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T a x a n d R e g u l a t o r y
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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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INTRODUCTION TO EPC CONTRACTS
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
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INTRODUCTION TO EPC CONTRACTS
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
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INTRODUCTION TO EPC CONTRACTS
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
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INTRODUCTION TO EPC CONTRACTS
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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INTRODUCTION TO EPC CONTRACTS
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&%/)
Source: Ministry of Finance, BMR Research
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)
Source: Ministry of Finance, BMR Research
In+lation %/)
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INTRODUCTION TO EPC CONTRACTS
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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INDIA INFRASTRUCTURE INVESTMENTS MOVEMENT AT LAST
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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INDIA INFRASTRUCTURE INVESTMENTS MOVEMENT AT LAST
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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INDIA INFRASTRUCTURE INVESTMENTS MOVEMENT AT LAST
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$06
FDI inflows in Telecom
1 1 8
2 3 8 3
1 3 0 . 7
2 5 1 4
2 0 1
2 7 1 5
Y e a r W i s e F D I F l o w s ( U S D
M n )
C u m i l a t i v e F D I f o r T e l e c o m
( U S D M n )
2 0 0 3 - 0 4 2 0 0 4 - 0 5 2 0 0 5 - 0 6 *
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INTRODUCTION TO EPC CONTRACTS
FUTURE OUTLOOK
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BRIC 2050 A DRAMATICALLY DIFFERENT WORLD
44.5
35.1
27.8
6.7
6.1
5.9
3.8
3.1
2.1
China
US
India
Japan
Brazil
Russ
ia
UK
Franc
I!al"
1he ;argest Economies in 2050
2DP ;%8
Source: Goldman Sachs Gloal Economics Pa!er ""
:ertaing the -6@
When BRICs US$ 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
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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
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#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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INTRODUCTION TO EPC CONTRACTS
AEROSPACE OFFSHORE OPPORTUNITY
January, 2007 | New Delhi
BMR & Associates
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INTRODUCTION TO EPC CONTRACTS
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
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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, 8.1percent 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
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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
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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
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MEDIA REPORTS
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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)
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PASSENGERAND CARGO
TRENDS
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PASSENGER TRAFFIC TRENDS
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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
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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
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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
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DEFENSE AND SPACE
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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)
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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
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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
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?ockheed martin
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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
RECENT RESPONSES AND REACTIONS (CONT)
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RECENT RESPONSES AND REACTIONS (CONT)
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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
RECENT RESPONSES AND REACTIONS (CONT)
| 68
19ECB-
RECENT RESPONSES AND REACTIONS (CONT)
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RECENT RESPONSES AND REACTIONS (CONT)
| 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
RECENT RESPONSES AND REACTIONS (CONT)
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RECENT RESPONSES AND REACTIONS (CONT)
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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
RECENT RESPONSES AND REACTIONS (CONT)
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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 $2.2 billion at list price to power its
new Boeing 777 and 787. For Jet Airways, GE has committed initial deliveries of the CF6-80E engine for the Airbus A330 fleet by March 20
RECENT RESPONSES AND REACTIONS (CONT)
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2E
RECENT RESPONSES AND REACTIONS (CONT)
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Current presence
Honeywell Technology Solutions Lab (HTSL) is a corporate arm of Honeywell Internationalheadquartered at Bangalore.
HTSL provides support and development to Honeywell International Business worldwideand responds to customer and societal needs
HTSL has operations in Bangalore and Madurai, India, Shanghai and Beijing, China,Minneapolis and Phoenix, USA, Singapore and Brno (Czech Republic)
Honeywell business presence in India is about US$ 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
RECENT RESPONSES AND REACTIONS (CONT)
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:oney"ell
RECENT RESPONSES AND REACTIONS (CONT)
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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
RECENT RESPONSES AND REACTIONS (CONT)
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:oney"ell
RECENT RESPONSES AND REACTIONS (CONT)
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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
RECENT RESPONSES AND REACTIONS (CONT)
| 74
7olls 7oyce
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AEROSPACEINDUSTRIES
ASSOCIATION
AEROSPACE INDUSTRIES ASSOCIATION
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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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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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OPPORTUNITIES IN THE DEFENSE SECTOR (CONT)
| 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
OPPORTUNITIES IN THE DEFENSE SECTOR (CONT)
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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
OPPORTUNITIES IN THE DEFENSE SECTOR (CONT)
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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
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
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
OPPORTUNITIES IN THE CIVIL SECTOR (CONT)
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Procedure +or o++sets
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
OPPORTUNITIES IN THE CIVIL SECTOR (CONT)
OPPORTUNITIES IN THE CIVIL SECTOR (CONT)
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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
OPPORTUNITIES IN THE CIVIL SECTOR (CONT)
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WAY FORWARD
WHAT SERVICES CAN BE OFFERED?
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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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