GMR builds construction unit to cut costs, meet deadlines

GMR builds construction unit to cut costs, meet deadlines

Mumbai: After building an international airport in Istanbul 12 months ahead of schedule, Bangalore-based infrastructure developer GMR Infrastructure Ltd is setting up an in-house engineering, procurement and construction, or EPC, division. The objective is to reduce future project costs and ensure that deadlines are met.

Designed to handle 20 million passengers a year, Turkey’s Istanbul Sabiha Gökçen International Airport, or SGIA, was completed in 18 months.

SGIA, twice the size of the new Hyderabad airport and 3.5 times the Bangalore airport, was built by a consortium including GMR, Limak Insaat San Ve Tic AS and Malaysia Airport Holding Bhd.

It was the third airport project for GMR, and the first outside of India, where large infrastructure projects typically run into long delays. The record time of completion apart, SGIA was also significant for GMR because it was the first project in which it had participated in the actual construction, said group financial officer Subba Rao Amarthaluru.

Established in 1978, GMR Group used to outsource project construction to other firms, mainly engineering and construction company Larsen and Toubro Ltd, or L&T, and Punj Lloyd Ltd. Both compete with GMR for airports, roads and power projects.

The in-house EPC division will not only help GMR capture the entire value chain of refurbishing airports, building roads, and so on, but also mirror the business model of L&T.

“There is lot of learning in terms of construction and pre-fabrication technology which we can implement in the Indian projects too. An EPC division fits well with our group as execution holds the key," Amarthaluru said.

GMR Group is estimating at least 8-12% cost savings by having an in-house EPC unit as it will lead to substantial savings through extensive procurement for various verticals. “After Istanbul airport, we will deploy our EPC team in road projects such as Vijayawada-Hyderabad and Chennai outer ring road and for power projects in Chhattisgarh and Maharashtra," Amarthaluru said.

According to Jai Mavani, executive director and head of the infrastructure practice at KPMG Advisory Services Pvt. Ltd, it makes “strategic sense" for existing infrastructure companies to enter the EPC business as they can have better control over costs and quality of construction.

“For existing players, the entry barriers will be relatively less and they will have captive projects, to start with. At a later stage, they can bid for other projects and spin it off as a separate business vertical," Mavani said, commenting on the sector in general and not GMR Group’s business strategy in particular.

“There are opportunities for EPC business coming up in Africa and other parts of the world. The challenges in the market are somewhat similar to India. If the strategy is right, these Indian infrastructure companies can find profitable prospects outside India too," Mavani added.

Amrit Pandurangi, who heads the transport and infrastructure practice for audit and consulting firm PricewaterhouseCoopers, said setting up an EPC division helps in smooth project implementation. “Thanks to stiff penalty imposed by the government for delaying the projects, now developers are increasingly getting into the EPC business."

In financial terms, the company gets control over the cost and margins besides meeting project deadlines better, Pandurangi added.

GMR operates two airports in India—the Indira Gandhi International Airport in New Delhi and the Rajiv Gandhi International Airport in Hyderabad. The Hyderabad airport will have two special economic zones related to aviation and hospitality, supplementing the airport operations, Amarthaluru said. GMR’s Delhi airport is also in the process of bidding for 15 acres that will have five plots for hotels and shopping and retail malls. In association with Malaysian Airlines, the group has also started an aircraft maintenance, repair and overhaul facility in Hyderabad.

The group is close to signing up with an international consulting firm for advice on setting up a risk-mitigation system and putting in place a strategic decision group, in partnership with Stanford University, to anchor its planning process.