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Feature | April 2016

BoP, the consolidator!

Considering Rs 2.5 crore per MW worth business opportunities in Balance of Plant (BoP) packages, it is expected that the consolidation activities are likely to be around the corner.
A few BoP players suggested that the recent trend from generation companies to award contracts on a single point source is likely to push big BoP players to look for more consolidation or partnering in the equipment business. However, there is a twist in offing.

Enticed by pro-development plans of the current government, power sector became a new darling of investors, at least on the paper! The gap between India´s low per capita consumption of 1000/kWh and global benchmarks gave a feeling of an assured return over a long period, drawing the attention of investors.

In India, as far as power sector is concerned, what can be a bigger opportunity than the envisaged 30,000 MW of capacity addition with 40 super critical thermal units in the pipeline. Although, these opportunities are far-fetched and unlikely to come on stream not sooner than next fiscal, it is expected that business opportunities worth `2 crore per MW will be available in the form of BoP packages. The packages that include site civil works, erection, testing and commissioning of various mechanical works as part of BoP segment.

According to Mahadevan Viswanathan, Director - Business Development & Materials Management, Thyssenkrupp Industries India Pvt. Ltd most of the upcoming power generation plants will be adopting EPC/BoP mode to execute their projects, therefore we see tremendous opportunity for BoP systems.

He added: ´Considering the present market conditions, we as an EPC company sees huge potential in this segment and are confident of our capabilities to execute large sized BoP projects.´

To this, SK Kodandaramaiah, Director - Business Development, Power Mech Projects Ltd predicts Rs 2.5 crore per MW business opportunities in overall BoP packages which are made up of three major components.

To begin with, he further explains, in the civil and structure package, there are opportunities worth Rs one crore per MW. Whereas, in packages like equipment supply and installation, mainly related to material handling, coal handling, ash handling, balance mechanical packages and electrical system installation and miscellaneous work, the opportunities may be worth Rs 1 to 1.2 crore per MW. Look closer, the government of India´s project monitoring group (PMG) in its latest update on its portal has sorted out issues of power projects worth Rs 4 lakh crore. An achievement in itself! And are leaving no stone unturned to resolve issues of power projects worth more than Rs 6 lakh crore.

A mammoth opportunity and task set out for the next few years! Hence, judging by this scenario, there is a probability of more consolidation than mergers and acquisition.

Is consolidation in the offing?
The power sector´s BoP segment is more vulnerable than it pretends to and, has been stuck with the syndrome of single point contract awarding strategy adopted by power generation companies. Ironically, to break this syndrome, the only option that can be considered by BoP players could be consolidation than mergers and acquisition.

When put forth this question, a section of the BoP players tried to dodge it first, and then, being vocal requesting anonymity. However, some suggested to understand why the current scenario is likely to lead to consolidation. According to major BoP players, at present, power producers/ owners prefer to order power plants on a single point responsibility basis, which enables them to eliminate multiple interface points and coordination. Also, the overall liability to execute the BoP package within the specified time schedule solely rests on a single party. This is precisely the key factor why owners prefer the BoP mode.

To cite an example, NTPC has changed its contracting philosophy, or rather strategies. With a number of projects lined up by the powerful PSU, they have adopted two types of strategies: One, to award a contract at a single point responsibility and the other is package-wise. The main motto to adopt such strategies are definitely due to compulsion of timely completion of projects. As a matter of fact, NTPC has recently come out with a few tenders on this format are 4X1,000 MW ultra mega power plant in Pudimadaka, a 2X800 MW in Telengana and 4X600 MW in Bareilly.

Meanwhile, following suit, the same strategies have been adopted by other players too. And, taking a lead from NTPC, the Neyveli Lignite Corporation Ltd too is coming up with a package in Ghatampur, Uttar Pradesh, which is a 3X660 MW project. However, S Ramakrishnan, Executive Director- Business Development, IVRCL, has a different point of view on consolidation. His views suggest that the obvious threat will come from none other than Indian market itself. ¨...any consolidation in India, by an Indian company, considering the current order book position will not look positive and reduced the operation costs,¨ he says.

But there is a risk that global players can manage to take. While consolidating with a global player, an Indian company in the BoP space can support the global player in terms of providing engineering support, licensing, local procurement, equipment procurement, etc., in India. And, positively, the global companies can outsource relatively cheaper services of the Indian BoP players in their projects in Eurpoean, African and American market. This will also help Indian BoP players to make inroads in the highly distanced market.

Undoubtedly, many Indian manufacturers and EPC solution providers are geared up to provide BoP systems for large capacity plants, but only a few of them are well equipped with in-house manufacturing capacity like Thyssenkrupp, L&T, BGR Energy, McNally Bharat, BHEL, to name a few.

Another possible reason is the limited presence of reputed vendors in the ash handling segment, which corners nearly 10 per cent of the total BoP package contract, there have been remarkable developments and increased demand in the market, which has helped several companies who are well equipped with the technology to meet their revenues and increase their capacities.
It is expected that these propositions can lead to consolidation in the BoP space.

Meanwhile, there have been instances in the past where plant commissioning has been held up due to deficiencies in BoP systems. And to some extent the BoP players do agree with these allegations. However, in response, the BoP players categorically attribute this primarily to delusion of pre-qualification requirements. The BoP players also raised concern over many smaller vendors, without any expertise, entered the market on a project-to-project basis with consortium arrangementseements and eventually faced with delays in delivery.

Explains Mahadevan Viswanathan of Thyssenkrupp, ´The main input required to run the plant is controlled by BoP package vendor (i.e. coal and water), if they delay the erection and commissioning process then the entire plant cannot be commissioned within the set time.´

However, alternate source of water can be arranged with tankers. Nonetheless, coal handling plant plays a crucial role in running the plant in-time. Presently, the owners, i.e. the EPC contractors, have introduced stringent liability clauses and increased the percentage of liquidated damages in order to curtail any misuse by the BoP package vendor and to reduce the effects on the overall plant completion schedule.

In-addition to that, the BOP package vendor has to give a Bank Guarantee for the required work. With such norms and stricter guidelines, timely completion can be achieved.

Since most of the power projects are handled by public sector companies, it is the decision-making process which prevents these companies to appoint a bidder or a vendor with the criterion of successful and timely execution of a work and the price levels should be made to commensurate with the service or delivery.

Whereas, a private developer can take a call and can pay a premium on pricing to get the work done in a qualitative manner. So, once there is improvement in the basic structure of bidding, then we can witness a drastic change in implementation of BoP packages which can bring in substantial improvement in the execution amd commissioning of power projects.

Meanwhile, other areas that need to be improved for timely project completion is proper execution of coal, ash handling packages and civil works. Because, the products which cater to coal and ash handling are not standardised. These products are highly customised, and need to include project-based specifics, and then re-engineering, if required. And, this is where it leads to delays. So, if the implementation process in coal and ash handling improves, most of the projects can be commissioned on time.

For timely completion of mechanical and electrical works, the key civil inputs have to be made available. This is easier said than done, since many civil inputs depend on the equipment layout, soil conditions and the key mechanical input data and there can be problems in interfacing the same. The skill lies in proper interfacing the key inputs for engineering of civil works.

Best practices
An appropriate geographical survey of the local condition and soil investigation must be conducted diligently. Long and strong associations with the sub-vendor´s/ sub-suppliers/ contractors with good payment terms and conditions along with proper account closing can help any BoP contractors execute any project effectively and reliably. Effective communication with various package vendors with a clear-cut scope division is important for efficient and timely completion of BoP projects. This in turn helps to bring down the delays and costs.

Considering today´s scenario, the best practice is the integrated approach towards executing a BoP package. To avoid delay in BoP package execution, the authorities should fix stringent qualification requirement, as there is a lot of competition in the civil work package of BoP. In India, there are many players who do not have the capability to take up the BoP packages, but still they bid for it and win the contract. This is mainly because, Indian market is a cost-driven, where a bidder with low pricing are always preferred. But, in this exercise, the authorities are forgetting that with low pricing, the bidder is tempted to compromise on quality and delivery parameters, which may hamper the entire project execution. This, in turn, leads to cost escalation due to delays in the overall execution of projects. This kind of practice needs to be checked.

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