It’s Procurement Time - Vendor Alert
OIL & GAS

It’s Procurement Time - Vendor Alert

With the Government rolling out Rs 2 lakh crore worth of infrastructure projects and a vision to provide housing for all by 2022, opportunities are on the rise for vendors, suppliers and manufacturers of construction machinery, equipment and building materials.

The great Indian infrastructure bazaar is back on and swinging - and every day brings with it fresh prospects, new opportunities. The buzz now is that states can approve projects up to Rs 1,000 crore - from the earlier Rs 200 crore - without Cabinet approval. With this fivefold hike for ministries, Road Transport and Highway Minister Nitin Gadkari´s recent announcement of a rollout of projects worth Rs 2 lakh crore, a vision for housing for all by 2022 and the smart city initiative, it´s truly game on.

For those that power the Indian infrastructure juggernaut - vendors, suppliers, equipment manufacturers, building material majors - the sunshine is coming back. Expecting the next fiscal year to be the trigger point of movement, Somy Thomas, Executive Director, Valuation and Advisory, Cushman & Wakefield, says, ¨With the government laying down the policy framework to enable faster clearances and project execution along with cheaper capital, there will be a quantum jump for companies. Procurement activities will be much higher in terms of machinery.¨ His recommendation to companies: prepare for capacity addition and be more flexible in ramping up capacity.

Prof Anil Sawhney, Associate Dean and Director, School of Construction, RICS School of Built Environment, Amity University, agrees, adding, ¨Typically, construction intensity of infrastructure projects averages around 55-65 per cent. Hence, we can expect to see the start of $20 billion worth of construction activity owing to these recent announcements.¨

However, one must first get off the drawing board, something Amit Bansal, Senior Director-Forensic Services, Deloitte India, is keenly aware of. ¨Most developers are first looking at consolidating existing projects,¨ he avers. Only operational projects can generate cash to bid for new projects. Thus, in Bansal´s view, interest will be primarily in projects with high financial viability. As for a freer hand from lenders for projects with stretched financial viability, it may take 12-18 months for things to change. As Bansal puts it, ¨The sentiment has changed but actual translation on ground is yet to happen.¨

Plans to procure
Nevertheless, the changed sentiment has prompted contractors to begin procurement planning, providing a huge opportunity for vendors, suppliers and manufacturers. For instance, Neerav Parmar, Associate Vice President-Contracts and Procurement, Shapoorji Pallonji Real Estate, expects demand for materials and machineries to increase manifold compared to the past couple of years. ¨For us, with increase in demand, the challenge is about getting the right material at the right time within the budgeted cost,¨ he points out. ¨The capabilities of vendors to meet growing demands will be really put to the test.¨

Another company looking ahead is Technip India. ¨We are gearing up for a major onshore gas terminal for ONGC at Kakinada where offshore gas will be treated for further distribution,¨ says Jayant Sarkar, Senior Vice President & Head-Construction, Technip India. Other ongoing projects for the company include a 1.25 mtpa purified terephthalic acid (PTA) unit in the Mangalore SEZ awarded by JBF Petrochemicals, being executed in collaboration with Technip Italy and project management as well as engineering, procurement and construction management (EPCM) services for a new industrial gas complex for Bharat Petroleum Corporation Ltd-Kochi Refinery (BPCL-KR) in Kerala.

For its part, Technip India works on a long-term basis with specialised sub-contractors who mobilise their own construction equipment. The company supplies all project materials for fabrication and erection at site. ¨We do not invest in equipment for on-shore projects,¨ says Sarkar, adding, ¨Technip makes necessary capital investments worldwide in spool bases, manufacturing plants, construction yards and vessels for off-shore and subsea projects.¨ Meanwhile, Sadbhav Engineering Ltd, which has made its mark in roads, mining and irrigation sectors, is busy with the Mysore-Bellary road project, Jodhpur-Panchpatra road project, the Kapurdi-Jalipa (Barmer) mining project and the Bhanpura canal works, with more on the anvil in the next three to four months. Rakshak Singhvi, Head (Procurement), Sadbhav Engineering Ltd, highlights the major equipment the company needs to acquire: Mining excavators (40-60 tonne), dump trucks (30-50 tonne), paver finisher (5.5 and 9 m), grader (200 Hp) and dozer (300 Hp), hot-mix plant, micro-surfacing machine, crushers and concrete equipment. ¨Material requirement will be gigantic as we prepare ample inventories at the beginning of any project in our hand,¨ he tells us. ¨We anticipate some advanced MIS tools for day-to-day activities, progress details, fuel and lubricant consumptions and physical inventories across sites.¨ The company is also expecting almost 27-odd projects that may go for fresh bidding with financial closure not being achieved by the developer in question.

Ashoka Buildcon, which executes EPC projects in the roads and power sectors, has a construction equipment bank of around Rs 300 crore. ¨Around 10-15 per cent of the contract value typically goes into mobilisation and value of equipment,¨ says Paresh Mehta, CFO, Ashoka Buildcon. ¨And on a yearly basis, we typically buy around Rs 35-50 crore of equipment for road construction. As the power sector is typically less capital-intensive, we do not procure much for these projects. In the roads sector, we also procure petroleum products that typically constitute around 15-25 per cent of our cost of production, which is typically 85 per cent of sales.¨ Another material procured is stone metal, along with steel and cement. However, as the company is majorly into tar road EPC contracts, quantity of steel and cement procured is low.

The buying process
Let´s now examine how the procurement process works. First, there´s a procurement plan, which indicates what is to be purchased, when, how, and at what cost, in a given timeframe. According to Parmar, the three types of procurement are procurement of works, materials and services - procurement of works consists of finalising contracts for the project by placing orders to contractors; procurement of materials consists of finalising purchase and placing orders to vendors; and procurement of services consists of finalising service contracts for the project by issuing work orders to service agencies. He says that Shapoorji Pallonji Real Estate works on bulk procurement by consolidating requirements over different regions and creating huge volumes for vendors. ¨Earlier, the approach was only transactional but now we are moving towards a strategic relationship approach whereby we look for a long-term brand association with our vendors and thereby increase mutual trust, creating a win-win situation,¨ he adds.

Technip follows a different process. As Sarkar informs us, ¨We shortlist subcontractors based on their past track record. Their performance is regularly reviewed to ensure quality and consistent delivery. Detailed tender documents are issued and bids evaluated thoroughly, both technically and commercially. All gaps in understanding by prospective subcontractors are closed and the best price determined and mutually agreed upon. We also ensure that shortlisted bidders have enough current capacity to undertake the work.¨

Singhvi believes leading a procurement team is a challenging job as the success of any project depends on selection of equipment and materials. ¨Before initiating any procurement, we examine its worth and accordingly start surveying products of various players available in the market,¨ he reveals. ¨We also review technical reports and market reputation that leads us to a final decision.¨ The company has different procurement models and vendor lists for various requirements designed according to past experiences.

¨Procurement is one area that needs a lot of rethinking and innovation,¨ says Sawhney. ¨The traditional design-bid-build approach is fraught with several inefficiencies. We must embrace modern and more robust forms of procurement methods. On projects, we must start evaluating Lean Integrated Project Delivery System (LIPDS), collaborative contracting, design-build, partnering and other innovative project delivery systems. As the nature of projects becomes increasingly complex, we have to infuse our procurement methods, contracts, and related work practices with collaboration, trust and integrated teams. A holistic view of procurement, contracting, and tendering processes is needed. The regime of lowest bidder needs to be overturned for a system of cost, time, and performance-based project team selection.¨

e-procurement
In keeping pace with the latest trends, Parmar cites e-tendering and e-procurement, which institute and enforce best practices that increase spend under management, the ultimate key to procurement savings. ¨E-procurement for materials and contracts can result in increased efficiency, cost savings and improved transparency,¨ he says. ¨E-procurement is now gaining popularity among vendors and they have also accepted this technique.¨

R Sanjay, Assistant Executive Director- Institutional Sale, Dalmia Cement Bharat Ltd, tells us that Dalmia Cement Bharat Ltd has had e-procurement successfully with only two to three companies, including Oil India and ONGC. But he says with confidence, ¨Within a year, this model may be institutionalised.¨

Technip India also has a robust e-procurement process, and suppliers and contractors are encouraged to register and work through the e-procurement portal. As Sarkar says, ¨This ensures speed of delivery and cost-efficiency, and fosters a transparent environment for all suppliers.¨ Bansal adds that a lot of companies have adopted it, but in a limited manner. ¨Infrastructure companies follow the conventional mechanism and, at the last stage, which is the price bit stage, they opt for the e-procurement route.¨ For his part, Mehta believes that e-procurement lies nowhere in the near future for private players, ¨as it is a process the Government has to follow to demonstrate transparency in.¨

Future drivers
All considered, procurement will only assume greater importance with a plethora of new projects on the horizon. Last month, the Centre for Monitoring and Indian Economy (CMIE) reportedly revealed that new investment projects announced rose to 7.3 per cent of GDP in Q3FY14 from 3.2 per cent in the second quarter. The power and transport infrastructure services sectors contributed to nearly 70 per cent of the rise in new investment; while 74 projects were announced in the power sector, 36 projects were in transport services, particularly the shipping and road sectors. Thomas and Bansal agree that the roads sector is leading the way. ¨It is like a low-hanging fruit,¨ says Thomas, adding that the next six months should see many contracts being awarded. After roads, he sees the next opportunity in railways, including high-speed railways. But as the sector is not evolved, he believes it could take over 18-24 months for procurement activities to kick-start. ¨However, the defence and railways granting permission to private sectors itself is a big initiative and this will also draw investors,¨ he adds. For his part, Bansal believes power projects, especially on the mining side, will be critical. In his list, Prof Sawhney mentions hard infrastructure along with smart cities and affordable housing as growth drivers. ¨Significant activity in creation of industrial corridors is expected over the next five years,¨ he adds, ¨Infrastructure Investment Trusts (InvITs) and Real-Estate Investment Trusts (REITs) will spur a lot of activity in the real-estate and infrastructure sectors.¨

According to Amit Gossain, Executive Vice President-Marketing, Business Development & Corporate Affairs, JCB India - India´s largest equipment company - national highways, rural roads, dams, irrigation and power plants are the main infrastructure drivers. ¨Maximum sales happen for roads generally - district roads, rural roads and national highways,¨ he adds.

Sanjay envisages maximum demand for cement coming from government contractors and builders and believes this will extend to infrastructure projects like bridges, power plants, railways and dams. ¨The Government is considering concretising national highways,¨ he adds. ¨While it is a challenge to completely concretise roads, there is a distinct intention to move in that direction. At present, it seems that the Government is in the process of understanding the price at which it can procure cement and its advantages over bitumen roads.¨

And RK Goyal, Managing Director, Kalyani Steels Ltd, tells us, ¨Maximum carbon steel demand currently comes from residential and commercial construction. As for alloy steel manufacturers, demand is derived from automotive industry and construction equipment and related capital machinery goods.¨ He cites infrastructure projects such as dedicated freight corridors, road construction, power plants, residential and commercial infrastructure development and urban infrastructure development as drivers of carbon steel demand in coming years. ¨At the same time,¨ he adds, ¨these projects will boost demand for construction equipment, which in turn will drive special steel demand. Also, on the back of such infrastructure projects, we expect demand from railways and mining equipment.¨

For its part, Sadbhav Engineering Ltd expects a better flow of projects in mainstream and innovative sectors like bullet trains, skybus and smart cities. Singhvi confirms, ¨We expect a steep hike in our machinery and materials procurement during the next financial year to meet our growing requirements and challenges.¨ However, Technip India will be selective in bidding for lump-sum EPC projects, which could give a technological advantage and offer a level playing field. ¨Our focus,¨ says Sarkar, ¨is on risk identification and mitigation through a global procurement network to bring price competitiveness and value for money to the client. The present economic scenario in India is yet to propel growth; we plan to move ahead with caution and engage in projects with a low risk profile.¨

Sawhney maintains that smart cities will steal the show. The bonus here is that the entire built environment sector will focus on something that connects a number of other activities, such as smart urban infrastructure, smart buildings, and use of technology. Road construction and industrial corridors will also be active industry subsectors for the next few years. And housing, of course, is expected to yield a lot of construction activity.

So with government policies changing, India aiming for over 7 per cent GDP growth and upbeat sentiment across sectors and investors, this is clearly the time to consolidate and start working. If companies - contractors and vendors, suppliers, manufacturers - want to gain from the next wave of infrastructure, they have to start preparing, now!

The right choice

Vendors are finalised on the basis of their track record, quality policies, clientele, market reviews, presence or network in the market and warranty policies. This is what contractors expect from vendors:

  • Cost, efficiency, brand value, technical advancement and economical age are prime concerns.
  • Reliable after-sales services.
  • Adherence to commitments made during sale.
  • Camps and training at worksites on new technologies for better workmanship and maintainability.
  • Sincere effort towards better health of equipment or reducing downtimes with regular health check-ups by trained engineers.
  • Good delivery lead time after ordering a product as various operations are interlinked and unavailability of a component may cause idling of all operations.
  • Speedy warranty settlements.
  • Timely delivery, good quality and agreed prices.
  • Safety, quality and adherence to agreed timelines.

Procurement Fraud
AMIT BANSAL, Senior Director-Forensic Services, Deloitte India
, elaborates upon procurement fraud, bribery and corrupt practices in the infrastructure sector along with measures to prevent, detect and respond to such risks.

In a recent survey of senior people in the infrastructure space by Deloitte India, 60 per cent of respondents believed that procurement fraud, bribery and corruption are the biggest fraud risks in the infrastructure sector. Procurement (done by infrastructure companies and government) is the process when a project is being awarded, while bribery and corruption can relate to procurement and the various clearances and approvals required.

Why such fraud?
A key reason for the prevalence of such fraud is that the level of regulatory intervention - government touch point - is extremely high. Developers go to government or departments of regulatory agencies for clearances and approvals. This creates an opportunity to use bribery and corruption for favouritism.This needs to be seen in the light of the fact that companies bid for projects at a competitive rate and while trying to manage costs within that, approvals and land acquisition often tend to get delayed. What happens next? One resorts to a bribe to bring projects on track. Fifty per cent of respondents to the survey cited that delays in regulatory clearances lead to bribery and corruption. Also,the processes laid out for various clearances or approvals - environment clearance is a key aspect here - may not be as transparent. Almost 70 per cent expressed the view that streamlining environmental clearances could help reduce the incidence of bribery and corruption.

When does it happen?
Typically, large infrastructure projects rely on large-scale procurement of goods and services. The major procurement for any infrastructure company or developer is essentially equipment and machines (equipment supply contracts), construction contracts or full-fledged EPC. And frauds can be of multiple types, especially in the infrastructure space. Also, project sites - especially road and port projects - tend to be in remote locations and the level of control that companies exercise on these sides is on the weaker side.

Further, availability of vendors with requisite competence is often a challenge. This leads to proliferation of small time vendors as also close associates of employees becoming vendors - giving rise to potential of fictitious vendors or favouritism of vendors for award of contracts. In remote locations, the supplies meant for one site have the risk of getting diverted to other sites of the same vendor. We have seen cases where close associates of employees have started either competing businesses or are acting as vendors and these vendors do tend to divert the material from one site to the other while billing both sites for the same material.

How does it affect the project?
Infrastructure projects operate on a multilayered structure. Even after centralising procurement for multiple projects, companies continue to have significant dependence on local third parties for sourcing material, equipment and labour. So even if one party indulges in fraud, it will have a cascading effect on the project cost. Further, if a particular vendor - who does not provide the best quality - is favoured, construction quality can get compromised. There have been instances where the foundation laying work for a boiler was given to an incapable party. The result: The entire work had to be discarded eventually and redone, resulting in higher costs and delay in execution.

What are the mechanisms to mitigate such frauds?
Essentially, frauds happen at two levels: where infrastructure firms or promoters indulge in such practices and where employees of these companies are involved. For employee-related issues, companies need robust internal control and processes to control frauds.

As the project progresses and deadline pressure mounts, exceptional approvals for procurement become frequent, with little focus on internal controls or due diligence. For companies with multiple projects running simultaneously, these exceptional approvals further reduce the span of control, effectively increasing the risk of procurement fraud. That is where a combination of measures is required, including making the entire process of clearances and approvals more transparent and time-bound.

Max each project!

What will contracting companies require to leverage manpower and capital investments in construction materials, equipment and more?
Prof Anil Sawhney, Associate Dean and Director, School of Construction, RICS School of Built Environment, Amity University, believes that well-trained core professionals are the biggest resource. ¨There is a tremendous shortage of contracts and commercial management specialists within the project delivery domain,¨ he says. ¨We need experts who can plan and design complex infrastructure projects keeping in mind delivery requirements. The role of R&D is significant in leveraging manpower and capital investments in construction technologies, materials and equipment. Industry and academia must come together to allow individual companies to see actual improvements in their bottom-line.¨ And Somy Thomas, Executive Director, Valuation & Advisory, Cushman & Wakefield, insists that the key to everything is better planning. Sharing that big-ticket contracts at Ashoka Buildcon are developed on PPP basis, Paresh Mehta, CFO, Ashoka Buildcon, says, the company is well-placed in terms of resources. SBI Macquarie, a JV, has already committed Rs 800 crore and could commit more for new projects. As for manpower, the company has a team of around 1,500 people in the construction sector. ¨We are quite well placed to take on whatever plans we have to grow at a pace of 15-20 per cent on the EPC side.¨

But what about financially burdened companies? ¨One should try a contracting arrangement with the focus on ensuring that the cash blockage in a new contract is minimum,¨ suggests Amit Bansal, Senior Director - Forensic Services, Deloitte India. ¨The other way is to look for means to recover the stuck money faster. Last, one can explore debt restructuring options by studying the debt profile and trying to generate lower cost debt instead of higher cost.¨

¨Companies should make a sound balance sheet consolidating their existing assets, maybe by shedding some assets, if they are over leveraged."adds Thomas. And Sawhney recommends shifting the focus on efficiency in capital expenditure through waste elimination.¨Not just material waste, but waste of time is widespread on construction projects,¨ he rues. ¨Many studies have reported that there is close to 30 per cent waste in the construction sector. Several causes are cited such as poor quality drawings and documentation, improper planning, missing information, rework, mistakes and errors. Construction companies must focus on eliminating these wastes and enhancing operational efficiencies operational efficiencies.¨

With the Government rolling out Rs 2 lakh crore worth of infrastructure projects and a vision to provide housing for all by 2022, opportunities are on the rise for vendors, suppliers and manufacturers of construction machinery, equipment and building materials. The great Indian infrastructure bazaar is back on and swinging - and every day brings with it fresh prospects, new opportunities. The buzz now is that states can approve projects up to Rs 1,000 crore - from the earlier Rs 200 crore - without Cabinet approval. With this fivefold hike for ministries, Road Transport and Highway Minister Nitin Gadkari´s recent announcement of a rollout of projects worth Rs 2 lakh crore, a vision for housing for all by 2022 and the smart city initiative, it´s truly game on. For those that power the Indian infrastructure juggernaut - vendors, suppliers, equipment manufacturers, building material majors - the sunshine is coming back. Expecting the next fiscal year to be the trigger point of movement, Somy Thomas, Executive Director, Valuation and Advisory, Cushman & Wakefield, says, ¨With the government laying down the policy framework to enable faster clearances and project execution along with cheaper capital, there will be a quantum jump for companies. Procurement activities will be much higher in terms of machinery.¨ His recommendation to companies: prepare for capacity addition and be more flexible in ramping up capacity. Prof Anil Sawhney, Associate Dean and Director, School of Construction, RICS School of Built Environment, Amity University, agrees, adding, ¨Typically, construction intensity of infrastructure projects averages around 55-65 per cent. Hence, we can expect to see the start of $20 billion worth of construction activity owing to these recent announcements.¨ However, one must first get off the drawing board, something Amit Bansal, Senior Director-Forensic Services, Deloitte India, is keenly aware of. ¨Most developers are first looking at consolidating existing projects,¨ he avers. Only operational projects can generate cash to bid for new projects. Thus, in Bansal´s view, interest will be primarily in projects with high financial viability. As for a freer hand from lenders for projects with stretched financial viability, it may take 12-18 months for things to change. As Bansal puts it, ¨The sentiment has changed but actual translation on ground is yet to happen.¨ Plans to procure Nevertheless, the changed sentiment has prompted contractors to begin procurement planning, providing a huge opportunity for vendors, suppliers and manufacturers. For instance, Neerav Parmar, Associate Vice President-Contracts and Procurement, Shapoorji Pallonji Real Estate, expects demand for materials and machineries to increase manifold compared to the past couple of years. ¨For us, with increase in demand, the challenge is about getting the right material at the right time within the budgeted cost,¨ he points out. ¨The capabilities of vendors to meet growing demands will be really put to the test.¨ Another company looking ahead is Technip India. ¨We are gearing up for a major onshore gas terminal for ONGC at Kakinada where offshore gas will be treated for further distribution,¨ says Jayant Sarkar, Senior Vice President & Head-Construction, Technip India. Other ongoing projects for the company include a 1.25 mtpa purified terephthalic acid (PTA) unit in the Mangalore SEZ awarded by JBF Petrochemicals, being executed in collaboration with Technip Italy and project management as well as engineering, procurement and construction management (EPCM) services for a new industrial gas complex for Bharat Petroleum Corporation Ltd-Kochi Refinery (BPCL-KR) in Kerala. For its part, Technip India works on a long-term basis with specialised sub-contractors who mobilise their own construction equipment. The company supplies all project materials for fabrication and erection at site. ¨We do not invest in equipment for on-shore projects,¨ says Sarkar, adding, ¨Technip makes necessary capital investments worldwide in spool bases, manufacturing plants, construction yards and vessels for off-shore and subsea projects.¨ Meanwhile, Sadbhav Engineering Ltd, which has made its mark in roads, mining and irrigation sectors, is busy with the Mysore-Bellary road project, Jodhpur-Panchpatra road project, the Kapurdi-Jalipa (Barmer) mining project and the Bhanpura canal works, with more on the anvil in the next three to four months. Rakshak Singhvi, Head (Procurement), Sadbhav Engineering Ltd, highlights the major equipment the company needs to acquire: Mining excavators (40-60 tonne), dump trucks (30-50 tonne), paver finisher (5.5 and 9 m), grader (200 Hp) and dozer (300 Hp), hot-mix plant, micro-surfacing machine, crushers and concrete equipment. ¨Material requirement will be gigantic as we prepare ample inventories at the beginning of any project in our hand,¨ he tells us. ¨We anticipate some advanced MIS tools for day-to-day activities, progress details, fuel and lubricant consumptions and physical inventories across sites.¨ The company is also expecting almost 27-odd projects that may go for fresh bidding with financial closure not being achieved by the developer in question. Ashoka Buildcon, which executes EPC projects in the roads and power sectors, has a construction equipment bank of around Rs 300 crore. ¨Around 10-15 per cent of the contract value typically goes into mobilisation and value of equipment,¨ says Paresh Mehta, CFO, Ashoka Buildcon. ¨And on a yearly basis, we typically buy around Rs 35-50 crore of equipment for road construction. As the power sector is typically less capital-intensive, we do not procure much for these projects. In the roads sector, we also procure petroleum products that typically constitute around 15-25 per cent of our cost of production, which is typically 85 per cent of sales.¨ Another material procured is stone metal, along with steel and cement. However, as the company is majorly into tar road EPC contracts, quantity of steel and cement procured is low. The buying process Let´s now examine how the procurement process works. First, there´s a procurement plan, which indicates what is to be purchased, when, how, and at what cost, in a given timeframe. According to Parmar, the three types of procurement are procurement of works, materials and services - procurement of works consists of finalising contracts for the project by placing orders to contractors; procurement of materials consists of finalising purchase and placing orders to vendors; and procurement of services consists of finalising service contracts for the project by issuing work orders to service agencies. He says that Shapoorji Pallonji Real Estate works on bulk procurement by consolidating requirements over different regions and creating huge volumes for vendors. ¨Earlier, the approach was only transactional but now we are moving towards a strategic relationship approach whereby we look for a long-term brand association with our vendors and thereby increase mutual trust, creating a win-win situation,¨ he adds. Technip follows a different process. As Sarkar informs us, ¨We shortlist subcontractors based on their past track record. Their performance is regularly reviewed to ensure quality and consistent delivery. Detailed tender documents are issued and bids evaluated thoroughly, both technically and commercially. All gaps in understanding by prospective subcontractors are closed and the best price determined and mutually agreed upon. We also ensure that shortlisted bidders have enough current capacity to undertake the work.¨ Singhvi believes leading a procurement team is a challenging job as the success of any project depends on selection of equipment and materials. ¨Before initiating any procurement, we examine its worth and accordingly start surveying products of various players available in the market,¨ he reveals. ¨We also review technical reports and market reputation that leads us to a final decision.¨ The company has different procurement models and vendor lists for various requirements designed according to past experiences. ¨Procurement is one area that needs a lot of rethinking and innovation,¨ says Sawhney. ¨The traditional design-bid-build approach is fraught with several inefficiencies. We must embrace modern and more robust forms of procurement methods. On projects, we must start evaluating Lean Integrated Project Delivery System (LIPDS), collaborative contracting, design-build, partnering and other innovative project delivery systems. As the nature of projects becomes increasingly complex, we have to infuse our procurement methods, contracts, and related work practices with collaboration, trust and integrated teams. A holistic view of procurement, contracting, and tendering processes is needed. The regime of lowest bidder needs to be overturned for a system of cost, time, and performance-based project team selection.¨ e-procurement In keeping pace with the latest trends, Parmar cites e-tendering and e-procurement, which institute and enforce best practices that increase spend under management, the ultimate key to procurement savings. ¨E-procurement for materials and contracts can result in increased efficiency, cost savings and improved transparency,¨ he says. ¨E-procurement is now gaining popularity among vendors and they have also accepted this technique.¨ R Sanjay, Assistant Executive Director- Institutional Sale, Dalmia Cement Bharat Ltd, tells us that Dalmia Cement Bharat Ltd has had e-procurement successfully with only two to three companies, including Oil India and ONGC. But he says with confidence, ¨Within a year, this model may be institutionalised.¨ Technip India also has a robust e-procurement process, and suppliers and contractors are encouraged to register and work through the e-procurement portal. As Sarkar says, ¨This ensures speed of delivery and cost-efficiency, and fosters a transparent environment for all suppliers.¨ Bansal adds that a lot of companies have adopted it, but in a limited manner. ¨Infrastructure companies follow the conventional mechanism and, at the last stage, which is the price bit stage, they opt for the e-procurement route.¨ For his part, Mehta believes that e-procurement lies nowhere in the near future for private players, ¨as it is a process the Government has to follow to demonstrate transparency in.¨ Future drivers All considered, procurement will only assume greater importance with a plethora of new projects on the horizon. Last month, the Centre for Monitoring and Indian Economy (CMIE) reportedly revealed that new investment projects announced rose to 7.3 per cent of GDP in Q3FY14 from 3.2 per cent in the second quarter. The power and transport infrastructure services sectors contributed to nearly 70 per cent of the rise in new investment; while 74 projects were announced in the power sector, 36 projects were in transport services, particularly the shipping and road sectors. Thomas and Bansal agree that the roads sector is leading the way. ¨It is like a low-hanging fruit,¨ says Thomas, adding that the next six months should see many contracts being awarded. After roads, he sees the next opportunity in railways, including high-speed railways. But as the sector is not evolved, he believes it could take over 18-24 months for procurement activities to kick-start. ¨However, the defence and railways granting permission to private sectors itself is a big initiative and this will also draw investors,¨ he adds. For his part, Bansal believes power projects, especially on the mining side, will be critical. In his list, Prof Sawhney mentions hard infrastructure along with smart cities and affordable housing as growth drivers. ¨Significant activity in creation of industrial corridors is expected over the next five years,¨ he adds, ¨Infrastructure Investment Trusts (InvITs) and Real-Estate Investment Trusts (REITs) will spur a lot of activity in the real-estate and infrastructure sectors.¨ According to Amit Gossain, Executive Vice President-Marketing, Business Development & Corporate Affairs, JCB India - India´s largest equipment company - national highways, rural roads, dams, irrigation and power plants are the main infrastructure drivers. ¨Maximum sales happen for roads generally - district roads, rural roads and national highways,¨ he adds. Sanjay envisages maximum demand for cement coming from government contractors and builders and believes this will extend to infrastructure projects like bridges, power plants, railways and dams. ¨The Government is considering concretising national highways,¨ he adds. ¨While it is a challenge to completely concretise roads, there is a distinct intention to move in that direction. At present, it seems that the Government is in the process of understanding the price at which it can procure cement and its advantages over bitumen roads.¨ And RK Goyal, Managing Director, Kalyani Steels Ltd, tells us, ¨Maximum carbon steel demand currently comes from residential and commercial construction. As for alloy steel manufacturers, demand is derived from automotive industry and construction equipment and related capital machinery goods.¨ He cites infrastructure projects such as dedicated freight corridors, road construction, power plants, residential and commercial infrastructure development and urban infrastructure development as drivers of carbon steel demand in coming years. ¨At the same time,¨ he adds, ¨these projects will boost demand for construction equipment, which in turn will drive special steel demand. Also, on the back of such infrastructure projects, we expect demand from railways and mining equipment.¨ For its part, Sadbhav Engineering Ltd expects a better flow of projects in mainstream and innovative sectors like bullet trains, skybus and smart cities. Singhvi confirms, ¨We expect a steep hike in our machinery and materials procurement during the next financial year to meet our growing requirements and challenges.¨ However, Technip India will be selective in bidding for lump-sum EPC projects, which could give a technological advantage and offer a level playing field. ¨Our focus,¨ says Sarkar, ¨is on risk identification and mitigation through a global procurement network to bring price competitiveness and value for money to the client. The present economic scenario in India is yet to propel growth; we plan to move ahead with caution and engage in projects with a low risk profile.¨ Sawhney maintains that smart cities will steal the show. The bonus here is that the entire built environment sector will focus on something that connects a number of other activities, such as smart urban infrastructure, smart buildings, and use of technology. Road construction and industrial corridors will also be active industry subsectors for the next few years. And housing, of course, is expected to yield a lot of construction activity. So with government policies changing, India aiming for over 7 per cent GDP growth and upbeat sentiment across sectors and investors, this is clearly the time to consolidate and start working. If companies - contractors and vendors, suppliers, manufacturers - want to gain from the next wave of infrastructure, they have to start preparing, now! The right choice Vendors are finalised on the basis of their track record, quality policies, clientele, market reviews, presence or network in the market and warranty policies. This is what contractors expect from vendors: Cost, efficiency, brand value, technical advancement and economical age are prime concerns. Reliable after-sales services. Adherence to commitments made during sale. Camps and training at worksites on new technologies for better workmanship and maintainability. Sincere effort towards better health of equipment or reducing downtimes with regular health check-ups by trained engineers. Good delivery lead time after ordering a product as various operations are interlinked and unavailability of a component may cause idling of all operations. Speedy warranty settlements. Timely delivery, good quality and agreed prices. Safety, quality and adherence to agreed timelines. Procurement Fraud AMIT BANSAL, Senior Director-Forensic Services, Deloitte India, elaborates upon procurement fraud, bribery and corrupt practices in the infrastructure sector along with measures to prevent, detect and respond to such risks. In a recent survey of senior people in the infrastructure space by Deloitte India, 60 per cent of respondents believed that procurement fraud, bribery and corruption are the biggest fraud risks in the infrastructure sector. Procurement (done by infrastructure companies and government) is the process when a project is being awarded, while bribery and corruption can relate to procurement and the various clearances and approvals required. Why such fraud? A key reason for the prevalence of such fraud is that the level of regulatory intervention - government touch point - is extremely high. Developers go to government or departments of regulatory agencies for clearances and approvals. This creates an opportunity to use bribery and corruption for favouritism.This needs to be seen in the light of the fact that companies bid for projects at a competitive rate and while trying to manage costs within that, approvals and land acquisition often tend to get delayed. What happens next? One resorts to a bribe to bring projects on track. Fifty per cent of respondents to the survey cited that delays in regulatory clearances lead to bribery and corruption. Also,the processes laid out for various clearances or approvals - environment clearance is a key aspect here - may not be as transparent. Almost 70 per cent expressed the view that streamlining environmental clearances could help reduce the incidence of bribery and corruption. When does it happen? Typically, large infrastructure projects rely on large-scale procurement of goods and services. The major procurement for any infrastructure company or developer is essentially equipment and machines (equipment supply contracts), construction contracts or full-fledged EPC. And frauds can be of multiple types, especially in the infrastructure space. Also, project sites - especially road and port projects - tend to be in remote locations and the level of control that companies exercise on these sides is on the weaker side. Further, availability of vendors with requisite competence is often a challenge. This leads to proliferation of small time vendors as also close associates of employees becoming vendors - giving rise to potential of fictitious vendors or favouritism of vendors for award of contracts. In remote locations, the supplies meant for one site have the risk of getting diverted to other sites of the same vendor. We have seen cases where close associates of employees have started either competing businesses or are acting as vendors and these vendors do tend to divert the material from one site to the other while billing both sites for the same material. How does it affect the project? Infrastructure projects operate on a multilayered structure. Even after centralising procurement for multiple projects, companies continue to have significant dependence on local third parties for sourcing material, equipment and labour. So even if one party indulges in fraud, it will have a cascading effect on the project cost. Further, if a particular vendor - who does not provide the best quality - is favoured, construction quality can get compromised. There have been instances where the foundation laying work for a boiler was given to an incapable party. The result: The entire work had to be discarded eventually and redone, resulting in higher costs and delay in execution. What are the mechanisms to mitigate such frauds? Essentially, frauds happen at two levels: where infrastructure firms or promoters indulge in such practices and where employees of these companies are involved. For employee-related issues, companies need robust internal control and processes to control frauds. As the project progresses and deadline pressure mounts, exceptional approvals for procurement become frequent, with little focus on internal controls or due diligence. For companies with multiple projects running simultaneously, these exceptional approvals further reduce the span of control, effectively increasing the risk of procurement fraud. That is where a combination of measures is required, including making the entire process of clearances and approvals more transparent and time-bound. Max each project! What will contracting companies require to leverage manpower and capital investments in construction materials, equipment and more? Prof Anil Sawhney, Associate Dean and Director, School of Construction, RICS School of Built Environment, Amity University, believes that well-trained core professionals are the biggest resource. ¨There is a tremendous shortage of contracts and commercial management specialists within the project delivery domain,¨ he says. ¨We need experts who can plan and design complex infrastructure projects keeping in mind delivery requirements. The role of R&D is significant in leveraging manpower and capital investments in construction technologies, materials and equipment. Industry and academia must come together to allow individual companies to see actual improvements in their bottom-line.¨ And Somy Thomas, Executive Director, Valuation & Advisory, Cushman & Wakefield, insists that the key to everything is better planning. Sharing that big-ticket contracts at Ashoka Buildcon are developed on PPP basis, Paresh Mehta, CFO, Ashoka Buildcon, says, the company is well-placed in terms of resources. SBI Macquarie, a JV, has already committed Rs 800 crore and could commit more for new projects. As for manpower, the company has a team of around 1,500 people in the construction sector. ¨We are quite well placed to take on whatever plans we have to grow at a pace of 15-20 per cent on the EPC side.¨ But what about financially burdened companies? ¨One should try a contracting arrangement with the focus on ensuring that the cash blockage in a new contract is minimum,¨ suggests Amit Bansal, Senior Director - Forensic Services, Deloitte India. ¨The other way is to look for means to recover the stuck money faster. Last, one can explore debt restructuring options by studying the debt profile and trying to generate lower cost debt instead of higher cost.¨ ¨Companies should make a sound balance sheet consolidating their existing assets, maybe by shedding some assets, if they are over leveraged."adds Thomas. And Sawhney recommends shifting the focus on efficiency in capital expenditure through waste elimination.¨Not just material waste, but waste of time is widespread on construction projects,¨ he rues. ¨Many studies have reported that there is close to 30 per cent waste in the construction sector. Several causes are cited such as poor quality drawings and documentation, improper planning, missing information, rework, mistakes and errors. Construction companies must focus on eliminating these wastes and enhancing operational efficiencies operational efficiencies.¨

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