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Mukesh Ambani's great gamble
Surajeet Das Gupta & Makarand Gadgil | April 15, 2006
Take 14,000 hectares of land, put in Rs 25,000 crore (Rs 250 billion) into the same basket, stir in some leisure and business districts, shake some architectural blueprints and what do you have? Dubai? Singapore? Shanghai? Or New Bombay?
Eat your hearts out, Mumbaikars. For, coming up across India's commercial capital, on as-yet fallow land in what is just another squalid suburban slum, is India's first 21st century megapolis. With its own dedicated airport, a rapid transit sea-link connecting it with Mumbai, and living conditions on par with the swankiest, most sophisticated cities of the world.
A whole new city? Is it possible? If Mukesh Ambani has his way - and why wouldn't he? - then yes, work on Navi Mumbai will begin in September this year, a new city, one third the size of existing Mumbai, and a probable rival to some of the swankiest cities in the world by the time it is completed a decade or so from now.
In what is the country's - even the subcontinent's - most ambitious infrastructure project to date, Mukesh Ambani's Reliance Group and the Maharashtra government (through PSUs) are out to create two sprawling special economic zones (SEZs) across 14,000 hectares in Navi Mumbai and Maha Mumbai.
The Reliance Group's whopping Rs 25,000 crore investment will be dwarfed by the estimated Rs 2,50,000 crore (Rs 2500 billion) to be invested by other developers who will put up factories, residential complexes, hospitals, hotels and shopping malls across the SEZs.
In a few years from now, the farmlands will begin to give way to a soaring skyline with hi-tech buildings, interspersed with amusement parks, shopping malls and an 18-hole international golf course; residents will walk (hopefully) from their highrise condominiums to their workplaces.
And in case you still want to visit Mumbai (for the culture, presumably, or to visit friends and relatives), a new 22.5 km long, six-lane highway will arc across the sea to get you to central Mumbai in just 30 minutes. Sceptical? The government has already pre-qualified bidders for the Rs 4,000 crore (Rs 40 billion) Mumbai trans-harbour sea-link; work should begin soon enough - now just imagine the ride over the sea!
What's more interesting, Navi Mumbai's jet-setters may not have to use the sea-link as often as they imagine; with an airport mooted as part of the essential infrastructure in the SEZs, they won't need to come to the existing Mumbai airport to take a flight out.
Also, the SEZs will be connected to Jawaharlal Nehru Port with a high-speed railway, plans of which are (still) on the drawingboard. As for corporates in the IT, gems and jewellery, pharma, auto-components, apparel and garment businesses, here's an opportunity to lease out space and transform it into an export hub for the world.
Too much of a good thing? Ajit Warty, director with the Mumbai Integrated SEZ - - which is overseeing the Maha Mumbai SEZ project - says otherwise: "Our aim is to create an SEZ which is world standard and will be able to rival global locations like Dubai's Jebel Ali, or Malaysia's Bandar Nusajaya Industrial Park, or even SEZs in China."
And the challenge is to build it at a lower cost by leveraging the company's project management skills and taking advantage of scale.
Still, the group is first testing the waters. It will take up the Navi Mumbai project (a joint venture with CIDCO) through a "cluster" approach. In simple terms, the company plans to develop infrastructure in individual clusters of 5,000-7,000 acres each, including land development, sewage, road, landscaping and telecom, to house between six and 12 industries each.
Within the next six months, it will bring in private developers to build hotels, shopping plazas, schools and residential complexes. The time frame for completing the first cluster? Let's say it should be completed by the end of this decade.
Reliance isn't ready to discuss the specifics of the financing pattern yet, but it does share some ballpark figures. If the development cost for each acre in an SEZ is around Rs 1 crore (Rs 10 million), then the investment required for the first phase will be around Rs 5,000-7,000 crore (Rs 50 billion to Rs 70 billion).
The company hopes to only lease out the infrastructure to companies and then use the cash to finance and replicate similar clusters. Points out Sanjay Punkhia, director of Navi Mumbai Special Economic Zone Company (which is developing the Navi Mumbai SEZ): "We will create one self-sufficient cluster and then replicate the same model."
Accordingly, the plan is to locate a gems and jewellery hub around Ulwe (where the proposed airport will be located) to facilitate the rapid export of both people and products.
The Kalomboli zone near the Mumbai-Pune highway will be used to set up a hub for food processing and textiles. The bigger ambition is to create an international financial services centre where global banks, insurance companies and merchant banks can function just as though they were in London or New York.†
That's by way of starters. The magnitude of the project is reflected in its various parameters. The completed SEZ will require a power plant to generate over 1,000 MW of electricity and about 300 million litres of water will be required every day.
The new city will house over a million people, virtually the same number as currently live in Navi Mumbai. And the Jawaharlal Nehru Port will form another exit point for the SEZ, and with a third berth of over 80 million tonne units added, it should be sufficient for now to support the project.
So, okay, the Ambani SEZ is a large project, perhaps a mammoth one by Indian standards, but hardly unusual given global SEZs. It's only half the size of the Suzhou Industrial Park or even Shantou SEZ, both in China. And compared to Shenzhen (33,000 hectares; China's largest SEZ), it is much smaller.
Sure, it's bigger than Malaysia's Bandar (10,000 hectares) and virtually similar in size to Iran's Chabahar Free Zone, but does that justify the hype? Yes, because it's six times the size of any existing SEZ in India, and at least thrice the size of any of its competitors.
But there's a huge gap between perception and reality. The Chinese SEZ experience, Reliance admits, has shown that a project of this magnitude is a long haul. For starters, SEZs in Dubai or China have had the advantage of being undertaken by the government, where costs of setting up have been much lower.
Experts point out that land constitutes over 10-15 per cent of the investment in the Ambani project, but in China, where land is owned by the government, the cost of acquisition is minimal.
Says Vivek Mehra, executive director, PricewaterhouseCoopers: "In most countries, SEZs have been built by governments and have been focused in one area, like manufacturing in China. The Indian model is different; it is built on private-public participation."
But then, there are advantages that can be leveraged too, such as a skilled labour force (not available in Dubai), and a large domestic market you can feed on.
"Our advantage is lower costs of labour than Malaysia, or the growing increase in cost of labour in China," says Mehra. "And products that do not attract import duty, or attract only a nominal one, like handset manufacturers, could ideally enjoy the advantage of a large local market as well as exports."
But before the spin-off, the problems.
One, land acquisition for the Maha Mumbai Special Economic Zone has still not taken off. The government notification to take over land from the farmers under the Land Acquisition Act might be a long while.
Says B Y Wankhede, district collector of Raigad, where the SEZ is coming up, "We have received the plans from Reliance. If every thing goes smoothly then we expect to complete the process within 40-42 weeks time."
Two, the proposed airport is far away in the horizon. Civil aviation ministry officials point out that, while they will clear the proposed airport, it will only come up after 2015, when Mumbai airport has exhausted all capacity to handle more traffic. That long wait could put a spanner in the SEZ's attempts to woo companies for exports.
Three, the trans-harbour line for which global tenders were floated in 2004 has been delayed considerably, and questions are being raised about the government's capability of funding the project.
MSRDC managing director Ramanth Jha, who is overseeing the project, points out: "We have sent the draft Memorandum of Understanding to the state government for its co-operation and are expecting approvals any time now. After this, we will ask the shortlisted bidders to submit their financial bids." Any further delay could make the SEZ less attractive.
Four, the proposal to set up a financial services centre might take years. It will need a complicated regulatory framework that simply does not exist currently (these companies cannot be regulated by SEBI, or RBI, for instance, and can offer loans or take deposits in dollars).
Any wonder Mukesh Ambani is treading cautiously and, in the first phase, concentrating on selling facilities and infrastructure to companies in India rather than to global giants. Reliance executives say the logic is simple: they must feel confident that we can offer international standard infrastructure, and that could take 3-5 years.
But as in its telecom foray, Reliance is looking at playing the pricing game: offer infrastructure at prices companies could never have imagined getting in and around Mumbai.
For instance, it has identified IT, ITES and KPO as a hot area, to constitute at least 30 per cent of the companies in the SEZ. The plan? To offer lease rates at par with those available in Hyderabad or Banaglore.
Realty experts say Mumbai real estate rates are twice, even thrice, those in Bangalore. And that has kept IT companies away, despite the large readymade talent pool. Now, Reliance hopes to make an offer these companies cannot refuse - offering infrastructure at the same rates as Bangalore, for instance. (Insiders say that is possible because real estate prices in Mumbai are artificially kept up and do not reflect real rates, so that when the government offers land, it is far less expensive.)
Similarly, the gems and jewellery business is spread across too many cities. Take the case of Surat, for instance, the centre for cutting and polishing diamonds, while Mumbai has the majority diamond traders and a large market for the stones.
Dilip Chaware, president of the Navi Mumbai SEZ points out, "The gems and jewellery trade has moved from Antwerp to Tel Aviv and now to Dubai. There is no reason why India cannot be a hub too. What has been missing is a 100 hectare hub where diamond merchants, financiers and polishing and cutting companies and jewellers can do business."
It will also woo companies in Mumbai to shift to Navi/Maha Mumbai, and this includes textile units, garment exporters, pharma companies, and engineering and auto component manufacturers, to name a few. The other attraction it's hoping to capitalise on is one that will appeal most to people - that the SEZs will have an infrastructure where people can "walk to work" within 15-20 minutes.
But like Rome, Reliances's SEZ will not be built in a day. And while many are critical of the plethora of incentives that are being offered to the Reliance SEZs, the success of the mega-project could be a litmus test about India's capability of replicating the SEZ model that has played a key role in China's amazing growth story.
Meanwhile, in Navi Mumbai...
Real estate prices in Navi Mumbai have been galloping in the past year. While residential rates have jumped, on average, from Rs 1,200 to Rs 2,500, land prices in the area have quadrupled from Rs 10,000 to Rs 50,000 a sq mt.
Says Anil Bagaria, one of the biggest brokers in the area, "We have seen prices of land double, and then double again, in one year's time."
Recently, a City and Industrial Devleopment Corporation tender saw prices touching Rs 95,000 per sq mt on Palm Beach, the poshest sector of the entire township, while Kharghar saw a prices reaching Rs 55,000 per sq mt.
In nearby Nerul, land is available at Rs 75,000 per sq mt.
In Sanpada, Says Bagaria, "Six months ago, the prices were hovering around Rs 15,000 a sq mt."† Ramesh Bhai Shah, president, Navi Mumbai Builders and Developers Association, says, "The SEZ proposed by Reliance over an area of 3,200 acres is a big factor contributing to these price hikes. Such mega-projects will leave Navi Mumbai with little availabe land. The overall development of Navi Mumbai is also a contributing factor."
Jamna Das Palan, president, Builders Association of Navi Mumbai, believes that Navi Mumbai does not have enough available land. As a result, builders have only one option - to jack up their costs substantially.
Industry observers say that upcoming projects have contributed to the surge in real estate prices. On the anvil are a World Trade Centre, the Panvel-Karjat railway line, the Dhapoli amusement park, the second international airport, the Sewri-Nhava sea link, and the Jawaharlal Nehru Port Trust-Goa express highway (reducing the distance to Goa by 215 km).
Here's what's in it for everyone
Advantage to units located in a SEZ
Incentives to developers and co-developers
Incentives to developers in Maharashtra