EPC & Economic Outlook

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All rights reserved | 1INTRODUCTION TO EPC CONTRACTS

T a x a n d R e g u l a t o r y


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All rights reserved | 2

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INTRODUCTION TO EPC CONTRACTS

Sujit Ghosh

Executive Director, BMR & Associates

Introduction to EPC contracts

Conference on

EPC contracts Tax, Legal and Commercial Imperatives

8 - 9 June 2006 | Hotel Intercontinental The Grand | Sahar Airport Road |Mumbai | India


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Engineering

Preparation of designs,plans, & technicalspecifications ofequipments

Preparation of performancestandards maintenance andtraining manuals

Designing and planninglayout

Documenting deliveryschedules of equipments,instructions for erection, etc

Procurement

Provision of equipments

Procurement from thirdparties

Clearing of goods at ports Delivery to the site Provision of spare parts

Construction

Erection, commissioning,testing and completion ofthe facility

Correction of defects

EPC

Engineering, Procurement and Construction (EPC) Contracts are in the nature ofturn-key projects , having a combined scope of work involving services and

supplies

Broadly, an EPC contract encompass the following key activities


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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


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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 documentLump sum price with / without split of various revenue streams

Split Price

During the course of the next one and half day, someof the critical aspects of EPC contract would bediscussed in detail


7/93All rights reserved | 7



Sujit Ghosh

Executive Director, BMR & Associates

Economic growth an opportunity for EPCcontractors

Conference onEPC contracts Tax, Legal and Commercial Imperatives

8 - 9 June 2006 | Hotel Intercontinental The Grand | Sahar AirportRoad | Mumbai | India





CONTENTS

Background How relevant is infrastructure

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





CONTENTS

Future outlook BRIC 2050

Demography

Investment opportunity Govt outlook

Tuning the budget

Modest outlook

SEZ

Can we doit

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 GDPcontinues to demonstrate growth at a robust8 percentplus levels

World-class infrastructure has emerged as one of the most importantnecessities for unleashing high and sustained growth

Poor infrastructure to support, the Indian economy continues to be a laggard

when compared to its developing peersInfrastructure and Indian economy are the flavor in any discussions today

The Big I,has the potential to push or logjamgrowth, improve or lower quality of lifeand makeIndia shining or dullon 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 partnershipis required to overcome bottlenecks

Apart from highway development and construction and modernization ofairports, 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 theIndian construction & engineering sector

extremely brightEPC contractors are already loaded with order books and we believe this isjust the beginningof the story and

India is awakening to a huge untapped opportunityand has the potential to deliver more than you and I

can imagine !!


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CURRENT ECONOMICSCENARIO


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TheBi

gPicture

1 . 3

5 . 1

5 . 9

7 . 3 7 . 3

7 . 8

4 . 8

6 . 5

6 . 1

4 . 4

5 . 8

4

8 . 5

6 . 9

8 . 4

1 9 9 1 -

9 2

1 9 9 2 -

9 3

1 9 9 3 -

9 4

1 9 9 4 -

9 5

1 9 9 5 -

9 6

1 9 9 6 -

9 7

1 9 9 7 -

9 8

1 9 9 8 -

9 9

1 9 9 9 -

0 0

2 0 0 0 -

0 1

2 0 0 1 -

0 2

2 0 0 2 -

0 3

2 0 0 3 -

0 4

2 0 0 4 -

0 5

2 0 0 5 -

0 6

INDIA GROWTHPATH

GDP Growth (%)

Liberalizationinitiated

5 . 8

3 . 8

7 . 5

1 0

8 . 48 . 5

3 . 9

5 . 1

4 . 34

4 . 3

7 . 5

8

9 . 3 9 . 5

9 . 2

7 . 5

1 . 6

2 . 7

4 . 2

3 . 53 . 3

2 0 0 1 - 0 2 2 0 0 2 - 0 3 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 )

India World China USA

Source: Economic Survey, BMR Research

India GDP Growth

(%)

India shining this is

just the beginning


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SECTORAL GROWTH

A g r i c u l t u r e ( % )

6 . 2

- 6 . 9

1 0

0 . 7

3 . 9

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

I n d u s t r y ( % )

2 . 7

7 7 . 6 7 . 48 . 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 i c e s ( % )

7 7 . 3 8 . 2

1 0 . 1 1 0

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 2 0 0 5 - 0 6

Source: GoI data, BMR Research

Industry and services - twin engines

propelling growth

Agriculture has been a windfall

20.8

26

53.2

!.!

26.

5"

Agriculture (%) Industry (%) Services (%)

2004-05

2005-06

Changing pie of GDP contribution


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SECTORAL GROWTH

A g r i c u l t u r e ( % )

6 . 2

- 6 . 9

1 0

0 . 7

3 . 9

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

I n d u s t r y ( % )

2 . 7

7 7 . 6 7 . 4 7 . 6

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 i c e s ( % )

7 7 . 3 8 . 21 0 . 1 1 0 . 3

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 2 0 0 5 - 0 6

Source: GoI data, BMR Research


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5

2.#

5.#

#88.!

2000$0 200$02 2002$03 2003$0" 200"$05 2005$

06%A&ril$

'e()

0.5

!

5.3

8

*ining *+g Electricit, -eneral

6 . 4

1 6 . 5

2 . 5

B a s i c G o o d s C a p i t a l G o o d s I n t e r m e d i a t e

G o o d s

1 1 . 7 1 4 . 1

1 1

C o n s u m e r

G o o d s

C o n s u m e r

D u r a b l e s

C o n s u m e r

N o n - D u r a b l e s

INDUSTRIAL GROWTH

Inde. o+ Industrial Production

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

Source: DIPP, BMR Research


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CORE INFRASTRUCTURE GROWTH

5 . 1 6 . 4

- 5 . 3

6 . 8

1 2 . 3

2 . 1

E l e c t r i c i t y C o a l P e t r o l e u m S t e e l C e m e n t R e f i n e r y

P r o d u c t s

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

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

!.2 !.

2

0.6

.5

#.38

".5

!.2 !.#

3.! 3.8

5."

!.2#.8

200$02 2002$03 2003$0" 200"$05 2005$06%A)

1rade otel trans&ort4 Commn. 'inancial Serices

Communit, Social 4 Personal

India accounts for .)/$of the "orld0sservice trade

1ervices account for #$of thecountry0s 2DP today

2ro"th in 1ervices sectorpegged ataround 3)*$

4ey contri5utors of gro"th 5eing6 7eal estate

elecommunications

Construction

Serice sector (rea u&%/)


S e r v i c e s ( % )

7 7 . 3 8 . 2

1 0 . 1 1 0 . 3

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 2 0 0 5 - 0 6


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FOREIGN TRADE

E!ports have gro"n 5y over %/).$over previous year

Importshave registered a gro"th of over 8.)#%$over previous year

India7s 'oreign 1rade %In US8 9illion)

Petroleumproducts registered a gro"th at /()*/$over previous year

9on'PetroleumProducts registered a gro"th of %#)#($over previous year

6 3 . 9

1 0 0 . 6

1 4 0 . 2

8 0 . 57 8

1 0 9

2 0 0 3 - 0 4 2 0 0 4 - 0 5 2 0 0 5 - 0 6 ( A p r i l - M a r )

E&orts Im&orts

2 0 . 6

4 3 . 8

9 6 . 4

- 3 9 . 6

2 9

5 7 . 6

7 7

- 2 8- 1 4 . 5

2 0 0 3 - 0 4 2 0 0 4 - 0 5 2 0 0 5 - 0 6 ( A p r i l -

M a r )

P:;


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FOREIGN DIRECT INVESTMENT

3.3

".8

3.22."

3.2

".3

2000$0 200$02 2002$03 2003$0" 200"$05 2005$06%A&ril$=an)

'>I % US8 (illion)

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

Source: DIPP, BMR Research

.25

".!2

.!! 2.06 2.08.5#

*auritius USA


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INFLATION

7 . 2

3 . 6 3 . 4

5 . 5

6 . 5

3 . 9 6

5 . 9 5 . 5

4 . 3 4 . 3

3 . 74 . 1

4 . 74 . 3 4 . 4 4 . 3 2

2 0 0 0 -

0 1

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 ( A )

Apr

il

May

June

July

Aug

Sep

t

Oct

Nov

Dec

May

W P I W P I 2 0 0 5 - 0 6

%#'(has "itnesseda slo" do"n ininflation to around /)%$

4ey contri5utors 5eing6

Deceleration in manufactured goodsprices

1lo" do"n in the primary commodity

price increase

Partial pass'through of rising oilprices

:o"ever, fuel, lu5es and petroleum"itnessed an inflation rate of around *$

Price situation 5eing closely monitoredand measures taken to control price rise5y the 2overnment

Inflation for %(' to remain #'#)#$(RBI Estimates)


In+lation %/)


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INDIA INFRASTRUCTUREINVESTMENTS MOVEMENT AT LAST


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INDIA INFRASTRUCTURE INVESTMENTS MOVEMENT AT LAST

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

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 tothe ground

Attempt to Recoup a Lost Decade

Infrastructure Investments Looking Up


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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

Roads: In the right lane

The growth in capacity addition of 4.7% for2005-06 (April-Dec)

Targeted capacity addition of 41,110MW,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 garneradditional capacity because of unavailabilityof gas / LNG / coal

Power: Going slow but moving25417

7446

13784"3!3

5380 "#!"

1 3 0 0 5 9 02 0 3 0

1 0 t h p l a n t a r g e t C o m m i s i o n e d U n d e r e x e c u t i o n

1hermal ,dro


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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

Telecom: Private initiatives pick up

1elecom groth %*illion)

3 8 . 4 4 1 . 6 4 2 . 9

4 6 . 2 5 0 . 2

4 1 . 3

6.5 3.0

52.2

!0.

2.2

33.#

0 . 0 2

1 . 9

6

1 1 . 51 2 . 8

1 3 . 9 6

2 2 . 5

2 0 0 2 - 0 2 2 0 0 2 - 0 3 2 0 0 3 - 0 4 2 0 0 4 - 0 5 2 0 0 5 - 0 6 2 0 0 6 - 0 7 *

1 9 4 8 1 9 9 8 2 0 0 3 2 0 0 5 2 0 0 6 2 0 0 6 * 2 0 0 7

F i x e d W L L / M o b i l e T e l e - D e n s i t y


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6 6 % 6 4 %

3 4 % 3 6 %

39.7

44.6

2004-05 2005-06

G o v t C o . P v t . C o T o t a l ( U S D B n )

1 5 . 9

1 9 . 3

2 0 0 4 - 0 5 2 0 0 5 - 0 6

T o t a l T e l e c o m R e v e n u e ( U S D B n )

Source: TRAI, BMR Research

Capital Investments of Telecom ServicesFinancial snapshot

2.52/

5!/

"/

2.#/

52/

"8/

S h a r e i n G D P C o n t r i b u t i o n b y G o v t

C o .

C o n t r i b u t i o n b y P v t

C o .

200"$05 2005$06

FDI inflows in Telecom

1 1 8

2 3 8 3

1 3 0 . 7

2 5 1 4

2 0 1

2 7 1 5

Y e a r W i s e F D I F l o w s ( U S D

M n )

C u m i l a t i v e F D I f o r T e l e c o m

( U S D M n )

2 0 0 3 - 0 4 2 0 0 4 - 0 5 2 0 0 5 - 0 6 *


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FUTURE OUTLOOK


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BRIC 2050 A DRAMATICALLY DIFFERENT WORLD

44.5

35.1

27.8

6.7

6.1

5.9

3.8

3.1

2.1

China

US

India

Japan

Brazil

Russ

ia

UK

Franc

I!al"

1he ;argest Economies in 2050

2DP ;%8

Source: Goldman Sachs Gloal Economics Pa!er ""

:ertaing the -6@

When BRICs US$ GDP would exceed G6


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DEMOGRAPHY

+ur population ' .)* 5illion,

constituting .$ of the "orld0speople

Population gro"ing at the rate of

.)/ $ per annum

. million literates in the .#

plus age group in the "orld 8/)($ of this in India

?iteracy rate in %. "as (#)/$

/$ of the populationconstitutes the "ork force

%)8$ of "ork force is currentlyunemployed

*edian Age %in ears)

8&

8,

%/

83 /%

83/#

8&

/##&

China


30/93


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

INVESTMENT OPPORTUNITY THE GOVERNMENT VISION

Infrastructure is our biggest problem and also biggest

opportunity.In the next 10 years we must spend US$ 150 billiontomodernize and expand Indias infrastructure

Even at the ADB meet, the Prime Minister reaffirmed that India'sinfrastructure needs in the next few years would be to the tune ofover $150 billion

Manufacturing sectors is central to Indias strategies to attain double-digit GDP growth in thenear term.

The government will create the pre-requisites for the manufacturing sector to attain atleast 12 per cent annual growth.

Manufacturingthe driver to double digit growth

Economic Survey 2005-06

Honble PMDr Manmohan Singh


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INVESTMENT OPPORTUNITY TUNING THE BUDGET

Budget 2006

bounded by NCMPFinance MinisterLaid foundation for the countryto achieve 10% growth in thenext 2 3 years

Creation of physical infrastructure Roads, ports, airports

Power plants Building social infrastructure

Education, healthcare, watersupply,

Budget 2006Infrastructurethe flavor in any discussion

Emphasis of budget on growth

reflected through allocationsBharat Nirman (Infrastructure) US$ 4.16 Bn

NREG (Employment) US$ 3.16 bn

SSA (Education) US$ 2.23 Bn

NRHM (Health) US$ 1.82 Bn

MDMS (Meals) US$ 1.07 Bn

RGDWM (Water) US$ 1.02 Bn

ICDS (Child Development) US$ 0.91 Bn

TSC (Sanitation) US$ 160 Mn

Growth momentum sustainedby

higher infrastructure spending

India also benefiting from globaleconomic upswing


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REL Dadri projects

5 Ultra mega power projects

Several IPPs

PSU projects

World class domesticgas discoveries

LNG import terminals

Transnational pipeline

Refinery Hub

NationalhighwaysGoldenQuadrilateralEast-West,North-Southcorridor

Rehabilitationof Roads

Modernization

Greenfieldports

Private

captiveports

Modernization

GreenfieldIntlairports

Greenfielddomestic

INVESTMENT OPPORTUNITY MODEST OUTLOOK

3 9 . 5

1 5 . 1

9 . 2

2 5 . 7

2 1 . 6

5 . 9 4 . 2 2 . 5

4 1 . 8

9 . 1

P o w e r G a s W a t e r R a i l w a y s R o a d s P o r t s A i r p o r t s S t o r a g e C o m m u . O t h e r s

Projected Infrastructure Spend 2005 2010US$ Billion

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


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Moradabad

Bornada,Jodhpur

Khopata,Maha Mumbai

Positra, Gujarat

Navi Mumbai

Kanpur

Greater Noida

Visakhapatanam,Andhra Pradesh

Paradeep

Vallarpadam,Kerala

Kulpi,WestBengal

Dahej, Gujarat

Nanguneri,Tamil Nadu

Ennor SEZ,Tamil Nadu

Mundra,Gujarat

Chennai

RanchiKolkata

Adityapur, WB

Nagpur

Baikampady

SEZ, Karnataka

Gopalpur,Orissa

Hassan,Karnataka

Bhadohi,UP

INVESTMENT OPPORTUNITY SEZ

-5out ( 1EAs setupand at

various stages ofdevelopment

./ already in operation

(. at various stages ofesta5lishment

Bore than .# ne"applicationsfor setting up1EAs in the pipeline

+ver I97 . 5illion ;appro!to 5e invested

in India through the 1EA route ?arge scale foreign

investment5eing attractedupon the passing of thislegislation

SEZ MAP of India (Not to Scale)

Jamnagar


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INVESTMENT OPPORTUNITY CAN WE DO IT

Projected Infrastructure Spend 2005 2010US$ Billion

7 1 1 7 6 8

8 2 9 8 9 6

9 6 7

3 6 4 6 5 8 7 2 8 7

2 0 0 5 - 0 6 2 0 0 6 - 0 7 2 0 0 7 - 0 8 2 0 0 8 - 0 9 2 0 0 9 - 1 0

5 % 6 % 7 % 8 % 9 %G D P G C F I GCFI cumulatively

amounts to USD298 Bn for 2005-10

PM 150 USD BnGOI 174 USD Bn

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 gradualincrease in GCFI as a % of GDP

Source: BMR Research

GDP at constantgrowth

Infrastructure atgradual pace


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CONCERNS &

IMPEDIMENTS


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CONCERNS & IMPEDIMENTS

Growth Disparities among the States

Lack of consistency in decisions

Bureaucracy

Several projectsbehindschedule

Severely

impactseconomicgrowth

Cost overrunsforcompanies

Coalition

Glacial pace of litigation

Slow project delivery

Structural impediments


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GROWTH DISPARITIES IN STATES

Orissa, Bihar,Assam

Arunachal Pradesh,

Haryana, Punjab,UP

2-4%

4-5%

5-6% Nagaland, Rajasthan,MP, J&K, AP

6-7% Delhi, Maharashtra, Sikkim,

Karnataka, TN, WB, HP,

Kerala

>7% Gujarat, Goa, Tripura

Annual -roth Bates States


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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

Bureaucracy 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

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

High input costs Inadequate supply of electricity, water etc

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

Regulatory reforms Reducing entry regulations Reducing multi-level clearances

Infrastructure reforms Expanding infrastructure

Governance reforms

Fiscal reforms driving towards making India globallycompetitive

Implementing GST Targeting subsidy to the needy and the poor

Improving exit options


42/93


#Given the future window ofopportunity, India certainly is

bound to become thecapitalof growthand you and I

may witness this story

THE ROAD AHEAD


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All rights reserved | 43INTRODUCTION TO EPC CONTRACTST a x a n d R e g u l a t o r y


44/93




AEROSPACE OFFSHORE OPPORTUNITY

January, 2007 | New Delhi

BMR & Associates


45/93




CONTENTS

Background Aviation

Civil aviation Aviation Defence

Media reports

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


46/93



INTRODUCTION TO EPC CONTRACTS | 46

BACKGROUND


47/93


AVIATION

Boom in aviation

India has embarked on an ambitious growth trajectory. Indias GDP grew at 7.5 percent, 8.1percent and 8.4 percent in 2004, 2005 and 2006 respectively. Reportedly, Indias GDP grewat 9.5 percent in the second half of fiscal 2007. Increased economic activity is beingwitnessed in across every sector

The civil aviation sector too has been witnessing a boom as the domestic passengercarriage, cargo movement and international air traffic have shown exponential growth. Thisgrowth 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 civilaviation sector has seen increased competition resulting in significant growth. Thecompetitive tendencies have, in turn, resulted in adoption of aggressive, innovative pricingstrategy 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 bilateralagreements

The year 2006 has been especially remarkable for the growth witnessed in passengertraffic. 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 scheduleddomestic air services are now available to / from 75 airports as against nearly 50 in the year2000


48/93


CIVIL AVIATION (CONT)

Civil Aviation forms a very important infrastructure in boosting trade and commerce as wellas in enhancing overall international competitiveness. In value terms nearly 30% of India'sforeign trade is handled by the airports

Indian economy is opening up its windows for participation of foreign companies in the civilaviation sector. Recently, Air India, Indias international fleet entity has entered into largestpurchase deal with Airbus / Boeing

Comprises of purchase of 68 aircrafts

Net project cost of approx Rs 34,615 crore (USD 8 billion)Further investment opportunities emerging out of this sector are primarily in terms of:

Construction, upgradation and operation of new and existing airports including cargo relatedinfrastructure.

Outsourcing of some of the operation and maintenance functions such as cargo handlingservices and commercial development

Consulting opportunities for airport design and architecture, traffic studies and projectsupervision

Setting up of non-aeronautical activities like shopping complex, golf course, entertainmentpark and aero-sports near the airport


49/93


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

AVIATION DEFENCE

| 49AEROSPACE OFFSET OPPORTUNITY


50/93


MEDIA REPORTS

| 50

Passenger nos to grow fromcurrent 16 mn to 50 mn by2008. Passenger load inDelhi & Mumbai to go up to43 mn and 52 mn by 2024.

Budget carrier Air Deccanhas signed a $150 millionagreement with Lufthansa

Technik for repair andoverhaul of its Airbus fleetof aircraft

Cochin International Airport(CIAL) to set up aninternational MRO facilityand an aviation training

academy

Air Sahara to place firmorders for 10 Boeing 737-800 aircraft worth around$700 mn with US aircraftmajor Boeing

Additional $40 bn

opportunity for the Indian ITindustry by 2020 fromoffshoring of engineeringservices alone

At International AerospaceExhibition held in Germany,India is not only beinglooked as a 'Key Market' byAerospace OEMs but alsoas a "Key Destination.

Starting from July 2005 anduntil 2021, Airbus to deliveran aircraft a month to India

Airbus to invest about $1billion in various projects inIndia over the next tenyears

Boeing projects $72 bnmarket in India in the next20 years; could bring inoffsets worth $21.6 bn. CASto invest up to $100 mn inMRO facility for Boeing

airplanes

During 2004-05, totalpassenger traffic grew at21.7% while the cargo trafficgrew by 19.9%

Go Air has signed an

agreement with AirbusIndustries to acquire 10 A-320 aircraft with an option ofpurchasing 10 more

Kingfisher Airlines has

signed contracts to acquire10 A-320 aircraft on firmorder with options to buyanother 20 until 2008 at acost of up to $1.8 bn or Rs8,100 crore


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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

COMMERCIAL AVIATION (CONT)

| 51


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PASSENGERAND CARGO

TRENDS


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PASSENGER TRAFFIC TRENDS

| 53

1 7

3 2

4 9

1 9

4 0

5 9

2 3

5 1

7 4

0

2 0

4 0

6 0

8 0

I n t e r n a t i o n a l D o m e s t i c T o t a l

2 0 0 3 - 0 4 2 0 0 4 - 0 5 2 0 0 5 - 0 6

Source : Ministry of Civil Aviation

In million

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


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AIR CARGO TRENDS

| 54

Source : Ministry of Civil Aviation

6 9 3

3 7 5

1 0 6 9

8 2 4

4 5 7

1 2 8 0

9 0 3

4 7 9

1 3 8 2

0

4 0 0

8 0 0

1 2 0 0

1 6 0 0

I n t e r n a t i o n a l D o m e s t i c T o t a l

2 0 0 3 - 0 4 2 0 0 4 - 0 5 2 0 0 5 - 0 6In ooo tonnes

2010 projection : 3360 thousand tonnes


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INDIANDEFENCE

SECTOR


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DEFENSE AND SPACE

| 56

India's Defense Budget rose 7%, to$20.11 bn - among the biggestdefense budgets in Asia-Pacific. Thirdlargest spender in the world next onlyto the US and China. GDP. The officialdefense expenditure of Rs 83,000crores is just over 3% of GDP

Total imports exceed anestimated $15 bn per year andexpected to grow to $50 bn by2015. Imports also grew by

42.8% to USD 15.8 bn in Nov2006 from USD 11 bn a yearago. A comparison with theprovisional earnings (USD 9.9bn) shows a sharp 60 % rise inimports in Nov 2006

HAL has been outsourcing smaller

components for its various projects.As per industry estimates theoutsourcing exercise expected toreach US$ 1 billion in next four or fiveyears from a level of approximately$150 m currently

3A; (eing one

o+ the (iggest

and renoned

>PSU
http://adfarm.mediaplex.com/ad/ck/4686-26456-11060-4?id=DVDPlayers


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DEFENSE AND SPACE

| 57

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

In the aero engines domain,solution providers includeQuEST, Infotech Enterprises,TCS, Snecma Aerospace India,while avionics has the likes ofHCL Technologies, SilverSoftware, AK Aerotek, AccordSoftware, CG Smith, Tata Power,Spectrum Infotech, BAe-HAL,Honeywell and L&T IT

India's Army will receive $9.26 bn,Air Force will receive $5.65 bn &

Navy will receive $3.39 bn. Anincrease of 7.2 %, allocating awhopping Rs 89,000 crore for thefiscal year 2006-07. Of this, Rs37,458 crore or 42 % of the totaloutlay has been earmarked fornew arms purchases. TheDefense Research &

Development Organization(DRDO) is expected to receive$1.81 bn


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DEFENSE AND SPACE (CONT)

QuEST InfotechEnterprises

TCS

SnecmaAerospace

India

HCL

TechnologiesSilver Software

Honeywell L&T IT

Taneja

AerospaceInfosys Genser

aerospace

HCLTechnologies Tata Power

Nest

Avionics

QuEST

L&T IT

Aero Engine>omain

Aionics

AeroStructure

-roundsu&&ort

eui&ment(usiness


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DEFENSE AND SPACE (CONT)

| 59

Upcoming acquisitions

Medium MultiRole Combat Aircraft (MRCA) medium combat aircraft fighter deal, for 125-200 aircraftand $10-15 billion (Majority of those jets will be built by state-owned HAL following the transfer oftechnology)

Indian Air Force (IAF) aims to acquire 126 "medium" multi-role fighters from 2008 onwards, to bolsterthe 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

| 60

0 . 6

31 . 2 8

2 . 7

0

2

4

6

2 0 1 0 2 0 2 0

C o m m e r c i a l A e r o M a r k e t D e f e n s eIn USD Billion

Aerospace designand engg services

market at aninflection point in

India


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BENEFITS TO AEROSPACE PLAYERS

| 61

Mechanism for fulfilling offset obligations

Participate in others offset opportunities on risk sharingbasis

Outsourcing opportunities available in plenty

Clear benefitsentail with

current

strategicinitiatives

Avenue to bring core aerospace competency

Getting the local manufacturing capability (without toomuch of capital investment)

Synergies with Aero Initiatives like BIC, OEM SystemIntegration Services (win broader content on new

platforms) & HTSI systems integration initiative

Develop shared infrastructure business models


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DEVELOPMENTIN THE

AEROSPACESEGMENT


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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 companiesincluding the Tata group, Infosys, Wipro and Maini

Held a conference of its 25 global vendors to talk about the LM supply chain to about 50Indian companies picked from the defense ministry's list of `champions of industry' to bepotential contractors in the MRCA offset

Prospective supplier of Integrated Platform Management System (IPMS) for Indian Navysship building program, which includes one aircraft carrier and over 30 ships for variousapplications

Partnered with

Larsen & Toubro (India)

India has sought information on buying what would be its first US military aircraft, sixLockheed Martin C-130J Super Hercules cargo planes, US Air Force officials and others

DEVELOPMENT IN THE AEROSPACE SEGMENT

| 63

?ockheed martin
http://www.lockheedmartin.com/wms


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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 theaerospace and defence sectors in India

Over next 15 years, the volume of investment and high-tech activities generated includingthe Airbus Engineering Centre will reach approx. INR 11,000 crores ( 2 billion)

Signing of Authorized Sales Representative contract between EADS Socata and IndUSAviation been announced - IndUS Aviation Inc. is an American-Indian Aircraftmanufacturing company with headquarters both in Dallas, Texas and in Bangalore, India.

RECENT RESPONSES AND REACTIONS (CONT)

| 65

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

E-D1 -ir5us


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Current presence

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

Future plans

To outsource over $100 million worth of components and design work to Indian vendorsover the next five years with L&T, HAL, Infotech Enterprises Ltd (IEL) and Tata AdvancedMaterials Ltd (TAML)

With HAL to manufacture engine components, and to set up a Rs 100 crore plant for this atKoraput 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


| 66


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| 67

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

oeing

C S O S S C O S CO


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Exisiting tie-up

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

Future plans

France's Snecma plans a (50:50) joint venture with HAL to make engine parts, with aninitial 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


| 68

19ECB-



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| 69

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

Smiths has set up a dedicated Offshore Engineering Centre (OEC) in QuEST Bangalore

1miths aerospace

ell :elicopter

http://www.bellhelicopter.textron.com/index.cfm


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| 70

Involved in HAL in its E-2C Hawkeye program (sourcing aircraft assemblies andcomponents, digitization)

Signed an agreement with HAL to identify projects of mutual benefit by way of sourcingaircraft assemblies and components, digitization and other related service

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 expandthis new fleet to 25 aircrafts

Opened the emergency escape slide manufacturing facility in India; ties up with Satyam &TCS for IT support

9orthrop 2rumman

2oodrich Corp



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Provides employment to over 18,000 direct and 7,000 additional employees throughsourcing activities with leading software suppliers

ADA awarded an engineering development contract valued at $105 million to GE AircraftEngines (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 and2009 due to growing demand for its large commercial engines, the GE90 and GEnx, as wellas 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 CF6-80E engine for the Airbus A330 fleet by March 20


| 71

2E



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Current presence

Honeywell Technology Solutions Lab (HTSL) is a corporate arm of Honeywell Internationalheadquartered at Bangalore.

HTSL provides support and development to Honeywell International Business worldwideand 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.2000crores)

Future plans

For its presence in Hyderabad, Honeywell has business plan of making an investment ofRs 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


| 72

:oney"ell

http://www.honeywell.com/


73/93


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-of-the art turbochargers for automobiles


| 73

:oney"ell

http://www.honeywell.com/


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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 centreprogramme for research and technology; invests $1 billion annually on research andtechnology, focusing on areas of innovation

Doing business in India for over 60 years with more than 1000 aero engines in service withthe military and civil operators. On the industrial side - has more than 100 gas turbinesengaged in off-shore oil and gas pumping ; more than 140 diesel engines powering themarine crude oil pipelines in India


| 74

7olls 7oyce


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AEROSPACEINDUSTRIES

ASSOCIATION

AEROSPACE INDUSTRIES ASSOCIATION


76/93


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

Manufacturers and suppliers of civil, military, and businessaircraft

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 associatemember companies(January 8, 2007)

AIA brings together the experience and expertise of its RegularMember and Associate Member companies' CEOs and seniorexecutives

AEROSPACE INDUSTRIES ASSOCIATION

| 76

Regular Members

Accenture

Boeing Company

GE

Goodrich Corp

Honeywell

Lockheed Martin

NorthropGrumman

Rolls Royce NAInc

Smiths Aerospace

Pratt & Whitney


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OPPORTUNITIESIN DEFENSE

SECTOR

OPPORTUNITIES IN THE DEFENSE SECTOR


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All rights reserved | 78INTRODUCTION TO EPC CONTRACTS | 78

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

A comprehensive policy for all capital acquisitionsfor the Armed forces

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

OPPORTUNITIES IN THE DEFENSE SECTOR

Defense offsets provisionsapplicable on

OPPORTUNITIES IN THE DEFENSE SECTOR (CONT)


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| 79

Applicability of Offsets: Proposals above INR 300 crores or more

Integrity Pact : in deals worth over INR 1 billion

% of Offset obligation : To the tune of 30 % of defense deals

Offsets at a Glance



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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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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

INDIAS NEW DEFENCE PROCUREMENT POLICY


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Indian private sector participation up to 100% with FDI permissible up to 26% - subject tolicensing

Condition of Management and control to remain in Indian hands with majorityrepresentation 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 priorapproval of Government

Payment of fee and royalty to foreign technology provider is permitted including that by awholly owned subsidiary to its off-shore parent company

INDIA S NEW DEFENCE PROCUREMENT POLICY

| 82

Constraints in private sector participation

Constraints exist despite there being a plethora of opportunities


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OFFSETS INCIVIL SECTOR

OPPORTUNITIES IN THE CIVIL SECTOR


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OPPORTUNITIES IN THE CIVIL SECTOR


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

OPPORTUNITIES IN THE CIVIL SECTOR (CONT)


85/93



Selection of offset provider

Indian companies to approach the vendor and make a presentation before the STC with a description ofits 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

Discharge of obligations

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

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

BPO not covered for offsets




86/93


Recent deals: Air India with Airbus and Boeing

Airbus and Boeing on look out for its offset partners

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

Certain facts



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WAY FORWARD

WHAT SERVICES CAN BE OFFERED?


88/93


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

WHAT SERVICES CAN BE OFFERED?

| 88

Aero engineering services

SAP Implementation

Engineering Tools

Network Infrastructure Management

PLM/PDM

BPO

Order Management etc

* Unclear if it could be used for offsets

IT and ITES*

POSSIBLE APPROACHES


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POSSIBLE APPROACHES

| 89AEROSPACE OFFSET OPPORTUNITY

Required investment & integration HighLow

One time

Newbusiness

Intendedlife span

Consortiums

Co-operativeventures

Jointventures

Equityinvestments

Merger &acquisition

Provide service toprime contractors

Strategic alliance; go tomarket as prime contractor


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EPC & Economic Outlook

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