One of the major reasons why SEZs have not taken off in a major way in India is on account of the intrinsic lack of export competitiveness, says Indranil Dasgupta, Chief Executive Officer-Industrial Zones, ATTIVO Economic Zones, Srei Infrastructure Finance Ltd.
Can you please tell us about the viability of SEZ projects in India? Why has it failed in India?
The concept of SEZ hinges on the ability of Indian companies to export goods and services on favourable terms in the international market. This, in turn, depends on the intrinsic export competitiveness of India in the manufacture of such goods and production of these services.
While Indian manufacturing in many sectors (such as textiles, pharmaceuticals, leather, auto components, etc.) has intrinsic factor advantages, it also suffers from certain environmental issues related to ease of doing business, lack of infrastructure, delay in ports, lack of Value Added Tax or GST, cascading impact of taxes and duties, higher cost of finance as compared to companies in competing countries such as China, ASEAN countries, etc. While successive governments including the current government have done their bit, a lot still needs to be done on these counts.
One of the major reasons why SEZs have not taken off in a major way in India is on account of the intrinsic lack of export competitiveness. Of course, those sectors that are labour or specific-skill intensive (e.g. leather and footwear, garments, gems and jewellery, etc.) or are mostly immune to the negative impact of environmental issues (such as IT or ITeS) have continued to prosper in the export markets and have established bases in SEZs.
I am very hopeful that the measures being under¡taken by the current government to address the environmental issues and further reduce, and finally, eliminate their negative impact will go a long way in enhancing the export competitiveness of Indian manufacturing and trans¡late into sustained growth of SEZs.
In addition, continuous changes in the government policies like imposition of MAT, DDT, duty drawbacks for certain industries given outside and not within SEZs, lack of clear state policies on SEZs in many parts of the country, have also impacted the growth of SEZs in the past.
However, SEZs have the potential to contribute to the growth and development of the Indian economy in terms of exports, employment, and investments. We have confidence in our ability to develop SEZs that are economically viable. We will continue to innovate ideas and offer simple solutions to complex problems.
Can you please apprise us about SEZ projects that Srei has financed? What kind of challenges do you face while financing such projects?
ATTIVO Economic Zones, a Srei initiative, is developing a service SEZ in Maharashtra and AMRL Hitech City Ltd in Tuticorin in Tamil Nadu. In addition, Srei has financed a petrochemical SEZ in Bharuch, a multi-product SEZ in Jambusar, an IT SEZ in NCR, etc. One of the major challenges faced in financing such projects lies in assessing the ability of the borrowing entity in being able to generate sufficient revenues to service its debt. Unlike other infrastructure projects, it is difficult to ascertain with a fair degree of certainty the revenue flows that may arise to the project from land lease or otherwise. Therefore, the assessment of the capability of the borrowing entity (and/or its promoter group), in being able to market the SEZ as well as to service the debt obligations in the event that the envisaged marketing activities do not succeed, becomes of paramount importance. Proper evaluation of land records, the major underlying security for such projects, also needs to be done.
SEZs have not performed to their full potential in the past ten years. In this context, can you please throw light on the risks involved in financing such projects?
The current Indian Trade Policy seems to be moving towards benefiting the investors in SEZ and developers of SEZ. RBI has recognised SEZ projects as infrastructure projects and like other infrastructure projects has certain generic risks.
As stated earlier, one of the major risks involved in financing SEZ projects is the project risk. SEZs are long gestation projects and these develop over years and can´t be implemented instantly. Accordingly the risk analysis of SEZ projects needs to comprise a detailed market analysis which would include detailed sectoral analysis, an assessment of the SEZ to attract appropriate investments from these sectors and the intrinsic marketing ability of the SEZ team to attract these investments.
In addition, legal risks, especially those associated with the nature, ownership and characteristic of land (the major underlying security) need to be evaluated. Regulatory risks also need to be taken into consideration, given that permissions for SEZs always involve Central and State level permissions.
Structural risks also need to be evaluated in depth - the soundness of the financing structure of the transaction, contract provisions and definitions for major EPC contracts and O&M contracts need to be examined. Promoter risks are also of importance and the ability and strength of the promoter to meet financial obligations in the event of insufficiency in projected cash flows, is also to be evaluated.
Baring generic business risks, SEZs pave way for huge investments in the time to come.
What quantum of investments do require for development of SEZ? Please tell us about the financial model and stakeholders involved in the project?
To attract global investment into Indian SEZs, one should be geared up to the world class standards competing with Middle East, ASEAN, Europe and US free trade zones to provide seamless connectivity, electric power, water, data highway and other infrastructure. It normally costs USD 75000- 100,000 per acre. This varies according to the terrain and reachability as well.
The financing model for SEZs, like other infrastructure projects, comprises components of equity and debt. Mezzanine capital is often the preferred mode of financing subject to serviceability through project cash flows.
What are the current issues plaguing the sector that need immediate attention and what are the proposed measures?
As stated earlier, re-examination of MAT imposition, DDT, duty drawbacks for certain industries given outside and not within SEZs, formulation of clear state policies on SEZs in many parts of the country are immediate requirements. In general, the Government should try to implement the Act in the spirit of its conception in 2005 and implement new measures by studying best-in-class SEZs and Economic Zones in China, Middle East, Thailand, etc.
- SUPRIYA ABHIJEET OUNDHAKAR