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Rediff News  All News  » Business » Mahindras cash in on early SEZ appeal

Mahindras cash in on early SEZ appeal

July 29, 2008 02:43 IST
Workers are putting the finishing touches to a five-storey building that will house a 3,200-seater BPO unit of Infosys Technologies in the 2,500-acre multi-product special economic zone (SEZ), 21 km from the Pink City. Infosys has leased 200 acres in the 385-acre IT zone, which is sold out.

Fifty metres away at the SEZ's technology park, two floors of offices are ready. Deutsche Bank Outsourcing International, which has leased out seven floors in two buildings, will start operations this week.

Welcome to the Mahindra World City Jaipur. Even as several SEZs are struggling to get off the ground, the Mahindras have managed to kick off their second SEZ at Jaipur, after their first one in Chennai.

"None of the big SEZ projects has taken off while we have made good progress on two of them. The Jaipur project will be operational this month,'' said Arun Nanda, vice-chairman, Mahindra Lifespaces.

Most other projects have not been able to cross the first hurdle of land acquisition. "The Mahindras believed in SEZs before they came into place in India. Others are sitting on approvals and now thinking about what to do with them," said Tapan Singhal, senior manager, PricewaterhouseCoopers.

To be fair, many SEZs have come up in the country. But a majority of them are captive units of IT, ITes, or pharma companies. Many government free trade zones and export promotion zones have been converted into SEZs. There are about half a dozen third-party SEZs from developers like DLF and Unitech but they are much smaller in size and scale (40-60 acres).

"Many of the big SEZ projects are suffering because of issues related to land acquisition; execution is not so much an issue. The Mahindras were early starters in Chennai in the older regime, when land stipulation was not there," said Vivek Mehra, executive director, PricewaterhouseCoopers and an expert on SEZs.

Mahindra World City Jaipur -- a 74:26 joint venture between Mahindra group firm Mahindra Lifespaces and Rajasthan Industrial and Investment Corporation -- is the largest public private partnership project in Rajasthan, and is expected to create large scale industrial development and employment in the state.

The multi-product SEZ will have three zones: IT (750 acres), light engineering, including auto and auto component (250 acres), handicraft (250 acres), besides zones for apparel, gems & jewellery, logistics and warehousing, a domestic tariff area for ancillaries to support export units and 1,000 acres of social infrastructure.

Twenty companies have signed up for these zones, who will invest more than Rs 1,000 crore, employ 75,000 people and generate exports of Rs 3,500 crore within four years.

The group's first SEZ, the 1,400-acre Mahindra World City near Chennai, already boasts clients like Infosys, Wipro, BMW and Braun and achieved a break-even this year, in its eighth year.

The Mahindras had acquired 1,000 acres close to the Ford factory near Chennai for an auto-ancillary park and later thought of doing a township.

"When we thought of an SEZ, we said we can build an island of excellence, opportunity for people to get plug and play infrastructure,'' said Nanda, a veteran of 35 years at the M&M Group.

In fact, M&M's success in Chennai saw other businessmen jumping onto the SEZ bandwagon. What does it do differently that's helping it implement its projects while others are stuck with issues like land acquisition?

"The basic difference is we did not look at it as a real estate business but as an infrastructure business. The profits can wait. We focused on creating the right infrastructure and attracting the right anchors (clients like Infosys)," said Nanda.

Take Chennai, for instance. It took the company four-and-half years to acquire the land and build the infrastructure and another year to get a good anchor in Infosys.

"A good anchor makes a lot of a difference,'' said Nanda. It wasn't easy; Mahindra had to invest upfront (Mahindras, for instance, are investing Rs 600 crore in Jaipur), build the infrastructure for Infosys to come in.

Mahindra could rope in Infosys after three of its directors led by Narayan Murthy visited the site and bought into the concept that a parallel city can be built 35-km away from Chennai. Of course, Infosys also managed to get a great deal. (not to be written: as an anchor, it got a rate which was a third of what others paid).

"They showed faith in us and we delivered to that faith," said Nanda who needs customers like Infosys who can scale-up quickly from 5,000-people at a centre to 25,000-people.

Even after selling all space in Chennai, it invested in sprucing up a nearby railway station that eased commuting for its customers' employees.

Perhaps, it's not enough. "Our experience has been fair to good at Chennai. The SEZ went through a learning curve and in some areas could not match our speed in execution of our facility. For instance, we have grown to 6500 employees there and the railway system cannot take the load. The internal transport system has been inadequate,'' said TV Mohandas Pai, director (human resources), Infosys.

Yet, its Chennai project has been able to win the confidence of its customers. So, when the government of Rajasthan invited Infosys to set up a campus in Jaipur, it suggested to them to create a SEZ so that there will be totality of infrastructure.

"We recommended them to invite the Mahindras to build the SEZ. The state was kind enough to accept our suggestion and that is why we are there," added Pai.

So, the day Mahindra signed the shareholders agreement with Rajasthan for the SEZ, two of its clients in Chennai, Infosys and Wipro, signed up for Jaipur. "We like to have big brands as one brand brings others," said BK Subbaiah, COO, Mahindra World City Jaipur. Once customers visit Chennai, they are convinced.

"We flew down to Chennai and met officials at Infy. If they can replicate what they have in Chennai, we will have what we had bargained for," said Vikram Sehgal, director - operations, Nagarro Software, which is building a five acre campus in Jaipur, which scored over other locations like Chandigarh and Lucknow.

"With increasing costs in metros, a lot of our engineers are finding it difficult to buy housing. Many of them are inclined to move to a tier-II city for cheaper housing, better work-life balance. We want to give our people an experience similar to California,'' added Sehgal, who will also be able to drive down costs.

In Gurgaon, where Nagarro's centre is located, it pays rentals of Rs 85 a sq ft; in Jaipur, its cost of operations will be around Rs 35-38 a sq ft. Another key driver for Nagarro was the availability of contagious space (it has leased 5 acres) for future. It may start its Jaipur operations with 300-500 people but can ramp up to 2000 people. "We are protected for contagious space for 10 years," said Sehgal.

But it's not an easy business. "You need to create infrastructure and jobs; the profits will come later. You make money on housing and not on the infrastructure. You have to look at this business with a 10-12 years timeframe unlike in real estate, where you have 2-3 years timeframe. So, you need deep pockets. You have to keep on pumping money without getting any returns," added Nanda.

For instance, it took eight years for the Mahindras to achieve a break even in Chennai; Jaipur will do so in three years, thanks to the state which has chipped in with land acquisition.

The state had 1,000 acres at the site; it acquired 3,000 acres more: 2,000 acres for Mahindra and 1,000 acre for rehabilitation. Jaipur Development Authority will develop this land, and offer it to displaced people.

This is a key factor why this project never faced resistance from land owners. The promoters also took care to see that they did not take any villages and did not dislodge anybody's housing. The SEZ will meet two-thirds of its water needs by using recycled water for all non-drinking usage; it will recycle its water as well take treated sewage water from Jaipur and use it after tertiary treatment.

"The Chief Minister of Rajasthan, Vasundhara Raje, is keen to change the image of the state from a tourist destination to a business destination," said a Mahindra official. Her principal secretary Sunil Arora is the chairman of the special purpose vehicle that's promoting the SEZ in Jaipur.

"The states are forthcoming because they see a developer is putting where his mouth is," said PwC's Sangal.

Customers like Infosys are satisfied with the pace of infrastructure development in Jaipur but are concerned about the delays in building a ring road to improve connectivity to the city from the SEZ, which is behind schedule by over a year.

Ranju Sarkar in Mumbai