percent to 7 percent of the project cost upfront, in arranging for the proper FEED package and tender enquiry. This may also involve selection of proper technology and obtaining Process Design Package or Basic Engineering Package from the Licensor. A role of Project Management Consultant (PMC) is also sometimes necessary to ensure that proper FEED Package and Tender enquiry is prepared. The Indian clients, especially large size organizations, are well aware of this issue and spend considerable efforts and money to prepare proper Tender Enquiries !

Before bidding for projects, EPC companies are known to evaluate their chances by preparing thorough tender enquiries. Kindly comment.
The ‘Bid No Bid’ procedure for the EPC Contractor is very important before embarking upon the EPC-LSTK bidding. Such bids involve high costs in terms of manhours and time. Therefore careful analysis of the tender enquiry, the chances of securing the Contract and executing the project in time, within the estimated cost, merits of technology, client's reputation, etc. have to be considered in the Bid No Bid decision.

The EPC contractor has to spend sufficient man hours in undertaking Proposal Engineering Work, preparing costs for all the components of the plant, in association with reputed vendors and construction contractors. So, a lot of preparatory work is a must before finalising the bid. This will require anywhere between 3 to 4 months period depending upon the volume of work and complexity.

May we have your comment on technology as a key differentiator among EPC companies?
In order to real ise "Single Point Responsibility" in absolute terms, more and more clients are preferring EPCLSTK mode of execution including sourcing of technology via EPC Contractor. This provides the clients (Project Owners) good opportunities to obtain all Process Performance Guarantees from the EPC contractor apart from the usual guarantees towards engineering, material and workmanship, time & cost guarantees etc.
Some of the process licensors themselves are also EPC-LSTK contractors and thereby provide complete guarantees to the Client for successful implementation of the project including start-up, commissioning and process Performance Test Run, and during the subsequent guarantee periods. This also ensures that the guaranteed product quality, raw material and utilities consumptions, and capacities are provided and met with by the EPC-LSTK contractors. This type of EPC-LSTK mode of contracting is very common in the Refinery, Fertilisers and Petrochemicals/Polymer sectors.

Middle East has attracted most of India’s engineering talent in the past decade and there is a void at the middle management level that Indian companies will have to fill. May we have your comment?
Retention of talent is a major challenge which most of the engineering companies face. The Middle East has been an attractive destination for the engineering professionals in the past decade due to a number of new projects and tax free lucrative salaries. This is in contrast with the opportunities as well as the 30 percent or more tax liabilities in India which almost all average salary earners have to pay.
However, as the number of large-sized projects are increasing in India, there has been a significant increase in the demand of professionals in the Indian market. The dearth of trained professionals cannot be denied and with increase in number of EPC players in the country, it is a pressing issue that industry needs to address. Due to lack of academia industry interaction, the industry continues to face this challenge. Tight project schedules do not allow adequate time to train fresh graduates and it takes at least 3 to 4 years to train and groom a fresh graduate, which requires substantial time and effort from the company’s side. By the time they are ready to start adding value to the company, some of them move out to other companies or even go abroad for better prospects.
Although salary is one of the issues, the bigger challenge for the companies (sometimes not realised) is to maintain conducive work atmosphere for the employees and offer them significant opportunities in their careers in terms of exposure to new projects and markets, technologies and new systems. One of the ways to retain the employees is to offer them profit share in terms of incentives and job rotations.

Is there a government body to address the issues that continue to restrict the growth of Indian EPC industry as strong industrial and infrastructure growth needs to be backed by strong EPC industry?
In India, there is no specific Ministry to safeguard the interest of the EPC contractors. Since almost 60 percent of the contract value comes by way of fabricating/selling the capital process equipment, this sector also falls alongwith the Capital Goods under the Ministry of Heavy Industries.
There is no separate wing in the Ministry to handle issues related to the EPC contracting business. Anticipating tremendous growth in this field in the near future, a special EPC cell in the Ministry is highly recommended. To summarise, the EPC-LSTK mode of Contracting is gaining momentum in this country. Considering the large investment in the Process Industry in the near future and possible shortage of qualified and experienced engineers, Project Owners in India are now expected to consider EPCLSTK mode for implementation of largesize chemical plants more favourably.