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From Site Selection magazine, September 2010

Zones of Transformation

New corridors, cities and districts hold great promise.

Victory Valley is among the development projects in Gurgaon from real estate development firm Ireo.
Image courtesy of Ireo

Varun Khanna, Director, Ireo
Varun Khanna, Director, Ireo

rom the elegant Far Eastern restaurant of the expansive recreation center of the Mumbai Cricket Association (MCA), one can gauge the vibrancy of India's financial and commercial capital. The lush, green complex is located in the heart of Mumbai and in its ritziest business hub, the Bandra-Kurla complex (BKC).

Dark, southwest monsoon clouds hover in the sky, even as a light shower rolls across the sprawling cricket ground, now painted a verdant green by the rains. In the background one can see scores of construction cranes working at a frenzied pace, as new high-rise buildings crop up on what once marshy land.

The 914-acre (370-hectare) BKC is home to some of the most expensive commercial properties in South Asia. Says Navin Makhija, director, the Wadhwa Group, a leading Mumbai-based developer (which has been buying up land in the metropolis by paying record sums in recent months): "Office rents here, of about US$6.50 a month for a square foot, are among the highest in the country. I expect a 50 percent jump in rentals over the next five years, looking at the frenzied pace of development."

The BKC is home to leading international and Indian financial institutions and banks including Citibank and the National Stock Exchange, besides other multinationals and domestic majors. The American consulate in Mumbai has also relocated to this fancy new development.

In October, the Bharat Diamond Bourse will move to the Bandra-Kurla complex, occupying more than 2 million sq. ft. (185,800 sq. m.) of commercial space in nine towers that are spread over 20 acres (8 hectares). Hundreds of diamond traders, brokers and exporters with global links (offices and/or associates in New York, Johannesburg, Tel Aviv and Antwerp) will be shifting to the new offices at the $215-million complex. Analysts expect about 100,000 people will be working out of the cavernous building.

A Corridor Like No Other

Almost 900 miles (1,448 km.) to the north of BKC is another new growth center, one that is attracting multinational companies, the who's who of corporate India and feisty information technology and telecommunications players. Gurgaon, a former dusty hamlet just 12 miles (19.3 km.) south of the national capital, Delhi, is today among the fastest-growing cities in India.

Drive down the bustling Golf Course road, which runs along the 142-acre (58-hectare) DLF Golf Course and country club, one of the best courses in India, and you will once again see those restless construction cranes busily adding floors to skyscrapers that are transforming the formerly rural landscape.

Says Varun Khanna, director, Ireo, a real estate development company promoted by a group of international private equity investors who injected $2 billion into the firm: "Projects along Golf Course road are among the most valuable assets in India today." Ireo, which currently owns about 3,300 acres (1,336 hectares) of land across north India, is in possession of 800 acres (324 hectares) of prime property in Gurgaon.

Located in the state of Haryana, Gurgaon is one of the most vibrant cities in the National Capital Region (NCR), which encompasses Delhi and includes satellite cities in the neighboring states of Haryana and Uttar Pradesh. The NCR, especially the satellites, are attracting billions of dollars in investments, as automakers, electronics and white-good manufacturers and information technology and IT enabled service (ITeS) players inject funds into the region, creating thousands of new jobs.

Interestingly, the 900-mile (1,448-km.) "corridor" linking Delhi, India's political capital, to Mumbai, its business hub, is now the focus of a massive new investment plan expected to draw in about $100 billion over the next few years. The Delhi-Mumbai Industrial Corridor (DMIC) will be a nearly 100-mile-wide (161-km.) "influence region" along both sides of a high-speed dedicated rail freight corridor that will link the two metros.

The Indian government, which has planned the ambitious DMIC project, envisages the development of nine integrated investment regions (each with a minimum area of 20,000 hectares or 49,419 acres) and 15 industrial areas (each with a minimum area of 10,000 hectares).

"If the Indian economy has to grow at 9 percent annually, as planned by the government, then we need large-scale manufacturing activities," points out Amitabh Kant, the chief executive officer and managing director of the Delhi Mumbai Industrial Corridor Development Corporation. "That is why we are creating new industrial cities, with the Delhi-Mumbai freight corridor as their backbone."

The corridor will straddle half-a-dozen states that today account for half of India's industrial production and exports and 43 percent of its total economic output. Kant says that seven new cities will be developed across these six states — Uttar Pradesh, Haryana, Rajasthan, Madhya Pradesh, Gujarat and Maharashtra. Each city is expected to draw investments of about $10 billion.

Smart and Global

Kant foresees the emergence of futuristic smart cities, operating on the concept of low pollution, recycling of resources and optimization of energy supplies. "A smart community means a city in which citizens, business and government live, work and interact in a sustainable manner through delivery of integrated, low-carbon products and services."

The entire project, which is being taken up as a public-private partnership initiative, will be executed in three phases over the next 15 years. Anand Sharma, India's government minister for commerce, expects the first phase to be ready by 2018. "We expect industrial output to triple and exports to grow four times on completion of the corridor," explains Sharma. "The project will have significant impact on employment generation, industrial production and exports."

The Indian government sees global interest in the mega project that promises to transform a vast swath of north and west India. Competitive tenders will be floated to elicit investors and international firms with the necessary expertise.

The Japanese government has already inked agreements with India, and a consortium of Japanese firms are already conducting feasibility studies for the first set of 'smart cities' to come up on the outskirts of Delhi.

A joint delegation of 65 Japanese and Australian business executives recently visited India to study the opportunities in the country's infrastructure sector, especially the Delhi-Mumbai industrial corridor. Paul Gallagher, the executive director of the Australia-Japan Business Co-operation Committee, saw great opportunities in urban infrastructure development, especially with the rapid urbanization that is occurring in the country. Hundreds of new cities would be needed to accommodate the new migrants, he felt.

Indeed, new cities — or satellites — are already being developed around major Indian metros including Mumbai, Delhi, Bangalore, Hyderabad, Chennai and Kolkata. Federal, state and local authorities are also investing huge amounts in beefing up the transport infrastructure in and around these metros.

For American and other western investors and businesses, there are opportunities aplenty as the Indian government is encouraging private (including international) investments in these multi-billion-dollar projects.

In the Zone

When foreign leaders visit India these days, most make it a point to visit the southern state of Karnataka and its capital, Bangalore, dubbed India's Silicon Valley. So it was not surprising that Bangalore happened to be one of the major ports of call for British Prime Minister David Cameron, and the large business delegation accompanying him, during his official visit to India in late July.

One of the most significant aspects of the Bangalore visit was the announcement by Xchanging plc, a U.K.-based company and one of the largest and fastest growing global business processors, to jointly develop six acres (2.4 hectares) of land in a new special economic zone (SEZ) that is being developed in Shimoga, a tier-3 town northwest of Bangalore.

Xchanging will build a state-of-the-art processing center at the SEZ, making it one of the first multinational companies to set up a center in a tier-3 location in India. The center will have an initial capacity of 1,000 people with an option to scale it to a 2,000-seat facility. It will also be Xchanging's fourth major processing center in India. The British firm employs nearly 3,500 people in India and has three of its top 10 global processing hubs in Bangalore, Gurgaon and Chennai.

"India is the undoubted global BPO powerhouse," notes David Andrews, CEO, Xchanging. "Today more than one-third of Xchanging's work force is Indian, complementing our strength in the U.K., Germany and the USA. We have invested in India for the engineering excellence that the country has to offer and the opportunities that exist in this fast growing economy. Shimoga is a landmark project. It paves the way to the yet untapped semi-urban potential of India."

Andrews points out that the company's focus is on India. "We are moving strongly into the local domestic market," he adds. Xchanging has nearly 80 banking customers in India, besides a couple in the insurance sector. The opening of the BPO in a tier-3 town will ensure it remains competitive in India, says Andrews.

India launched its ambitious SEZ programme about five years ago, hoping to replicate the success of similar zones in China. The Shenzhen SEZ in the southern Chinese province of Guangdong, which celebrated its 30th anniversary in August, has been a remarkable success story. Authorities in Shenzhen now plan to expand the special economic zone to cover the entire, 1,250-sq.-mile (3,238-sq.-km.) city.

India, though, does not have SEZs on such a massive scale, and unlike China, the policy has met with some degree of opposition from political parties, environmentalists and even farmers. Many of the proposed large SEZs outside cities such as Mumbai, Delhi and Bangalore have had to be scaled down in size following land acquisition problems.

Reliance Industries Ltd (RIL), India's largest private sector company — with interests spanning oil and gas, petrochemicals, refineries, textiles, retail and life sciences — recently decided to downsize its ambitious plans for setting up two SEZs of 25,000 acres (10,118 hectares) each in the northern state of Haryana. It is, however, developing a 1,500-acre (607-hectare), multi-sector SEZ in Gurgaon on the outskirts of the national capital.

The Indian government has granted formal approval to 576 proposals for SEZs over the last five years, says Jyotiraditya Scindia, the junior government minister for commerce. Of these, 358 have been notified and 114 have begun exporting products and services. A majority of SEZs in India are focused on information technology and IT-enabled services. More than half of the operational SEZs are from these two sectors.

The concept of SEZs was mooted to encourage exports, generate new jobs and attract foreign capital. Scindia notes that the existing SEZs have attracted investments of more than $35 billion and have resulted in the generation of over half a million jobs. Exports from the 114 SEZs grew by 120 percent last year to about $50 billion. India's total exports for the financial year ended on March 31, 2010, amounted to $175 billion, a 5-percent fall over the previous year.

But the Indian government, which is introducing major tax reforms through a direct tax code (DTC), plans to do away with some of the incentives that were extended to developers of SEZs. These incentives were graded, with 100 percent tax exemption to companies operating within the zone during the first year, and then a gradually declining percentage over the following 10 years. Developers of SEZs also enjoyed tax concessions.

But developers of SEZs are confident that demand for units in these zones will continue to grow. "There is good demand for SEZs and we plan to take up many IT-related projects in the future," explains Snehal Mantri, director, Mantri Developers, a leading Bangalore-based real estate company.

Meeting the Infrastructure Challenge

Though India launched its reforms program in the early 1990s, opening up most sectors of the economy to international and domestic competition, one of the major bottle-necks that reduced the inflow of investments was the creaky state of its infrastructure.

Bad roads, congested ports, over-crowded airports, power shortages and terrible telecommunication services meant frustrating delays, low productivity, lower profits and wasteful expenditure.

Indian Prime Minister Manmohan Singh, an economist and former central bank governor — and also the author of the economic reforms program — decided to focus his efforts on the infrastructure sector after he was made head of the government by his Congress party in 2004.

Singh reasoned that if India's gross domestic product (GDP) grew at double-digit rates — from the 7.5 to 9 percent rate of the past few years — it could result in drastically reducing the number of people living below the poverty line. Since the Indian economy is driven by domestic demand — unlike some of the Southeast Asian economies that are hugely dependent on exports — the only way to accelerate growth was to invest huge sums in upgrading existing infrastructure and building new as well.

So for the first time, the core sector — which includes roads and highways, ports and airports and power — began getting the attention of planners and policy-makers. Notes S.K. Goel, chairman and managing director, India Infrastructure Finance Company Ltd, a state-owned lender to the infrastructure sector: "The 11th Five Year Plan [2007-2012] estimated the investment requirements of the infrastructure sector at $514 billion. The Planning Commission has now doubled the allocation for infrastructure in the 12th Five Year Plan [2012-17] investment to $1 trillion."

A veteran banker, Goel says the Planning Commission also envisaged that during the 12th Plan period, private sector investments in infrastructure sector will surpass public sector ones. Though India has dismantled much of the socialist infrastructure of the 1960s and 1970s, it still follows the five-year plan. The Planning Commission, headed by renowned economist and a close aide of Prime Minister Singh, Montek Singh Ahluwalia, allocates funds for different ministries and distributes money to states.

Of course, attracting investments into the infrastructure is easier said than done. Both Indian and international investors were wary of the entrenched interests in the sector — state-owned monopolies, powerful trade unions and some rent-seekers — and awaited clarity and the setting up of regulators.

The government has in recent years brought about the necessary changes, resulting in enhanced inflow of funds into sectors such as ports and airports, power plants and roads and highways.

Gateways for Growth

The opening of the T3 terminal at the Indira Gandhi International Airport at Delhi in August — it is India's biggest terminal and the eighth-largest in the world — within just over three years of the start of work has shown that, given the right environment, Indian engineers and technologists can execute the most complicated task and without cost and time over-runs.

"The GMR group is committed to play a leading role in the development of world class infrastructure in the country," remarks G.M. Rao, chairman, GMR Group, which operates and manages the Delhi International Airport. "The new Terminal 3 of the IGI airport at Delhi symbolizes the aspirations of a new and vibrant India. It demonstrates the abilities of our planners, designers, engineers and contractors. And as an engine for growth, it opens immense possibilities for the economic development of this region."

Spread across 5.4 million sq. ft. (501,660 sq. m.), the new nine-level terminal building comprises a range of world-class features and facilities designed to provide enhanced passenger comfort and convenience.

India's civil aviation sector, which is witnessing explosive growth, is expected to draw investments of about $120 billion over the next decade. Already, two greenfield airports have been developed in Hyderabad and Bangalore. The Delhi and Mumbai airports, the country's busiest, have been privatized and are being modernized, while the government is investing huge funds in upgrading the other airports.

Changes have been rather slow in the ports sector, where the dozen major ports — accounting for a significant chunk of the country's external trade — are dominated by state-owned trusts. But private-sector ports, including Mundra and Pipavav in Gujarat, are rapidly increasing their share.

Mundra Port and special economic zone (MPSEZ), part of the Adani Group, one of the newest ports in the country, has set an ambitious target to emerge as the largest over the next few years. The port plans to raise capacity to 200 million tons in the next 10 years. State-owned Kandla Port Trust, also in the western state of Gujarat, is today the largest port, handling 80 million tons of cargo.

The winds of change are gradually blowing across the Indian ports sector and the next few years should see many international players operate ports (not just terminals, as happens today) in the country, which has a coast that stretches for 4,660 miles (7,498 km.).

B. Nitin Rao is a Mumbai-based writer, who has been associated with several Indian newspapers and magazines over the past 25 years. He has also worked abroad in the Middle East, besides contributing articles to other international titles.

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