Infrastructure in India - Ports, Roads and Telecom

8/3/2019 Infrastructure in India - Ports, Roads and Telecom

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2009 Evalueserve, Ltd. All Rights Reserved.

January 10

Infrastructure in India Ports, Roads and

Telecom


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Infrastructure in India Ports, Roads and Telecom

2010 Evalueserve, Ltd. All Rights Reserved. 2

Content

1 Ports Sector Overview ..................................................... 31.1 Port Sector in India .................................................................... 31.2 Current Indian Scenario............................................................. 31.3 Government Policy .................................................................... 51.4 Key Players ............................................................................... 71.5 Investment Focus ...................................................................... 81.6 Future Prospects ....................................................................... 8

2 Roads Sector Overview .................................................... 92.1 Road Sector in India .................................................................. 92.2 Current Scenario in India ......................................................... 102.3 Government Policies ............................................................... 112.4 Key Players ............................................................................. 132.5 Investment Focus .................................................................... 142.6 Future Prospects ..................................................................... 14

3 Telecom Sector Overview .............................................. 153.1 Telecom Sector in India ........................................................... 153.2 Current Indian Scenario........................................................... 153.3 Government Policy .................................................................. 173.4 Telecom Infrastructure Companies ......................................... 183.5 Investment Focus .................................................................... 193.6 Future Prospects ..................................................................... 20

4 Sources of Data ................................................................. 215 Evalueserve Disclaimer .................................................... 21


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Infrastructure in India Ports, Roads, and Telecom


1 Ports Sector Overview

1.1 Port Sector in India

India has 12 major ports and about 200 non-major ports spread across its 7,517-km coastline, which isdivided into two: East Coast and West Coast (each coast has six major ports). Of the non-major ports, only

66 are operational, indicating thepotential of port capacity yet to betapped in the country. The table oneshows cargo handling capacities atsome of the major ports.

Under the 11th

five-year plan, thegovernment plans to invest about USD19 billion to increase the cargo handlingcapacity of Indian ports by 2012. Of this,

about USD 11.7 billion is expected to becontributed by the private sector.

Chart one depicts the projected investment in port infrastructure in India in 200712.

Chart One Projected Investment in Port Infrastructure (200712)

1.1 1.31.5 1.5 1.7

1.51.7

2.22.8

3.5

2007-08 2008-09 2009-10 2010-11 2011-12

Year

USDBillion

Public Private

Source: Various reports, News articles and Evalueserve analysis

Of the total planned investment, about USD 13.2 billion will be spent on major ports and about USD 5.9billion on non-major ports. Of major ports, about 6.7 billion will be invested by private investors. For non-major ports, about USD 5 billion will come from private investors.

Investments under the current five-year plan indicate the importance that the government has placed onprivate participation (about 61 percent by investment) in port development.

1.2 Current Indian Scenario

From the last few years, Indian ports managed about 95 percent of volume (of total trade in the country) andabout 70 percent of the value (of total trade). The major ports handle about 72 percent of the total traffic. In200809, total cargo traffic handled by Indian ports was about 738.1 million tonne. Further, according to

Table One - Major Ports in India

Name of Port Capacity (mn tonne)Kandla 77.40

Paradip 71.00

Visakhapatnam 64.00

Others 343.3

Total 555.67

Figures as on March 2009

2.63.0

3.7

4.3

5.2CAGR 19 percent


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industry estimates, total cargo traffic at Indian ports is expected to grow to about 860 million tonne by 201112.

Chart One Cargo Traffic at Indian Ports

383.8 423.6463.8 519.2

530.4 590.0

137.8 145.5186.1

203.6 207.8

270.0

2004 - 05 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2011 - 12Year

milliontonnes

Major Ports Non-major Ports

Sources: Various reports, News articles and Evalueserve analysis

Table Two Key Parameters

As on Aug 2009

Parameters 0001 0708 0809(provisional)

Average turnaroundtime (days)

4.24 2.63 2.44

Average pre-berthing time(hours)

11.04 11.4 9.95

Average output pership per berth day(tonne)

6,961 10,071 10,464

The average turnaround time has been stable fornearly two years as vessels of higher tonnage areincreasingly berthing at ports. Further, theaverage output/ship/berth/day has shown aconsistently increasing trend, indicating improved

cargo handling at the ports. However, the averagepre-berthing had increased because of capacityconstraints on handling specific commodities (foodgrains and fertilisers are on priority) in certainports.

Quick fact The turnaround time of ships in portssuch as Singapore is six to eight hours.

Traffic levels at Indian ports have been consistently indicating the need for urgent capacity expansion plansof ports. During the last five years,major ports have been operating

at a utilisation rate of over 90percent. This, coupled with trafficgrowth at CAGR of over 9percent, presents a case forcapacity expansion. Thegovernment plans to invest aboutUSD 19 billion to increase thecargo handling capacity of portsby 2012. Of this, about USD 11.7

billion is expected from private sources through PPPs in the development of berths, container terminals andwarehousing/ storage facilities.

Table Three- Capacity Expansion Plans at Indian Ports

PortsCapacity in 200809 (mn tonne)

Planned Capacity by201112 (mn tonne)

Major Ports 555.67 1,001.8

Non-majorPorts

230 NA

521.6569.1

649.9722.9

738.1860.0CAGR 9 percent

Expected

India will build 50 new ports over the next five years as it looks to overhaul creaky infrastructure andreduce congestion at ports

- APVN Sarma, Secretary, Ministry of ShippingJuly 2009


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Currently, operational issues such as land acquisition, environmental clearancesand time consuminginter-ministerial consultationsfor the approval of port projectscontinue to impact the growth of theoverall sector. As a recent example, Jawaharlal Nehru Port Trust (JNPT) struggled for about two years to getapproval from the Shipping Ministry for a project that involved deepening of its channel. The contractultimately got cancelled in 2009 when the lowest bidder sought corrections in the price to reflect the changein rupee-euro exchange rates over time.

However, the government has started introducing preliminary changes to ensure easy awarding of portprojects. For example, to expedite PPP projects, the Shipping Ministry in 2009 authorised port authorities toaward contracts without its prior approval.

Some other issues in the port sector are:

Presently, the size of draughts at all major ports ranges 912 meters, which is insufficient to handlelarger vessels, impacting accessibility and the amount of cargo carried (as well as associated turn-around time).

Indian ports have inadequate connectivity through roads and rails. This stops Indian ports frombeing perceived as integrated logistics solutions providers. Moreover, this leads to operationalinefficiency, increasing logistic cost and turn-around time.

1.3 Government Policy

The government is in the process of finalising the national maritime policy. The idea of the policy wasflagged off in 2004. It will put in place an agenda for the development of ports and the shipping sector for 20years. The draft of the policy is planned to emphasise on aspects such as

Enable cost (and time) effective movement of cargo

Improving transparency in matters related to investment in the port sector

Improving core competence of maritime personnel in the country

Interlinkages between administrative bodies for ports in India are as follows:

Non-major Ports

State Maritime Board/ Port departments of State Government(Supervises ports and determines tariff at non-major ports)

Major Port 1 Major Port 2

Board of Trusteesof Major Port 1

Board of Trustees ofMajor Port 2

Ministry of Shipping, Government of India(Formulation of policies and supervision of the

sector)

Major Port 11

Board of Trustees ofMajor Port 11

Central Level

Tariff Authority for Major Ports(Regulates Tariffs at Major Ports)

Ennore PortCor oration

State Level

There is a need for deeper draught ports and services such as bunkering, coastal shipping,connectivity and hinterland development... - Executive Vice Chairman, Pipavav Port, March 2009


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The government has taken several initiatives for the development of ports and the shipping sector includingthe following:

Budgetary Allocations The government has proposed an outlay of USD 4 billion for infrastructuredevelopment at major ports during the current five-year plan. Also, for non-major ports, thegovernment has proposed an outlay of about USD 1 billion during this same period. The remainingpublic funds under the 11

thplan are expected to come from internal and extra budgetary support.

National Maritime Development Program (NMDP) The NMDP was launched by the governmentin 2005. The programme envisages total investment of USD 22 billion (with an original timeline of 25years) aiming at the expansion of cargo handling capacities at Indian ports and enhancing overallcompetitiveness of the maritime sector. The program includes 253 ports projects scheduled to becompleted by 201112 and 111 shipping and inland water transport projects to be completed by2016.

Of the total investment planned under NMDP, about USD 12.3 billion will be spent on port projects.Of this, only 6 percent (USD 740 million) will be funded through budgetary support. While forshipping and IWT projects, about 30 percent of the planned investment (USD 2.9 billion) would befunded through budgetary support.

The chart below shows the break-up of fund sources for investments planned under NMDP:

Chart Two Sources of Funds for Investments Planned under NMDP

31%

48%

17%

4%

Private Sector Internal Accruals from Ports NHAI and Railway Budgetary Support


Table Four Status of Projects under NMDP

ProjectsTotal

PlannedCompleted In Progress Approved

UnderApprovalProcess

PreliminaryPlanning

Stage

Port Projects 253 41 64 31 25 92IWT Project 111 5 43 NA NA 63

...Six to seven projects have been cleared so far and.we are hoping to award a total of 22 projectduring the current financial year (2009-10)

APVN Sarma, Secretary, Ministry of Shipping, August 2009

* Figures as on March 2009;#IWT - Shipping and Inland Water Transport Project

In 2009, the government prepared a draft bill for bringing in all non-major ports under the purview of TariffAuthority for Major Ports (TAMP). Presently, non-major ports fix tariff on their own.


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Approval for Port-based SEZs The government has so far given formal approval to seven port-based Special Economic Zones (SEZs) or port-based multi-product SEZs. These SEZs have beenallowed preferential tax treatment. Some of the tax benefits allowed to units in such areas are dutyfree import (or domestic procurement) of capital goods, raw materials, etc; exemption of domesticsales from Special Additional Duty (SAD); exemption from income tax; etc.

Port Connectivity Projects The government has awarded projects for port connectivity on highpriority. Under this programme, it envisaged a plan for the construction of 380-km road-portconnectivity projects and 3,666 km rail-port connectivity projects. Table five shows the status of portconnectivity projects as of March 2009.

1.4 Key Players

Brief profiles of some of the key players in the port sector are as follows:

L&T Infrastructure Development Projects Limited L&T Infrastructure Development ProjectsLimited is a subsidiary of Larsen & Toubro (L&T) Limited. The company executes infrastructureprojects in ports through PPPs and SPVs. Some of the major projects of the company include thedevelopment of Dharma Port in Orissa in a joint venture with Tata Steel and the development andoperation of additional berths at Kakinada Deep Water Port. The company had revenue of aboutUSD 3 million in 200809, down by 12.3 percent y-o-y.

DP World It is the first largest port operator in the world present in more than XX countries.Currently it is engaged at Mundra, Navi Mumbai, Kochi, Chennai, Visakhapatnam and Kulpi seaports as an operator or developer (of terminals). The current investments of DP world in

India is about USD 2 billion and has a planned investment of USD 12 billion in next five years.

Gammon India Limited Gammon India Limited is a major construction contractor specialising inroad, flyover, railway and port development projects. In the port sector, the company hasconstructed berths at Vishakhapatnam Port, among other projects. It had revenue of USD 1.1 billionin 200809, up by 97 percent y-o-y. The company had net profit of USD 12.2 million in 200809,down by 21 percent y-o-y. The company plans to expand its operations to water projects.

Other port operators include APM terminals and Container Corporation of India Ltd. In the shipping business,major players include Shipping Corporation of India (SCI), Essar Shipping Ports and Logistics, and TheGreat Eastern Shipping Company. In the shipyard business, major players include Hindustan ShipyardLimited, ABG Shipyard Limitedand Bharti Shipyard Limited.

Table Five Status of Port Connectivity Projects

ProjectsLength Planned

(Km)Length

Completed (Km)

Length UnderImplementation

(Km)

Remaining(Km)

Road-port

connectivity 380 206 168 6Rail-portconnectivity

3,666 1,569 1,696 401

* Figures as on March 2009


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1.5 Investment Focus

The government has planned significant investments for the development of ports and related infrastructurein the current five-year plan. A majority of these investments are expected to go in the following areas:

Increase in Container Handling Capacity at Ports Container handling capacity expansion at

Indian ports is expected to attract significant investment in the near future. Over 19992009,container traffic at major ports grew at a CAGR of about 13.5 percent. Further, the governmentplans to increase container handling capacity at Indian ports to 20 million twenty-feet equivalentunits (TEUs) by 2020 from present 7.7 million TEUs.

Increase in Private Participation in Dry and Liquid Bulk Terminals and Greenfield PortsEarlier, a majority of private investments were restricted only to container terminal projects. Now, thegovernment has created an effective ecosystem for private investors to invest in areas such as drybulk and liquid bulk terminals, greenfield ports, dredging and multi-purpose berths. Currently, 23greenfield ports are being developed by private players with an investment of over USD 10.2 billion.

Capacity Expansion at Ports The government plans to increase cargo handling capacity atIndian ports to more than 1,000 million tonne by 201112 from present 785 million tonne (555.7

million tonne for major ports and 230 million tonne for non major ports).

1.6 Future Prospects

NMDP is divided into two phases. The first phase was planned to be completed by 2009 and the secondphase by 201314, while that of shipping is expected to be concluded by 202425. The objective of thegovernment is to transform Indian ports into world-class facilities.

According to government estimates, total traffic at major ports is projected to be about 1,600 million tonne by202526. Further, keeping in view the expected growth in traffic, the government plans to increase thecapacity of major ports to 2,100 million tonne by 202526. To achieve this, it has allowed every major port toengage national/international consultants to prepare perspective plans for the ports.

As India attempts to double its share in the global trade from the current 1.6 percent level, industry expertsbelieve that the port sector will see a shipping boom in the next few years, similar to the trend witnessed byChina few years ago.

India will be the next China (and see a shipping boom) in the next few years

- Tobias Konig, Managing Partner, Konig and Cie, April 2009

There is a greater reason to make investment now because the commodity prices have comedown and interest rates have declined bringing down the cost of port development

- A Ports and Shipping Consultant, Jan 2010


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2 Roads Sector Overview

2.1 Road Sector in India

India has a road network of 3.3 million km. Currently about 85 percent of passenger traffic and 65 percent offreight traffic use road networks in India. The 11

thfive year plan envisages an investment of about USD 67

billion for the road sector. Of this, the private sector is expected to invest approximately USD 23 billion.About 12,000 kms of national road projects are expected to be awarded annually until 2013.

The following figure illustrates investment expected during the 11th

five year plan 200712).

Chart Two depicts project-wise split of investment during 200712.

Chart Two Project-wise break-up of investment in the road sector in India (200712)


The road density in India is low at 3 km per 1,000 people (world average of 6.7 km) and 750 km per 1,000square km (world average of 840 km). Currently, several government programs are launched to developabout 420,000 km of road network. Some of these programs are the National Highway Development

Program (NHDP), Pradhan Mantri Gram Sadak Yojana (PMGSY), Special Accelerated Road DevelopmentProgram for North East, etc. The projects are financed through sources such as budgetary allocation,funding by bilateral/multilateral agencies, Central Road Fund (cess on petrol and diesel) or through privateparticipation (a majority of it is for toll projects).

Chart One Investment expected in the road sector in India (as per the 11t

five year plan (200712))


1422

8

17 6

1

National

Highways

State Roads Rural Roads NE Roads

U

SDbillion

Public Private

CAGR 11 %

No Private Sectorparticipation

expected

1

2831

8

8 8 9 911

3 44

5

6

2007-08 2008-09 2009-10 2010-11 2011-12

USDbillion

Public Private

1112

1314

17


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The Indian government has realised the importance of private players in developing road infrastructure, andthus have taken several initiatives, such as introducing SPV route, setting up of Viability Gap Fund (VGF),and launching standard bidding documents and model concession agreement. This has helped increaseprivate participation in road projects by multi-folds.

2.2 Current Scenario in India

Roads in India can be divided into three broad categoriesnational highways, state highways, and districtand rural roads. The current distribution of the road network is as follows:

Road type Network (in Km)

National highways 70,000

State highways 130,000

District and Rural roads 3,000,000 (rural roads account for about 80 percent of this value)

National highways are planned to facilitate medium- and long-distance inter-city passenger and freight trafficacross the country. Similarly, state highways are planned to carry the passenger and freight traffic within thestate, while district and village roads are for regions within villages and districts.

The road sector has experienced increased private sector participation with the adoption of PPP mechanismby the government. Project worth approximately USD 10 billion have already been awarded; of which about60 percent were on BOT Toll basis (as of June 2009). Toll collection is a strong function of two factorstoll rate and traffic volume. The current tolling rates are pre-decided by the government and are adjustedeach year. Estimates for traffic growth for the projects are provided by the government. However, bidders

carry out independent traffic projection for each project. More than 50 foreign firms have participated inabout 90 projects with participation estimated to be USD 2.4 billion (either in JVs or independent).

NHDP The NHDP was launched by the government of India to upgrade highways in the country in sixphases.

Phase I and Phase II comprised the Golden Quadrilateral (GQ) (5,846 km), NS-EW Corridor (7,142km), port connectivity (356 km) and other road projects (801 km) at an estimated cost of USD 14billion. As of September 2007, these phases needed a total investment of USD 9 billion (USD 6billion market borrowings, USD 0.9 billion private investment and rest from budgetary support).

Phase-III comprises upgrading and four-laning 12,109 km of national highways at an estimatedcost of USD 12 billion. The cost is expected to be financed through market borrowings (USD 4billion) and private investment (USD 7.6 billion).

Phase IV consists of double-laning 20,000 km of highways at a cost of USD 5.4 billion (USD 0.45

billion market borrowings). Phase V comprises six-laning 6,500 km of the GQ stretch at a cost of USD 3.8 billion (USD 3.5

billion private investments).

Quick Facts

Fact One About 15 percent of national highways and 2 percent of state highways are four/six/eight laned.Fact Two Approximately 60 percent of national highways and 20 percent of state highways have doublelanes.

Fact Three About 25 percent of national highways are single/intermediate lanes.

I have set a target of 20 km of road per day leading to 7,000 km in a year, my job is to create aparadigm shift in attitude, kilometres and approach

-Mr. Kamal Nath, Union Minister of Surface Transport and Highways, July 2009


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Phase VI involves the construction of 1,000 km of expressways at an estimated cost of USD 3.7billion (USD 2.8 billion from private players).

Rural Connectivity The PMGSY is a 100 percent centrally sponsored scheme, and is the biggest projectfor the rural sector. The scheme was launched in December 2009. As of September 2009, about 64,000 kmof road work has been completed under the PMGSY with an investment of about USD 11 billion. Further, the

ministry has cleared the development of about 400,000 kms of rural roads for a cost of USD 22 billion.

2.3 Government Policies

The government has taken several initiatives to attract private sector participation in the road sector. Someof these initiatives are as follows:

Financial Incentives

The government has permitted a 100 percent foreign equity in the construction and maintenance ofroads, highways, tunnels, etc.

A 100 percent tax exemption is permitted during any 10 consecutive years within a period of 20years after the completion of the project.

There are agreements with more than 70 countries to avoid double taxation.

Capital grant for projects under the Viability Gap Fund (VGF) scheme is restricted to a maximum of40 percent of the project cost (for projects costing more than USD 50 million).

Incentives at Operational Level

Tolls charges are fixed and indexed to a formula linked with the wholesale price index. However, oncertain set of projects, the government has introduced a clause for developers to charge tolls(against the already fixed charge).

The government permits duty free import of high-capacity equipment required for highwayconstruction.

The government carries out all preparatory works, such as detailed feasibility study, environmentclearances and relocation of utility services, for projects identified for private investment. Further, itprovides support for land acquisition, resettlement and rehabilitation.

Recent Developments- The panel to revamp investment norms for the road sector headed by B K Chaturvedi,Member, Planning Commission, Government of India, has made the following suggestions (last quarter year2009):

Abolishing the lock-in period clause that prevented investors from exiting the road project during theconcession period

Extending government guarantee for loans taken by developers for road projects (to a limited extent)

Right of refusal to the existing concessionaire on the expansion project

Diluting qualification and conflict of interest norms such as experience of implementing twice the size ofthe project to be awarded

Current Status

At present, about 20 percent of the target for road development under the NHDP is complete (at a rateof about 3-8 kms a day).

The PPP project awarded - USD 6.5 billion (July 07); USD 8 billion (July 08); 10 billion (June 09).The plan to award 122 projects worth approximately USD 22 billion in 200910 may not be completedby the March 2010 deadline. Consequently, an extension of three months is given by the government.


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Moreover, the interlinkages among administrative bodies for road network are as follows:

There are several factors that pose as challenge to the growth of the sector. Issues such as landacquisition, encroachment of highways, environmental clearances, shifting of utilities, railwaysapprovals, local law and orderproblem continue to impact the growth of the overall sector. Some of otherissues in the road sector are as follows:

Inconsistency in policy making The Model Concession Agreements and bidding documentshave been through several changes, and financing and fiscal provisions have also changed severaltimes. The changes introduced partly address the issues of termination clause, viability gap funding,exit policy, double taxation and dividends (in case of an SPV), and standardisation of biddingdocuments. This is a reflection of limited stability at the decision-making level.

Unavailability of project management tools There is a lack of the availability of adequate toolsto ensure efficient project management. Any delay in project completion has corresponding costimplications, which may take the overall cost of the project to significantly high levels.

Number of clearances On an average, about 20 signatures are needed to make final decision.This introduces inefficiency in the process of awarding projects. The current processes related toclearances need to be revamped to avoid these inefficiencies.

Institutional Advisory FrameworkFacilitated by

Committee on Infrastructure, PlanningCommission, Finance Ministry/PPP Cell

Ministry of Road Transport and Highways(Allocation of funds for the development and

maintenance of highways)

Ministry of Rural Development(Allocation of funds for the development

and maintenance of rural roads)

Central Level

Department of RoadTransport & Highways

NHAI(NHDP implementation, operations and maintenance)

Planning, Policyand Budgeting

Secretary, PanchayatRaj

State Level

State PWD(NH-Wing)

State PWDState Highways(Village roads)

Rural Redevelopment& Panchayat Raj

(Rural roads)

Road Development Corporations(Construction, maintenance and operation of roads)

Note In the entire ecosystem, the government plays the role of a facilitator and regulator. Private players, onthe other hand, play the role of a developer and operator. These players have a significant presence in thenational highway sector, and are exploring participation in the state road sector as well. At the state road level,state road agencies are involved in all the processes. Rural roads have seen almost no participation fromprivate players, and the government plays the dominant role.


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Lack of availability of professional consultants There is a lack of qualityprofessional/consultants in the sector. Moreover, since there are a large number of projects to beawarded in the next few years, the lack of availability of professional consultants and contractmanagers becomes a significant issue.

Other project related issues Several issues such as lower cost of estimated project cost figuresin concession agreement (later leading to uncomfortable D-E levels), dispute resolution requirementbecause of local demands and conditions, need for faster approvals from lenders, and automaticdivestment clause continue to hinder the growth of the sector.

2.4 Key Players

About 40 domestic players are operating in the sector in India. Moreover, there are foreign contractors frommore than 15 countries that have participated in road projects in India. Brief profiles of some of the privateplayers in the road sector are as follows:

GMR Infrastructure GMR Infrastructure is a Bangalore based infrastructure company withprojects in airports, highways, energy and urban infrastructure (mainly SEZs). The company hasabout eight road projects in its portfolio worth approximately USD 0.9 billion and covering more than600 kms. The concession periods for these projects are between 17.5 years and 25 years. In 200809, the gross revenue of GMR increased by 66 percent to approximately USD 1 billion and net profitrose by 33 percent to about USD 60 million. As of October 2009, the company had qualified tosubmit requests for proposals for six NHAI projects worth USD 1.8 billion.

Reliance Infrastructure Limited

The company entered the road sector in 2006 and is one of thelargest road developers. Its portfolio of road projects covers more than 500 kms at a cost of aboutUSD 1 billion. By 2011, a total of seven projects are expected to be operational. In 200809,Reliance Infrastructure reported revenue of USD 2.8 billion and a profit of USD 0.3 billion, anincrease of 31 percent and 15 percent (in the same period), respectively.

IRB Infrastructure Developers Limited The company has 12 operational road projects, 2 areunder construction (under the Phase V of NHDP) and 4 more projects have been secured coveringclose to 400 kms (cost about USD 0.9 billion). IRBs revenues are expected to increase by morethan 70 percent in 200910 to about USD 8 billion. It is projected that the revenues from the existingprojects would increase by 610 percent due to an increase in traffic volumes.

Larsen & Toubro The company has completed four major projects and secured one new national

highway project last year. In 2008-09, the company reported a 30 percent growth in its net profit toUSD 0.58 billion. Sales in the same period grew by 35 percent to USD 7.4 billion.

While Internationally.

Build Operate Transferremains a predominate form of contracts, attracting more than 60percent of the total investment in privately managed road projects during 200106.

Private Activity is concentratedwith about 10 countries attracting approximately 90 percentof the total investment during 200106.

There is an increased government support, with about one-third of PPP projects (during200106) receiving some form of government support such as shadow toll, availability fee,subsidies, minimum revenue guarantee.

There is an increased need for good governanceto manage the monopolistic nature of theconcessions and to ensure maximum benefit for the public in PPP projects.

..The Government will have to reduce the biddingprocess and bring down it to 5-6 months from almost ayear now to achieve its target

- Highway Industry Analyst, Dec 2009

The goal set by Mr. Kamal Nath ... isvery ambitious, hard to believe

- Infrastructure Analyst, Dec 2009


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Some of the other domestic players are Punj Llyod, L&T, Jaypee, IRB Infrastructure Developers, IL&FSTransportation Networks, Navyuga, etc.

Some of the international players operating in road development in India are Berhad, IJM Corporation, SDNand Road Builders (Malaysia), Deutsche Bank, John Laing (The UK), Emirates Trading Agency (Dubai), theIsolux Corsan Group (Spain), Italthai (Thailand), Baelim (Korea), Dyckerhoff (Russia), Widmann AG

(Germany), Kajima and Taisei (Japan), and Atlantia Spa (Italy).


Road development is a one of the priority sectors since the government is increasingly focusing on roaddevelopment to cater to a projected annual growth of 1215 percent for passenger traffic and 1518 percentfor cargo traffic. The following could be the investment focus for short term:

A large share of highways is to be developed through PPP. There is an opportunity for investmentin highway projects connecting metro to metro and metro to tier I/II cities. The traffic projections onsuch stretches are easily achieved and these projects are profitable even if contracted at apremium to the government.

Currently, there is a need for quality consultants, especially for technical consultants with expertisein project preparation, contract management, Intelligent Transport System (ITS), and financial andlegal services. As per the plans laid for road development, there is a requirement for sizablefinancial resources, equipment manufacturers/suppliers, organized material market and adequatetraining in short to mid term.


The road sector is identified as one of the priority areas for the development of infrastructure. Thegovernment plans to substantially increase investment on road projects and attract more and more privateplayers. The future prospect for the sector looks bright. Some of the essential indicators are as follows:

According to the Union Road Transport and Highways Minister Kamal Nath, road projects worthUSD 41 billion would be awarded in the next two years. He added that of the 60 projects to beawarded in 200910, 12 have already been awarded (as of June 2009). The government hasdecided to make the remaining projects commercially more viable (the project cost may be broughtdown by 525 percent through various initiatives).

Further, the government plans to take various initiatives to bring about transparency in the bidingprocess, effective contract administration and help bidders achieve financial closure. A three-stagework plan for the next three years has been designed. About 13,400 km of road network will beoffered for bidding in 200910. All the road projects are expected to be awarded by 201213, while2016 will be the completion deadline.

Currently, there are about 40 medium and large highway developers in India. The capacity of theprivate sector to meet the ambitious plan of setting up road networks is limited. This would be aninteresting time to observe if new players would want to explore opportunities in the Indian road

sector. The government plans to seek about USD 2 billion (over and above the recent USD 3 billionallocation by the World Bank for road projects) from the World Bank over the next 34 years for roaddevelopment in the country.

Advent of Mega Projects In the last quarter of year 2009, Mr. Kamal Nath, revealed plans to award10 'mega projects'with the objective to build roads that are more than 400 km longworth aboutUSD 10 billion over the next two years.

the fact that there is a proven track record of public-private partnership in the roads sector through thetoll and the annuity model, and it becomes very clear that the roads sector provides tremendousopportunities that no can afford to miss - may he be a contractor, a banker, or an investor

-Deepak Parekh, Chairman HDFC bank, December 2009


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3 Telecom Sector Overview

3.1 Telecom Sector in India

India has among the fastest growing telecom markets worldwide, with about 13 million subscriber additionsper month. In terms of the number of subscribers, India is the second largest telecom market in the world,with about 530 million subscribers as of October 2009. The sector continued its growth even in the difficulttimes of the global economic crisis in 2008 and witnessed a subscriber growth of 44.2 percent over that in

the last year.

As of October 2009, India had ateledensity of 45 percent, hinting at thesignificant market potential yet to betapped. The next phase of growth insubscriber base is expected to come fromrural areas, as the urban teledensity has

reached about 97 percent (more than 100percent in Delhi, Mumbai, Chennai andKolkota), as against the rural teledensity of18 percent.

3.2 Current Indian Scenario

In 200809, the wireline subscriber base declined to close to 37.25 million from 38.22 million. This sector isdominated by two public sector companies Bharti Sanchar Nigam limited (BSNL) and Mahanagar TelephoneNigam Limied (MTNL) who collectively control 87 percent of the market (as of March 2009). As of now, thereare more than 10 telecom service providers in India. Two of these service providers entered the market in2008 and two in September 2009.

As of June 2009, there were close to 127 million wireless Internet users and only 14 million fixed Internetconnections, of which DSL accounted for about 85 percent of the total broadband users. Penetration forInternet subscriptions is close to 1 percent of the total population.

Some of the factors that impacted the revenues of key companies strongly in 2009 were decreasing minutesof usage (and ARPUs), falling tariffs, stiff competition (about 12 licensees per circle), and high taxes.

Facts at a Glance

There are close to 506 million mobile subscribersinthe county (November 2009) as compared with 30 millionabout six years ago.

About 15 million of mobile phone subscriberswereadded in August 2009.

There are 13 pan-India(22 circles) service providers.As of October 2009, there were 37.25 million wirelinesubscribers (a decrease of 2.5 percent y-o-y).

Other Events

TATA DOCOMO has introduced a game changing idea of pay-per-use, a per second billing plan and percharacter spacing sms plan This started a new price war that is expected to push the already low Average

Revenue Per User (ARPU) market to even lower levels.

New activations targeting existing users mean multiple connections, splitting ARPU among multipleoperators. New subscribers are also being chased in less penetrated semi-urban and rural markets. Butnet-net, ARPU per new monthly connection claimed to be 1012 million is low some say even sub-USD1 per month Ashwani Windlass, former founder, CEO, Vodafone Essar, Dec 2009

Avoid Indian telecoms as dynamic game of price positioning (is) expected to be played out in the nexttwothree quarters; Research Report on Indian equities, Nov 2009

It is indeed a matter of great satisfaction that the Indian telecom industry continued to grow even whenmost other sectors grappled with a demand slowdown

Deputy Director General, Cellular Operators Association of India, December 2009


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Investments Expected

The 11th five-year plan anticipates an investment of about USD 54 billion in the telecom infrastructure sectorby 2012, backed by opportunities in rural areas, roll out of 3G technology and adequate government support.Private players are expected to contribute more than 69 percent of the total investment in the period.Investment in passive infrastructure will continue to dominate total investment in infrastructure. Passive

infrastructure accounts for about 70 percent cost incurred in setting up a wireless telecom network. Further,of the total cost of passive infrastructure, telecom tower accounts for about 70 percent. This makes tower acritical area for the operations of any telecom operator.

Chart One Telecom Sector in India

4 57

9

13

44333

200708 200809 200910 201011 201112

USDBillion

Public Private

52 165

392261

99

4141

42

39

38

94

430

300

140206

200506 200607 200708 200708 200809No.ofSubscribers(million

)

Wireless Subscribers Wireline Subscribers

1.1

2.6

2.2

2005 2007 2009

US

Cents

Effective Tariff Per Minute (US C ents )

Source News Articles, Various Reports and Evalueserve Analysis

78

10

13

17

Public-private break-up in Investments in TelecomInfrastructure in India

Growth of Telecom Subscribers in India

As on Jan 2009

Average Tariff per Minute

New technologies such as3G and Wi-Max areexpected to be rolled out in2010

Mobile Number Portability(MNP) is expected to

increase competition.Mobile Virtual NetworkOperators (MVNO) andassociated value- addedservices will providenecessary impetus toimprove ARPUs

Subscriber addition fromsemi-urban and rural areasis expected

Upcoming Events


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3.3 Government Policy

The government has taken a number of policy initiatives to increase private participation and to bridge thegap between rural and urban teledensity in the country. Some of these initiatives are

Financial Incentives

The Department of Telecommunication (DoT) announced to offer subsidy to select bidders for theinstallation of telecom towers in rural areas.

The government has set up a Universal Service Obligation (USO) fund that provides subsidy for theinstallation of telecom towers in rural areas. The fund recently concluded the first phase of MobileInfrastructure Project. Under this, about 7,500 towers were installed in 500 villages in 27 states. Inthe first phase, villages with population of over 2,000 were covered.

In the second phase, the fund will provide mobile coverage to villages with population of more than500. Under this project, 10,000 towers would be installed within two years.

A carry forward of losses on mergers is allowed in the telecom service sector

Incentives at Operational LevelThe government has allowed infrastructure sharing (both active and passive) with a view that this will enablefaster penetration of wireless telecom network in rural areas. Infrastructure sharing resulted in the reductionof cost, expansion of coverage and efficient utilisation of telecom infrastructure. According to industrysources, infrastructure sharing helps reduce the cost of telecom infrastructure by 2530 percent, speed-upnetwork roll outs and reduce carbon footprint.

Some incentives offered to telecom equipment companies

100-percent Foreign Direct Investment (FDI) permitted through automatic route

Income and capital invested could be fully repatriated

Telecom product-specific Special Economic Zones

Export income of exporters exempt from income taxA five-year, 100-percent tax holiday and 30-percent tax in a block of 15 years

Infrastructure telecom equipment exempted from customs duty

There are several factors that pose challenges to the growth of telecom infrastructure in rural areas. Thesefactors include:

Shortage of Electric Power Rural areas face frequent and long power cuts. Due to this,operators need to set up generators and back-up systems for setting up network in such areas. Thismakes it uneconomical for an operator to set up and run networks at such places.

Lack of Uniform Policy on Right of Way (RoW) There is no uniformity on the policy regardingRight of Way (RoW). Different states have varying stance over the issue. This impacts cost outlaysand ownership of the cable network. Industry players have urged the government to formulate auniform policy over the issue that should be binding on the states.

Low population density and difficult terrain Other factors that dissuade private operators fromexpanding their networks in rural areas include low population density and low-income level ofpeople. This reduces the overall return on investment for private players to expand their networks.Further, the situation is aggravated by the difficult terrain in such areas that presents difficulty inlaying the network.

A snapshot of key telecom associations and regulators is as follows:

The Associations

The Cellular Operators Association of India (COAI): COAI is an association of Indian telecomservice providers using Global System for Mobile (GSM) technology. This was constituted in 1995


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with the objective to protect the common and collective interests of members (primarily serviceproviders).

Association of Unified Telecom Service Providers of India (AUSPI): AUSPI is an association ofIndian telecom service providers using Code Division Multiple Access (CDMA) technology. Theassociation was established in 1997.

Regulators

Department of Telecommunication (DoT): The DoT is a government body under Ministry ofCommunications and Information Technology, Government of India. The department is responsiblefor overall supervision, policy making, performance review, licensing of new players, enforcingregulatory measures and international cooperation in the field of telecommunication in the country.

Telecom Regulatory Authority of India (TRAI): It was established in 1997. The body acts a regulatorfor the telecom sector. Also, the body acts as an advisory organisation for all policy matters relatedto the telecom sector.

3.4 Telecom Infrastructure Companies

The tough market conditions of 200809 saw the telecom tower industry in India enter into a phase ofconsolidation. During this time, some of the pure-play tower companies acquired the small tower businessesof operators.

The trend started in February 2008 with the acquisition of 875 telecom towers of Spice Telecom by SREIgroup company Quippo Telecom Infrastructure Limited (QTIL). Further, in January 2009, Wireless TataTelecom Infrastructure Limited (WTTIL)tower arm of Tata Teleservices Limited (TTSL)was merged withQTIL. Also, in March 2009, American Tower Company (ATC) acquired Xcel Telecoma Mumbai-basedindependent tower company with about 1,700 towers.

Further in 200809, there was a slide in the valuation of towers. The valuation of the tower for the Tata-Quippo deal figured at about USD 170,000 against the valuation of USD 260,000348,000 as received by

Bharti Airtel and Reliance Communications in 2007 while offloading their stakes in tower arms.

According to industry estimates, any new tower firm needs a tenancy ratio of each tower in the range of 1.5to 2.0 to break even against the current industry average of 1.1 in India. Indus Towers, a three-way ventureof Bharti Airtel, Vodafone Essar and Idea Cellular, reportedly has a tenancy ratio of 1.3 per tower. The factindicates that a pure-play tower company can operate closer to the desired tenancy ratio, if operators exitthe tower business. Such expectations have made global pure-play tower companies such as ATC enter themarket.The table below mentions some of the major tower companies in India.

Name of Company Approximate Number of Towers(as on may 2009)

Reliance Infratel 47,000

Bharti Infratel 30,000Indus Towers 90,000BSNL/ MTNL 45,000Aircel 7,000GTL Infrastructure 7,0008,000WTTIL-Quippo 18,000Essar Telecom Infra 4,500

There are 13 service providers and more than 8 telecom tower companies in India. Some of the majorplayers are

Bharti Airtel It has more than 100 million subscribers in the country and is among the top fivetelecom service providers worldwide (by subscriber base). It operates in many segments such asmobile services, telemedia services, enterprise services carriers, enterprise services corporate, andpassive infrastructure services in the telecom industry. For the quarter ending September 2009, the


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net profit of the firm increased by about 35 percent, up from about USD 372 million in the samequarter previous year to about USD 500 million.

GTL InfrastructureLtd.(GIL) It is a subsidiary of Global Group Enterprise. The company,headquartered in Mumbai, is a third-party infrastructure provider established in 2004. It builds,operates and maintains passive network infrastructure for telecom service providers across India.

The company plans to establish a pan-India network of 23,700 towers by 2011. The company hadrevenue of about USD 58 million in fiscal year ending March 2009, an increase of about 80 percenty-o-y. The company had net profit of about USD 0.6 million against a net loss of USD 12.8 millionlast year.

Huawei Telecommunications (India) It is a telecom infrastructure and services providerheadquartered in China. Huawei Telecommunications (India) Pvt. Ltd. was established in 2001 andis located in Bangalore. The company supplies telecom equipment such as macro Node B, basestation controller (BSC), base transceiver station (BTS), radio network controller and WiMAX basestationto telecom operators worldwide. The company had revenue of about USD 570 million in 2007.In May 2009, it got a USD 150-million contract from Unitech Wireless to supply network equipment.In September 2009, the company opened a new development facility in Bangalore. Recently, thecompany announced to create an all-IP network infrastructure in over 20,000 towns and 600,000

villages across India.

Sterlite Optical Technologies Ltd. The company, based in Pune, is an integrated manufacturerof optical fibers, telecom cables and power transmission conductors. The company supplies telecomand power cables in 60 countries across the world and contributes to about 6 percent of the globaloptical fiber cables market. The company had revenue of about USD 500 million in fiscal yearending March 2009, an increase of about 20 percent over its revenue last year. The company hadnet profit of about USD 20 million, a decline of 20 percent over net profit for last year.


In the short term, investments focus in telecom infrastructure can broadly be divided into two: investments inthe expansion of telecom network in rural areas and investments in new technologies (3G, Wi-Max).

Investments in expansion of telecom network

Currently, increasing rural teledensity (about 18 percent teledensity covering about 70 percent of thecountrys population in rural areas) is high on the governments agenda. Various i nitiatives have been taken

in this direction.

However, efforts have fallen short due to various issues prevalent in such areas. One of such issues is thelack of proper power supply in rural areas.

Power management solution providers see an opportunity here to provide solutions for powerproblems for base transceiver stations in rural areas.

Various alternative energy solution providers are exploring ways to offer power solutions customisedfor applications in such areas.

The private sector has started participating in the rural sector in a much bigger way and accounts for80 percent of the market. Their continued participation will help us achieve the target of 40 percentrural teledensity well before the set timeline of 2014

Deputy Director General, Cellular Operators Association of India, December 2009

In January 2009, Tata Teleservices merged its mobile tower companyWireless Tata Tele InfoServices Ltd (WTTIL)with Quippo, a tower firm owned by the SREI Group and the Singaporegovernment. As per the deal, the merged company is expected to have an enterprise value of close to

USD 2.6 billion with close to 18,000 towers.


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Active and passive infrastructure sharing is clearly the business model that industry players areopting for to expand their reach in rural areas for the next wave of growth.

Investments in new technologies

The auction of spectrum for new technologies (such as 3G and Wi-Max) is on the cards for the Indiantelecom industry since quite a long time now. As of December 2009, licences for these technologies wereexpected to be awarded in February 2010.

With the advent of the 3G technology, there will be a need for high-quality value-added services. Thegovernment plans to allot the licence to four players initially.

3G - Future In India Upcoming Markets

Auction deadline for 3G spectrum in India is chosen to beFebruary 2010 (after a series of delays); however, theallocation is expected to happen only by August 2010,implying there are some months before consumers can availthese services. The government expects to raise more thanUSD 5 billion from the auction of 3G licenses. As of December2009, there were close to 100 million 3G capable handsets inthe country.

Wireless The government hasset a target to increase ruralteledensity to 40 percent in fiveyears from the current 18percent.

Internet In the next five years,the government plans to connect500,000 villages with wirelessbroadband.


Telecom is one of the priority sectors for infrastructure development in the country. The future prospects ofthe sector are bright, with huge potential yet to be tapped in rural areas where teledensity remains at closeto 18 percent.

In the second phase of the application of Universal Service Obligation Fund (USO) used tosubsidise telecom projects in rural India where worth of funds are close to USD 5 billionabout10,000 towers are to be installed in rural areas.

Service providers are expected to focus on service quality for urban consumers in 200910. As 3Gand Wi-Max get introduced, many data-centric mobile service users may move to these. Further, theadvent of 3G and MNP services will give a necessary impetus to innovation in value-added services

(VAS) and associated ARPUs.

Recently, DoT permitted Mobile Virtual Network Operations (MVNO) in India. A licence fee of USD18.5 million for an all-India roll-out of MVNO is expected.

The government had set 31 December 2009 as a deadline for implementing MNP for metros and June2010 for non-metros. However, both MTNL and BSNL had said that they will not be able to offer the MNPfacility before April 2010.

In two years, Indias tower slot demand may rise to over 700,000 from 320,000 now, as demandfrom existing and new 2G operators rises and operators (who) begin rolling out 3G and WiMaxservices

Inder Bajaj, President, Reliance Infratel, Nov/Dec 2009


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4 Sources of Data

Some of the sources of data used in the study were -

Website of National Highway Authority of India, Ministry of Road Transport and Highways

Guidance for Investment in Road Sector, Government of IndiaWebsite of Ministry of Shipping, Government of India

Website of Federation of Chamber of Indian Chambers of Commerce & Industry

Website of Indian Ports Association

Websites of CoAI, TRAI, DoT

Worldwide trends in Private Participation in Roads, Cesar Queiroz and Ada Karina Izaguirre,Public-Private Private Infrastructure Advisory Facility.

Official Memorandum, Revised Strategy of the National Highway Development ProjectFramework and Financing

India Infrastructure

Website of Committee of Infrastructure

Various industry publications, business dailies, news articles, select databases

5 Evalueserve Disclaimer

The information contained herein has been obtained from sources believed to be reliable. Evalueservedisclaims all warranties as to the accuracy, completeness or adequacy of such information. Evalueserveshall have no liability for errors, omissions or inadequacies in the information contained herein or forinterpretations thereof.

Infrastructure in India - Ports, Roads and Telecom

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