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| May 8, 2006 | Monday | Rabi-us-Sani 9, 1427 |
SEZs — flavour of the season
SPECIAL Economic Zones (SEZs) are the flavour of the season in India. State governments are in a big rush to capitalise on the expected boom in the sector, and many have unveiled ambitious plans.
Indian business groups too have been announcing huge investments in SEZs, enthused by the spurt in activities, relating to these zones, in officialdom. Though the concept of SEZs was first mooted by the Indian government about five years ago, it had been slow to take-off, and is taking shape only now.
Under the original plan, an SEZ was to be considered, for all practical purposes, as foreign territory. Investors – both Indian and foreign – could bring in their money, put up factories, IT parks, financial firms, export their products and services, and not pay any taxes.
More importantly, employees working at SEZs would not be governed by Indian labour laws, and employers were free to hire and fire at will. Full repatriation of profits and capital was also to be assured, and local civic laws would be different from those prevailing outside the zones.
The Indian government wanted these exclusive enclaves to be modelled on the lines of Shenzhen in China, other industrial parks in south China, and those in the Gulf, especially Jebel Ali free zone in Dubai.
The original concept, however, has been watered down now. Under pressure from its leftist allies, the United Progressive Alliance (UPA) government has been coy in tackling the labour laws issue at SEZs. There is still a lot of ambiguity on labour matters. The government has also made some other changes, and is still not sure on how to treat financial players, including insurance companies and banks.
India had earlier toyed with the concept of free trade zones and export promotion zones, but they had not proved to be very successful. The two noteworthy ones were the Santacruz Electronics Exports Promotion Zone (SEEPZ) in Mumbai, and the Kandla Free Trade Zone in Gujarat.
Last year, the government converted most of the zones – including SEEPZ – into SEZs. But the last few weeks have seen sudden movement on the SEZ front. State governments have signed agreements with corporates, and business houses have embarked on a massive land acquisition spree.
Over the past two months, the government has received about 180 proposals for setting up SEZs. A decision on many of these would be taken over the coming weeks. But already, about 100 SEZs are in the pipeline, and the government recently cleared proposals for about 150 SEZs, covering about 40,000 hectares of land and involving investments of about Rs1 trillion.
LAST week, the Haryana government cleared a proposal by India’s leading business group – Reliance Industries, controlled by Mukesh Ambani – to establish a sprawling, 25,000-acre SEZ near Gurgaon, bordering Delhi.
Gurgaon is one of the fastest growing satellite cities in India, and billions of rupees of real estate development is occurring here. Together with other satellite cities, like Noida and Greater Noida, and of course, Delhi, it forms part of the National Capital Region.
Reliance plans to promote a special purpose vehicle to develop the SEZ, which will require an investment of a whopping Rs300 billion. Mukesh Ambani expects the project, on completion, to be worth over Rs2 trillion.
The Reliance scrip touched an all-time high last week following the announcement of the Gurgaon SEZ. It peaked at Rs1,122, as investors went on a rampage acquiring the Reliance shares.
The oil-and-petroleum giant, which is also promoting a massive new refinery in Jamnagar near Gujarat, has aggressive plans for the SEZ sector. Besides Haryana, it is planning to put up SEZs in Jamnagar, and one near Mumbai. Reliance Petroleum is putting up a $6 billion refinery in Jamnagar, and the federal government last month notified that a 1,000-acre plot adjacent to the refinery will be a multi-product SEZ.
Dow Chemicals of the US is also planning a downstream unit in the Reliance-promoted SEZ in Jamnagar, for export of specialty petrochemicals.
But its most ambitious venture is near Mumbai, where Reliance is all set to build a twin-set of SEZs on 14,000 hectares of land, with an initial investment of about Rs250 billion.
Mukesh Ambani, who has acquired tremendous experience in executing mega projects (including the first phase of the Jamnagar refinery, and the Reliance Infocom network, which is now part of his estranged brother, Anil Ambani’s empire), has decided to take on the most ambitious infrastructure project in the country.
The Navi Mumbai and Maha Mumbai SEZs would include IT parks, offices, factories, residential townships, hotels, golf courses, hospitals, shopping malls – in fact they would be mini-cities, well-planned, but rivalling Mumbai.
While Reliance plans to make the initial investment of Rs250 billion, ultimately after the twin SEZ project is executed, it would be worth over Rs2.5 trillion. Ambani is taking up the project in a joint venture with the Maharashtra government (the Haryana SEZ is also a joint venture with a state government agency there).
The Maharashtra government plans to build a Rs40 billion trans-harbour freeway over the sea, to ensure that the businessmen, executives and residents do not spend much time travelling to Mumbai. The state government is also pushing for an international airport near the SEZs.
The new SEZs are also in proximity of the Nhava-Sheva port – one of India’s largest container ports – and a high-speed rail line is being planned between the zones and the port.
Realising the difficulty in acquiring land, Ambani has started hiring top bureaucrats from Maharashtra – mostly retiring IAS officers and revenue officials – to ensure smooth sailing for his project. Property prices around both Navi Mumbai and Gurgaon have started soaring after the announcement of the mega projects by the Reliance group.
Ambani is also making an aggressive foray into the retailing sector, and he plans to set up a chain of hyper malls across the country. He is also planning to set up a venture capital fund to finance these ambitious retail and real estate projects.
OTHER industrial, property development and information technology groups are also busy unveiling their SEZ plans, though on a much smaller scale. Mahindra & Mahindra, the Mumbai-based automobile giant, Essar, the oil giant, and DLF, the Delhi-based real estate major, are among those planning SEZs.
Other developers, including Ansals, Gesco, Vipul group, and Pune-based Panchshil are also planning SEZs. Infotech leaders Infosys and Wipro are promoting IT-focussed SEZs across the country. Wipro’s SEZ is being planned near Kolkata. Other IT firms are planning ITES (IT enabled services) SEZs.
Funding of these SEZs is emerging as a major challenge for banks and financial institutions. Recently, US-based Banyan Real Estate, together with Landmark Holdings of the Dalmia group, picked up a 16.5 per cent stake (around Rs750 million) in a Rs12 billion IT SEZ being set up in Gurgaon by the Vipul group.
Top banks, including state-owned State Bank of India (the country’s largest commercial bank), and leading private ones such as ICICI Bank, HDFC Bank, UTI Bank and IDBI Bank, are also working out a strategy to fund the billions of rupees needed for the SEZs. Many of the banks are planning to set up consortia to fund these big-ticket items.
Domestic and international investors are taking a serious look at the proposals by SEZ promoters, and are expected to take a stake in some of the projects. The initial funding requirements amount to nearly Rs200 billion, and the financiers are preparing the appraisal reports. The reports are expected to be ready within three months, and financial closure is expected by October.
One of the major reasons for the big rush to set up SEZs is the hefty tax breaks and tax holidays offered by the government. Development of SEZs falls under the infrastructure sector, while export earnings can attract huge concessions.
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