The initial hoopla over special economic zones is receding and pragmatism is creeping in. With the SEZ culture new to the private sector, there is clearly lack of experience and foresight. Private sector players with little prior experience are now facing ground realities, and are confronted with intricacies they never anticipated.
An SEZ, especially a multi-product one, is not all about constructing compound walls, roads and levelling of land. According to Bhavin Shah, Vice President, Mundra Port and SEZ Ltd, "In a multi-product SEZ, developer will act as a municipality itself. You should have all the facilities within the SEZ including graveyard, birth-death registration facility etc. The problem is how to price them." Shah was speaking at a conference on 'Profitability of Special Economic Zones' organised by Informedia India Pvt. Ltd.
No doubt, building an SEZ requires deep pockets and is a long-term game. Many infrastructure facilities within SEZ are developed in stages. Says Ashish Mathur, Head - Business Development, Mahindra World City, "It is difficult to estimate breakeven for the project. You need to have deep pockets. For example, Jaipur SEZ will be developed over a period of six years. So how does one calculate breakeven? In that sense, it is a risky business."
Most of the developers who had joined the mad rush to set up special economic zones realise that there is no exit route. "In any development activity there should be an exit mechanism. The SEZ Act is silent on exit mechanism for the developer," says Abhishek Goenka, Associate Partner, BMR Advisors.
An export-oriented unit that finds no market for its products abroad can sell them in the domestic market, of course, after paying all taxes and duties. Similarly, a unit in an SEZ can divert its products to domestic tariff area if it finds no takers for its products in the international market after paying all taxes and duties. However, there are no such options for an SEZ developer. After developing plots or constructing units within an SEZ if the developer finds no takers, what can he do? "Can he utilise those plots and units with all infrastructure facilities for some other purpose after paying back all tax and duty benefits availed of by him?" asks Goenka. The Act is, however, silent on this.
The global slowdown and US sub-prime crisis may impact FDI flows into the country and into SEZs. "Several foreign companies were earlier planning to invest in SEZ but they are now holding back. They say there is a global downturn, sub-prime crisis, oil crisis etc. They are waiting for the uncertainty to clear," says Bhavin Shah of MPSEZ.
Acquiring land for SEZ is still a major problem, especially after Singur and Nandigram. "Between the announcement and notification for acquisition of land, the price of land shoots up by at least 30 per cent. For example, land between Mundra Port and Mundra town now costs not less than Rs 2 crore per acre. At this price an SEZ project is not feasible," Shah explains.
For example, Ispat Industries Ltd is planning to set up a cluster of sector-specific SEZs at Rewas in Raigarh, Maharashtra. Although the company requires just 500 acres of land for its first sector-specific SEZ, the company has already acquired more than 1,000 acres. According to company sources, land price in the region was ruling at Rs 2 lakh per acre two years ago and has since gone up to Rs 5 lakh per acre.
Changes in the Income Tax Act were introduced through the SEZ Act and not through the Finance Bill. Now whatever changes in the IT Act that need to be effected (vis-à-vis SEZ) it should be through the SEZ Act only. This Act comes under the purview of the commerce ministry while the IT Act is under the finance ministry. "The file is currently shuttling between the two ministries," says Abhishek Goenka of BMR Advisors.
Every new concept takes its own time to gain acceptance among the masses. It may be the case with special economic zones. As Bipin Agrawal, Executive Director, Omaxe Ltd, put it: "Whatever we do there are bound to be a few gaps. All that we can do is to strive to make this policy framework better and innovate as we gradually grow."