Major corporate promoters may look at scaling down the size of special economic zones (SEZs) to allow them to sidestep the delays resulting from the government’s reluctance to notify any fresh projects where land is yet to be acquired.
Rather than risk delays for mega projects worth several thousand crores, conglomerates, such as Reliance Industries Ltd and Mahindra & Mahindra, are aiming to get the land they have already acquired notified as an SEZ, even though the acquired properties are a small sliver of the originally planned size.
Reliance, which is in the process of taking control of 1,600 hectares of land acquired by its joint-venture partner, City Industrial Development Corporation (Cidco), is now planning to seek notification for the Navi Mumbai SEZ as a multi-product SEZ.
The original size of this project was 4,000 hectares but the project, which recently achieved financial closure, relies on Cidco to acquire the balance land.
Mahindra, which has already acquired around 1,000 acres of land at Jaipur for its 3,000-acre SEZ, is planning to emulate the Reliance example.
“At the Jaipur SEZ, in the worst case scenario, we can acquire another 30 acres land to make it one contiguous area and secure a final notification for a reduced-size SEZ,” says Arun Nanda, president infrastructure sector at Mahindra.
Realiance officials say that while they have in-principle approvals for the 4,000-hectare Navi Mumbai SEZ and the 10,000-hectare Mumbai SEZ, both in Maharashtra, they still don’t have a formal notification from the government.
The company has recently announced a relief and rehabilitation package for project-affected persons in the Mumbai SEZ where it has privately purchased around 1,000 acres.
Between these two SEZs, Reliance had planned an investment of Rs30,000 crore. Another Rs4,000 crore has been earmarked for the Rewas Port, which is meant to support the SEZs. A separate Reliance SEZ in Haryana, spread over 10,000 hectares, has a project outlay of Rs25,000 crore. The company recently acquired 3,600 hectares of land for Rs2,200 crore.
Similarly, the Mahindra group has announced a 3,000-acre SEZ in Jaipur, dubbed Mahindra World City. Within that, a 190-acre facility to house Infosys Technologies and Wipro as anchor tenants has already received formal approval from the government, but the rest of the zone is still awaiting other clearances. Another Mahindra SEZ, a 3,000-acre project in Pune, is also awaiting formal clearances. “Even at the Pune SEZ we are in talks with the local community on what they would want in return for their land and come to a solution,” says Nanda who is hopeful of proceeding with the SEZ.
So far, 63 SEZs have already been approved in principle by the Union government. But formal notification of these SEZs is subject to fulfilment of norms laid down, only after which can developers and units located there, avail of concessions such as duty-free imports and a five-year income-tax holiday on profits earned.
“In the normal course of events, these final notifications would be routine,” says Bobby Parikh, a partner of Mumbai consultancy BMR Associates, which has a flourishing SEZ practice. “But, given the controversy over the SEZ issue... actual notifications would have to await promulgation of revised norms.” Uncertainty over notifications could delay investment and development plans, causing the cost of development to inflate. This, in turn, could affect the projected returns on investment.
Downsizing of a project size also affects the viability and the pricing of the infrastructure to be developed within the zone. For instance, the cost of power that a large 3,000MW power plant produces is significantly lower than that of captive, smaller power plants put up by industrial units in India today.
It’s because of the availability of cheap, reliable and adequate infrastructure that businesses would like to set up shop inside these zones. But as S.J. Vijay, managing director of Salmon Leap Associates, a SEZ consultancy, explains, if the board of approvals, which consists of senior members drawn from different ministries, is unable to reach a consensus, the matter is sent to a group of Union ministers called the empowered group of ministers that’s currently headed by defence minister Pranab Mukherjee.
Given mounting concerns on the acquisition of farmland for SEZ’s, analysts expect even the group to go very slow on fresh notifications.
The entire SEZ model has come under criticism in recent weeks from all political parties as well as factions within the government.
Finance minister P. Chidambaram, for one, supports the concept but fears that there will be tax leakages.
For instance, a factory in a SEZ that buys all its raw materials from within India and exports just one unit of its entire production would meet the criterion on net foreign exchange earnings and thus, quality for income-tax exemption on its entire profit, points out Parikh, echoing what have been serious concerns within the government.