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FINANCING OF

SPECIAL ECONOMIC ZONES

Mr Ravi Parthasarathy
Vice Chairman & Managing Director

INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED


APRIL 30, 2004
SECTION A

BACKGROUND
INTRODUCTION

n Although India attracts FDI of US$ 2.6 bn p.a., it is far less compared
to other developing countries (China – US$ 43 bn, Brazil – US$ 19 bn)
n While Indian exports have accelerated post liberalization in 1991,
growth rates are not comparable with developing countries
n The fulcrum of the export volume growth of such countries has been
FDI
n To draw a parallel :
– China set up Shenzhen SEZ in 1986
– Total FDI till date touched US$ 25 bn
– Annual Exports of US$ 47 bn
SEZ AS A CATALYST

n Significant FDI is a direct function of quality infrastructure


n Some initiatives for the same included :
– Export Processing Zones (EPZ’s)
– Free Trade Zones (FTZ’s)
n However, they met with limited success on account of :
– Size
– Inadequate infrastructure
– Location handicaps
n Accordingly, in April 2000, the GoI promulgated the “Special
Economic Zone” Policy
THE RESPONSE

n 12 approved SEZs
n 9 in the pipeline
n Pace of implementation has
remained slow
Noida
Jodhpur Kanpur
Jaipur Bhadohi

Kandla Kulpi
Surat
Indore
Gopalpur Salt Lake
Falta
MiSEZ Paradip

Dronagiri Kakinada
Visakhapatnam

Hassan Chennai
Approved
Cochin
Nanguneri Pipeline
THE CONSTRAINTS

n Inadequate experience of developers to successfully manage and


execute all aspects of setting up a SEZ
– In reality an SEZ is a bouquet of various infrastructure facilities
n Perception of a SEZ as a land banking opportunity rather than an
integrated area development
n Slow land acquisition processes
n Non-codification of labour laws
n R&R issues
n Large magnitude of funding with reasonably long gestation for
construction and attaining commercial viability
n Lack of adequate response from the financial sector
THESIS FOR SUCCESS

n Based on IL&FS experience on infrastructure projects in general and

SEZs in particular, focus needs to be on :

– Adequate project development

– Project structuring to ensure commercial viability of

sub-components

– Capital structuring to ensure financial close


PROJECT DEVELOPMENT

n SEZs are complex in scope and globally benchmarked

n Hence a detailed project development exercise is essential prior to


implementation

n Role of Project Development :


– Feasibility Studies
– Master Planning
– Thematic mapping of site
– Marketing to identify target audience
– Receiving statutory and environmental approvals
– Identification of R&R Issues

– Identification and Mitigation of Risks


PROJECT STRUCTURING

n Understanding project requirements in relation to location


n Dividing project sub-components as :
– Required but can be hived off to an external agency
– Required and needs to be part of the main project
n This disaggregated approach would ensure :
– Commercial Viability of sub-components
– Derisking the main project
– Clearly identifying risk profile of the sub-components
n This would then lead to a better ability to :
– Developing stand alone components thereby lowering project cost and
leveraging promoter capital
– Attract sector specific Strategic and Financial Partners
CAPITAL STRUCTURING

n Bankability concerns on account of :


– Large funding requirement
– Long construction period for providing all services
– Timing of receipt of revenues from land sale and/or provision of
services
n Therefore requires credit enhancement measures to provide lender
comfort
SECTION B

IL&FS EXPERIENCE
DIVERSE REQUIREMENTS

n IL&FS has been closely involved with two SEZs :

– Andhra Pradesh SEZ

– Maha Mumbai Integrated SEZ

n Experience has been markedly different in terms of

– Locational advantages

– Level of existing infrastructure

– Promoter identity
ANDHRA PRADESH SEZ
(APSEZ)
APSEZ – KEY FEATURES

§ APSEZ sponsored by GoAP


§ Site : Vishakhapatnam
§ An area with low industrial
activity
§ Low value land – cheaper
project cost
§ Low level of surround
infrastructure

APSEZ
DEVELOPMENT APPROACH

n First develop on stand alone basis the required surround infrastructure

– Vizag Industrial Water Supply project

– Vizag Container Terminal

– Gangavaram port

– Pharma city

– Upgradation of airport

– 4-laning of National Highway

n Of the above, the water supply project and port have made significant

progress on the back of rigorous project development


VIZAG INDUSTRIAL WATER SUPPLY

n Project entails supplying 264 mld of water to existing industrial consumers

and the municipality

n IL&FS along with APIIC undertook the project development activity for :

– Detailed Feasibility Studies

– Development of Concession Agreement, Bulk Water Supply Agreement

etc

– Project was bid out and L&T was selected as the Preferred Bidder

– Project has achieved Financial close and expects to be commissioned in

May 2004
GANGAVARAM PORT

n Located south of Vizag Port Trust with a deep draft of 20 metres

n Proximity to hinterland industrial users VSP, NTPC etc

n Project Development

– Detailed techno-economic studies

– Development of preferred Master Plan

n Selection of Bidder on ICB basis : DVS Raju, Dubai Port International

n Concession and State Support Agreement signed

n Technical Close : August 2004

n Financial Close : December 2004


READINESS FOR ATTRACTING DEVELOPER

n The completion of the two projects strengthens the Government’s

credibility towards ensuring development of APSEZ

n Parallely government completing land acquisition

n Budgeting for government support :

– Grants for unviable components

– Revenue shortfall funding

n Based on above, invite bids on a BOOT basis for implementing the

SEZ
MAHA MUMBAI INTEGRATED SEZ
(MiSEZ)
LOCATION

§ Mumbai, the financial capital of India


§ In close proximity to the Mumbai-Thane-Pune industrial corridor, which is
the industrial and services powerhouse of India accounting for a US$ 35 bn
§ Site in close proximity to the two busiest seaports
§ In terms of connectivity, the Mumbai international airport is the busiest
airport in the country with flight connections to all the major cities of the
world
§ Healthy domestic consumption in the state, along with skilled manpower are
also a distinct advantage of setting up an SEZ in close proximity to Mumbai
§ Locationally, Mumbai has the best chance of being able to develop the First
SEZ
§ However, conceptualising of two SEZs in the same vicinity created viability
issues
INTEGRATION

n SICOM, signed an MoU with Gujarat Positra Port Infrastructure Ltd


(GPPIL), a Nikhil Gandhi group company, to set up the Maha
Mumbai SEZ (MMSEZ), spread over an area of around 2100 Ha
n CIDCO invited bids to implement the Navi Mumbai Special
Economic Zone (NMSEZ), spread over an area of around 500 Ha
n Since, two SEZs in the same vicinity would create duplication of
infrastructure and undue competition, IL&FS recommended that the
promoters also bid for NMSEZ
n Later, a consensus was arrived at between the Promoters, GoM and
Lenders to develop both the SEZs simultaneously as an integrated
SEZ
n Thus the Maha Mumbai Integrated SEZ (MiSEZ) was created
SITE MAP

NMSEZ

MMSEZ
PROJECT DEVELOPMENT / STRUCTURING

n Master planning completed for optimal land use

– Larger units and infrastructure facilities within MMSEZ area

– Smaller units in NMSEZ

n Integration of common facilities led to reduction in project cost

– Standalone MMSEZ : Rs 4.4 bn

– Integrated SEZ : Rs 4.8 bn

n Identification of stand alone entities e.g. :

– Power generation, water supply – discussions on with leading


developers for satisfying SEZ demand as well as that of adjoining
areas
CREDIT ENHANCEMENT

n Inducting entrepreneurs and sale of land primordial for ensuring project


viability

n However, timing for the same uncertain

n In the case of MiSEZ, given locational considerations a three year time frame
sufficient to complete such land sale

n Accordingly, for MiSEZ have advocated :

– A three year Debt Service Reserve Fund for meeting interest payments

– Such DSRF would be created upfront and managed independently by


IL&FS

– Would accordingly lead to Financial Close

n Based on the above, IDBI has yesterday provided sanctions to the tune of
Rs 5000 mn
CONCLUSION
SUMMARY

n Successful financial closure of SEZs would be determined by :

– Location

– Existing Infrastructure

– Nature of Developer (Public or Private)

n While MiSEZ and APSEZ are at two ends of the spectrum, others are

likely to fall in between in terms of the :

– Approach to development

– Type of credit / revenue support etc