1. Basic Principles

The proposed Common Facilities Centre (CFC) must fit into the broader, clearly-stated long-term vision of the cluster for which it is proposed to be set up. S tand-alone CFC proposals without ensuring adequate consistency with the broad, common vision and strategic action plan for development of the cluster/network may lead to ineffectiveness of the CFC. The measurement of its effectiveness must, therefore, be explicitly stated in the context of the economic value chain of the cluster that the proposed CFC is likely to serve.

2. Avoidance of Duplication of Facilities

Duplication of similar facility in the cluster should be avoided. It must be ensured that the proposed facilities in the CFC are currently not available in the cluster for access by the intended clientele of the cluster. It is, therefore, necessary to also provide a summary of the existing facilities and the limitations to their use by the cluster members.

3. Broad Categories of CFC

3.1. Different types of CFC may require different types of public support. C FCs may be categorised into the following three broad types , depending upon their predominant characteristics of being a public good or a private good :

(i) Developmental (DV): The CFCs that seek to disseminate and promote adoption of advanced technology, undertake R&D, provide new forms of training, include a common testing/standardisation facility, etc., are the ones for which private sector is less likely to invest on its own, due to perceptions of higher financial risks and/or longer gestation period for gains. Such CFCs do not demonstrate commercial viability without substantive long term public support for the target cluster members (even beyond 3 years of operationalisation of CFC).

(ii) Quasi Developmental (QD): The common facilities that do not necessarily demonstrate commercial viability in the short to medium term (less than 3 years) and distribution of gains to individual firms is not clearly established, e.g., common effluent treatment plant, may fall between DV and CL types.

(iii) Commercial (CL): The common facilities that are likely to lead to clear commercial gains for the target cluster (private sector) enterprises within up to two years of the CFC becoming operational, e.g., common production centre, common marketing facility, common raw material depot that procures raw material and/or sells common finished products will fall in this category.

Illustrative Types of CFC

3.2. Some illustrative types of CFCs in each of the three categories are given below. The extent of benefits that a CFC is likely to provide to the individual participating client units will generally be an important determining factor in measuring the "public good" content of the proposed CFC and, hence, deciding the extent of Government financial support. However, the project authorities need to recognise that in specific situations and/or for specific reasons (to be spelt out), the CFC may have characteristics which may be a combination of two or more of the clear types mentioned above. Hence, it is necessary to clearly work out each component of the CFC, with clearly stated financial parameters, from among the following illustrative (not exhaustive ) categories :

a . Testing Facility - for quality upgradation, cluster-wide (DV).

b. Design Centre - for new designs not being currently used in the cluster and/or for up-gradation of existing designs (DV).

c. Common Production/Processing Centre - for balancing/correcting/improving production line that cannot be undertaken by individual units (CL).

d. Effluent Treatment Plant - for pollution control (QD).

e. Marketing Display/Selling Centre - to organise buyer-seller meets, fairs, regular display, providing alternate outlets for marketing (CL).

f. Information Centre/Sub-Contracting Exchange - to facilitate improved supply-chain linkages within and outside the cluster (QD).

g. Common Logistics Centre - to improve efficiency of logistics operations as a means to cutting costs, faster supply of goods to the buyers, reducing breakages, etc. This may be a physical facility such as inland container depot or information hub (QD).

h. Research & Development Centre - to either undertake indigenous R&D or just customise the technology/process techniques to suit local requirements (DV).

i. Training Centre - to improve the skills and knowledge of different levels of workers, supervisors or even management structures (DV).

j. Common Raw Material/Sales Depot - to improve the in-efficiencies involved in small lot buying/selling leading to higher costs and non-adherence to desired material specifications (CL).

4. CFCs as Combination of Types

The same type of a CFC for different client groups may require different treatments. Depending upon the existing economic and technical status of the units in the cluster, different norms of treatment may have to be applied to arrive at the necessary support in the form of Government grant-in-aid. To illustrate, a common production centre to be set up by economically well-off enterprises for themselves may be considered as a commercial proposition, while a similar one by a group of micro enterprises may be considered as a developmental intervention. Secondly, whether the client group of the CFC is closed (i.e., consists only of the prime beneficiaries/promoters who discourage the use of the CFC by non-promoters) or open to usage by any cluster

firm without discrimination may also help to determine the extent of public support that should be given to the proposal.

5. Special Purpose Vehicles

5.1 A clear legal entity with evidence of prior experience of positive collaboration among its members, whether formally or otherwise, as the applicant of the proposed CFC assures sound management. Ideally, therefore, a ll proposals for CFCs must emerge from special purpose vehicles (SPV), consisting of the actual/likely cluster beneficiaries organised in any legally recognised form like a cooperative society, registered society, trust, company, etc. The private sector beneficiaries, i.e., cluster units must together have majority stake in such an entity, with no single unit having financial share of more than 10 per cent in the equity capital (or equivalent capital contribution) of the SPV. Registered industry associations with a clear track record of financial records and developmental activities over the last 3 years are also eligible to seek funding support for a CFC.

5.2 Thus, while it is necessary to form a special purpose vehicle (SPV) right at the start, considering the uneven state of development of such collaborative initiatives among small and micro enterprises in the country, it would be permissible for a lead Government institution to be the prime mover (Implementing Agency - IA) of a proposal for CFC in the initial stages of its conceptualisation, design, determination of technical parameters, project preparation and documentation, etc., in consultation with the cluster beneficiaries. It will, however, be necessary to constitute the SPV at the earliest possible, with clear indication of the time frame for completion of this essential requirement while submitting the proposal for Government assistance to the CFC.

5.3 There should be a minimum of 20 small scale industry (SSI) or smaller (tiny/micro) cluster units serving as members of the SPV. There is no ceiling on the maximum number of members. In special cases where considerations of investments, technology or small size of the cluster warrant lesser number of units, a minimum of 10 SSI units may be considered for the SPV, giving reasons thereof. All the participating small enterprise units should be independent in terms of their financial stakes and management.

6. Government Financial Assistance

6.1 With the grant-in-aid sought from the Government, the proposed CFC must be financially and operationally as viable as any commercial project. As a result, all CFC proposals should comply with the financial norms of appraisal that a commercial bank would seek, e.g., internal rate of return, break-even point analysis, debt-service coverage ratio, sensitivity analysis, etc., using basic templates such as projected profit & loss account and projected balance sheet for the proposed CFC. The proposed CFC must also justify its need in terms of its likely impact at the level of an individual representative enterprise of the group that it intends to benefit.

6.2 In keeping with the objective as stated at the beginning of the paragraph 6.1 above , CFC projects would be classified and the Central Government (viability gap funding) assistance therefor would be based on the following broad norms:

(i) Developmental CFC projects: Central Government support of 70 per cent of the project cost and the remaining to be provided by the State Government concerned and the project beneficiaries.

•  Quasi-Developmental CFC projects: Central Government

support of 50 per cent of the project cost and the remaining to be

provided by the State Government concerned and the project

beneficiaries.

•  Quasi-Commercial CFC projects: Central Government support of not more than 30 per cent of the project cost and the remaining to be provided by the State Government concerned and the project beneficiaries.

•  However, in case of clusters of micro and / or village enterprises,

i.e., enterprises with investment in plant and machinery

(excluding land and building) in each case not exceeding Rs. 25 lakh, the extent of Central Government assistance may be raised to 80, 60 and 40 per cent of the project cost in the three types of CFCs respectively.

In all the cases stated above , the entire cost of land and building shall be met by SPV /State Government concerned.

6.3 The share of the cluster beneficiaries in all the three above-mentioned cases should be as high as possible and not less than 10 per cent of the total cost of the CFC, including the cost of land and building(s). State Government contribution will be considered as the viability gap funding. Large mother manufacturing firms (whether in the public or private sector), other major buyers of the cluster SSI products, commercial machinery suppliers, raw material suppliers and business development service (BDS) providers will be eligible to contribute up to 50 per cent of the beneficiary share, provided the management remains clearly with the intended beneficiary SPV consisting of the small/micro enterprises beneficiaries of the cluster. The SPV may also raise loans from banks to take care of any shortfall, expansion, etc. on the term that the plant and machinery in the CFC purchased with Government assistance will not be given first charge of hypothecation to the bank and the first right thereto will rest with the Government funding the project through grant-in-aid.

•  The CFC may be utilised by the SPV members as also others in a cluster.

However, evidence should be furnished that the SPV members would utilise at least 60 per cent of the installed capacity.

7. Submission of Proposals

7.1 Before submission of a detailed proposal for Central Government assistance for a CFC, a preliminary application in the enclosed format (Annex V) may be sent to the office of Development Commissioner (Small Scale Industries) [DC (SSI)], Government of India to seek in-principle interest and comments on ways to ensure positive outcome of the proposal for CFC. However, it would not be necessary to submit a preliminary application if the cluster has already been assisted by the Central Government for development of facilities other than CFC.

.2 Taking in to account the outcome of the preliminary application, t he detailed project proposal (Annex VI) supported by a cluster diagnostic study and a copy of any financial appraisal that may have been undertaken by a bank or financial institution may be submitted to the DC (SSI). All proposals need to be forwarded by the SPV (or, the lead Government institution/Implementing Agency (IA), vide para. 5.2), with recommendation of both the local Small Industries Service Institute (SISI) (or, in case of clusters of village industries or coir industries, from the State Directorate of the Khadi and Village Industries Commission (KVIC) or, as the case may be, of the Regional Office of the Coir Board) and the Department concerned of the State Government (with clear commitment of the latter in respect of its financial contribution) .

8. Appraisal and Approval of Proposals

8.1. There would be two levels of Steering Committees for appraisal and approval of proposals. The first would be chaired by DC (SSI) that would appraise and approve funding proposals for CFCs with a financial outlay of less than Rs. 1 crore. For all proposals with financial outlay of Rs. 1 crore and more, the Steering Committee would be headed by the Secretary, Ministry of SSI. However, projects costing Rs. 5 crore and above will be scruitinised on file by the office of DC(SSI) in consultation with FA, before putting up to the Steering Committee for approval.

8.2 Each Committee shall have representatives of appropriate levels drawn from the Ministries/Departments concerned, including (but not restricted to) the Ministry of Finance (Integrated Finance Wing) of the Ministry of SSI and Planning Commission, and would invite the representatives of the State Governments concerned to its meetings.

8.3. The Committees will meet as often as necessary, preferably once in three months.

8.4. The Committees may take the assistance of some experts in the technical field relevant to the cluster as well as the general field of cluster development, in the process of preliminary appraisal of proposals before formal consideration by the Committee. The suggestions emerging from such preliminary scrutiny would be conveyed in writing to the SPV/Implementing Agency as well as the State Government concerned.

Annex V

Preliminary Application for CFCs in Clusters

1. Details of the Cluster - name of the cluster, its geographical spread, number of units/firms, proportion of micro/tiny units, name(s) of product(s) manufactured, annual turnover of the cluster during past five financial years, principal markets for the cluster product(s), annual exports, if any:

2.1. Whether any diagnostic study of the cluster was conducted in the past? If so, full details of the recommendations of the study (a copy of the report to be enclosed):

2.2 Does the diagnostic study recommend establishment of a CFC? If so, summary details:

3. Summary details of the proposed CFC (name and broad description of purpose and proposed facilities):

4. Financial summary of the proposed CFC:

(Rs. lakh)

5. Broad parameters of financial viability of CFC and likely year of its becoming financially viable

(Rs. lakh)

** Note: Please give year-wise projections, till attainment of viability .

6. Likely benefits to cluster/member firms (how many firms?):

7. Is there any such similar facility available in the cluster? If yes, provide brief details of the same and justify the need for the proposed CFC

8. How the CFC fits in to common long term vision of the growth of the cluster?

9. Will an SPV be formed / has already formed for the CFC? If proposed, give likely date:

10. What will be the monitoring mechanism for reporting progress of work?

Annex VI

Format of Detailed Proposal for CFC

1. The basic details to be furnished for the proposed CFC would be as under:

3 Financial appraisal tools that will be employed and considered would be as under:
(i) Return on Capital Employed (ROCE): The total return generated by the project over its entire projected life will be averaged to find out the average yearly return. The simple acceptance rule for the investment is that the return should (incorporating benefit of grant-in-aid assistance) be sufficiently larger than the capital employed. Return in excess of 25% is desirable.

(ii) Debt Service Coverage Ratio (DSCR): The formula is [net profit + interest (on long term loan) + depreciation] / interest (on long term loan) + principal loan. Acceptance rule will be cumulative DSCR of 3:1 during repayment period.

(iii) Break-Even (BE) Analysis: Break-even, viz., (fixed costs of operation / sales realisation (user charges) - variable costs of operation) should be below 60 per cent of installed capacity.

(iv) Sensitivity Analysis: Sensitivity analysis will be pursued in terms of a 5-10 per cent drop in user charges or fall in capacity utilisation by 10-20 per cent.