82660 Competitive Industries Note: Industrial parks where firms need it: A new way to attract investment A UNIQUE APPROACH TO LOCATION SELECTION Location selection is probably the most critical step when designing an industrial park or zone program: it largely determines demand for the infrastructure, and hence effective implementation success. The Scheme for Integrated Textile Parks (SITP) of the Government of India, started in 2005, has used a unique strategy to handle the location selection issue. It essentially reverses the usual process, which has caused many programs to stumble in implementation, including the high-profile Indian SEZ program (Figure 1). The program focuses government efforts on attracting and organizing the firms that will use the park, and then has them to locate, dimension, and build the park itself. While it is early days, and the scheme does not solve all the issues of industrial parks or zones, it does seem—so far—to have mitigated the location selection risk: parks have been built where on average 50 entrepreneurs have started to operate, and private investment already represents 4 times public investment (Figure 2). FIGURE 1: Implementation of India’s SEZ Program TABLE OF CONTENTS Formally approved SEZs Notified SEZs Operational SEZs A unique approach to location selection . . . . . . . . . . . . . . . . . . . .1 End of 2011 End of 2011 End of 2011 The tough question: “how to”. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 580 Conditions and risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 -35% Reasons not notified: • Fail inspection (land not contiguous, free of unencumbrances) ABOUT THE AUTHORS • Fail minimum capital requirements 380 Luke Simon Jordan -67% Luke Jordan is a Private Sector Development Specialist with the Competitive Industries Practice, based in New Delhi. He works Reasons not on manufacturing in India and mining based growth in Afghanistan. operational: • Land speculation • Lack of demand 124 Yannick Saleman • Lack of financing • Delays in construction Yannick Saleman is a Private Sector Development Consultant with the Competitive Industries Practice, based in New Delhi. He works on manufacturing in India and the Competitive Industries and Innovation Program globally. Excludes SEZs established prior to the SEZ Act of 2005. Operational defined as having begun exports. Source: SEZ India. Financial & Private Sector Development — October 2012 1 Comptetitive Industries Note | October 2013 • Issue 2 1 THE TOUGH QUESTION: “HOW TO” How was this achieved? First and foremost, entrepreneurs How does the program ensure that interested firms do are attracted by the freedom given to them to decide on the build the parks and invest? To avail the grants, they first location of the park under the program. They have natural need to form a special purpose vehicle (SPV), which makes incentives to decide on the place most convenient for them, them financially interdependent. The first grant disbursal in balancing for backward and forward linkages and so that happens only after entrepreneurs, through the SPV, have the price of land is not prohibitive; and the most relevant jointly procured and paid for the land at the chosen location knowledge to navigate the local political economy of park (Figure 4). implementation, much more so than a distant ministry or This means that demand is subject to verification by the third party consultants. ultimate users in a way that is costly to them. Much more The government role in location selection is limited, than when signing an MoU, prospective firms have to put and it has mostly consisted in the approval of detailed their own money at stake to buy the land and demonstrate project proposals (DPRs) submitted by a group of these demand. The prospective users themselves are providing entrepreneurs to set up a park and avail the grants, followed costly signals that the park is in the right place. by the monitoring of park implementation. Finally, while this note focuses on location selection dynamics, Government grants represent 40 to 49 percent of some other benefits are worth noting, especially in the park infrastructure costs—leaving the majority for the generation of cluster effects. Bringing entrepreneurs together entrepreneurs to fund. The program reduces capacity to design and implement their park builds cohesion among constraints by offering the services of specialized project them, potentially facilitating common activities later. management consultancies (PMCs) to help the group of Such activities are often a major rationale for park and firms raise bank loans and design and implement the park zone policies, and are much harder to generate when the (Figure 3). infrastructure is first built, then individual firms attracted on their own. FIGURE 2: Estimated Private/ Public Investment Ratio, SITP 16 14 Current Investment/grant ratio (LHS) Average 12 10 8 6 4 2 0 Active IL&FS Parks, decreasing investment/grant ratio order Source: Ministry of Textiles, Government of India, through IL&FS. 2 Comptetitive Industries Comptetitive Note Industries | October Note 2013 | October • Issue 2013 2 2 • Issue 2 FIGURE 3: SITP Grant Design Assists (identification & procurement) Clearances State/ COMMON INFRASTRUCTURE & add-ons IDC Monitors implementation Assists with or Acquires Buys, Own, Operate, Maintain Helps Establish, Advises Identifies PMC SPV LAND Invests & Procures Grants Invest Fee (min 51% of Designates (40% of capital) Monthly Grants equity share) & Monitors charges Invest State/ Individual MoT Entrepreneurs IDC Assets Needs assessment and capacity building CONDITIONS AND RISKS motivated land selection. State industrial development corporations, for example, may in effect select a park The strategy does require that certain conditions hold location as in the past, and then with a few hand- locally. The depth of the private sector should be sufficient, outs attract firms for “true” demand. More generally, guaranteeing that at least a few dozen capable firms can entrepreneurs might themselves create “shell” firms to be identified to launch the initial parks. Some amount of avail the grant, and then divert the funds. social capital must be present, so that entrepreneurs can come together under an SPV. And land markets must not In the SITP, and particularly in schemes in India in other be entirely dysfunctional, allowing private sector purchase. sectors, the first risk is real. The second is mitigated, though not entirely, by the disbursement structure: the SPV Some of these conditions may in fact be ceasing to hold in has no direct access to grant money, which goes directly some parts of India. Some land markets may have become from an escrow account to contractors. simply too expensive for locations near cities to be viable without the use of eminent domain. However, India’s land The final insight is one of caution: implementation details markets are among the most expensive in the world, with matter. In India itself, replication in other sectors has shown peri-urban land fetching prices several times those of many variable results, and those details have been the decisive European countries. factor for success. This also means that the reasons for not using such a model should be very clear, before going back Another risk is that quasi-private state agencies may to the old ways of choosing where to build. use the cover of such a program to justify an otherwise- The strategy does require that certain conditions hold locally. The depth of the private sector should be sufficient, guaranteeing that at least a few dozen capable firms can be identified to launch the initial parks. Some amount of social capital must be present, so that entrepreneurs can come together under an SPV. And land markets must not be entirely dysfunctional, allowing private sector purchase. Comptetitive Industries Comptetitive Note || October Industries Note October 2013 2013 • • Issue 2 Issue 2 3 3 FIGURE 4: Project Development Process LEGEND: IL&FS Identification of cluster Stakeholder involved Entrepreneurs GoI Interaction with industry associations and other representatives Identification of Needs assessment and Assessment of common potential entrepreneurs capacity building infrastructure, amenities & factory buildings for the park Identification of land Establishment of SPV Preliminary layout plan Procurement of land Preliminary costing Vetting by SPV Detailed engineering & procurement Preparation of DPR Award of contracts GoI approval Construction & supervision Financial closure Operation & maintenance Source: IL&FS. This note is sourced from: “The Implementation of Industrial Parks Some Lessons Learned in India” (submitted to Policy Research Working Paper Series). Key References: Bloom, N., McKenzie, D. & al. (2012). Does management matter? Evidence from India. NBER Working Paper. Desmet, K., Ghani, E., O’Connell, S., & Rossi-Hansberg, E. (2012). The Spatial Development of India. Policy Research Working Paper Series, The World Bank. Hirschman, A. O. (1970). Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States. Harvard University Press. Neufville, R., & Scholtes, S. (2011). Flexibility in Engineering Design. The MIT Press. World Bank (2012). Learning from SEZs in India. Unpublished. Disclaimer CI Notes are produced by the Competitive Industries Practice at the World Bank Group. The series aims to share lessons learned in interventions foused on boosting industry competitiveness. CI Notes are funded by the: The findings, interpretations, and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of the CIIP Partners, the World Bank Group, the Executive Directors of The World Bank or the governments they represent. 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