Clustering for comfort

The Special Economic Zones (SEZ) Act, introduced in 2005, had envisioned the creation of better infrastructure in the country which would generate employment across sectors. This Act predictably saw a boom in the setting up of SEZs. For the corporate sector, it seemed like a win-win proposal as they hoped the subsidies received under the scheme would help exceed existing profit margins. Joining the race, many leading pharmaceutical firms set up pharma SEZs or commissioned manufacturing facilities in SEZs across India. Unfortunately, the SEZ concept did not live up to expectations.

There are hardly any success stories of pharma SEZs. To overcome this and begin anew, the Department of Pharmaceuticals (DoP) released a concept note on a new programme, called the Cluster Development Programme for Pharma Sector (CDP-PS) on May 25, 2010. With a special emphasis on enabling SME pharma units, the CDP-PS aims to encourage quality, productivity and innovation in the pharma industry by leveraging the geographical proximity of enterprises on the ‘collaborating while competing’ principle, to make the scheme more participatory and cost effective. The scheme provides critical mass for customisation of interventions, like standard testing facilities. Thus it will allow SME pharma players access to technology and facilities at a fraction of the cost.

A few pharma clusters already exist in India like Baddi (Himachal Pradesh), Haridwar (Uttarakhand) and Gurgaon (Haryana) in the north; Pattancheru Pashmalyram and Khazipalli (in Andhra Pradesh), Alandur and Ambattur (both in Tamil Nadu) in the South; Thane, Nashik, Aurangabad (Maharashtra), Vadodara and Ahmedabad (Gujarat) in the West region and Goa/ Sikkim.

“India has the talent pool. They lack on the financial front. If clusters are created along the lines of China, then many young entrepreneurs will rush to set up facilities for pharma units.” BR Sikri VP, Bulk Drugs Manufacturers Association VP, Indian Drugs Manufacturers Associations

Giving more examples, BR Sikri, Vice President, Bulk Drugs Manufacturers Association and Vice President, Indian Drugs Manufacturers Associations informs, “Visakhapatnam has a cluster of active pharmaceutical ingredients (API) industries. Similar to these, there is a bio technology park set up near Hyderabad. Himachal Pradesh and Uttarakhand have dedicated pharma cities but these cannot be defined as clusters.”

Learning from the SEZ model

The announcement of SEZ Act was welcomed by the industry and the pharma sector was one amongst the few which expanded its horizons and set up various SEZs. Parsvnath, Inspira Infrastructure, JB SEZ (HBS – Pharma SEZ), Ramky Group- Pharma SEZ, APIIC, KIADB (Pharma), Serum Bio-pharma Park, Wockhardt Infrastructure Development etc. At that point of the time private banking firms also supported the venture and invested sizable sums through the PE/VC model. Leading pharma and biotech companies, like Ranbaxy, Dr Reddy’s Laboratories, Zydus Cadila, Jubilant Life Sciences, Biocon, Divi’s Laboratories, Piramal Lifesciences, JB Chemicals and many more set up their manufacturing units in various of these SEZ facilities.

Today the tide has turned and many pharma companies have opted to either shut down or run their units in such SEZs with a skeletal staff. Yet others are surrendering the allotted plots to the SEZ developers. Even a location like the Indore SEZ, in Madhya Pradesh seems to have fallen out of favour, though its central location translates into better logistical connectivity within and outside India. Surprisingly, pharma companies still invested in the Indore SEZ are not 100 per cent sure of continuing operations.

Sikri explains the hitches of such projects and opines that basic requirements need to be well defined before venturing into the space. “The basic concept of an SEZ has to be understood. The schemes introduced should continue but unfortunately this is not the case. Duties are changed, levies are changed, tax structure is changed,” he points out.

While sharing the example of our neighbouring country, China, where SEZs are a success story, he says that that country’s government strictly adheres to the announcements made throughout the period scheme. “Colonies for workers are set up, a waste management system is introduced, infrastructure is fully developed, water supply and power stations are installed, power backup is introduced, and other basic amenities are provided , which becomes a permanent place for employees as they get all facilities under one roof. Within India, Visakhapatnam is a great success as facilities like common lab, common library, common effluent treatment plant (ETP), waste management system and even common R&D centre can be created,” points out Sikri.

But not everyone is convinced that this model will work in India. Commenting on the cluster based model, Dinesh Mody, Director JB Chemicals stresses, “Development and joint management of common facilities requires a lot of trust and cooperation among cluster participants. Companies often view others as competitors and do not want to participate in common activities. Hence, it may not be feasible to set up pharma specific clusters, but chemical industry clusters could be considered as it would cater to all pharma manufacturers, as issues related to bank subsidies, effluent treatments, power and water requirements etc. are similar.”

Fixing the loopholes

According to the scheme document, the CDP-PS is proposed as a Central Sector Scheme for the remaining years of the 12th Five Year Plan and to continue in the next Five Year Plan. The total size of the scheme is proposed to be `125 crores and envisions common facilities for testing, training centre, R&D centres, effluent treatment plant, logistics centres etc. The grant in aid to be provided is only for the common facilities and not for production units.

Commenting on the same, Sikri says, “`125 crore is a meager amount. If India wants to compete with China, then the budget of such a scheme should be in thousand crores. India has the talent pool. They lack on the financial front. If clusters are created along the lines of China, then many young entrepreneurs will rush to set up facilities for pharma units.”

The success of any project depends on the methods of approach and its accessibility. If the Government does not want another programme failing, then what should be the steps taken at both ends? Sikri suggests, “If the MSME segment is encouraged to begin with, it will be good move on the part of the Government otherwise smaller companies will not be able to access this scheme and big giants with their muscle and financial power will try to grab such an opportunity.”

Mody remarks, “CDP-PS may be accessible provided a number of units join hands to approach DoP. However, whether the funds allocated would be enough is another matter.”

Commenting on the implementation mechanism, Mody emphasises, “Affordable clusters will need to be created with infrastructure and logistics. It is also possible to consider already set up units in an area as a cluster and provide suitable support/ facilities.”

Sikri opines, “Single window system has to be really introduced so that all formalities for licencing etc. are completed under one roof. Red tapism has to go with the changed scenario.”

A model to follow

According to Mody, “Baddi is a good example of a successful cluster, as the Centre and state combined to provide suitable facilities, with the Centre giving tax free holidays and state providing all the infrastructure and support. This attracted first time manufacturers as well as seasoned companies setting up yet another manufacturing unit to avail of the benefits. Maharashtra has two to three naturally formed clusters, but the state government must gear up to introduce planned clusters. Similarly other states like Madhya Pradesh, Karnataka etc can also develop clusters with adequate planning.”

The newly formed states need to have such cluster schemes on a priority basis. Sikri says, “Seemandhra and Telangana are the two states in which this scheme can be immediately implemented because this area is surrounded by natural resources. Secondly, these are newly created states and both the Centre and state governments have the intention to create employment opportunities. The pharma sector is well established in the surrounding areas and it is already considered a hub of the industry. In the second phase, such incentive schemes should be introduced in states like Orissa, Bihar, parts of Uttar Pradesh, so that there is an uniform distribution of employment opportunities all over India. This will ensure that the youth of all states get an opportunity to set up their units as young entrepreneurs and other youth get equal opportunities for employment.”

Indian entrepreneurs are capable enough to accept any global challenge. The business model has to be cost effective. At present India has a fragmented life sciences industry with intense competition on prices, stringent government price controls, and limited availability of infrastructure. Nonetheless, MNCs are increasing their operations in India and creating opportunities to drive industry growth in the country. But government should encourage the local domestic industry to come forward.

“India is among the top five pharma emerging markets. The double digit growth registered by India’s life sciences and healthcare industry can be attributed to several socio – economic factors and plenty of scope is there to further improve on the health of the pharma industry by introducing new SEZs, as well as the new cluster scheme so that we reduce dependability on China and become self sufficient,” feels Sikri.

As Greek philosopher, Heraclitus says, ‘change is the only constant in life.’ This quote is very applicable in the pharma industry. After the SEZ model failed in various parts of the country, the government is trying to initiate the cluster model, albeit with limited funds. Though Indian pharma companies are trying to get more funds from the government, if this model manages to nail it then the growth of the industry would move on to the fast track.

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