Loans to SEZs to Qualify as 'Infrastructure' Lending

It has been decided by the Government of India that henceforth SEZs -- both firms that develop, operate and maintain SEZs, as well as firms that operate business units within them -- should be able to borrow on more commercially advantageous terms. Rather than being classified as real-estate lending, financing to these firms would be considered 'infrastructure,' thus attracting a lower-rate of interest and requiring borrowers to meet fewer qualifying conditions.

This is, in one sense, a valid reclassification. The public purpose provision within the Land Acquisition Act, formerly associated with large infrastructure projects, has been redefined to include commercial projects in which economic activity would be spurred; so why not see such projects as infrastructure when it comes to financing?

One very good reason is the element of risk involved. There is in general greater likelihood of a commercial real-estate developer (which is what many SEZ promoters are) becoming overextended due to perverse incentives related to moral hazard than would be the case with large traditional infrastructure projects where the public purpose was more apparent -- if not completely uncontested -- and therefore the implicit guarantee by the state and its agencies more meaningful in determining the associated risk premium.

A quote from the Economic Times coverage of the decision included this statement:

'LB Singhal, director general, Export Promotion Council for EoUs and SEZs said: “We had taken up this issue with the ministry of finance and the ministry of commerce. The matter was before the empowered group of ministers headed by finance minister Pranab Mukherjee, which had decided that SEZ should be treated as infrastructure.” '

The decision-making process is presented in this account (by an IAS officer whose job it is to promote the interests, and address the concerns, of business-people) as one in which both formal procedural requirements were met and substantive deliberation took place. Viewed differently, the process involved a longstanding policy conclusion, reached by a group of Mandarins, supported by experts in planning for financial contingency -- that is, both Finance Ministry and RBI officials -- being overturned in an overtly political forum in which tortured logic, and a vague nod to the difficulties associated with today's tight global credit markets, substitutes for rational debate. The ability of any EGoM -- particularly the leading figure on each -- to make these kinds of decisions makes this avatar of committee-based cabinet government an important institutional innovation, which India will end up either celebrating as a boon to efficiency, or lamenting as the further entrenchment of patronage politics.