PROF. ANIL MENDHI

4. Project Management

PART I:LOCATION STRATEGY /

DECISIONSPART II:

CONCEPT OF INDUSTRIALLY BACKWARD AREAS AND INCENTIVE SCHEMES

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SESSION TODAY: LOCATION

Objective of location strategy Location - Industrial V/S Services Factors affecting choice of location Decisions have long term implications Location evaluation methods / techniques Concept of industrially backward areas and

incentive schemes Disbursing agencies IDCs and SFCs

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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 taken 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.

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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

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Objective of Location Strategy

Maximize the benefits of location to the firm

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Industrial Location DecisionsCost focus

Revenue varies little between locations

Location is a major cost factor Affects shipping &

production costs (e.g., labor) Costs vary greatly between

locations

© 1995 Corel Corp.

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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

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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

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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)

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Region Location Decisions Corporate desires Attractiveness of region (culture, taxes, climate,

etc.) Labor, availability, costs, attitudes towards unions Costs and availability of utilities Environmental regulations of state and town Government incentives Proximity to customers & suppliers Cost of Land, Development and construction

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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.

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Organizations That Need To Be 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 Doctors, lawyers, accountants Banks, auto repair, motels

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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, - Steel Plants, - Alumina refineries, - Thermal Power Plants, Fly Ash Aggregates, etc.

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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.

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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

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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.

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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 Government’s 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)

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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

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Location Evaluation Methods Factor-rating method Locational break-

even analysis Center of gravity

method Transportation

model

© 1995 Corel Corp.

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1. Factor-Rating Method Most widely used location technique Useful for service & industrial locations Rates locations using factors

Intangible (qualitative) factorsExample: Education quality, labor skills

Tangible (quantitative) factorsExample: Short-term & long-term costs

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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)

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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)

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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

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LOCATION RATING INDEX CALCULATIONSFactor Factor

WeightRating Factor

ScoreVG5

G4

A3

P2

VP1

Nearness to market 0.10 0.30

Nearness to raw materials

0.25 1.25

Availability of infrastructurePowerWaterTransportationcommunication

0.15 0.60

Labor situation 0.10 0.50

Govt. Incentives 0.05 0.20

Other factors 0.10 0.40

Rating Index 3.25

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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 volumeVolume must be above break-even

2. Locational Break-Even Analysis

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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

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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

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Center of Gravity Method Equations

ddixix = x coordinate of = x coordinate of

location ilocation i

WWii == Volume of Volume of

goods moved to or from goods moved to or from location i location i

ddiyiy = y coordinate of = y coordinate of

location ilocation i

X CoordinateX Coordinate

Y CoordinateY Coordinate

ii

iiix

x W

WdC

ii

iiiy

y W

WdC

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Figure :Center of gravity

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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 Used primarily for industrial locations - Type of linear

programming model is used Objective: Minimize total production

& shipping costs Constraints

Production capacity at source (factory) Demand requirement at destination

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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

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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.

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Geographic Information Systems

Latest tool to help in location analysis

Enables combination of many parameters

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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. © 1995 Corel Corp.

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PART II

CONCEPT OF INDUSTRIALLY BACKWARD AREAS AND

INCENTIVE SCHEMES

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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 incentivesfrom time to time

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MAHARASHTRA – PACKAGE SCHEME OF INCENTIVES

Maharashtra is the leading state in the forefront of industrialization in India.

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 highest amongst the States (at current prices - base year 1998-99)

Its scheme of incentives was introduced in 1964. Last modified in 2001.

Valid for five years - up to only March 31, 2006!!

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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!

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IMPLEMENTING AGENCIES: DIC or Joint Director of Industries (Mumbai Metropolitan

Region) (JDI-MMR) would coordinate in the matter and 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

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CLASSIFICATION OF AREAS

AREA CRITERIAGROUP A DEVELOPED AREAS LIKE

MMR & PMRGROUP B SOME DEVELOPMENTGROUP C LESS DEVELOPED THAN BGROUP D LESS DEVELOPED THAN C

GROUP D+ LEAST DEVELOPED

NO INDUSTRY DISTRICT AS DECIDED BY GOVT.

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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

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DEFINITION : Investment in Fixed Assets:

♦ Land (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

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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.

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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.

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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

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INTEREST SUBSIDY CALCULATION:

AREA/GROUP MONETARY CEILING (RS. LAKHS)

MAXIMUM PERIOD OF ELIGIBILITY

(IN YEARS)GROUP C 10 4

GROUP D 20 5

GROUP D+ 25 6

NO INDUSTRY DISTRICT

35 7

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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.

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REFUND OF OCTROI

TALUKA / AREA CLASSIFICATION

MAXIMUM PERIOD OF ELIGIBILITY (YEARS)

B 5

C 7

D 9

D+ 12

NO INDUSTRY 15

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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.

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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.

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QUESTIONS1. 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.