The great SEZ rush skids on slowdown, land issues

The great SEZ rush skids on slowdown, land issues
Business Standard, June 18, 2009, Page 1

Rituparna Bhuyan / New Delhi/ahmedabad/mumbai

Almost half the proposals to be taken up by the Board of Approval involve developers wanting to curtail their plans.

When the Board of Approval for special economic zones (SEZs) meets on Friday, liaison and corporate affairs executives will jostle for space in the narrow corridors on the ground floor of Udyog Bhavan, which houses the commerce department.

In stark contrast to last year, however, few of them will be pushing proposals for new zones. Demand dynamics brought on by the global slowdown and persistent land acquisition problems are forcing developers to alter their plans.

As a result, almost half the proposals that the inter-ministerial panel headed by Commerce Secretary Rahul Khullar will consider have to do with extensions to acquire land or cancellations of these tax-free enclaves that were supposed to catapult India’s exports into the big league.

Of the 58 SEZ proposals on the agenda, only two are for setting up new zones; 23 zones are applying for an extension of the validity period and two — from K Rajeha Universal — are seeking de-notification on the grounds that the economic downturn has resulted in lower demand.

Then there is Mansarovar Industrial Development Corporation that has decided to expand the focus of its zone from handicrafts to information technology-enabled services (ITES), and to split the 131 hectare-zone.

“The developer has requested that due to the present downturn in the economy, the additional sectors (ITES) may kindly be permitted to be included in the SEZ,” the commerce ministry said in its note for the BoA meeting.

Similarly, financial constraints have forced Diamond Software Developers, which was setting up an SEZ focused on information technology (IT) and ITES in Noida, to drop its plans.

Meanwhile, companies such as Parasvnath SEZ have had to move the proposed 10.11 hectare Biotech SEZ from Ranga Reddy district in Andhra Pradesh to Medak in the southern state owing to legal hurdles in land acquisition.

Similarly, with only 63 per cent of the land acquired, Rajasthan Explosives and Chemicals has sought more time for developing a multi-product zone.

Plagued by insufficient demand for space, land acquisition problems and the liquidity crunch in the first half of 2009, nearly 27 developers with all approvals in place had already sought more time to operationalise SEZs. Ministry officials said the number could go up to 50 at Friday's BoA meeting and much more at subsequent meetings.

According to the norms, an SEZ has to be up and running within three years of receiving the formal approval, which is only given after land is in the developer’s possession.

When the economy was growing at 9 per cent, there was a rush to set up SEZs. Between February 2006 and May 2009, the government gave formal approvals to 568 proposals, nearly 60 per cent for IT. Of these, 315 have been notified, which means they can claim tax and duty benefits.

But work has been completed and exports are taking place in only 90 zones. So, only 16 per cent of the formally approved proposals are contributing to India’s exports.

Exports from these 90 operational SEZs are projected to grow 38 per cent to over Rs 1,25,000 crore in 2009-10, as against Rs 90,000 crore last year. This will, however, be just a quarter of the Rs 5,00,000 crore projected if all the formally approved zones were to become operational.

Government officials, however, said this was only to be expected. “When we started giving approvals, we expected at least one-third of the approved SEZs to fall by the wayside. But the slowdown and restrictions on state governments acquiring land could see more projects not seeing the light of the day,” said an official who was associated with SEZ policies and approvals for over five years.

“The number of approved zones is already high. The serious players are here to stay and our focus will be to facilitate SEZ-related matters,” added another official.

Experts said with prospective clients putting their expansion plans on hold, developers do not want to take risk and build zones. This is because, unlike the real estate business model, SEZs require a long gestation period before developers see any financial gains.

“Scrapping unviable zones is a systemic correction. When the business cycle is on an upturn, the zones will bounce back,” said Aradhana Agarwal, senior fellow at ICRIER and reader at Delhi University’s Department of Business Economics.

PricewaterhouseCoopers Executive Director Vivek Mehra, who is advising many developers, said the downturn had lowered demand for space in the IT zones. Besides, the extension of the Software Technology Park scheme also meant that the rush for SEZs has come down.

“There are pressures on timeline and builders, who have put in more than the requisite 25 acres, are looking at other options. Even if you de-notify now, you have the option to seek a re-notification later or a set up a zone with a smaller land area,” he said.

Developers seeking extensions include fraud-hit Satyam (three zones), Infosys (two zones), NIIT, and ONGC-promoted Kakinada SEZ in Andhra Pradesh.

The former commerce ministry official said the manufacturing sector-related SEZs, which have not shelved their plans, could stage a comeback over the next eight to 10 months if production shifted to low cost destinations.

For the moment, the absence of demand and liquidity crunch has also forced real estate major DLF to get conditional approval to scrap four of its notified zones, while its plea to get another of its Delhi-based zone has already been accepted.

Gitanjali Gems, which has permission to set up nine SEZs, has also applied the brakes on its plans. Although the company has decided against going ahead with a proposed zone in Nanded, the development of six zones in Gujarat and Maharashtra is yet to pick up. Only one SEZ in Hyderabad is expected to be operational, but that is one-and-a-half years away.

In pharmaceuticals, chemicals and biotech, most of the 16 notified SEZs have been non-starters. Apart from the projects of Divi’s Laboratories, Biocon and Serum Institute of India - the first among the notified SEZs in 2006 – the others are still under implementation. Issues such as land acquisition, delays in developing physical infrastructure, setting up of plants and regulatory approvals from the US and Europe are delaying the projects, sources said.

“The development of a pharmaceutical SEZ may take three-seven years as pharmaceutical plants need quality water, effluent treatment plants and good physical infrastructure,” said Hitesh Gajaria, head - pharmaceuticals and executive director, KPMG India.

Even government-promoted projects such as development of Kandla Port Trust’s Rs 7,000 crore port-based SEZ is in pause mode.

“A majority of the developers want to see how the situation evolves in the coming days. So, they do not want to scrap their plans for the zones as of now. But there is an oversupply issue in zones,” said Abhishek Goenka, partner at consulting firm BMR & Associates.

With the inputs of Maulik Rajnikant Pathak & P B Jayakumar