The SEZ way

Pharma and biotech companies are taking advantage of the SEZ Act and setting up their own establishments. Usha Sharma looks at SEZs from a project management point of view

"This situation can be avoided by taking into confidence all stakeholders, which includes the Government, the ruling party and the opposition, landowners etc. Otherwise every SEZ will be converted into a Singur. The Government should only act as a facilitator. First of all our policy has to remain stable till the SEZ is completed or else the financials for setting up will be a mess. Most small scale industries (SSIs) who were invited to set up plants in tax heavens have suffered huge losses due to shifting of production facilities" - R S Swaminathan Director Spectrum Pharma-Tech Consultant

India has emerged as a preferable manufacturing destination for global pharmaceutical majors due to high quality, cost effective production capabilities. Thus, over the years, the industry has gained the status of being one of the top exporters and foreign exchange earners for the country. Indian pharma exports continue to move upwards, which suggests that the pharma industry is growing at an exponential rate. It was in February 2006, that the Indian Government took the initiative to take this growth to the next level by setting up Special Economic Zones (SEZs) for both Indian pharma as well biotechnology industries. The SEZ model has been borrowed from China, which has about 600 SEZs and is doing remarkably well in terms of Foreign Direct Investment (FDI).

Taking full advantage of this initiative, pharma companies like Ipca, Zydus Cadila, Wockhardt have successfully set up their own SEZs, and according to industry observers, many more pharma entities are due to follow. Ajanta Pharma and Dishman Pharma have already finalised the land and location for setting up new SEZs at Aurangabad, Maharashtra and Bavla, Gujarat.

The trend is that pharma companies seem to prefer to set up these SEZs through their own infrastructure subsidiaries. For example, Inspira Infrastructures, a group company of Ajanta Pharma, is developing Ajanta's pharma and biotech SEZ, whereas Dishman's project will be executed by Dishman Infrastructure, a group company of Dishman Pharma.

Real estate move

This pharma and biotech SEZ activity has also attracted the attention of leading real estate players who intend to capture a piece of the action. Parsvnath Developers and Ramkey Group have set up their own SEZs at Nanded in Maharashtra and Vishakapatnam respectively.

Parsvnath SEZ Ltd (PSL), a subsidiary of Parsvnath Developers, has already received a Letter of Intent (LoI) from Maharashtra Industrial Development Corporation (MIDC), a Maharashtra Government undertaking for development of pharma SEZ project in Krushnoor industrial area of Nanded, which is in close proximity to the SH-6 connecting Nanded and Secunderabad. It is spread over a total area of 370 acres. PSL will float a special purpose company jointly with MIDC to implement the project. PSL will hold 74 percent stake in the joint venture (JV) with MIDC holding the balance 26 percent. The Nanded Pharma SEZ has already been approved and notified by the Government of India.

Government initiative

The Government had introduced the policy for setting up SEZs in India with the intention of providing an internationally competitive and hassle-free environment for exports. There are multiple advantages of SEZs. This activity will bring in more FDI to India. Although export promotion schemes available outside SEZs are not very different from those available inside them, the difference is that an SEZ is considered as an infrastructure business and not as a real estate investment. SEZs follow the concept of global trade and diminishing border controls. Investment will naturally flow where tariffs are low, labour availability and infrastructure is good and the Indian Government realises this fact. Today, state governments are competing not just with each other, but with other countries to attract investment. This is the situation in China, Singapore, Malaysia and UAE. Globally, the SEZ model has been extremely successful, not just in developing countries but also developed countries, as a model for attracting investment.

Immediate action

When the SEZ policy was announced, many pharma companies started looking at expanding into SEZs. However, the Export Processing Zones (EPZs) that got converted into SEZs did not have place to accommodate them. There were no SEZs that were able to accommodate the pharma companies. As a result, many companies decided to set up their own SEZs on a smaller scale, to meet their requirements. Later, the Group of Ministers (GoM) introduced a minimum land requirement clause for sector specific SEZs. As the in-house land requirement for an SEZ was much lower than the mandatory 100 hectare (ha) and 10 ha for pharma and biotech, respectively, these groups also decided to lease excess land to other industry players.

Ravi Agrawal, Executive Director, Inspira Infrastructures, says, "Government has been smart enough to regulate that no manufacturing units are moved to SEZs, but only new investment flows to these zones, which is exactly what we have seen until now. If we look at the current scenario, few operational SEZs have been outperforming the rest of the country in attracting investment, creating jobs and bringing export dollars. Hence, with this policy, the Government has been bang on target to achieve the above objectives. Our SEZs also are estimated to generate about 3,000 new jobs in Aurangabad giving a boost to the local economy."

Setting up SEZs

Globally, the philosophy behind SEZs is to attract more capital to enhance economic activity in the location and step up exports. The tax sops offered make it a profitable proposition to invest in such ventures. In fact, SEZs by definition are 'specifically delineated duty-free enclaves and shall be deemed to be foreign territories for the purposes of trade operations and duties and tariffs,' they will act as engines for export led economic growth in India.

As per the SEZ Act 2005, a company can only lease land in any SEZ in India. The procedure to lease land in an SEZ is very streamlined. However, all applications are scrutinised by the development commissioner to ensure the project plan meets the Government's criteria in terms of the mandatory obligations and this is a fairly routine procedure. The other processes to get utility connections are streamlined, as it is the developer's responsibility to provide all amenities to the door step of all units. Each pharma SEZ would have specific offerings based on the locational advantages and the capabilities of the developer to provide facilities best suited for targeted clients, even within pharma and biotech industry. While leasing land in an SEZ, companies can focus on their project rather than worry about the issues related to private land purchase in India.

There is no payment to be made to the Government, either by the developer or the manufacturing unit and service provider. All entities need to adhere to the mandatory obligations and rules as specified by the Government in the SEZ Act. After the duration of tax exemptions, all tax obligations have to be met. "We understand that the payback period is longer in developing SEZ as against constructing buildings. However, companies that sustain through the cycle will have an opportunity to make profits when manufacturing companies move in and the non-processing area in the SEZ starts mushrooming," Agrawal comments.

Pain points

Few years ago, Cipla has set up its SEZ at Goa. The project ran into difficulties and was halted after running successfully for some time. The Goa SEZ Virodhi Manch (SVM), a non-political body comprising various social groups and non-governmental organisations opposed to SEZ in the state, has accused the state government of helping SEZ developers make a backdoor entry into Goa.

"This situation can be avoided by taking into confidence all stakeholders, which includes the Government, the ruling party and the opposition, landowners etc. Otherwise every SEZ will be converted into a Singur. The Government should only act as a facilitator. First of all, our policy has to remain stable till the SEZ is completed or else the financials for setting up will be a mess. Most small scale industries (SSIs) who were invited to set up plants in tax heavens have suffered huge losses due to shifting of production facilities," says R S Swaminathan, Director, Spectrum Pharma-Tech Consultant.

Different roles

Architecture does play a role in planning for concepts like proper utilisation of space. It provides strategy and design concepts like renewable energy, green building materials, building orientation, vastu etc. The proper motivation of persons at site is a key factor in finishing work on time and this cannot be achieved if the project manager is inexperienced in handling men at the site. They work with practical engineering knowledge experience, which streamlines activities at site, ensuring proper movement of goods and services and prevents losses due to unnecessary inventory or time mismatch of availability of men or material at site. Proper knowledge of the SEZ Act and rules, use of detailed engineering design and construction, motivation of persons at site and some prior exposure while construction of pharma and biotech facilities could saves a lot of cost escalation.

Knowledge with initiative

From a project management point of view, architects, pharma consultants, project managers and engineering consultants working on an SEZ may be using the same skills as they would outside an SEZ. But the major difference is that the knowledge of the SEZ Act is pivotal to its smooth running. It could involve lowering of costs at every step of construction phase, starting from material procurement, procurement of construction equipment, vendor short listing, type of contract to be signed etc, which allows control on all these activities such that maximum direct and indirect benefits can be taken from tax exemptions provided by the Act, thus avoiding losses due to non-adherance to government procedures.

Confirming this, Agrawal says, "Our SEZs are located in Aurangabad, which is an established pharma hub and emerging hub for biotech. Although, we do not foresee any major issue while leasing land or space in our SEZ, clients need to be thoroughly aware about the SEZ Act and rules and the conditions it places on them. While we try to inform them of their obligations of being in an SEZ, companies need to thoroughly study the laws applicable to them. It is always prudent to take a conscious decision rather than learning the hard way."

The exposure of project manager to pharma construction will help to some extent. The manager will be sensitive to safety issues and construction quality expected in pharma and biotech facilities and will give importance to proper quality parameters. The pharma industry has to get certain certifications from regulatory authorities of the target export country like the United States Food and Drugs Authority (US FDA). In cases where certifications are required for manufacturing facility, quality of construction becomes critical issue. Due to this parameter, the project manager prepares layouts according to US FDA guidelines, taking care of equipment placements, men and material movements, containment needs, inventory norms for warehouse, expansion philosophy etc.

The consultant advises on where specific type of manufacturing units like high potent drugs, active pharmaceuticals ingredients (APIs) and formulations, ancillary industries like packing material suppliers etc. need to be located. They could also help in setting up a common effluent treatment plant (ETP).

The facilites required for pharma and biotech SEZs are completely different. For example, in a pharma SEZ, companies have to provide ETPs capable of handling pharma effluents, whereas designing in biotech SEZs, ETPs will have to provide for treatment of live organisms in the discharge from these units.

Outlook

Future prospects look good. The SEZ Act will surely bring in more FDI because foreign investors always look for legal and governmental framework. With the Act, the rules have been made transparent, which will instil confidence in foreign companies, "I am completely bullish on the prospects of the SEZs in India. SEZs have been a very good initiative by the Government to boost the economic activity and SEZs have proved the same. Going forward, lot of international companies also will consider setting up base in India.

There is a good momentum going for India and SEZs will continue to be its leading growth driver. Our company is already considering more SEZ projects in the near future in other sectors," Agarwal adds. But, Swaminathan warns that "Frequent changes and review of policies would have a very adverse impact. To make it successful, it is essential that the policy remains stable and robust."

u.sharma@expressindia.com