"NO, NO. I’M NOT interested in smart cities any more. I’m focussing on smart villages." Innocuous words on the face of it, but enough to send our photo editor into a tizzy. “You told me he was providing services to smart cities,” he accosts me. “But when I went to shoot, he said he was looking at villages!”
The “he” is Subhash Chandra, chairman of the Rs 17,000 crore Essel Group. Chandra made his name with Zee, the largest Indian television network. The Essel Group, which now occupies Chandra full-time (he has stepped away from active management of Zee), is a conglomerate with interests in media and entertainment, packaging, infrastructure, education, and technology. Chandra also has a reputation in the industry of being something of a visionary: He brought in the country’s first T20 cricket league, before the IPL, and also attempted to build a nationwide optic fibre network decades ago. Both attempts bombed, but the image of a risk-taker has stuck.
That’s why, when I learnt that Chandra was sniffing an opportunity in the smart cities project, I was hooked. Some preliminary investigations, a chat with the man himself, and detailed talks with his team, and I thought I had a handle on his plans. Till he said that thing about “smart villages”.
I confront Chandra about the flip-flop and he explains that unlike in cities, folks in villages may not be able to pay for new services, but may be willing to spend on something that will directly increase their income (read infrastructure). In a scheme still under wraps, Essel is finalising deals with three villages to improve basic services. Says Kamal Maheshwari, president of Essel Infra’s business development and smart city divisions: “The scope of the business multiplies when you include villages, as there are several thousand of them across the country.” But even as Chandra talks up villages, Essel is still firmly entrenched in urban and semi-urban areas, largely in North India.
WHILE THE IDEA of smart cities fascinates Chandra the visionary, the businessman inside doesn’t really care if it’s cities or villages. “Chandra’s one-line brief to me was to find smart ways to deliver five or six utility bills to every home,” says Ashok Agarwal, who had been hired in 2010 to head the utilities push. Essentially, build an infrastructure backbone that is now being adapted to the smart city plan. Today, Essel Infra has diverse business units, from roads to power transmission and distribution, to municipal waste recycling, to renewable energy, to integrated utilities—a package deal that covers power, water, cable and broadband, and solid waste management. The last is key to smart cities—and to Chandra’s ambition to pepper every household with utility bills.
Smart utilities (integrated utilities) is the latest business unit in the company, and has just begun to implement various contracts with state authorities to distribute power and water, and collect and process municipal solid waste in over a dozen cities and towns, including Ludhiana, Aurangabad, Ujjain, and Jabalpur. The company also has a licence to supply city gas, though the actual pricing and distribution have not yet been worked out.
Essel is also resurrecting an old Chandra plan: laying optic fibre cable in over 300 cities in three phases to bring broadband connectivity to homes. Then there are the contracts to set up solar power plants in Jalaun, Mansa, and Gulbarga, among other places, which will together generate a little over 150 MW.
Integrated utilities today fetch about Rs 1,000 crore for the group. And things have not even begun yet in earnest.
IN POPULAR IMAGINATION, a smart city suggests futuristic transport pods and hi-tech apps on the streets. Which is not really what they are. Or are they? I go to the government seeking help. The smart cities website says that the objective “is to promote cities that provide core infrastructure and give a decent quality of life to its citizens, a clean and sustainable environment and application of ‘smart’ solutions. The focus is on sustainable and inclusive development.” Chandra’s idea of providing the underlying infrastructure is in sync with this, even if something like solid waste processing is not what one automatically associates with a smart city. “There is a misconception that a smart city is all about IT infrastructure. In fact, it is about first having basic amenities and then smartly monitoring them,” explains Agarwal.
As well, the government’s plan for infrastructure development indicates sizeable investments in the near future. In 2015-16, planned spending on infrastructure is estimated at $10.8 billion (Rs 68,223.6 crore). Add to this the plan to electrify 20,000 villages by 2022, and connect 170,000 habitations by all-weather roads. But the smart cities project remains the most ambitious.
A year after the government announced the smart city mission, consultants are also beginning to put a tag on its scope. Sustainability Outlook, a Delhi-based organisation that collates data to promote sustainability in the Indian economy, has developed a Smart City Opportunity Assessment Model, which pegs the total opportunity at $45 billion to $50 billion over the next five years. It estimates that water and energy alone will account for $37 billion.
The $48 billion networking giant Cisco values the global market for smart city solutions at $3 trillion and India at $6 billion. Hemant Sahai, managing partner of HAS Advocates, which works with several Japanese tech and infrastructure firms, says: “Correctly executed, given the state of Indian cities, it may well be the opportunity that the U.S. saw in building roads after the Great Depression. Smart cities can be a game changer as they will involve small, big, and giant firms at one go.”
BACK IN 2008, when he first learnt of smart cities, Chandra was drawn by the criterion for qualification—a city that grows its GDP in an equitable and ecologically sustainable way. Shorn of jargon, the core promises include adequate energy (a tenth compulsorily from renewable sources), water, sanitation, efficient urban mobility, and security. In August 2015, the government announced its list of 98 potential smart cities. The shortlisted cities will each have to submit a development plan made with the help of an approved urban consultant. These plans will be vetted by a panel of urban planning experts. The rules mandate that for a plan to make the cut, it must have at least one “smart” idea that can be replicated.
Each of the 98 cities has been allocated Rs 2 crore by the government to prepare the initial project document. On approval, each city will get Rs 200 crore in the first year and Rs 100 crore in the subsequent three years to implement its proposals. Cities can source additional capital through public-private partnership (PPP) bonds.
There are three types of development that the smart city plan envisages: retrofitting existing areas of over 500 acres; redevelopment of areas of at least 50 acres; and greenfield development of new cities of at least 250 acres. The latter two will involve upfront capital, while the first will require capital as well as political and popular will to pull off even as the city continues to function through such a massive rejig.
A recently concluded summit organised by consulting firm BCG and Confederation of Indian Industry revealed that the private sector is taking an increasing role in the public space. Over the past two decades, India has seen heightened private participation, with the highest aggregate investment commitment during 2008-12; the share of private investment reached 40% in 2010-11. The summit concluded that the PPP model will see boom years ahead, as it has proven itself as a mature model in many developed as well as developing countries.
Essel’s advantage is that it has already worked on different PPP models. For instance, in Aurangabad, in what is so far India’s largest PPP in water, Essel got a capex grant of Rs 390 crore for the Rs 1,250 crore project. Essel was responsible for water supply from dam to tap; the tariff was pre-defined for 20 years by the general body governing the district.
Agarwal says Essel’s expertise came through in making the system efficient. Before the PPP was implemented in September 2014, water supply in Aurangabad was patchy, and the government was losing up to 50% of water revenue. “This game is all about extreme efficiency, low operating costs, and high levels of service,” says Agarwal. The situation improved within a year. Connections went up to over a lakh, and collection charges went up from Rs 2 crore to Rs 5 crore a month.
In places like Nagpur, Muzzafarpur, Sagar, Ujjain, and Gwalior, Essel has taken up power-distribution franchises. Again, as in Aurangabad, the idea is to improve collections as well as make power supply more efficient. As part of its market survey, Essel found that in Nagpur, 80% of the losses were commercial (theft, non-payment, etc.), and the remaining technical (inefficient or out-of-date equipment). Within a year, it managed to improve supply from an average of five hours a day to 14 to 16 hours, and slashed losses from 34% to 13%.
In Jabalpur, Essel wanted to generate electricity from municipal solid waste, but found that the cost worked out to Rs 8 per kWh, way more expensive than other kinds of power. Essel tied up with Japanese equipment maker Hitachi Zosen and indigenised 80% of the components to bring down tariff to Rs 6.4. The Madhya Pradesh state power distributor entered into a 25-year power-purchase agreement with Essel. “Many of these projects seem complex as they are being attempted for the first time. We will use our cost advantage to expand our solid-waste portfolio to other locations,” says Agarwal.
Essel’s aggression in taking on such projects to scale rapidly is a risky strategy, reckons Nagpur-based consultancy pManifold Business Solutions. It has analysed that the Rs 4.14 per unit quoted by Essel in Gwalior would give the firm negative return. That’s being proved right, as Essel is said to be renegotiating parts of the contract to allow it some profit.
ULTIMATELY, THE FATE OF Essel’s smart city push rests on its ability to win government contracts as the lowest bidder. Agarwal says that since Essel has expertise in running several kinds of services, it could bring down costs by offering a bundle that will be cheaper than players that offer individual services. For example, if a company bids separately for power distribution, it would have to pay the local municipality right-of-way charges to lay cables. Essel, by bundling power, water, and broadband together, can pare costs, and, therefore, bid lower.
Although it has been a decade since the government allowed private companies to distribute power, there are big problems. None of the service companies admit on record that the model is ruined by the existence of government-owned power distribution firms. The CEO of a power-distribution franchisee, who asked not to be named, says privatisation is resented by vested interests, and the current model of contracting as against partnership in power distribution makes it riskier for investing companies. Says a senior official in the Maharashtra chief minister’s office: “It’s true that the policy has not lived up to expectation, but we are committed to bring in more private players in power distribution.”
Vinayak Chatterjee, CEO of Delhi-based consulting firm Feedback Ventures, which distributes power in over 10,000 sq. km. in semi-urban Odisha, says cleaning up state-owned distribution companies will create new opportunities. He estimates that the annual loss in the energy business is around Rs 90,000 crore and just adopting newer technology and cleaning up the system will help reduce this. “The recent investment of a Canadian pension fund in Reliance Infra is indicative of the interest of investors,” he says. (In November, Reliance Infra decided to sell 49% in its Mumbai power company to Canadian pension fund manger Public Sector Pension Investment Board for an undisclosed amount.)
Amit Mittal, CEO of Delhi-based A2Z Infrastructure, which held a clutch of government contracts for services such municipal and sewage waste cleanup, advises caution. Just before its IPO, the firm had several contracts for cleaning up cities, with a flagship project in Lucknow, where it set up a unit to generate power from municipal waste. But with a change of government two years ago, its contract was abruptly terminated. The company is planning to take legal recourse. “The opportunity from public utilities is high but fraught with several unknown and uncontrollable political risks,” says Mittal.
The other focus for Essel is roads; it has built 2,100 km of roads so far, and has 2,500 km in the pipeline. “We have always invested in businesses others thought were not profitable,” says Chandra. He says that when he entered the cable distribution business, it bled for a long time and still requires a lot of investment to digitise. But, he says, eventually infrastructure is a cash-generating business.
Chandra says there are many similarities between the entertainment and utilities businesses. As incomes of Indian homes rose, more expensive subscriptions of satellite television increased. Similarly, says Chandra, the wallet share of utilities will increase as families buy more white goods or build larger homes. Agarwal says the group’s access to homes gives it consumption data and consumer behaviour insights that will help its business. “We will have hard data on household consumption of utility services and that will help us cross-sell other products,” says Agarwal.
As of now, Essel has bid for nearly 20 utility projects, which are in different stages of evaluation. Agarwal and his team are also working closely with a handful of cities to share their expertise on managing utility services and help prepare their smart city master plans. Although the work won’t ensure any contracts from the cities, it will help Essel better understand the needs of a large city. Says Agarwal: “The question is not about how much business we can win in the short term, but about understanding how much we can manage to do.”