It may set up a project construction company to take on the might of L&T.

By George Skaria

It is engineering a new business. Nearly a decade after the Rs 8,954-crore Reliance Industries Ltd (RIL) fired its first salvo in a series of vain attempts to gain control over the Rs 5,453-crore Larsen & Toubro (L&T), the Ambanis are on the verge of creating their own L&T.

The brainchild of RIL's 41year-old vice-chairman, Mukesh Ambani, the new project construction company could be set up either as a separate entity, christened Reliance Projects. Or by merging the engineering and construction assets of the group into the Rs 35.65-crore Reliance Industrial Infrastructure Ltd (RIIL), which was set up in 1988, to implement infrastructure projects.

When, and if, it happens, RIL--which refused to comment on the issue--expects that, with its Rs 450-crore engineering and construction equipment assets, its new unit will be bigger than L&T's--the largest engineering company in the country with a related equipment asset base of nearly Rs 350 crore. Size will also help RIL's new venture to compete effectively in the Rs 45,000-crore industry, where operating margins are around 10 per cent, and transnational companies are rushing in.

Why is RIL taking the plunge now? First, along with a large asset base, it has built internal competencies in this field after commissioning the Hazira (Gujarat) cracker project in 1996, and nearly completing the world's largest 15-million tonnes per annum (tpa) refinery at Jamnagar (Gujarat), which will commence operations in December, 1998--nearly six months ahead of schedule.

Over the past two decades, the Reliance Group has commissioned 20 plants, which has enabled it to hone its project management skills. For instance, with a Rs 9,000-crore investment at Hazira, RIL has created one of the world's largest petrochemicals complexes. This has enabled the company to consistently compress project implementation times, and, in the process, save costs.

Second, RIL has bid for several infrastructure projects--apart from its expansions--like roads, ports, highways, and power. It can optimally use its in-house expertise for such projects only if they are channelised into a cogent organisational structure. The venture will also be an ideal base to bid for overseas projects, and efficiently utilise the 1,000-odd engineering personnel hired by the group for the Jamnagar refinery project. Traditionally, infrastructure projects have to provide an additional 30 per cent of the project cost to account for liquidated damages and risk factors. But if RIL is both the owner and the builder, these costs can be saved.

Finally, RIL has lost the fervour of its earlier interest in L&T. For two reasons. One, RIL's stake in L&T has come down from a high of 22 per cent in 1994 to about 6.50 per cent at present. Coupled with political opposition, the reduced stake has made it tougher for RIL to make another bid for L&T in the near future. Also, L&T's business profile--besides being an engineering and procurement contractor--includes cement and switchgears. And RIL is not interested in these ventures.

This is not the first time that RIL has tried to create a project construction company; it has been toying with the idea for almost five years now. The first attempt was made in 1993, when it signed a Memorandum of Understanding (MOU) with the American project management and engineering giant, Flour Daniel. But just as the partners were planning to convert the MOU into a joint venture, the American company backed out as it did not wish to lock itself up with just one Indian partner. A year later, the proposed venture was abandoned.

In the recent past, RIL has seen small ventures being launched by other companies. Such as the Rs 1,712-crore Essar Group, which set up the low-profile Essar Projects in 1990. Later, in March, 1993, the project construction assets of the Rs 2,429-crore Essar Steel were transferred to the new company. But RIL is still assessing the advantages of going ahead with the venture. If it is set up as part of RIIL, there could be tax advantages in terms of the amortisation of the equipment that it already has. However, it may also float a company in which it has full control as opposed to about 70 per cent stake in RIIL. Either way, the Ambanis will manage their decade-old dream project into reality.

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