Infrastructure in India Ports, Roads and Telecom

January 10

2009 Evalueserve, Ltd. All Rights Reserved.

Infrastructure in India Ports, Roads and Telecom

Ports Sector Overview ..................................................... 3

1.1 1.2 1.3 1.4 1.5 1.6 Port Sector in India .................................................................... 3 Current Indian Scenario............................................................. 3 Government Policy .................................................................... 5 Key Players ............................................................................... 7 Investment Focus ...................................................................... 8 Future Prospects ....................................................................... 8

Roads Sector Overview.................................................... 9

2.1 2.2 2.3 2.4 2.5 2.6 Road Sector in India .................................................................. 9 Current Scenario in India ......................................................... 10 Government Policies ............................................................... 11 Key Players ............................................................................. 13 Investment Focus .................................................................... 14 Future Prospects ..................................................................... 14

Telecom Sector Overview .............................................. 15

3.1 3.2 3.3 3.4 Telecom Sector in India ........................................................... 15 Current Indian Scenario........................................................... 15 Government Policy .................................................................. 17 Telecom Infrastructure Companies ......................................... 18 Investment Focus .................................................................... 19 Future Prospects ..................................................................... 20

Content

3.5 3.6

4 5

Sources of Data ................................................................. 21 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 is divided into two: East Coast and West Coast (each coast has six major ports). Of the non-major ports, only 66 are operational, indicating the Table One - Major Ports in India potential of port capacity yet to be tapped in the country. The table one shows cargo handling capacities at Name of Port Capacity (mn tonne) some of the major ports. Kandla 77.40
Paradip Visakhapatnam Others 71.00 64.00 343.3

Total
Figures as on March 2009

555.67

Under the 11 five-year plan, the government plans to invest about USD 19 billion to increase the cargo handling capacity of Indian ports by 2012. Of this, about USD 11.7 billion is expected to be contributed by the private sector.

th

Chart one depicts the projected investment in port infrastructure in India in 200712. Chart One Projected Investment in Port Infrastructure (200712)

5.2
CAGR 19 percent

3.7
USD Billion

4.3
3.5

2.6
1.5

3.0
2.2 1.7 2.8

1.1

1.3

1.5

1.5

1.7

2007-08

2008-09

2009-10 Year
Public Private

2010-11

2011-12

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 5.9 billion on non-major ports. Of major ports, about 6.7 billion will be invested by private investors. For nonmajor 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 on private 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) and about 70 percent of the value (of total trade). The major ports handle about 72 percent of the total traffic. In 200809, total cargo traffic handled by Indian ports was about 738.1 million tonne. Further, according to

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Infrastructure in India Ports, Roads, and Telecom industry estimates, total cargo traffic at Indian ports is expected to grow to about 860 million tonne by 2011 12. Chart One Cargo Traffic at Indian Ports

CAGR 9 percent

million tonnes

521.6
137.8

569.1
145.5

649.9
186.1

722.9
203.6

738.1
207.8

860.0
270.0

383.8

423.6

463.8

519.2

530.4

590.0

2004 - 05

2005 - 06

2006 - 07 Year
Major Ports

2007 - 08

2008 - 09

2011 - 12

Expected

Non-major Ports

Sources: Various reports, News articles and Evalueserve analysis

Table Two Key Parameters Parameters Average turnaround time (days) Average preberthing time (hours) Average output per ship per berth day (tonne) 0001 4.24 11.04 0708 2.63 11.4 0809
(provisional)

2.44 9.95

The average turnaround time has been stable for nearly two years as vessels of higher tonnage are increasingly berthing at ports. Further, the average output/ship/berth/day has shown a consistently increasing trend, indicating improved cargo handling at the ports. However, the average pre-berthing had increased because of capacity constraints on handling specific commodities (food grains and fertilisers are on priority) in certain ports. Quick fact The turnaround time of ships in ports such as Singapore is six to eight hours.

6,961

10,071

10,464
As on Aug 2009

Traffic levels at Indian ports have been consistently indicating the need for urgent capacity expansion plans of ports. During the last five years, Table Three - Capacity Expansion Plans at Indian Ports major ports have been operating at a utilisation rate of over 90 percent. This, coupled with traffic Capacity in 2008 Planned Capacity by Ports growth at CAGR of over 9 09 (mn tonne) 201112 (mn tonne) percent, presents a case for capacity expansion. The Major Ports 555.67 1,001.8 government plans to invest about Non-major USD 19 billion to increase the 230 NA Ports cargo handling capacity of ports by 2012. Of this, about USD 11.7 billion is expected from private sources through PPPs in the development of berths, container terminals and warehousing/ storage facilities. India will build 50 new ports over the next five years as it looks to overhaul creaky infrastructure and reduce congestion at ports - APVN Sarma, Secretary, Ministry of Shipping July 2009

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Infrastructure in India Ports, Roads, and Telecom Currently, operational issues such as land acquisition, environmental clearances and time consuming inter-ministerial consultations for the approval of port projects continue to impact the growth of the overall sector. As a recent example, Jawaharlal Nehru Port Trust (JNPT) struggled for about two years to get approval from the Shipping Ministry for a project that involved deepening of its channel. The contract ultimately got cancelled in 2009 when the lowest bidder sought corrections in the price to reflect the change in rupee-euro exchange rates over time. However, the government has started introducing preliminary changes to ensure easy awarding of port projects. For example, to expedite PPP projects, the Shipping Ministry in 2009 authorised port authorities to award 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 handle larger vessels, impacting accessibility and the amount of cargo carried (as well as associated turnaround time). 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 Indian ports have inadequate connectivity through roads and rails. This stops Indian ports from being perceived as integrated logistics solutions providers. Moreover, this leads to operational inefficiency, 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 was flagged off in 2004. It will put in place an agenda for the development of ports and the shipping sector for 20 years. 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:

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

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

Central Level

Board of Trustees of Major Port 1 Major Port 1

Board of Trustees of Major Port 2 Major Port 2

Board of Trustees of Major Port 11 Major Port 11

Ennore Port (Corporation)

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

State Level

Non-major Ports

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Infrastructure in India Ports, Roads, and Telecom

In 2009, the government prepared a draft bill for bringing in all non-major ports under the purview of Tariff Authority for Major Ports (TAMP). Presently, non-major ports fix tariff on their own. The government has taken several initiatives for the development of ports and the shipping sector including the following: Budgetary Allocations The government has proposed an outlay of USD 4 billion for infrastructure development at major ports during the current five-year plan. Also, for non-major ports, the government has proposed an outlay of about USD 1 billion during this same period. The remaining th public funds under the 11 plan are expected to come from internal and extra budgetary support. National Maritime Development Program (NMDP) The NMDP was launched by the government in 2005. The programme envisages total investment of USD 22 billion (with an original timeline of 25 years) aiming at the expansion of cargo handling capacities at Indian ports and enhancing overall competitiveness of the maritime sector. The program includes 253 ports projects scheduled to be completed by 201112 and 111 shipping and inland water transport projects to be completed by 2016. Table Four Status of Projects under NMDP Total Planned 253 111 Under Approval Process 25 NA Preliminary Planning Stage 92 63

Projects Port Projects IWT Project

Completed 41 5

In Progress 64 43

Approved 31 NA

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

...Six to seven projects have been cleared so far and.we are hoping to award a total of 22 project during the current financial year (2009-10) APVN Sarma, Secretary, Ministry of Shipping, August 2009

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 for shipping and IWT projects, about 30 percent of the planned investment (USD 2.9 billion) would be funded 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

17% 4% 48% 31%

Private Sector

Internal Accruals from Ports

NHAI and Railway

Budgetary Support

Source: Various reports, News articles and Evalueserve analysis

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Infrastructure in India Ports, Roads, and Telecom Approval for Port-based SEZs The government has so far given formal approval to seven portbased Special Economic Zones (SEZs) or port-based multi-product SEZs. These SEZs have been allowed preferential tax treatment. Some of the tax benefits allowed to units in such areas are duty free import (or domestic procurement) of capital goods, raw materials, etc; exemption of domestic sales from Special Additional Duty (SAD); exemption from income tax; etc. Port Connectivity Projects The government has awarded projects for port connectivity on high priority. Under this programme, it envisaged a plan for the construction of 380-km road-port connectivity projects and 3,666 km rail-port connectivity projects. Table five shows the status of port connectivity projects as of March 2009. Table Five Status of Port Connectivity Projects Length Under Implementation (Km) 168 1,696

Projects Road-port connectivity Rail-port connectivity

Length Planned (Km) 380 3,666

Length Completed (Km) 206 1,569

Remaining (Km) 6 401

* Figures as on 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 Projects Limited is a subsidiary of Larsen & Toubro (L&T) Limited. The company executes infrastructure projects in ports through PPPs and SPVs. Some of the major projects of the company include the development of Dharma Port in Orissa in a joint venture with Tata Steel and the development and operation of additional berths at Kakinada Deep Water Port. The company had revenue of about USD 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 sea ports 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 in road, flyover, railway and port development projects. In the port sector, the company has constructed berths at Vishakhapatnam Port, among other projects. It had revenue of USD 1.1 billion in 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 The Great Eastern Shipping Company. In the shipyard business, major players include Hindustan Shipyard Limited, ABG Shipyard Limited and Bharti Shipyard Limited.

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Infrastructure in India Ports, Roads, and Telecom

1.5 Investment Focus

The government has planned significant investments for the development of ports and related infrastructure in 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 government plans to increase container handling capacity at Indian ports to 20 million twenty-feet equivalent units (TEUs) by 2020 from present 7.7 million TEUs. Increase in Private Participation in Dry and Liquid Bulk Terminals and Greenfield Ports Earlier, a majority of private investments were restricted only to container terminal projects. Now, the government has created an effective ecosystem for private investors to invest in areas such as dry bulk and liquid bulk terminals, greenfield ports, dredging and multi-purpose berths. Currently, 23 greenfield 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 at Indian 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 second phase by 201314, while that of shipping is expected to be concluded by 202425. The objective of the government 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 by 202526. Further, keeping in view the expected growth in traffic, the government plans to increase the capacity of major ports to 2,100 million tonne by 202526. To achieve this, it has allowed every major port to engage national/international consultants to prepare perspective plans for the ports. There is a greater reason to make investment now because the commodity prices have come down and interest rates have declined bringing down the cost of port development - A Ports and Shipping Consultant, Jan 2010

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

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Infrastructure in India Ports, Roads, and Telecom

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 of th freight traffic use road networks in India. The 11 five 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 11 five year plan 200712). Chart One Investment expected in the road sector in India (as per the 11 five year plan (2007 12))
th th

17
CAGR 11 %

11
USD billion

12

13

14
6

3 8

4 8

11

2007-08

2008-09

2009-10 Private

2010-11

2011-12

Public

Source: Various reports, News articles and Evalueserve analysis

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)
31 28
No Private Sector participation expected

USD billion

17

14

22

8 1
8 1 NE Roads

National Highways

State Roads Public

Rural Roads

Private

Source: Various reports, News articles and Evalueserve analysis

The road density in India is low at 3 km per 1,000 people (world average of 6.7 km) and 750 km per 1,000 square km (world average of 840 km). Currently, several government programs are launched to develop about 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 Development Program 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 private participation (a majority of it is for toll projects).

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Infrastructure in India Ports, Roads, and Telecom

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

The Indian government has realised the importance of private players in developing road infrastructure, and thus 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 increase private 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 district and rural roads. The current distribution of the road network is as follows: Road type National highways State highways District and Rural roads 70,000 130,000 3,000,000 (rural roads account for about 80 percent of this value) Network (in Km)

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

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 a paradigm shift in attitude, kilometres and approach - Mr. Kamal Nath, Union Minister of Surface Transport and Highways, July 2009 The road sector has experienced increased private sector participation with the adoption of PPP mechanism by the government. Project worth approximately USD 10 billion have already been awarded; of which about 60 percent were on BOT Toll basis (as of June 2009). Toll collection is a strong function of two factors toll rate and traffic volume. The current tolling rates are pre-decided by the government and are adjusted each 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 in about 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 six phases. Phase I and Phase II comprised the Golden Quadrilateral (GQ) (5,846 km), NS-EW Corridor (7,142 km), port connectivity (356 km) and other road projects (801 km) at an estimated cost of USD 14 billion. As of September 2007, these phases needed a total investment of USD 9 billion (USD 6 billion 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 estimated cost of USD 12 billion. The cost is expected to be financed through market borrowings (USD 4 billion) 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).

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Infrastructure in India Ports, Roads, and Telecom Phase VI involves the construction of 1,000 km of expressways at an estimated cost of USD 3.7 billion (USD 2.8 billion from private players).

Rural Connectivity The PMGSY is a 100 percent centrally sponsored scheme, and is the biggest project for the rural sector. The scheme was launched in December 2009. As of September 2009, about 64,000 km of 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. Current Status At present, about 20 percent of the target for road development under the NHDP is complete (at a rate of 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 completed by the March 2010 deadline. Consequently, an extension of three months is given by the government.

2.3 Government Policies

The government has taken several initiatives to attract private sector participation in the road sector. Some of these initiatives are as follows: Financial Incentives The government has permitted a 100 percent foreign equity in the construction and maintenance of roads, highways, tunnels, etc. A 100 percent tax exemption is permitted during any 10 consecutive years within a period of 20 years 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 of 40 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, on certain 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 highway construction. The government carries out all preparatory works, such as detailed feasibility study, environment clearances and relocation of utility services, for projects identified for private investment. Further, it provides 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 year 2009): Abolishing the lock-in period clause that prevented investors from exiting the road project during the concession 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 of the project to be awarded

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11

Infrastructure in India Ports, Roads, and Telecom Moreover, the interlinkages among administrative bodies for road network are as follows:

Institutional Advisory Framework Facilitated by Committee on Infrastructure, Planning Commission, Finance Ministry/PPP Cell

Central Level

Ministry of Road Transport and Highways (Allocation of funds for the development and maintenance of highways) Department of Road Transport & Highways NHAI (NHDP implementation, operations and maintenance)

Ministry of Rural Development (Allocation of funds for the development and maintenance of rural roads)

Planning, Policy and Budgeting

Secretary, Panchayat Raj

State Level

State PWD (NH-Wing)

State PWD State 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, on the other hand, play the role of a developer and operator. These players have a significant presence in the national 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 from private players, and the government plays the dominant role. There are several factors that pose as challenge to the growth of the sector. Issues such as land acquisition, encroachment of highways, environmental clearances, shifting of utilities, railways approvals, local law and order problem continue to impact the growth of the overall sector. Some of other issues in the road sector are as follows: Inconsistency in policy making The Model Concession Agreements and bidding documents have been through several changes, and financing and fiscal provisions have also changed several times. 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 bidding documents. 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 tools to ensure efficient project management. Any delay in project completion has corresponding cost implications, 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 to clearances need to be revamped to avoid these inefficiencies.

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12

Infrastructure in India Ports, Roads, and Telecom ..The Government will have to reduce the bidding process and bring down it to 5-6 months from almost a year now to achieve its target - Highway Industry Analyst, Dec 2009 The goal set by Mr. Kamal Nath ... is very ambitious, hard to believe - Infrastructure Analyst, Dec 2009

Lack of availability of professional consultants There is a lack of quality professional/consultants in the sector. Moreover, since there are a large number of projects to be awarded in the next few years, the lack of availability of professional consultants and contract managers becomes a significant issue. Other project related issues Several issues such as lower cost of estimated project cost figures in concession agreement (later leading to uncomfortable D-E levels), dispute resolution requirement because of local demands and conditions, need for faster approvals from lenders, and automatic divestment clause continue to hinder the growth of the sector. While Internationally. Build Operate Transfer remains a predominate form of contracts, attracting more than 60 percent of the total investment in privately managed road projects during 200106. Private Activity is concentrated with about 10 countries attracting approximately 90 percent of the total investment during 200106. There is an increased government support, with about one-third of PPP projects (during 200106) receiving some form of government support such as shadow toll, availability fee, subsidies, minimum revenue guarantee. There is an increased need for good governance to manage the monopolistic nature of the concessions and to ensure maximum benefit for the public in PPP projects.

2.4 Key Players

About 40 domestic players are operating in the sector in India. Moreover, there are foreign contractors from more than 15 countries that have participated in road projects in India. Brief profiles of some of the private players in the road sector are as follows: GMR Infrastructure GMR Infrastructure is a Bangalore based infrastructure company with projects in airports, highways, energy and urban infrastructure (mainly SEZs). The company has about eight road projects in its portfolio worth approximately USD 0.9 billion and covering more than 600 kms. The concession periods for these projects are between 17.5 years and 25 years. In 2008 09, the gross revenue of GMR increased by 66 percent to approximately USD 1 billion and net profit rose by 33 percent to about USD 60 million. As of October 2009, the company had qualified to submit 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 the largest road developers. Its portfolio of road projects covers more than 500 kms at a cost of about USD 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, an increase of 31 percent and 15 percent (in the same period), respectively. IRB Infrastructure Developers Limited The company has 12 operational road projects, 2 are under construction (under the Phase V of NHDP) and 4 more projects have been secured covering close to 400 kms (cost about USD 0.9 billion). IRBs revenues are expected to increase by more than 70 percent in 200910 to about USD 8 billion. It is projected that the revenues from the existing projects 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 to USD 0.58 billion. Sales in the same period grew by 35 percent to USD 7.4 billion.

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13

Infrastructure in India Ports, Roads, and Telecom Some of the other domestic players are Punj Llyod, L&T, Jaypee, IRB Infrastructure Developers, IL&FS Transportation Networks, Navyuga, etc. Some of the international players operating in road development in India are Berhad, IJM Corporation, SDN and Road Builders (Malaysia), Deutsche Bank, John Laing (The UK), Emirates Trading Agency (Dubai), the Isolux Corsan Group (Spain), Italthai (Thailand), Baelim (Korea), Dyckerhoff (Russia), Widmann AG (Germany), Kajima and Taisei (Japan), and Atlantia Spa (Italy).

2.5 Investment Focus

Road development is a one of the priority sectors since the government is increasingly focusing on road development to cater to a projected annual growth of 1215 percent for passenger traffic and 1518 percent for 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 investment in highway projects connecting metro to metro and metro to tier I/II cities. The traffic projections on such stretches are easily achieved and these projects are profitable even if contracted at a premium to the government. Currently, there is a need for quality consultants, especially for technical consultants with expertise in project preparation, contract management, Intelligent Transport System (ITS), and financial and legal services. As per the plans laid for road development, there is a requirement for sizable financial resources, equipment manufacturers/suppliers, organized material market and adequate training in short to mid term. the fact that there is a proven track record of public-private partnership in the roads sector through the toll and the annuity model, and it becomes very clear that the roads sector provides tremendous opportunities that no can afford to miss - may he be a contractor, a banker, or an investor - Deepak Parekh, Chairman HDFC bank, December 2009

2.6 Future Prospects

The road sector is identified as one of the priority areas for the development of infrastructure. The government plans to substantially increase investment on road projects and attract more and more private players. 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 worth USD 41 billion would be awarded in the next two years. He added that of the 60 projects to be awarded in 200910, 12 have already been awarded (as of June 2009). The government has decided to make the remaining projects commercially more viable (the project cost may be brought down by 525 percent through various initiatives). Advent of Mega Projects In the last quarter of year 2009, Mr. Kamal Nath, revealed plans to award 10 'mega projects'with the objective to build roads that are more than 400 km longworth about USD 10 billion over the next two years. Further, the government plans to take various initiatives to bring about transparency in the biding process, effective contract administration and help bidders achieve financial closure. A three-stage work plan for the next three years has been designed. About 13,400 km of road network will be offered for bidding in 200910. All the road projects are expected to be awarded by 201213, while 2016 will be the completion deadline. Currently, there are about 40 medium and large highway developers in India. The capacity of the private sector to meet the ambitious plan of setting up road networks is limited. This would be an interesting 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 billion allocation by the World Bank for road projects) from the World Bank over the next 34 years for road development in the country.

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14

Infrastructure in India Ports, Roads, and Telecom

3 Telecom Sector Overview

3.1 Telecom Sector in India
India has among the fastest growing telecom markets worldwide, with about 13 million subscriber additions per 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 difficult times of the global economic crisis in 2008 and witnessed a subscriber growth of 44.2 percent over that in the last year. Facts at a Glance As of October 2009, India had a There are close to 506 million mobile subscribers in teledensity of 45 percent, hinting at the the county (November 2009) as compared with 30 million significant market potential yet to be about six years ago. tapped. The next phase of growth in About 15 million of mobile phone subscribers were subscriber base is expected to come from added in August 2009. rural areas, as the urban teledensity has There are 13 pan-India (22 circles) service providers. reached about 97 percent (more than 100 As of October 2009, there were 37.25 million wireline percent in Delhi, Mumbai, Chennai and subscribers (a decrease of 2.5 percent y-o-y). Kolkota), as against the rural teledensity of 18 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 is dominated by two public sector companies Bharti Sanchar Nigam limited (BSNL) and Mahanagar Telephone Nigam Limied (MTNL) who collectively control 87 percent of the market (as of March 2009). As of now, there are more than 10 telecom service providers in India. Two of these service providers entered the market in 2008 and two in September 2009. It is indeed a matter of great satisfaction that the Indian telecom industry continued to grow even when most other sectors grappled with a demand slowdown Deputy Director General, Cellular Operators Association of India, December 2009 As of June 2009, there were close to 127 million wireless Internet users and only 14 million fixed Internet connections, of which DSL accounted for about 85 percent of the total broadband users. Penetration for Internet subscriptions is close to 1 percent of the total population. Other Events TATA DOCOMO has introduced a game changing idea of pay-per-use, a per second billing plan and per character 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 multiple operators. New subscribers are also being chased in less penetrated semi-urban and rural markets. But net-net, ARPU per new monthly connection claimed to be 1012 million is low some say even sub-USD 1 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 next twothree quarters; Research Report on Indian equities, Nov 2009

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

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Infrastructure in India Ports, Roads, and Telecom

Investments Expected
The 11th five-year plan anticipates an investment of about USD 54 billion in the telecom infrastructure sector by 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 a critical area for the operations of any telecom operator. Chart One Telecom Sector in India
Public-private break-up in Investments in Telecom Infrastructure in India 17

USD Billion

13 10 8 7

13 9 7 3 3 200910 4 201011 4 201112

4 3 200708

Upcoming Events

200809

Public

Private

Growth of Telecom Subscribers in India

As on Jan 2009

430 300 206 41

99
200607

38 39
261 392

94 41
52
200506

140 42

165
200708

200708

200809

Wireless Subscribers

Wireline Subscribers

New technologies such as 3G and Wi-Max are expected to be rolled out in 2010 Mobile Number Portability (MNP) is expected to increase competition. Mobile Virtual Network Operators (MVNO) and associated value- added services will provide necessary impetus to improve ARPUs Subscriber addition from semi-urban and rural areas is expected

No. of Subscribers ( million)

Average Tariff per Minute

2.6 2.2

US Cents

1.1

2005

2007

2009

Effective Tariff Per Minute (US Cents)

Source News Articles, Various Reports and Evalueserve Analysis

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Infrastructure in India Ports, Roads, and Telecom

3.3 Government Policy

The government has taken a number of policy initiatives to increase private participation and to bridge the gap 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 the installation of telecom towers in rural areas. The government has set up a Universal Service Obligation (USO) fund that provides subsidy for the installation of telecom towers in rural areas. The fund recently concluded the first phase of Mobile Infrastructure Project. Under this, about 7,500 towers were installed in 500 villages in 27 states. In the 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 than 500. 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 Level The government has allowed infrastructure sharing (both active and passive) with a view that this will enable faster penetration of wireless telecom network in rural areas. Infrastructure sharing resulted in the reduction of cost, expansion of coverage and efficient utilisation of telecom infrastructure. According to industry sources, infrastructure sharing helps reduce the cost of telecom infrastructure by 2530 percent, speed-up network 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 tax A 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. These factors 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. This makes 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 regarding Right of Way (RoW). Different states have varying stance over the issue. This impacts cost outlays and ownership of the cable network. Industry players have urged the government to formulate a uniform policy over the issue that should be binding on the states. Low population density and difficult terrain Other factors that dissuade private operators from expanding their networks in rural areas include low population density and low-income level of people. 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 in laying 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 telecom service providers using Global System for Mobile (GSM) technology. This was constituted in 1995

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Infrastructure in India Ports, Roads, and Telecom with the objective to protect the common and collective interests of members (primarily service providers). Association of Unified Telecom Service Providers of India (AUSPI): AUSPI is an association of Indian telecom service providers using Code Division Multiple Access (CDMA) technology. The association was established in 1997. Regulators Department of Telecommunication (DoT): The DoT is a government body under Ministry of Communications and Information Technology, Government of India. The department is responsible for overall supervision, policy making, performance review, licensing of new players, enforcing regulatory 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 regulator for the telecom sector. Also, the body acts as an advisory organisation for all policy matters related to 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 of consolidation. During this time, some of the pure-play tower companies acquired the small tower businesses of operators. The trend started in February 2008 with the acquisition of 875 telecom towers of Spice Telecom by SREI group company Quippo Telecom Infrastructure Limited (QTIL). Further, in January 2009, Wireless Tata Telecom Infrastructure Limited (WTTIL)tower arm of Tata Teleservices Limited (TTSL)was merged with QTIL. Also, in March 2009, American Tower Company (ATC) acquired Xcel Telecoma Mumbai-based independent 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 TataQuippo 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 1.5 to 2.0 to break even against the current industry average of 1.1 in India. Indus Towers, a three-way venture of Bharti Airtel, Vodafone Essar and Idea Cellular, reportedly has a tenancy ratio of 1.3 per tower. The fact indicates that a pure-play tower company can operate closer to the desired tenancy ratio, if operators exit the tower business. Such expectations have made global pure-play tower companies such as ATC enter the market. The table below mentions some of the major tower companies in India. Name of Company Reliance Infratel Bharti Infratel Indus Towers BSNL/ MTNL Aircel GTL Infrastructure WTTIL-Quippo Essar Telecom Infra Approximate Number of Towers
(as on may 2009)

47,000 30,000 90,000 45,000 7,000 7,0008,000 18,000 4,500

There are 13 service providers and more than 8 telecom tower companies in India. Some of the major players are Bharti Airtel It has more than 100 million subscribers in the country and is among the top five telecom service providers worldwide (by subscriber base). It operates in many segments such as mobile services, telemedia services, enterprise services carriers, enterprise services corporate, and passive infrastructure services in the telecom industry. For the quarter ending September 2009, the

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Infrastructure in India Ports, Roads, and Telecom net profit of the firm increased by about 35 percent, up from about USD 372 million in the same quarter previous year to about USD 500 million. GTL Infrastructure Ltd. (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 had revenue of about USD 58 million in fiscal year ending March 2009, an increase of about 80 percent y-o-y. The company had net profit of about USD 0.6 million against a net loss of USD 12.8 million last year. Huawei Telecommunications (India) It is a telecom infrastructure and services provider headquartered in China. Huawei Telecommunications (India) Pvt. Ltd. was established in 2001 and is located in Bangalore. The company supplies telecom equipment such as macro Node B, base station controller (BSC), base transceiver station (BTS), radio network controller and WiMAX base stationto 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, the company 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 manufacturer of optical fibers, telecom cables and power transmission conductors. The company supplies telecom and power cables in 60 countries across the world and contributes to about 6 percent of the global optical fiber cables market. The company had revenue of about USD 500 million in fiscal year ending March 2009, an increase of about 20 percent over its revenue last year. The company had net profit of about USD 20 million, a decline of 20 percent over net profit for last year. In January 2009, Tata Teleservices merged its mobile tower companyWireless Tata Tele Info Services Ltd (WTTIL)with Quippo, a tower firm owned by the SREI Group and the Singapore government. 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.

3.5 Investment Focus

In the short term, investments focus in telecom infrastructure can broadly be divided into two: investments in the 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 the countrys population in rural areas) is high on the governments agenda. Various initiatives have been taken in this direction. The private sector has started participating in the rural sector in a much bigger way and accounts for 80 percent of the market. Their continued participation will help us achieve the target of 40 percent rural teledensity well before the set timeline of 2014 Deputy Director General, Cellular Operators Association of India, December 2009 However, efforts have fallen short due to various issues prevalent in such areas. One of such issues is the lack of proper power supply in rural areas. Power management solution providers see an opportunity here to provide solutions for power problems for base transceiver stations in rural areas. Various alternative energy solution providers are exploring ways to offer power solutions customised for applications in such areas.

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Infrastructure in India Ports, Roads, and Telecom Active and passive infrastructure sharing is clearly the business model that industry players are opting 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 Indian telecom industry since quite a long time now. As of December 2009, licences for these technologies were expected to be awarded in February 2010. In two years, Indias tower slot demand may rise to over 700,000 from 320,000 now, as demand from existing and new 2G operators rises and operators (who) begin rolling out 3G and WiMax services Inder Bajaj, President, Reliance Infratel, Nov/Dec 2009 With the advent of the 3G technology, there will be a need for high-quality value-added services. The government plans to allot the licence to four players initially. 3G - Future In India Auction deadline for 3G spectrum in India is chosen to be February 2010 (after a series of delays); however, the allocation is expected to happen only by August 2010, implying there are some months before consumers can avail these services. The government expects to raise more than USD 5 billion from the auction of 3G licenses. As of December 2009, there were close to 100 million 3G capable handsets in the country. Upcoming Markets Wireless The government has set a target to increase rural teledensity to 40 percent in five years from the current 18 percent. Internet In the next five years, the government plans to connect 500,000 villages with wireless broadband.

3.6 Future Prospects

Telecom is one of the priority sectors for infrastructure development in the country. The future prospects of the sector are bright, with huge potential yet to be tapped in rural areas where teledensity remains at close to 18 percent. In the second phase of the application of Universal Service Obligation Fund (USO)used to subsidise telecom projects in rural India where worth of funds are close to USD 5 billionabout 10,000 towers are to be installed in rural areas. Service providers are expected to focus on service quality for urban consumers in 200910. As 3G and Wi-Max get introduced, many data-centric mobile service users may move to these. Further, the advent of 3G and MNP services will give a necessary impetus to innovation in value-added services (VAS) and associated ARPUs. The government had set 31 December 2009 as a deadline for implementing MNP for metros and June 2010 for non-metros. However, both MTNL and BSNL had said that they will not be able to offer the MNP facility before April 2010.

Recently, DoT permitted Mobile Virtual Network Operations (MVNO) in India. A licence fee of USD 18.5 million for an all-India roll-out of MVNO is expected.

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Infrastructure in India Ports, Roads, and Telecom

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 India Website 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 Project Framework and Financing India Infrastructure Website of Committee of Infrastructure Various industry publications, business dailies, news articles, select databases

Evalueserve Disclaimer

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

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