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Managing Construction of Power Projects: Inadequate Construction Agencies, Shri R V Shahi, Former Secretary, Ministry of Power

Recently I visited a thermal power project, being developed by a major private sector group, which has two units of 500 MW each. It has already spent Rs. 3,500 crores. For many months arrival of some critical equipment and parts was the cause for delay. Now when they have reached the site the supplying agencies are inadequately staffed to handle speedy erection and commissioning. Each day of delay means a direct loss, on the capital invested, of the order of Rs. 1.35 crores. The project is already delayed by a few months which means an extra burden of 40 crores of loss per month and this continues. Indirect loss on account of power not being generated will be even more. Last week I also visited a few hydro projects being developed in Himachal Pradesh. Availability of important construction machinery and, more importantly availability of skilled manpower, in some cases even semi skilled manpower, in required numbers, are critical. Contracting agencies, loaded with so much of work in so many projects, are finding it virtually impossible to cope with the challenge, are unable to put right hype of managers and supervisors and are totally unable to get sufficient number of skilled work force

These are not isolated cases. Examples of these types are many. In order to put the issues concerning smooth project construction management in the right prospective, it needs to be stated that we are passing, during the current Five Year Plan, through a very challenging phase. Power project execution requires couple of years of advance preparation. Since in last many Five Year Plans, we had inadequate preparations, we could not take up, with complete seriousness, project execution of a large number of projects. The preparatory exercises led to delayed commencement leading, in turn, to non-fulfillment substantial portion of targets. In the 8th and 9th Five Year Plans we could complete less than 50% of the target. In the 10th Five Year Plan we could achieve somewhat better but not more than 60% of the target. What, however, has been significantly different during the 10th Plan is the adequacies of the preparation for a large number of projects for the 11th Plan. We missed about 10,000 MW of capacity in the last year of the 10th Plan and hopefully all of them should be available in the first year of 11th Plan, besides about 4000 MW which had been originally planned for the first year of the 11th Five Year Plan.

The consequences of a long period of inadequate preparations, resulting in very low percentage of fulfillment of targets have been the following :

  1. Many of the related sectors such as Coal, Railways, and even equipment manufacturer started believing that power sector could present a promise but would not deliver. That set in a large degree of complacency in these organizations.

  2. The manufacturing segment have been even more skeptical about the likely growth in the power generation capacity. They believed that perhaps the Indian power sector would move in the same manner as it did in the last 10 to 15 years. Therefore, when during 10th Plan, unprecedented number of orders for new projects were being placed, manufacturers were surprised.

  3. Even much worse has been the preparation among the construction agencies which were all geared to just a level of activities matching to what has been happening in last many years.

Thus, when we started the 11th Five Year Plan in April 2007, with a more concrete picture of preparedness and with demands on all these related organizations and agencies for a much higher level of delivery and performance, which is almost 3 to 4 times of what has been achieved in last many years, they are confronted with an incredible amount of dismay, surprise and panic. To precisely quantify the nature of challenge and the likely stresses and strains which all the concerned agencies are confronted with, it may be desirable to outline, in brief, the problems :

  1. Including the 10,000 MW of carryover of the last year of the 10th Plan, we have a more concrete target of 78,000 MW for the 11th Plan (compare it with about 24,000 MW done in the 10th Five Year Plan). This is more than three times of the previous plan.

  2. At present projects aggregating to almost 50,000 MW of capacity are on ground under construction at various stages of completion (compare it with about 15,000 MW which were under construction when the 9th Plan ended and 10th Plan began). This was possible because of continuous follow-up on preparatory works during the 10th Five Year Plan so that projects are awarded for construction as per predetermined schedules.

  3. A number of Thermal Projects, for which preparatory work had been done during 2005-06/06-07, and they were to finalize the tenders and awards during the first year of 11th Five Year Plan, i.e. the current year, would be definitely be awarded by March 2008 and they can all be expected to be commissioned by March 2012.

These are unbelievably very high targets as compared to what this sector, and all others related to this sector namely the equipment manufacturers, transporters, contracting agencies and construction agencies, have experienced so far. It could be appreciated that they are not just greater than what they have done but, infact, they are almost 300 to 400% times higher than achieved. Obviously, a successful implementation of these schemes, which are now not on paper but are real and on ground, would require more than commensurate preparations on the part of all these agencies.

The inadequacy of power manufacturing capability has been highlighted over last few years, but more particularly in last two years. Not only the capacity to manufacture is far too less in respect of main plant equipment but also the country is inadequately provided in the manufacturing capacities of balance of plants. Some actions have happened on these fronts in last two years. They should have been caused to happen much earlier. If they are seriously and sincerely persued and monitored, their outcomes would definitely and positively support perhaps the programmes of 12th Five Year Plan, and even partly for the 11th Five Year Plan. A word of caution is, however, necessary that (a) Meticulous monitoring to ensure implementation of these expansion plans of manufacturing facilities is essential and (b) Our requirements of periods beyond 11th Plan must be captured now and advance actions launched so that we are not again late when the targets for these plans are set.

Equipment supplies can be augmented through imports, though a very large import caused on account of totally inadequate domestic support may not be the most preferred option. In any case, to support the economic activities which have pitched up very well to achieve a double digit growth, even though substantial import may not be the best option, perhaps power sector would supplement the supplies of equipment through import to meet the targets. That is possible, but even there the following issues could continue to create major impediments in meeting the target.

  1. Will our port facilities will able to handle all these imports? It is necessary to mention that, in view of likely shortage in domestic coal production, many of our ports will have to handle large quantities of import of coal. Therefore, suitable augmentation of existing ports and creation of new ports are essential if the targets have to be met. Needless to mention that expansion of these ports and creation of new ports are necessary even for many other sectors which are also undergoing similar expansions.

  2. Transport facilities including the road network is already proving inadequate. While monitoring commissioning of some of the power projects meant for commissioning in 2006-07, I recall, a little bit of disruption in transportation including traffic jams in different segments were becoming the real cause for delayed arrival of plant and equipment supplies. Arrangement of transport facilities itself, in many cases, was becoming a problem. Everything was geared up, but timely supplies matched to schedule, not being available, caused almost 10,000 MW to slip.

  3. The point that is being made is that we are not only no where near the required capability in terms of manufacturing capacity, in terms of transport facility and infrastructure, but very predominantly we are most poorly placed in terms of our ability to construct, erect and commission even what has been delivered at site. This is infact the cutting edge of the project management cycle. Because, if equipment delivered is not erected and commissioned that causes the maximum financial burden. It also needs to be emphasized that this is the direct financial burden by way of interest during construction on expenditures already incurred. Indirect loss is caused on account of lack of generation of power, a revenue and a profit that could have been generated and earned if the project was commissioned in time.

A proper construction management at site requires an orchestration of so many activities in coordination with a large number of agencies. It is by no means an easy job. However, some of the important aspects which might help are outlined below:

  1. Right in the initial stage, when the entire scope of work is captured and assessed, it must be decided as to how to structure the contract packages so that implementation is smooth. There are various schools of thought - one suggesting that contract execution through turn key contract system, giving the entire scope of work to one competent, qualified and experienced agency, with committed delivery of performance, would take away a lot of inter contractors problems for the client and therefore this approach would be most cost effective and perhaps time and cost over runs could be minimum. Another school of thought suggests that turn key contract would prove to be costlier inasmuchas the sole contracting agency will like to load the cost in order to balance a number of risks that such an agency will be taking on its own. A third school of thought is of the view that the entire scope of work of a project could be a hybrid of turn key and contract packaging approaches. In this alternative, at the most the entire work could be scoped in two to three packages. Each approach has its own merits and demerits. There are varying experiences. However, large number of packages to be handled directly with a number of contracting agencies by the owner's management team have thrown up more examples of problems and delays.

  2. Selection of right contracting agencies is another important consideration. A pennywise and pound-foolish approach may land the entire project into avoidable difficulties. Prequalification of agencies should be a must, even though a two part tendering is not followed. Only such agencies can be allowed to participate which meet the predetermined criteria of experience, financial strength and availability of resources for the project. There have been instances where the contracting agencies have listed the resources available with them in terms of manpower and equipments but they have been found to be overloaded with so many other contracts. This aspect has to be particularly captured and due provision made while qualifying an agency to submit commercial bids. In some cases, the agencies participate in consortium. There have been examples where the most competent of the participating agencies in the consortium, subsequently during execution dropout thus rendering the project in jeopardy. How best to bind such consortium partners for being fully associated during execution and not run away, would require a careful architecture of the contract document.

  3. Quite often major contracting agencies sub-contract or sublet a part of the works. This cannot be avoided or prevented. What is, however, important is to keep in mind that these contracting agencies engage only such groups as are capable to undertake the work being identified for them. The original contract should provide for such consent from the client and checks on contracting agencies.

  4. Last few years' experiences have shown that a number of contracting agencies try to economise on management, supervision and quality checks. In most cases they are found to be inadequately staffed for all these three areas both in terms of numbers as also in terms of experience and quality of people. This leads to the need for the owner organization to themselves start taking care of a large number of construction supervision related issues which normally the managers and engineers of contractors should take care. A proper provision in the contract document to address this requirement, and more importantly a proper implementation of committed placement of manpower by contractors is essential.

  5. Development of essential infrastructure at the site, in terms of access roads and approach from outside etc., should either be provided by the owner organization right in the initial stage or should be suitably integrated with the scope of main contract. This could cover items like road connectivity (both within the project site as also the approach from outside), water supply, electricity, housing/dwelling units etc. These are so important ingredients that if they are not appropriately provided for, the loss in terms of delays could be enormous.

  6. Quite often contracting agencies get into the problem of liquidity. While the contract provisions should properly address this, during execution both the owner and the contracting agencies should develop a streamlined procedure so that flow of fund is so smooth that the progress of the project is not hampered on account of lack of materials or manpower.

  7. There are examples of deviations in scope or quantities or substitution of materials during execution. Quite often this leads to the situation of stalemate when proper resolution of extra claims is not facilitated. In public sector this causes avoidable long delays. A mechanism, which should resolve, in a regular way, this type of issues, would go a long way in eliminating or reducing such hurdles during project execution.

  8. With the type of construction/erection activities, which are going on in the country in the power sector and also in other sectors, it is quite clear that we do not have sufficient number of these agencies, to handle these jobs. This is also leading to excessively high quotes from them. Manufacturers of plant and machinery need to take up crash programmes to develop such agencies. Even owner organizations may assist in this process.

  9. Last but not the least, availability of adequate number of skilled and semi-skilled manpower has, in a recent years, emerged as a major problem in large number of projects. While the equipment supplying agencies, which also have the responsibility of erection and commissioning, must take immediate steps to develop through crash programmes, such skilled work force, a macro level strategy is also essential so that this problem is solved through series of initiatives by government and non-government organizations.