Tax and Regulatory INTRODUCTION TO EPC CONTRACTS

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Introduction to EPC contracts

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Conference on EPC contracts Tax, Legal and Commercial Imperatives 8 - 9 June 2006 | Hotel Intercontinental The Grand | Sahar Airport Road | Mumbai | India

Sujit Ghosh Executive Director, BMR & Associates

INTRODUCTION TO EPC CONTRACTS
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INTRODUCTION TO EPC CONTRACTS

Engineering, Procurement and Construction (EPC) Contracts are in the nature of turn-key projects , having a combined scope of work involving services and supplies Broadly, an EPC contract encompass the following key activities
Engineering Preparation of designs, plans, & technical specifications of equipments Preparation of performance standards maintenance and training manuals Designing and planning layout Documenting delivery schedules of equipments, instructions for erection, etc

EPC

Construction Erection, commissioning, testing and completion of the facility Correction of defects

Procurement Provision of equipments Procurement from third parties Clearing of goods at ports Delivery to the site Provision of spare parts

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PROJECT OWNERS OBJECTIVES

Single point responsibility Fixed price or price determined upfront Lowest possible price keeping in mind all possible exemptions or favorable positions No risk on legal / regulatory positions Minimal or no compliance obligations Liquidated damages (& penalty) for any default by the Contractor Appoint more than one contractors under single umbrella, since no one contractor possesses all the necessary capabilities

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CONTRACTORS CONCERNS
Full pass-through of the taxes No risk appetite for taxes Certainty of taxes Minimal or no compliance obligation Consolidation of expertise and consortium operation, if needed

INTRODUCTION TO EPC CONTRACTS

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TYPES OF EPC CONTRACTS

Privately Negotiated Tendered out Issued under Nomination basis Single document Single document (separate purchase orders for various scopes) Multiple document Lump sum price with / without split of various revenue streams Split Price

During the course of the next one and half day, some of the critical aspects of EPC contract would be discussed in detail

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Insert picture stock here Economic growth an opportunity forfrom EPC contractors

Conference on EPC contracts Tax, Legal and Commercial Imperatives 8 - 9 June 2006 | Hotel Intercontinental The Grand | Sahar Airport Road | Mumbai | India

Sujit Ghosh Executive Director, BMR & Associates

INTRODUCTION TO EPC CONTRACTS
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CONTENTS
Background

How relevant is infrastructure

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Current economic scenario

India growth path Sectoral growth Core infrastructure growth Service sector Foreign trade FDI Inflation

India Infrastructure investments

movement at last

Attempt to recoup a lost decade Infrastructure investment: looking up Roads: in the right lane Power: going slow but moving Telecom: private initiatives pick up

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CONTENTS
Future outlook

BRIC 2050 Demography Investment opportunity

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Govt outlook Tuning the budget Modest outlook SEZ Can we do it

Concerns and impediments

Growth disparities in states Other concerns Structural impediments

Way forward

Road ahead

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HOW RELEVANT IS INFRASTRUCTURE GROWTH

India has embarked on an ambitious yet achievable growth trajectory Increased economic activity is being witnessed in most sectors, and GDP continues to demonstrate growth at a robust 8 percent plus levels World-class infrastructure has emerged as one of the most important necessities for unleashing high and sustained growth Poor infrastructure to support, the Indian economy continues to be a laggard when compared to its developing peers Infrastructure and Indian economy are the flavor in any discussions today

The Big I, has the potential to push or logjam growth, improve or lower quality of life and make India shining or dull on the world stage

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HOW RELEVANT IS INFRASTRUCTURE GROWTH

From a policy perspective, there has been a growing consensus that a private-public partnership is required to overcome bottlenecks Apart from highway development and construction and modernization of airports, the potential for the sector lies in the space of oil and gas, power, telecom etc where high demand has led to increased action This makes the future of the Indian construction & engineering sector extremely bright EPC contractors are already loaded with order books and we believe this is just the beginning of the story and

India is awakening to a huge untapped opportunity and has the potential to deliver more than you and I can imagine !!

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CURRENT ECONOMIC SCENARIO

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INDIA GROWTH PATH

GDP Growth (%) India GDP Growth (%)
7 .8 7 .3
9 .3 8 .5 7 .5 9 .5 10 9 .2 8 .4 7 .5

India shining this is just the beginning

8 .5 8 .4

India

World

China

USA

7 .3

8 7 .5

5 .9 5 .1

5 .8

5 .1 4 .3 3 .9 3 .8 2 .7 4 .2 3 .5 4 3 .3 4 .3

e h T
1 .3

g i B
4 .8

e r u t c i P
6 .5 6 .1 4 .4

6 .9

5 .8

1 .6

Liberalization initiated
2 0 0 3 -0 4 2 0 0 4 -0 5 2 0 0 5 -0 6 2 0 0 6 -1 0 (E )
199192 199293 199394 199495 199596 199697 199798 199899 199900 200001 200102 200203 200304 200405 200506

2 0 0 1 -0 2

2 0 0 2 -0 3

Source: Economic Survey, BMR Research

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SECTORAL GROWTH
Changing pie of GDP contribution
200405 2005-06
20.8 !.!

Industry and services - twin engines propelling growth

In d u s tr y (% ) 7 7 .6 8 .7 7 .4

53.2 26

5" 26.

2 .7

Agriculture (%)

Industry (%)

Services (%)
2 0 0 1 -0 2 2 0 0 2 -0 3 2 0 0 3 -0 4 (P ) 2 0 0 4 -0 5 (Q ) 2 0 0 5 -0 6

Agriculture has been a windfall

A g r ic u ltu r e (% )

10 6 .2 3 .9 0 .7
2 0 0 1 -0 2 2 0 0 2 -0 3 2 0 0 3 -0 4 (P ) 2 0 0 4 -0 5 (Q ) 2 0 0 5 -0 6

S e r v ic e s (% ) 7 7 .3 8 .2 1 0 .1 10

2 0 0 1 -0 2

2 0 0 2 -0 3

20030 4 (P )

2 0 0 4 -0 5

2 0 0 5 -0 6

-6 .9
Source: GoI data, BMR Research

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SECTORAL GROWTH

In d u s tr y (% )
7 2 .7 A g r ic u ltu r e (% ) 7 .6 7 .4 7 .6

10 6 .2 3 .9 0 .7
2 0 0 1 -0 2 2 0 0 2 -0 3 2 0 0 3 -0 4 (P ) 2 0 0 4 -0 5 (Q ) 2 0 0 5 -0 6

2 0 0 1 -0 2

2 0 0 2 -0 3

20030 4 (P )

2 0 0 4 -0 5 (Q )

2 0 0 5 -0 6

-6 .9

S e r v ic e s (% ) 7 7 .3 8 .2 1 0 .1

1 0 .3

2 0 0 1 -0 2
Source: GoI data, BMR Research

2 0 0 2 -0 3

20030 4 (P )

2 0 0 4 -0 5

2 0 0 5 -0 6

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INDUSTRIAL GROWTH
Inde. o+ Industrial Production 8.! 2005$06 %A&ril$'e()%/)
# 5 2.# 5.# 8

! 5.3 0.5

2000$0

200 $02

2002$03

2003$0"

200"$05

2005$ 06%A&ril$ 'e ()

* ining

* +g

Ele ctricit,

-e ne ral

1 6 .5

1 1 .7

1 4 .1 11

6 .4 2 .5

B a s ic G o o d s
Source: DIPP, BMR Research

C a p ita l G o o d s

In te r m e d ia te G oods

C onsum er G oods

Consum er D u r a b le s

C onsum er N o n -D u r a b le s
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CORE INFRASTRUCTURE GROWTH

In+rastructure Sector -ro0th 2005$06%/)

1 2 .3 6 .4 6 .8 2 .1

5 .1

E le c tr ic ity

Coal

P e tr o le u m -5 .3

S te e l

Cem ent

R e fin e r y P r o d u c ts

he si! core infrastructure sectors registered an average gro"th of #$ %&&#' &( vis a vis #)*$ in corresponding year +verall gro"th of (),$ in -pril %&&(
Source: Ministry of Finance, BMR Research

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SERVICE SECTOR
S e r v ic e s (% ) 1 0 .1 7 7 .3 8 .2 1 0 .3

2 0 0 1 -0 2

2 0 0 2 -0 3

20030 4 (P )

2 0 0 4 -0 5

2 0 0 5 -0 6

1rade2 3otel2 trans&ort4 Commn. Communit,2 Social 4 Personal

Ser5ice sector (rea6 u& %/)

'inancial Ser5ices

India accounts for .)/$ of the "orld0s service trade 1ervices account for #&$ of the country0s 2DP today 2ro"th in 1ervices sector pegged at around 3)*$ 4ey contri5utors of gro"th 5eing6 7eal estate elecommunications Construction
.5 !.# #.8

2 !.2 #.3 3.! !. 8 3.8 5." ".5 0.6 !.2

200 $02

2002$03

2003$0"

200"$05

2005$06%A)

Source: Ministry of Finance, BMR Research

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FOREIGN TRADE
India7s 'oreign 1rade %In US8 9illion) Im&ort 9rea6$u& 4 1rade 9alance %In US8 9illion)
E.&orts Im&orts

P:;

<on$ P:;

1rade 9alance

9 6 .4

1 4 0 .2 109 6 3 .9 78 8 0 .5 1 0 0 .6

77 5 7 .6 2 0 .6 29 4 3 .8

2 0 0 3 -0 4

2 0 0 4 -0 5

2 0 0 5 -0 6 ( A p r il- M a r )

2 0 0 3 -0 4

- 1 4 .5

2 0 0 4 -0 5 -2 8

2 0 0 5 - 0 6 ( A p r ilM ar) -3 9 .6

E!ports have gro"n 5y over %/),.$ over previous year Imports have registered a gro"th of over 8.)#%$ over previous year Petroleum products registered a gro"th at /()*/$ over previous year 9on'Petroleum Products registered a gro"th of %#)#($ over previous year E!ports e!pected to gro" at C-27 of 3)#$ for the a5ove period

Source: Ministry of Commerce, BMR Research

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FOREIGN DIRECT INVESTMENT

'>I % US8 (illion)
".8 3.3 3.2 2." 3.2 ".3

2000$0
.25

200 $02

2002$03

2003$0"

200"$05

2005$06 %A&ril$=an)

Countr, 0ise '>I %Aug !! $ =an 2006) US8 (illion

".!2 2.08

.!!

2.06

.5#

*auritius
Source: DIPP, BMR Research

USA

<etherlands

=a&an

U?

-erman,

Singa&ore

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INFLATION

%&&#'&( has "itnessed a slo" do"n in inflation to around /)&%$ 4ey contri5utors 5eing6 In+lation %/)
W PI
il ay pr

W P I 2 0 0 5 -0 6
ne ly pt ug ov Se Ju Ju ec D ct ay M
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Deceleration in manufactured goods

prices

1lo" do"n in the primary commodity

price increase

7 .2 5 .9 5 .5 5 .5 4 .3 4 .3 3 .7 3 .6 3 .4 4 .1 4 .7 4 .3 4 .4 4 .3 2 3 .9 6 6 .5

Partial pass'through of rising oil

prices

:o"ever, fuel, lu5es and petroleum "itnessed an inflation rate of around *$ Price situation 5eing closely monitored and measures taken to control price rise 5y the 2overnment Inflation for %&&('&, to remain #'#)#$
(RBI Estimates)

Source: Ministry of Finance, BMR Research

2000- 2001- 2002- 2003- 2004- 200501 02 03 0 4 (P ) 0 5 (Q ) 0 6 (A )

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INTRODUCTION TO EPC CONTRACTS

INDIA INFRASTRUCTURE INVESTMENTS MOVEMENT AT LAST

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INDIA INFRASTRUCTURE INVESTMENTS MOVEMENT AT LAST Attempt to Recoup a Lost Decade

The 1990s was perhaps the worst Indian history in terms of infrastructure investment The Government cut capital investment due to fiscal constraints Policy confusion and unconducive environment failed to attract private investment Thus the gross fixed capital formation for infrastructure continues to remain near to the ground

Infrastructure Investments Looking Up

After a long hiatus, investment in infrastructure is finally looking up Government has decided to take the plunge especially in roads and electricity Major investments in pipeline

Road Power Telecom Energy / oil & gas

Right policy mix support accelerating investments

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INDIA INFRASTRUCTURE INVESTMENTS MOVEMENT AT LAST Roads: In the right lane

Work of 4-laning of Sections of North-South Corridor and East-West Corridor Total length of national highways in the country 65,569 km
Being improved in a phased manner 96% of NHDP Phase I likely to be completed by June 2006 Phase II to be completed by 2008 Phase III to be completed by 2012

Power: Going slow but moving

The growth in capacity addition of 4.7% for 2005-06 (April-Dec) Targeted capacity addition of 41,110 MW,revised to 36,956 MW To achieve a target of around 34,024 MW
Private sector is expected to add capacity of 4,898 MW Country has not been able to garner additional capacity because of unavailability of gas / LNG / coal

Po0er -eneration %*W)

25417

1hermal

3,dro

<uclear

"3!3

13784 7446 5380

1300 1 0 th p la n t a r g e t

590 C o m m is io n e d

"#!" 2030

U n d e r e x e c u tio n

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INDIA INFRASTRUCTURE INVESTMENTS MOVEMENT AT LAST Telecom: Private initiatives pick up

One sector where there have been significant policy making progress Liberalization of every segment of telecom sector Less Regulatory uncertainty with environment encouraging private participation
For the next four to five years, annual investments of over US$ 4-5 billion expected in this sector

1elecom gro0th %*illion)

F ix e d 1948 1998 2003 W L L /M o b ile 2005 T e le -D e n s ity 2006 2006* 2007 2 2 .5

3 8 .4

4 1 .6 6

4 2 .9

1 1 .5

1 2 .8 4 6 .2

1 3 .9 6 5 0 .2 !0. 4 1 .3 2.2

52.2 33.# 2 0 0 3 -0 4 2 0 0 4 -0 5 2 0 0 5 -0 6 2 0 0 6 -0 7 *

6.5 0 .0 2 2 0 0 2 -0 2

1 .9

3.0

2 0 0 2 -0 3

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INDIA INFRASTRUCTURE INVESTMENTS MOVEMENT AT LAST

Financial snapshot
T o ta l T e le c o m R e v e n u e (U S D B n ) 1 9 .3 1 5 .9

Capital Investments of Telecom Services

G ovt C o. 66% P v t. C o T o ta l (U S D B n ) 64% 44.6 36%

34% 39.7

2 0 0 4 -0 5

2 0 0 5 -0 6

2004-05

2005-06

FDI inflows in Telecom

200"$05 2005$06 5!/ 52/ " /

2 0 0 3 -0 4
"8/

2 0 0 4 -0 5

2 0 0 5 -0 6 * 2383 2514

2715

2.52/ 2.# / S h a re in G D P
Source: TRAI, BMR Research

118
C o n tr ib u tio n b y G o v t Co. C o n tr ib u tio n b y P v t Co.

1 3 0 .7

201

Y e a r W is e F D I F lo w s ( U S D C u m ila t iv e F D I fo r T e le c o m Mn) (U S D M n )
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FUTURE OUTLOOK

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BRIC 2050 A DRAMATICALLY DIFFERENT WORLD

1he ;argest Economies in 2050
2DP ;%&&8 <1= trillion>

:5erta6ing the -6@

When BRICs US$ GDP would exceed G6

I!al" Franc

2.1 3.1 3.8 5.9 6.1 6.7 27.8 35.1 44.5

Source: Goldman Sachs Glo al Economics Pa!er ""

China

US

India

Japan

Brazil Russia

UK

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DEMOGRAPHY
*edian Age %in Aears)
/# 83 8& %/ 8, 8& 83 /# #& /%

+ur population ' .)&* 5illion, constituting .,$ of the "orld0s people Population gro"ing at the rate of .)/ $ per annum ,,. million literates in the .# plus age group in the "orld

8/)($ of this in India

China
Current

<1

India

Europe

@apan

A+ter 5 ,ears

?iteracy rate in %&&. "as (#)/$ /&$ of the population constitutes the "ork force %)8$ of "ork force is currently unemployed

Currently, the median age of India0s population is %/ years -fter .# years India is e!pected to have a huge "orking population of around *&& million
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INVESTMENT OPPORTUNITY THE GOVERNMENT VISION

Infrastructure is our biggest problem and also biggest opportunity. In the next 10 years we must spend US$ 150 billion to modernize and expand Indias infrastructure Even at the ADB meet, the Prime Minister reaffirmed that India's infrastructure needs in the next few years would be to the tune of over $150 billion

Honble PM Dr Manmohan Singh

Economic Survey 2005-06

The committee headed by Prime Minister has estimated an investment requirement of: Rs 1,74,000 crore National Highway by 2012 Rs 40, 000 crores for Airports by 2010 Rs 50, 000 crores for ports by 2012

Manufacturingthe driver to double digit growth

Manufacturing sectors is central to Indias strategies to attain double-digit GDP growth in the near term. The government will create the pre-requisites for the manufacturing sector to attain at least 12 per cent annual growth.
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INVESTMENT OPPORTUNITY TUNING THE BUDGET

Budget 2006 bounded by NCMP Finance Minister
Laid foundation for the country to achieve 10% growth in the next 2 3 years

Emphasis of budget on growth reflected through allocations

Bharat Nirman (Infrastructure) US$ 4.16 Bn NREG (Employment) US$ 3.16 bn SSA (Education) US$ 2.23 Bn NRHM (Health) MDMS (Meals) RGDWM (Water) ICDS (Child Development) TSC (Sanitation) US$ 1.82 Bn US$ 1.07 Bn US$ 1.02 Bn US$ 0.91 Bn US$ 160 Mn

Budget 2006Infrastructure the flavor in any discussion

Creation of physical infrastructure Roads, ports, airports Power plants Building social infrastructure Education, healthcare, water supply,

Growth momentum sustained by higher infrastructure spending India also benefiting from global economic upswing
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INTRODUCTION TO EPC CONTRACTS

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INVESTMENT OPPORTUNITY MODEST OUTLOOK

REL Dadri projects 5 Ultra mega power projects Several IPPs PSU projects

Projected Infrastructure Spend 2005 2010 US$ Billion

National highways Golden Quadrilateral East-West, North-South corridor Rehabilitation of Roads Moderniza tion Greenfield Intl airports Greenfield domestic

3 9 .5

World class domestic gas discoveries LNG import terminals Transnational pipeline Refinery Hub

Modernizati on Greenfield ports Private captive ports

4 1 .8

2 5 .7 2 1 .6 1 5 .1 9 .2 5 .9
Pow er Gas W a te r R a ilw a y s R oads P o rts

9 .1 4 .2
A ir p o r ts

2 .5
S to ra g e Com m u. O th e rs

A total investment outlay of US$ 174 billion envisaged during 2005-2010

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INVESTMENT OPPORTUNITY SEZ

-5out ,( 1EAs setup and at various stages of development ./ already in operation (. at various stages of
esta5lishment
SEZ MAP of India (Not to Scale)

Greater Noida Moradabad

Kanpur Bornada, Jodhpur Bhadohi, UP

Bore than .#& ne" applications for setting up 1EAs in the pipeline +ver I97 .&&& 5illion ;appro! <1D %/ 5illion> to 5e invested in India through the 1EA route ?arge scale foreign investment 5eing attracted upon the passing of this legislation

Jamnagar Mundra, Gujarat

Navi Mumbai

Kulpi, West Positra, Gujarat Bengal Adityapur, WB Kolkata Dahej, Gujarat Ranchi Gopalpur, Nagpur Orissa Khopata, Paradeep Maha Mumbai Visakhapatanam, Andhra Pradesh Baikampady SEZ, Karnataka Chennai Hassan, Ennor SEZ, Karnataka Tamil Nadu Vallarpadam, Kerala Nanguneri, Tamil Nadu

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INVESTMENT OPPORTUNITY CAN WE DO IT

India currently spends around 3.5% of GDP on Infrastructure while China 10.6% Assuming that the GDP grows at 8%, the there is a need for gradual increase in GCFI as a % of GDP
Projected Infrastructure Spend 2005 2010 US$ Billion
G CFI 6% 7% 8% 896 9% 967
GCFI cumulatively amounts to USD 298 Bn for 2005-10 PM 150 USD Bn GOI 174 USD Bn

G DP 5%

GDP at constant 711 growth Infrastructure at gradual pace

36 2 0 0 5 -0 6
Source: BMR Research

768

829

46 2 0 0 6 -0 7

58 2 0 0 7 -0 8

72 2 0 0 8 -0 9

87 2 0 0 9 -1 0

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CONCERNS & IMPEDIMENTS

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CONCERNS & IMPEDIMENTS

Growth Disparities among the States Lack of consistency in decisions Bureaucracy Coalition Glacial pace of litigation Slow project delivery

Several projects behind schedule Cost overruns for companies Severely impacts economic growth
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Structural impediments
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GROWTH DISPARITIES IN STATES

Annual -ro0th Bates States

>7%

Gujarat, Goa, Tripura Delhi, Maharashtra, Sikkim, Karnataka, TN, WB, HP, Kerala
5-6%

6-7%

Nagaland, Rajasthan, MP, J&K, AP Arunachal Pradesh, Haryana, Punjab, UP

2-4%

4-5%

Orissa, Bihar, Assam

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OTHER CONCERNS AND IMPEDIMENTS Lack of stability in decision making

Interpretation of contracts and concession agreements is in itself very challenging No single agency to deal with. Need for liaising with hybrid agencies both at the Central and the State level Adds time and costs to projects leading to time and cost overruns

Bureaucracy

Coalition at the Centre Litigious environment coupled with glacial pace of litigation Slow project delivery process

Processes too time consuming Systems lack transparency Short of promptness

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STRUCTURAL IMPEDIMENTS Deficiencies in infrastructure

Lack of hinterland connectivity National highway network lagging behind Waterways not leveraged well Railway connectivity limitations Inadequate supply of electricity, water etc

High input costs

Restrictive labour laws High taxes Government interference

Several sectors controlled despite being liberalised leading to uncompetitive environment

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WAY FORWARD

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WAY FORWARD Macro level deliverable

Need to create conducive environment Reducing entry regulations Reducing multi-level clearances Expanding infrastructure

Regulatory reforms

Infrastructure reforms Governance reforms Fiscal reforms driving towards making India globally competitive

Implementing GST Targeting subsidy to the needy and the poor

Improving exit options

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THE ROAD AHEAD

#Given the future window of

opportunity, India certainly is bound to become the

capital

of growth and you and I

may witness this story
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Tax and Regulatory INTRODUCTION TO EPC CONTRACTS

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AEROSPACE OFFSHORE OPPORTUNITY

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January, 2007 | New Delhi

BMR & Associates

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CONTENTS

Background

Aviation Civil aviation Aviation Defence Media reports

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Passenger and cargo trends India Defence sector Developments in aerospace Aerospace Industries association Opportunities in the Defence sector Offset in the civil sector Way forward

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BACKGROUND

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AVIATION
Boom in aviation

India has embarked on an ambitious growth trajectory. Indias GDP grew at 7.5 percent, 8.1 percent and 8.4 percent in 2004, 2005 and 2006 respectively. Reportedly, Indias GDP grew at 9.5 percent in the second half of fiscal 2007. Increased economic activity is being witnessed in across every sector The civil aviation sector too has been witnessing a boom as the domestic passenger carriage, cargo movement and international air traffic have shown exponential growth. This growth has been largely fuelled by the policy of increased liberalization, which has been followed by Government on both domestic as well as international side After dismantling of monopoly of national carriers on the domestic skies in 1994, the civil aviation sector has seen increased competition resulting in significant growth. The competitive tendencies have, in turn, resulted in adoption of aggressive, innovative pricing strategy and low cost model by the upcoming new airlines On the international side, Government has taken several initiatives to increase the availability of seats as well as better connectivity by entering into several bilateral agreements The year 2006 has been especially remarkable for the growth witnessed in passenger traffic. The airlines have carried nearly 29 million domestic passengers till November, 2006, which is a growth of 47% over the corresponding period of 2005. Further, the scheduled domestic air services are now available to / from 75 airports as against nearly 50 in the year 2000
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CIVIL AVIATION (CONT)

Civil Aviation forms a very important infrastructure in boosting trade and commerce as well as in enhancing overall international competitiveness. In value terms nearly 30% of India's foreign trade is handled by the airports Indian economy is opening up its windows for participation of foreign companies in the civil aviation sector. Recently, Air India, Indias international fleet entity has entered into largest purchase deal with Airbus / Boeing

Comprises of purchase of 68 aircrafts Net project cost of approx Rs 34,615 crore (USD 8 billion) Construction, upgradation and operation of new and existing airports including cargo related infrastructure. Outsourcing of some of the operation and maintenance functions such as cargo handling services and commercial development Consulting opportunities for airport design and architecture, traffic studies and project supervision Setting up of non-aeronautical activities like shopping complex, golf course, entertainment park and aero-sports near the airport

Further investment opportunities emerging out of this sector are primarily in terms of:

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AVIATION DEFENCE
Since year 2001 when Government of India has developed policy initiatives to engage a greater participation of private players in Defence production by way of either a Joint Production Ventures or Outsourcing and is earnest in taking inherent benefits of the competitive environment From being primarily a supplier of raw materials, semi-finished products, parts and components to DPSUs, OFs, Base Workshops of Army, Base Repair Depots of Air Force and Dockyards of Navy, the private sector today is engaged in development and production of several hi-tech Defence equipments. Today private sector has become a partner in the manufacturing of complete advance equipment or systems Indian Defence Industry is today determined to facilitate greater participation of private sector in Defence Growth in passenger and air cargo traffic over the years is attracting global aerospace players to enter into the Indian market

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MEDIA REPORTS

Passenger nos to grow from current 16 mn to 50 mn by 2008. Passenger load in Delhi & Mumbai to go up to 43 mn and 52 mn by 2024. Budget carrier Air Deccan has signed a $150 million agreement with Lufthansa Technik for repair and overhaul of its Airbus fleet of aircraft Cochin International Airport (CIAL) to set up an international MRO facility and an aviation training academy

Air Sahara to place firm orders for 10 Boeing 737800 aircraft worth around $700 mn with US aircraft major Boeing

Starting from July 2005 and until 2021, Airbus to deliver an aircraft a month to India

During 2004-05, total passenger traffic grew at 21.7% while the cargo traffic grew by 19.9%

Airbus to invest about $1 billion in various projects in India over the next ten years Additional $40 bn opportunity for the Indian IT industry by 2020 from offshoring of engineering services alone

At International Aerospace Exhibition held in Germany, India is not only being looked as a 'Key Market' by Aerospace OEMs but also as a "Key Destination.

Boeing projects $72 bn market in India in the next 20 years; could bring in offsets worth $21.6 bn. CAS to invest up to $100 mn in MRO facility for Boeing airplanes

Go Air has signed an agreement with Airbus Industries to acquire 10 A320 aircraft with an option of purchasing 10 more

Kingfisher Airlines has signed contracts to acquire 10 A-320 aircraft on firm order with options to buy another 20 until 2008 at a cost of up to $1.8 bn or Rs 8,100 crore

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COMMERCIAL AVIATION (CONT)

Offshoring services sector

Barket potential for outsourced engineering services from India is estimated at $7/12 billion. The

worldwide market for outsourced engineering is expected to reach a whopping $123.9 billion in 2006

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PASSENGER AND CARGO TRENDS

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PASSENGER TRAFFIC TRENDS

In million

2 0 0 3 -0 4

2 0 0 4 -0 5

2 0 0 5 -0 6 74 59

80

60 40 40 17 19 23 32

51

49

20

0 In te r n a tio n a l D o m e s tic T o ta l

2010 projection : 105 115 (69 mn domestic & 40 mn international)

Source : Ministry of Civil Aviation

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AIR CARGO TRENDS

2 0 0 3 -0 4
In ooo tonnes

2 0 0 4 -0 5

2 0 0 5 -0 6 1382 1280

1600

1200 824 800 693 375 4 5 74 7 9 903

1069

400

0
I n t e r n a t io n a l D o m e s tic T o ta l

2010 projection : 3360 thousand tonnes

Source : Ministry of Civil Aviation

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INDIAN DEFENCE SECTOR

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DEFENSE AND SPACE

3A; (eing one o+ the (iggest and reno0ned >PSU

India's Defense Budget rose 7%, to $20.11 bn - among the biggest defense budgets in Asia-Pacific. Third largest spender in the world next only to the US and China. GDP. The official defense expenditure of Rs 83,000 crores is just over 3% of GDP

HAL has been outsourcing smaller components for its various projects. As per industry estimates the outsourcing exercise expected to reach US$ 1 billion in next four or five years from a level of approximately $150 m currently

Total imports exceed an estimated $15 bn per year and expected to grow to $50 bn by 2015. Imports also grew by 42.8% to USD 15.8 bn in Nov 2006 from USD 11 bn a year ago. A comparison with the provisional earnings (USD 9.9 bn) shows a sharp 60 % rise in imports in Nov 2006

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DEFENSE AND SPACE

Evolution of Indian Defence Industry with large infrastructure for Defence Ordnance and equipment consisting of 39 Ordnance Factories (OFs), 8 Defence PSUs (DPSUs) and 49 R & D Laboratories

India's Army will receive $9.26 bn, Air Force will receive $5.65 bn & Navy will receive $3.39 bn. An increase of 7.2 %, allocating a whopping Rs 89,000 crore for the fiscal year 2006-07. Of this, Rs 37,458 crore or 42 % of the total outlay has been earmarked for new arms purchases. The Defense Research & Development Organization (DRDO) is expected to receive $1.81 bn

In the aero engines domain, solution providers include QuEST, Infotech Enterprises, TCS, Snecma Aerospace India, while avionics has the likes of HCL Technologies, Silver Software, AK Aerotek, Accord Software, CG Smith, Tata Power, Spectrum Infotech, BAe-HAL, Honeywell and L&T IT

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DEFENSE AND SPACE (CONT)

Aero Engine >omain

QuEST

Infotech Enterprises

TCS

Snecma Aerospace India

A5ionics

HCL Technologies

Silver Software

Honeywell

L&T IT

Aero Structure

Infosys

QuEST

Genser aerospace

Taneja Aerospace

-round su&&ort eCui&ment (usiness

HCL Technologies

Tata Power

Nest Avionics

L&T IT

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DEFENSE AND SPACE (CONT)

Upcoming acquisitions

Medium MultiRole Combat Aircraft (MRCA) medium combat aircraft fighter deal, for 125-200 aircraft and $10-15 billion (Majority of those jets will be built by state-owned HAL following the transfer of technology) Indian Air Force (IAF) aims to acquire 126 "medium" multi-role fighters from 2008 onwards, to bolster the arm even as its MiG-21s are phasing out The $500-700 million contract for new utility helicopters with high-altitude capability The long, long delayed purchase of new 155mm howitzers, worth up to $2 billion

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AEROSPACE DESIGN AND ENGG SERVICES MARKET SIZE

In USD Billion 6

C o m m e r c ia l A e r o M a r k e t

D e fe n s e

2 .7 4

2 1 .2 8 0 .6 0 2010 2020 3

Aerospace design and engg services market at an inflection point in India

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BENEFITS TO AEROSPACE PLAYERS

Mechanism for fulfilling offset obligations Participate in others offset opportunities on risk sharing basis Outsourcing opportunities available in plenty Avenue to bring core aerospace competency Getting the local manufacturing capability (without too much of capital investment) Develop shared infrastructure business models Synergies with Aero Initiatives like BIC, OEM System Integration Services (win broader content on new platforms) & HTSI systems integration initiative

Clear benefits entail with current strategic initiatives

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DEVELOPMENT IN THE AEROSPACE SEGMENT

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DEVELOPMENT IN THE AEROSPACE SEGMENT

?ockheed martin

Scouting for

Joint venture opportunities in India for participation in defense offset framework

Current assignments

Already working for HAL and Bharat Electronics Ltd; in touch with other 30 companies including the Tata group, Infosys, Wipro and Maini

Held a conference of its 25 global vendors to talk about the LM supply chain to about 50 Indian companies picked from the defense ministry's list of `champions of industry' to be potential contractors in the MRCA offset Prospective supplier of Integrated Platform Management System (IPMS) for Indian Navys ship building program, which includes one aircraft carrier and over 30 ships for various applications Partnered with

Larsen & Toubro (India)

India has sought information on buying what would be its first US military aircraft, six Lockheed Martin C-130J Super Hercules cargo planes, US Air Force officials and others
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RECENT RESPONSES AND REACTIONS (CONT)

hales

Current presence

Thales (49%), Rolta India Ltd (51%) JV for development of Aviation related software Capital base of $11 million Development of state-of-the-art Command, Control, Communications, Computers, Intelligence, Surveillance

Scouting for

Joint ventures in air traffic management industry expects Larsen & Toubro to be one of them

Future plans

Plans to set up an avionics maintenance centre in Gurgaon, India

Recent contract: Thales, UK to supply of three new Full Flight Simulators to Kingfisher

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RECENT RESPONSES AND REACTIONS (CONT)

E-D1 -ir5us

Airbus to set up an MRO in India with an investment of $100 million Infotech sets up CoE for Airbus Opening of EADS Technology Centre in India leading to creation of 2,000 jobs in the aerospace and defence sectors in India Over next 15 years, the volume of investment and high-tech activities generated including the Airbus Engineering Centre will reach approx. INR 11,000 crores ( 2 billion) Signing of Authorized Sales Representative contract between EADS Socata and IndUS Aviation been announced - IndUS Aviation Inc. is an American-Indian Aircraft manufacturing company with headquarters both in Dallas, Texas and in Bangalore, India.

Recent plans: Cooperation between its Eurocopter subsidiary and India's HAL to develop a new army helicopter

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RECENT RESPONSES AND REACTIONS (CONT)

< C Pratt & Chitney

Current presence

JV signed between Pratt & Whitney (51%) and Infotech (49%) - named as Infotech Aerospace Services). To invest $ 7.3 million in Infotech

Future plans

To outsource over $100 million worth of components and design work to Indian vendors over the next five years with L&T, HAL, Infotech Enterprises Ltd (IEL) and Tata Advanced Materials Ltd (TAML) With HAL to manufacture engine components, and to set up a Rs 100 crore plant for this at Koraput in Orissa, from which it expects an annual business of USD 500 million in 10 years UTC to open a Mfg. & Maintenance (M&M) facility. Pratt & Whitney to set up an aircraft engine workshop in India National Aerospace Laboratories (NAL) in Bangalore signed an R&D cooperation agreement with Boeing, as also setting up two testing facilities for Pratt & Whitney Signed a contract for engines to power Kingfisher's new fleet of Airbus A330 aircraft

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RECENT RESPONSES AND REACTIONS (CONT)

Doeing

Future plans

Setting up an R&D center in India To invest $118 million to set up a MRO facility in Maharashtra as part of US aerospace firms India commitments, following the Rs 35,000-crore deal with Air-India MRO facility to serve the Boeing family of airplanes for the entire South-East Asia Air Sahara placed order for purchase of Boeing 737-800 passenger jets worth $700 million on Boeing Company HCL Technologies been selected as a software development partner for 787 Dreamliner Jet Airways to buy 10 aircraft from US-based aerospace major Boeing to expand its international operations

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RECENT RESPONSES AND REACTIONS (CONT)

19ECB-

Exisiting tie-up

Existing tie-up with Coimbatore-based Lakshmi Machine Works (LMW) for its casting and casing requirements

Future plans

France's Snecma plans a (50:50) joint venture with HAL to make engine parts, with an initial investment of $6.5m Snecma is eyeing new joint ventures with private Indian companies To approach players like L&T and Godrej and Boyce for joint ventures

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RECENT RESPONSES AND REACTIONS (CONT)

Dell :elicopter

Existing tie-up

Signed a $ 5 million contract with state-owned HAL to manufacture tail rotors for its hugely successful 206 model ied up "ith several Indian la5oratories for research in cutting edge technology HAL and Bell Helicopter, a Textron Company, have signed a MoU for cooperation in the areas of supply of airframe sub-assemblies and product support Developing futuristic "Fancraft" for anti-terrorist operations and emergency medical services in heavily built-up urban areas In the race for the Indian Army's plan to buy 200 helicopters for deployment in the high altitude areas in the Himalayas

1miths aerospace

Smiths has set up a dedicated Offshore Engineering Centre (OEC) in QuEST Bangalore
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RECENT RESPONSES AND REACTIONS (CONT)

9orthrop 2rumman

Involved in HAL in its E-2C Hawkeye program (sourcing aircraft assemblies and components, digitization) Signed an agreement with HAL to identify projects of mutual benefit by way of sourcing aircraft assemblies and components, digitization and other related service
2oodrich Corp

Aircraft interior products manufacturing facility in Bangalore , Local sourcing of hardware; Engineering design and support. Selected to supply wheels and brakes to SpiceJet's fleet of Boeing Next Generation 737 aircraft. Spice Jet launched 737 NG service within India in May 2005. Plans are to expand this new fleet to 25 aircrafts Opened the emergency escape slide manufacturing facility in India; ties up with Satyam & TCS for IT support

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RECENT RESPONSES AND REACTIONS (CONT)

2E

Provides employment to over 18,000 direct and 7,000 additional employees through sourcing activities with leading software suppliers ADA awarded an engineering development contract valued at $105 million to GE Aircraft Engines (GEAE) for engines that will be used for Tejas Looking at establishing relationships with Air-India and Indian Airlines for local engine MRO facilities. GE had early committed $20 million investment in an engine shop as part of a $8.1 billion deal by Air-India to acquire 68 airplanes from Boeing It is enhancing its overall engine production by more than 60 per cent between 2007 and 2009 due to growing demand for its large commercial engines, the GE90 and GEnx, as well as continued growth of CFM56 and CF34 engines Air India had ordered GE engines valued at more than $2.2 billion at list price to power its new Boeing 777 and 787. For Jet Airways, GE has committed initial deliveries of the CF680E engine for the Airbus A330 fleet by March 20

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RECENT RESPONSES AND REACTIONS (CONT)

:oney"ell

Current presence

Honeywell Technology Solutions Lab (HTSL) is a corporate arm of Honeywell International headquartered at Bangalore. HTSL provides support and development to Honeywell International Business worldwide and responds to customer and societal needs

HTSL has operations in Bangalore and Madurai, India, Shanghai and Beijing, China, Minneapolis and Phoenix, USA, Singapore and Brno (Czech Republic) Honeywell business presence in India is about US$ 400 million (approx Rs.2000 crores)

Future plans
For its presence in Hyderabad, Honeywell has business plan of making an investment of Rs 45 crores achieving a turnover of Rs 700 crores and employment of 5500 by 2009 Honeywell to expand its R&D centre in Bangalore by doubling its headcount Tata Honeywell Ltd (THL) is a joint venture between Tata Industries and Honeywell Inc, USA. Tata Consultancy Services (TCS) has announced a strategic agreement with THL

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RECENT RESPONSES AND REACTIONS (CONT)

:oney"ell

TCS, under an outsourcing agreement, will manage THL's entire IT infrastructure operations, spread across India, with its hub at Pune, and nine regional offices Air Deccan selects Honeywell Avionic suite for supply of air safety equipments for A320 Aircraft Honeywell Turbo Technologies is setting up a new plant in Pune to manufacture state-ofthe art turbochargers for automobiles

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RECENT RESPONSES AND REACTIONS (CONT)

7olls 7oyce

Likely to consider outsourcing IT work to India Has a 50 year strong and evolving partnership with HAL Looking for partnerships with Indian varsities, under its university technology centre programme for research and technology; invests $1 billion annually on research and technology, focusing on areas of innovation Doing business in India for over 60 years with more than 1000 aero engines in service with the military and civil operators. On the industrial side - has more than 100 gas turbines engaged in off-shore oil and gas pumping ; more than 140 diesel engines powering the marine crude oil pipelines in India

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AEROSPACE INDUSTRIES ASSOCIATION

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AEROSPACE INDUSTRIES ASSOCIATION

Aerospace Industries Association (AIA) represents the nation's leading

Regular Members Accenture Boeing Company GE Goodrich Corp Honeywell Lockheed Martin Northrop Grumman Rolls Royce NA Inc Smiths Aerospace Pratt & Whitney

Manufacturers and suppliers of civil, military, and business aircraft Helicopters Unmanned aerial vehicles Space systems aircraft engines Missiles Materiel, and related components Equipment Services; and Information technology

Founded in 1919 and now has 105 regular member and 182 associate member companies (January 8, 2007) AIA brings together the experience and expertise of its Regular Member and Associate Member companies' CEOs and senior executives
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OPPORTUNITIES IN DEFENSE SECTOR

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OPPORTUNITIES IN THE DEFENSE SECTOR

A comprehensive policy for all capital acquisitions for the Armed forces

Coverage
Capital acquisitions under three categories:
Buy decision which includes Buy (global) and Buy (India) Buy and Make decision with transfer of technology (TOT) Make decision

Defense offsets provisionsapplicable on

Proposals where the indicative cost in the RFP is INR 300 crores or more for:
Capital acquisitions under Buy decision Capital acquisitions under Buy and Make decision with TOT

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OPPORTUNITIES IN THE DEFENSE SECTOR (CONT)

Offsets at a Glance

Applicability of Offsets: Proposals above INR 300 crores or more % of Offset obligation : To the tune of 30 % of defense deals Integrity Pact : in deals worth over INR 1 billion

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OPPORTUNITIES IN THE DEFENSE SECTOR (CONT)

Procedure +or o++sets Eligible offset providers

Public sector undertakings and private companies in the defense sector (subject to their obtaining of
industrial licence) Facilitation agency

Defense Offset Facilitation Agency (DOFA) under the department of defense production For facilitation and implementation of the policy & assisting potential vendors in interfacing with Indian
defense industry Authority for grant of approvals

Full discretion to main vendors / OEMs to select Indian offset partner Indian offset provider to be eligible offset provider only

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OPPORTUNITIES IN THE DEFENSE SECTOR (CONT)

Procedure +or o++sets Selection of offset provider

Eligible companies to approach the vendor directly Parties to negotiate the commercial deal Vendor to submit the technical and commercial offset offers RFP to MoD Committees formed under MoD to scrutinize and accept the main and offset offer Offset obligation to be coterminous with the main contract of procurement
Discharge of obligations

Direct purchase of, or executing export orders for, defense products and components manufactured by,
or services provided by, Indian defense industries

Direct foreign investment in Indian defense industries Direct foreign investment in Indian organizations engaged in defense research and development

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INDIAS NEW DEFENCE PROCUREMENT POLICY

Constraints in private sector participation
Indian private sector participation up to 100% with FDI permissible up to 26% - subject to licensing Condition of Management and control to remain in Indian hands with majority representation in the board. The Chief Executive to be a resident Indian Transfer of equity by foreign investor subject to lock-in period of three-years and prior approval of Government Payment of fee and royalty to foreign technology provider is permitted including that by a wholly owned subsidiary to its off-shore parent company

Constraints exist despite there being a plethora of opportunities

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OFFSETS IN CIVIL SECTOR

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OPPORTUNITIES IN THE CIVIL SECTOR

Procedure +or o++sets Eligible offset providers

All Indian companies Indian companies with 100 % foreign equity participation

Authority for grant of approval

Ministry of Commerce to grant approvals for participation in the offset framework All offset applications to first receive the nod of the State Trading Corporation of India Limited
(STC) before it is considered by the Ministry of Commerce

Discretion with vendors

Selection of offset providers subject to approval of STC Vendors to select Indian offset partner and refer to STC for approval

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OPPORTUNITIES IN THE CIVIL SECTOR (CONT)

Procedure +or o++sets Discharge of obligations

Direct Offsets - to mean contracts for goods or services which are directly utilized in the manufacture of
an aircraft

Indirect offsets to mean contracts, which may result in indirect benefits to aviation sector, for instance
modernization of airports/seaports, construction of roads/bridges etc

BPO not covered for offsets

Selection of offset provider

Indian companies to approach the vendor and make a presentation before the STC with a description of
its service offerings

Vendor to approach STC for receiving their nod to the proposal STC to refer the case to Ministry of Commerce for grant of approval

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OPPORTUNITIES IN THE CIVIL SECTOR (CONT)

Certain facts
Recent deals: Air India with Airbus and Boeing

% of Offset obligation : 30% in Airbus deal; 40% in Boeing deal

Airbus and Boeing on look out for its offset partners

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WAY FORWARD

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WHAT SERVICES CAN BE OFFERED?

Aero engineering services
Safety Critical software development Embedded system design & development System Integration DSP, VHDL, FPGA Programming D0178B V&V Test & Simulation Certification Support Diagnostics, Prognostics Mechanical Analysis Mechanical Design
* Unclear if it could be used for offsets

IT and ITES*
SAP Implementation Engineering Tools Network Infrastructure Management PLM/PDM BPO Order Management etc

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POSSIBLE APPROACHES
Strategic alliance; go to market as prime contractor Merger & acquisition Provide service to prime contractors
Intended life span

New business

Equity investments Joint ventures

Co-operative ventures

Consortiums
One time

Low

Required investment & integration

High

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Tax and Regulatory INTRODUCTION TO EPC CONTRACTS

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INTRODUCTION TO EPC CONTRACTS

Challenge Us

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Tax and Regulatory INTRODUCTION TO EPC CONTRACTS

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INTRODUCTION TO EPC CONTRACTS

Challenge Us

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