Spotlight

Seizing opportunities

The Government of India has planned that at least three hotel plots should come up in each SEZ. Opportunities are knocking on hotel developers' door, with more SEZs coming up. By Praveen K Singh

In order to create free trade zones with minimum interference from establishments, the Union government has created special economic zones (SEZs). These are governed by a set of rules to facilitate foreign direct investment for world-class products and services. These zones, planned to prevail over complexities in bureaucracy and fiscal dealings, are offered with best infrastructure, liberal tax holidays, unrestricted duty free imports of basic and final goods and also capital goods.

Keeping in mind the severe shortage of rooms in the country, the government has also planned to allocate a minimum area for at least three hotel plots in each SEZ including multi-product specialty and in trade specific zones. Out of these three plots, there will be two hotels and one serviced apartment. Commerce secretary GK Pillai, cites, "Various exemptions have been offered to the developers." Welcoming the move, the president of Federation of Hotel & Restaurant Associations, Rajesh Mishra, said that this move would attract foreign investors that will increase the momentum of development in the hospitality sector too.

Creating Space

Hotel consultant, M Ramvittal Rao, believes, "SEZ will be literally creating a new township: the focus will be mainly on businesses that can set up shop and enjoy various benefits for getting footfalls into the concerned state or nearby township. Large tracts of land will be converted for effective commercial use which will bring in long stay customers, short stay customers and conferences and conventions (MICE segment hotels)." Echoing his views, Sunil Khanna of Hotel Consult, describes, "In view of our experience in the recent past, the major advantages accrue to hotel projects being planned in SEZs entail a captive market within the SEZ itself for business travellers looking for two to three-star category accommodation at a good price. Also the hotels’ facilities get supplemented by other facilities in the zone, such as conferencing, fine dining restaurants, food courts, business centres, retail area, laundry etc." He explains that the hotels, therefore can be set up very quickly as limited facilities are required only to meet the very basic needs of guests.

"As serviced apartments also get developed along with the hotel, there is flexibility on room inventory as serviced apartments are also available for renting very often and the hotels get additional income from the services provided to the serviced apartments," Khanna observes. Talking about the viability of these projects, he says, "With the land being extremely cheap in SEZs, it therefore makes viability dependent primarily on the cost of construction and furnishing which itself is quite low." As per the government rule, a minimum 10 hectares of land is required to set up an SEZ and each SEZ should have a minimum built-up area of 1 lakh square metres. On the other hand, multi-product SEZs need to have an area of 1,000 hectares, while multi-services and sector-specific SEZs require a minimum area of 100 hectares, of which, the processing area in SEZs would be 35 per cent at least. The Ministry of commerce has allowed a maximum number of hotel rooms to be 100 for sector specific SEZ and 250 for multi-product SEZ.

"The areas developed through SEZs will have a top-notch infrastructure and also there will huge employment opportunity in the country," reacts Pillai. According to the government estimation, the 150 new SEZs would give employment to over seven lakh people. In addition, the hospitality sector will need at least 1.6 lakh trained manpower.

Tax holidays

SEZ developers and units established in SEZs have also been granted various exemptions including exemptions from state and local taxes, tax on electricity, exemption from income tax for 10 years, exemption from import duty, service tax, etc. They have also been ensured sufficient availability of water and electricity. According to the Foreign Trade Policy (2004-09), 'SEZ is a specifically delineated duty-free enclave and shall be deemed to be foreign territory for the purposes of trade operations, duties and tariffs'.

According to experts the biggest benefit of this is that the SEZ developers need not pay any tax on materials. Centres outside SEZs will be deprived of this advantage. Though there is provision to assess the impact of SEZs on the environment, they have been exempted from the provision of public hearing and the land-use declaration. In case of offence of non-compliance with environmental laws, units in SEZs cannot be directly booked and there is a condition to get prior permission from the board of approval constituted by central government in exercise of the powers conferred under the SEZ Act, which is headed by the secretary of the department of commerce.

Benefits derived from SEZs are evident from the investment, employment, exports and infrastructural developments additionally generated. Investment of Rs 1,00,000 crore, including FDI of US$ five to six billion is expected by the end of December 2007 in various sectors including hospitality. Around 5,00,000 direct jobs are expected to be created by December 2007. The benefits derived from the multiplier effect of the investments and additional economic activities in the SEZs and the employment generated thus will outweigh the tax exemptions and the losses on account of land acquisition. Alternatively, the governor of RBI has asked all banks to treat SEZ development as real estate development and not as infrastructure and therefore limit their exposure and make stipulations suitably.

The players

Of now, the Union government has cleared around 150 SEZs, including those of Mukesh Ambani's Reliance Group, DLF, the Adani Group, Bharat Forge, Biocon, Bajaj Auto and Satyam Computer. All these companies have to complete a set of formalities, such as land acquisition. DLF has announced its various hospitality projects in some of these SEZs, including the one they themselves are developing.

Among the hotel developers, Rao says, "The players here can be all the hotel companies who are in India and the international hotels that are entering India with JVs as there will be so many opportunities that will be made available to these old and new companies." He believes that it is important that good infrastructure in terms of wide roads easy accessibilities to airports and rail heads, un-interrupted and steady electricity, good communication facilities and plentiful water are made available so that there is a proper setup for these hotels to provide the best of services.

Downside

Of all the top business houses trying to set up SEZs, more are of IT and engineering sectors. The proposals and sanctions of multi-product SEZs are comparatively low and those promoted by well-known developers are fewer. On the other hand there has been some political opposition too; left parties have been opposing formation of SEZs thinking this will affect farmers whose lands are being used towards creation of these zones. Even the ministry of finance has some reservations, as they believe there will be a huge loss of revenue for the government.

However, the ministry of commerce has brought presentations to convince critics, by releasing estimates of revenue gain the government is going to make. The minimum processing area limit has been fixed at a uniform level of 50 per cent for multi-product and sector-specific SEZs. Earlier, the processing area for multi-product zones was set at 35 per cent, with the provision for relaxing it to 25 per cent. Due to this, the developers will have a smaller amount of land to set up commercial complexes, malls, hospitals, etc. in multi-product area zone. This decision was taken keeping in mind the unregulated growth of real estate business.

At the moment, the rush for setting up SEZ persists. Some of the states, which are ahead in the race of setting up of SEZs, include, Maharashtra, Karnataka, Tamil Nadu, Andhra Pradesh, Haryana, Gujarat, Uttar Pradesh and West Bengal. With Maharashtra planning to have as many as 51 SEZs, there is a huge scope for the hotel developers to get a move on to this locale and many others.