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5.

Project Management
PART I:
LOCATION STRATEGY /
DECISIONS
PART II:
CONCEPT OF INDUSTRIALLY
BACKWARD AREAS AND
INCENTIVE SCHEMES

SESSION TODAY: LOCATION

Objective of location strategy


Location - Industrial V/S Services
Factors affecting choice of location
Long term implications of location decisions
Location evaluation methods / techniques
Concept of industrially backward areas and incentive
schemes
Disbursing agencies
Role of IDCs and SFCs
PROF. ANIL MENDHI

LOCATION AND SITE


Location and site are two separate entities quite often
mistaken as one!
Location refers to a city / town or an industrial zone and is
used in broader sense while site refers to a specific plot of
land, where the project would be set up.
Choice of location has to be made after careful
consideration of a number of factors such as proximity to
markets and sources of raw materials, availability of
infrastructure, Government policies, incentives offered,
labor situation, etc.
PROF. ANIL MENDHI

Factors Affecting Site


Site size and cost
Air, rail, highway, and waterway systems
Zoning restrictions
Nearness of services/supplies (utilities
mainly) needed
Environmental impact issues
PROF. ANIL MENDHI

Objective of Location Strategy

Maximize the benefits of location


to the firm

PROF. ANIL MENDHI

Industrial Location Decisions


Cost focus
Revenue varies little
between locations

Location is a major
cost factor
Affects shipping &
production costs (e.g., labor)
Costs vary greatly between locations
PROF. ANIL MENDHI

1995 Corel Corp.

Service Location Decisions


Revenue focus
Costs vary little between market areas

Location is a major
revenue factor
Affects amount of
customer contact
Affects volume of
business
PROF. ANIL MENDHI

In General - Location Decisions


Long-term decisions
Difficult to reverse
Affect fixed & variable costs
Transportation cost
As much as 25% of product price
Other costs: Taxes, wages, rent etc.

Objective: Maximize benefits of location


to the firm
PROF. ANIL MENDHI

Factors Affecting Country Locations


Government rules, attitudes, stability, incentives
Culture & economy
Market location
Labor availability, attitudes, productivity, and cost
Availability of supplies, communications, energy
Exchange rate & its stability
Ranking factors are available for different countries
from various sources
(ECONOMIC INTELLIGENCE UNIT)
PROF. ANIL MENDHI

Economy Rankings
Economies are ranked on their ease of doing business, from
1 181, with first place being the best. A high ranking on
the ease of doing business index means the regulatory
environment is conducive to the operation of business. This
index averages the country's percentile rankings on 10
aspects, made up of a variety of indicators, giving equal
weight to each aspect. The rankings are available for the
period of next five years from January 2008 from
Economic Intelligence Unit report.
PROF. ANIL MENDHI

INDIAS RANKING - 2008


Ease of...Doing Business : 122 (China 83, Brazil 125 , Russia 120,
Yemen 98, Pakistan 77)

Starting a Business:
Dealing with Licenses:
Employing Workers:
Registering Property:
Getting Credit:
28
Protecting Investors:
Paying Taxes:
169
Trading Across Borders:
Enforcing Contracts:
Closing a Business:

121
136
89
105
38
90
180
140

PROF. ANIL MENDHI

EIUs Ranking
EIU has given India a ranking of BB compared to BBB for China.
Band
Characteristics
AAA
Capacity and commitment to honor obligations not in
question under any foreseeable circumstances.
AACapacity and commitment to honor obligations not in question.
A Capacity and commitment to honor obligations strong.
BBB
Capacity and commitment to honor obligations
currently but somewhat susceptible to changes in economic climate.
BB Capacity and commitment to honor obligations currently but
susceptible to changes in economic climate.
B Capacity and commitment to honor obligations currently but
very susceptible to changes in economic climate.
PROF. ANIL MENDHI

EIUs Ranking
CCC
Questionable capacity and commitment to honor
obligations. Patchy payment record.
CC
Somewhat weak capacity and commitment to honor
obligations. Patchy payment record. Likely to be in default on
some obligations.
C Weak capacity and commitment to honor obligations.
Patchy payment record. Likely to be in default on significant
amount of obligations.
D Very weak capacity and commitment to honor obligations.
Poor payment record. Currently in default on significant
amount of obligations.
PROF. ANIL MENDHI

Region Location Decisions


Different criteria used while deciding the location for a new unit are:
Proximity to Market
Proximity to raw material sources & other suppliers
Labor, availability, costs, attitudes towards unions
Availability of infrastructure
Attractiveness of region (culture, taxes, climate, etc.)
Costs and availability of utilities
Cost of Land, Development and construction
Environmental regulations of state and town
Government incentives
Corporate desires
PROF. ANIL MENDHI

1. PROXIMITY TO MARKETS
Proximity to the markets is an important criteria for deciding on
the location. This is particularly true of bulky products for which
the transportation costs are likely to be considerable e.g. plastic
products (big containers, fuel tanks, which may occupy more
space resulting in higher costs).
For certain products like refined sugar the reason for locating a
stand alone sugar refining plant near the market would be
different.
Unit manufacturing perishable products should also be located
near the center of consumption. (Dairy and milk products)
Service organizations (except some like BPO operations) have to
be necessarily located near the market.
PROF. ANIL MENDHI

Organizations That Need To Be


necessarily Close to Markets
Government agencies
Police & fire departments
Post Offices
Development Agencies / Corporations
Retail Sales and Service
Fast food restaurants, supermarkets, gas stations
Drug stores, shopping malls
Bakeries
Services
Hospitals, Doctors, lawyers, accountants, consultants, etc.
Banks, auto repair, motels
PROF. ANIL MENDHI

2. PROXIMITY TO RAW MATERIALS


Projects which are resource based should be
located near the sources of raw materials for
economies of transportation.
- Cement Plants (lime stone),
- Steel Plants (iron ore or scrap),
- Alumina refineries (bauxite),
- Coal based Thermal Power Plants, Fly Ash
Aggregates, etc.
PROF. ANIL MENDHI

FOOT LOOSE INDUSTRIES!!


They do not require nearness to either raw materials or
markets.
They do not require face-to-face contact with customers
Availability of infrastructure, Govt. Incentives and
trained manpower are the only criteria for such units.
Electronics Industry
Software Development
BPOs, Call Centers, Telemarketing, etc.
PROF. ANIL MENDHI

3. AVAILABILITY OF
INFRASTRUCTURE
Availability of:
Power:
- Availability, investment required, power tariff and stability of
power supply
Water:
- Quality and Quantity, reliability of supply,
possibility of
ground sources (tube wells)
Communications:
- Telephones, Internet (bandwidth?), possibility of leasing lines,
etc.
Transport:
- Rail, Road, Air and sea or inland water
PROF. ANIL MENDHI

4. LABOUR SITUATION
Availability of unskilled , semi-skilled and
skilled labor,
Productivity of labor,
Cost of labor,
Current situation wrt industrial relations, and
History and frequency of strikes and lock-outs
in the area, Degree of unionization, severity of
the unionization, etc.
PROF. ANIL MENDHI

5. GOVERNMENT POLICIES:
Public and private sector may have different criteria for
deciding on a location.
Location of public sector projects may be guided /
influenced more by the Governments policy towards
dispersal of industries.
Private sector projects are more likely to be guided by
the Carrot & Stick approach of the Government
policies.
Quality of government (including stability, honesty,
attitudes toward new business - whether overseas or
local)
PROF. ANIL MENDHI

6. OTHER MISCELLANEOUS
FACTORS:
General living conditions (cost of living, cost of
housing, education facilities, entertainment /
recreation facilities, healthcare facilities,
security, political environment, etc.)
Climatic conditions,
Nearness to ancillary units,
Cost of mitigating environmental pollution
PROF. ANIL MENDHI

Location Evaluation Methods


Factor-rating
method
Locational breakeven analysis
Center of gravity
method
Transportation
model
PROF. ANIL MENDHI

1995 Corel Corp.

1. Factor-Rating Method
Most widely used location technique
Useful for service & industrial locations
Rates locations using factors
Intangible (qualitative) factors
Example: Education quality, labor skills
Tangible (quantitative) factors
Example: Short-term & long-term costs
PROF. ANIL MENDHI

List the Factors


Affecting Selection of Location
Labor costs (including wages, unionization, productivity)
Labor availability (including attitudes, age, distribution,
and skills)
Proximity to raw materials and suppliers
Proximity to markets
State and local government fiscal policies (including
incentives, taxes, unemployment compensation)
Utilities (including gas, electric, water, and their costs)
PROF. ANIL MENDHI

List the Factors


Affecting Selection of Location (contd.)
Site costs (including land, expansion, parking, drainage)
Transportation availability (including rail, air, water, and
interstate roads)
Quality-of-life issues (including all levels of education,
cost of living, health care, sports, cultural activities,
transportation, housing, entertainment, religious facilities)
Foreign exchange Including rates and stability
Quality of government (including stability, honesty,
attitudes toward new business - whether overseas or local)
PROF. ANIL MENDHI

Steps in Factor Rating Method


List relevant factors
Assign importance weight to each factor
(0 - 1)
Develop scale for each factor (1 - 5)
Score each location using factor scale
Multiply scores by weights for each factor
& total
Select location with maximum total score
PROF. ANIL MENDHI

LOCATION RATING INDEX CALCULATIONS


Factor

Factor
Weight

Rating
VG
5

G
4

A
3

P
2

VP
1

Factor
Score

Nearness to market

0.10

Nearness to raw
materials

0.25

Availability of
infrastructure
Power
Water
Transportation
communication

0.15

Labor situation

0.10

Govt. Incentives

0.05

0.20

Other factors

0.10

0.40

0.30
1.25

0.60

0.50

Rating Index

3.25

2. Location Break-Even Analysis


Method of cost & volume analysis used for
industrial locations
Steps
Determine fixed & variable costs for each
location
Plot total cost for each location
Select location with lowest total cost for
expected production volume
Volume must be above break-even
PROF. ANIL MENDHI

3. Center of Gravity Method


Used primarily for services
Finds location of single distribution center
serving several destinations
Considers
Location of existing destinations
Example: Markets, retailers etc.
Volume to be shipped
Shipping distance (or cost)
Shipping cost/unit/mile is constant
PROF. ANIL MENDHI

Center of Gravity Method Steps


Place existing locations on a coordinate grid
Grid has arbitrary origin & scale
Maintains relative distances

Calculate X & Y coordinates for center of


gravity
Gives location of distribution center
Minimizes transportation cost

PROF. ANIL MENDHI

Center of Gravity Method Equations


X Coordinate
Cx

d ix Wi
i

Wi
i

Y Coordinate
Cy

d iy Wi
i

Wi
i

dix = x coordinate of
location i
Wi = Volume of
goods moved to or from
location i
diy = y coordinate of
location i
PROF. ANIL MENDHI

Figure :Center of gravity

PROF. ANIL MENDHI

4. Transportation Model
Used primarily for industrial locations Logistics is the name
of the game!
Finds quantities to be shipped from several sources to several
destinations
Type of linear programming model is used
Objective: Minimize total production
& shipping costs
Constraints
Production capacity at source (factory)
Demand requirement at destination
PROF. ANIL MENDHI

Summary of Methods
of Solving Location Problems
Weighted index method which:
Assigns weights and points to various factors
Determines tangible costs
Investigates intangible costs
Center of Gravity Method
Finds best distribution center location
Location breakeven methods
Special case of breakeven analysis
Transportation method
A specialized linear programming method
PROF. ANIL MENDHI

SITE SELECTION:
After deciding the location, different alternative
sites available at the chosen location need to be
assessed for suitability and economies.
Cost of land,

Cost of development of land,


Work and costs involved for utility connections.
Preference for industrial estates / Economic Zones
developed by the Government authorities e.g. MIDC,
GIDC, etc. and others.
PROF. ANIL MENDHI

Geographic Information Systems

Latest tool to help in location


analysis
Enables combination of many
parameters
PROF. ANIL MENDHI

ONE OF THE POSSIBILITIES?


The ideal location for many
companies in the future will
be perhaps a floating factory
ship that will go from port to
port, from country to
country wherever the
cost per unit is
the lowest.
PROF. ANIL MENDHI

1995 Corel Corp.

PART II
CONCEPT OF INDUSTRIALLY
BACKWARD AREAS AND
INCENTIVE SCHEMES

PROF. ANIL MENDHI

INCENTIVES
FOR ATTRACTING INVESTMENT
State Governments offer various incentives for
attracting investment leading to their overall
economic development. Major goals are:
Creating strong industrial base
Creating employment
Ensuring planned development and dispersal of
industries.

States revise the schemes of incentives


from time to time
PROF. ANIL MENDHI

MAHARASHTRA
PACKAGE SCHEME OF INCENTIVES
Maharashtra is the leading state in the forefront of
industrialization in India. Most preferred Investment Destination.
Maharashtra ranks First amongst the States in terms of State
Domestic Product and accounts for 15% of the National Income.
Per capita income of Rs. 23,849, more than 60% higher than the
national average and third amongst the States next only to
Punjab and Haryana (at current prices - base year 1998-99)
Its scheme of incentives was introduced in 1964. Last modified
in 2006.
Valid for five years - up to only March 31, 2011.
PROF. ANIL MENDHI

ELIGIBLE INDUSTRIES
Industries listed in Schedule I of Industries (Development &
Regulation) Act 1951.
Industries falling under SSI sector
IT units registered with the Directorate of Industries or SICOM Ltd.
Hotels
Poultry & Agro-industries
Cold Storages
BT Units
Non-conventional Energy units such as Wind farms, Solar energy
units, units generating electricity from biogas, municipal waste, etc.
CENTRAL PUBLIC SECTOR UNITS ARE NOT ELIGIBLE!
PROF. ANIL MENDHI

IMPLEMENTING AGENCIES:
DIC or Joint Director of Industries (Mumbai Metropolitan
Region) (JDI-MMR) would coordinate in the matter and for
issue of Eligibility Certificate (EC).
Application for eligibility to be filed with implementing agency
at least three months prior to expected date of commencing
production.
In case of SSIs MSFC is the implementing agency.
In case of LSIs, hotels, IT units, BT units and non conventional
energy units SICOM Ltd. is the implementing agency.
Priority given to EOUs and sick units

PROF. ANIL MENDHI

CLASSIFICATION OF AREAS
AREA

CRITERIA

GROUP A

DEVELOPED AREAS LIKE


MMR & PMR

GROUP B

SOME DEVELOPMENT

GROUP C

LESS DEVELOPED THAN B

GROUP D

LESS DEVELOPED THAN C

GROUP D+

LEAST DEVELOPED

NO INDUSTRY DISTRICT

AS DECIDED BY GOVT.

PROF. ANIL MENDHI

SPECIAL CAPITAL INCENTIVES (SCI)


FOR SSI UNITS
AREA/GROUP

QUANTUM
% OF FIXED CAPITAL
INVESTMENT

CEILING
(RS. LAKHS)

GROUP C

20

10

GROUP D

30

20

GROUP D+

35

25

NO INDUSTRY
DISTRICT

40

35

PROF. ANIL MENDHI

DEFINITION :
Investment in Fixed Assets:
Land (next 15 years) including cost of development
Buildings
Plant and Machinery including installation charges
Pre-operative expenses capitalized
Technical know-how
Any amount paid to Govt. agencies like MSEB,
MIDC, etc. as non-refundable interest free deposit
PROF. ANIL MENDHI

DISBURSAL:
Amount of SCI will be disbursed by the
implementing agency in equal annual
installments over five years from the date of
effect of EC, which is also the date of
commencement of production (First day of
the next month).
SCI is admissible as a grant.
PROF. ANIL MENDHI

OTHER INCENTIVES:
Interest subsidy
Refund of Octroi / Entry Tax
Exemption of Electricity Duty:
Eligible new units in C, D and D+ areas are
exempted from paying electricity duty for a period of
15 years.
In other areas of the state, EOUs, IT & BT units and
units in SEZs and units in EHT parks are exempted
from paying electricity duty for a period of 10 years.
PROF. ANIL MENDHI

INTEREST SUBSIDY:
Interest subsidy to new textile, hosiery &
knitwear industrial units in SSI sector. Amount
will be equal to the amount of interest payable
by the unit @ five percent per annum, out of the
interest actually paid by the unit .
Units to claim the subsidy within three months
from the end of the financial year.
Subsidy not applicable on interest paid on
defaulted installments
PROF. ANIL MENDHI

INTEREST SUBSIDY CALCULATION:


AREA/GROUP

MONETARY CEILING
(RS. LAKHS)

MAXIMUM PERIOD
OF ELIGIBILITY
(IN YEARS)

GROUP C

10

GROUP D

20

GROUP D+

25

NO INDUSTRY
DISTRICT

35

PROF. ANIL MENDHI

REFUND OF OCTROI
All eligible units, that go into production,
would be entitled to refund of octroi duty /
entry tax (in lieu of octroi) payable / paid
to the local authority on purchases of all
items required by them.
Incentive available in the form of grant
with a ceiling of 100 % of the admissible
fixed capital investment for a period of
specified number of years.
PROF. ANIL MENDHI

REFUND OF OCTROI
TALUKA / AREA
CLASSIFICATION

MAXIMUM PERIOD OF
ELIGIBILITY (YEARS)

D+

12

NO INDUSTRY

15
PROF. ANIL MENDHI

DEVELOPMENT OF
INDUSTRIAL AREAS
Each state has an Industrial Development Corporation
to develop industrial areas (e.g. MIDC, GIDC,
GDDIDC, etc.).
Typical Industrial Estates have all basic Infrastructure
facilities and give land on lease.
Some offer Standard Design Factories / Sheds.
Some are designed as special purpose Industrial Estates
(Electronic City in Verna, Goa, EHT Parks, Software
Technology Parks, etc.)
Special Authorities / Corporations are set up for EPZs,
SEZs, etc.
PROF. ANIL MENDHI

FINANCE CORPORATIONS
Each state usually has a State Finance Corporation
(e.g. MSFC, GSFC, etc.). They cater to the financial
requirements of mainly SSI units.
It also has a State Industrial & Investment Corporation
(e.g. SICOM, PICUP, IPICOL, etc.). They normally
cater to the financial requirements of Medium size
enterprises.
All India Financial Institutions normally fund large
projects sometimes by forming consortia with
International Funding Agencies if necessary.
PROF. ANIL MENDHI

REVIEW QUESTIONS
1. What are the different criteria to be considered while
deciding the location for a new unit? Explain giving
examples.
2. What are the different techniques used for evaluating
alternate locations for a given project? Describe any two
and explain with examples.
3. Describe Location Rating Index method of evaluation of
locations for an industrial unit. Explain by giving an
example.
4. A numerical could be asked on Center of gravity method.
PROF. ANIL MENDHI

REVIEW QUESTIONS
5. What are the eligibility criteria under the
current Industrial Policy of the Government of
India for an industry to be covered under SSI
sector? What are the special provisions,
concessions and incentives available to the SSI
sector under the policy? (2002)

PROF. ANIL MENDHI

Schedule I units

1.METALLURGICAL INDUSTRIES: A.Ferrous:(1) Iron and steel (metal). (2)


Ferro-alloys.(3) Iron and steel castings and forgings.(4)Iron and steel structurals.
(5) Iron and steel pipes.(6)Special steels.(7) Other products of iron and
steel.B.Non-ferrous:61[(1)Precious metals, including gold and silver, and their
alloys.(1-A)Other non-ferrous metals and their alloys];

(2)Semi-manufactures and manufactures.2. FUELS:(1) Coal, lignite, coke and


their derivatives. (2)Mineral oil (crude oil), motor and aviation spirit, diesel oil,
kerosene oil, fuel oil, diverse hydrocarbon oils and their blends including synthetic
fuels, lubricating oils and the like.(3) Fuel gases-(coal gas. natural gas and the
like).

3.BOILERS AND STEAM-GENERATING PLANTS: Boilers and steamgenerating plants.

4. PRIME MOVERS (OTHER WAN ELECRICAL GENERATORS):(1)


Steam-engines and turbines. (2)Internal combustion engines.
PROF. ANIL MENDHI

SCHUDULE I (contd.).
5. ELECTRICAL EQUIPMENT:(1) Equipment for generation,
transmission and distribution of electricity including transformers.
(2)Electrical motors.(3)Electrical fans. (4) Electrical lamps. (5)
Electrical furnaces.(6)Electrical cables and wires.(7) X-ray equipment.
(8)Electrical equipment.(9)Household appliances such as electric irons.
heaters and the like.(10) Storage batteries.(11) Dry cells.
6. TELECOMMUNICATIONS:(1) Telephones. (2)Telegraph
equipment.(3)Wireless communication apparatus. (4) Radio receivers,
including amplifying and public-address equipment.(5) Television sets.
(6)Teleprinters.
7.TRANSPORTATION:(1) Aircraft. (2)Ships and other vessels drawn
by power.(3)Railway locomotives.(4) Railway rolling-stock.(5)
Automobiles (motor cars, buses, trucks, motor cycles, scooters and the
like).(6)Bicycles. (7)Others, such as fork-lift trucks and the like.
PROF. ANIL MENDHI

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