The Singur Advantage - Tata's agreement with WB government

The agreement between Tata Motors and the government of West Bengal to manufacture the world's cheapest car in the state involved much more than subsidies on land and interest paid on bank loans.

The government worked out a package — which included tax paybacks and concessional power — to match the benefits the plant would have enjoyed in Uttarakhand and Himachal Pradesh, both designated backward areas that attracted central tax concessions.

The documents, which the West Bengal government released today, show that the state government will provide to Tata Motors a loan of Rs 200 crore at 1 per cent interest per year repayable in five equal annual installments starting from the 21st year of the date of disbursement of loan. If the state had put the sum in a fixed deposit scheme, its principal would be worth Rs 3,000 crore in 20 years.  This loan was disbursed within 60 days of signing of the agreement in May 2006.

The West Bengal government will also provide electricity for the project at Rs 3 per KwH, against the going rate of Rs 4.15 per KwH. In the case of a more than 25 paise per KwH increase in tariff in every block of five years, the government will provide relief through additional compensation to neutralise the additional increase.

The state government also promised to revisit the computation of the comparison of benefits offered by Uttarakhand and Himachal Pradesh. The incentive package in these states comprised excise exemption for 10 years and 100 per cent income tax exemption for the first five years and 30 per cent for the next five years.

The state government also subsidised the cost of land required for the factory and the interest paid by Tata Motors on loans taken to build the project. Thus, the West Bengal Industrial Development Corporation (WBIDC) is to provide Industrial Promotion Assistance in the form of a loan to Tata Motors at 0.1 per cent interest a year for amounts equal to gross VAT and CST received by the government of West Bengal in each of the previous year ended March 31 on the sale of each Nano from the date of commencement of sales.

In other words, the state government would repay Tata Motors the VAT and CST collected on each Nano sale and as a result not earn anything as tax. This benefit will continue till the balance amount of the benefit offered by Uttarakhand was reached on a net present value basis, after which it is to be discontinued. The loan with interest will be repayable in annual installments starting from the 31st year of sales from the plant.

WBIDC will ensure that the loan under this head is paid within 60 days of the close of the previous year (March 31), failing which WBIDC will be liable to compensate Tata Motors for the financial inconvenience at the rate of 1.5 times the bank rate prevailing at the time on the amount due for the period of the delay.

The agreement also said Tata Motors and the government of West Bengal will make joint efforts to maximise sales of the car in West Bengal. Under the agreement, WBIDC would provides 645.67 acres to Tata Motors Ltd on a 90-year lease, on an annual lease rental of Rs 1 crore per year for the first five years with an increase at the rate of 25 per cent after every five years till 30 years.

The effective lease rental for Tata Motors would be Rs 1291 per acre per month annually, rising in keeping with an escalation clause. After 30 years, the lease rental will be fixed at Rs 5 crore per year, with an increase at the rate of 30 per cent after every 10 years till the 60th year. After 60 years, the lease rental will be fixed at Rs 20 crore per year for 645 acres which will be unchanged till the 90th year. After 90 years the lease terms will be fixed on mutually agreed terms. The benefit on account of land would be calculated as the total land area leased out to Tata Motors multiplied by the cost of acquisition less the net present value (NPV) of rent payable during 60 years.

Over and above all this, the agreement says WBIDC will lease 290 acres to vendors selected and approved by Tata Motors on payment of a premium equal to the actual cost of acquisition plus incidentals, to be calculated on the basis of the total acquisition cost and other incidental expenses expended by WBIDC or any of its subsidiaries (duly certified by its auditor) averaged over the total land acquired.  The lease rental payable per year per acre by the vendors will be Rs 8,000 per acre for the first 45 years and Rs 16,000 per acre for the next 45 years. The going rate for commercial space in the area was around Rs 25,000 per acre per year for high land, with low-lying or waterlogging-prone areas fetching Rs 12,500 per month. The initial lease tenure will be 90 years, after which the lease terms will be fixed on mutually agreed terms at that point of time.

The agreement says Tata Motors will manufacture 250,000 cars a year on a two-shift basis which could be expanded to 350,000 on three-shift basis. In addition, the Singur unit would act as a mother plant for many aggregates to tune of 500,000 cars.

Tata Motors told the West Bengal government it would be investing over Rs 1500 crore and vendors were likely to make further investment of over Rs 500 crore.

Source - Business Standard