Wednesday, May 27, 2009

Public policy dilemmas - Town Planning

This post on town planning violations is drawn from personal experience and reflects the dilemmas associated with implementing "black and white" rules in the the "grey" real world. These comments are not intended as judgements or criticisms of rules, but only meant to spotlight attention to the difficulty of administering conventional rules and regulations in a complex society like ours.

The commonest complaint against urban planners is their failure to regulate building violations - set backs, cantilever projections and elevations, parking areas, additional floors/pent houses etc. Under the existing rules, building plans are approved by the Town Planning Department after collecting a security deposit along with the regular building permission fees. This deposit is forfeited if any plan violations are detected. Since violations have become the norm (I can confidently say that 100% of our buildings violate plans!) and security deposit invariably gets forfeited, builders have internalized the security deposit as a form of building fee. They have come to see the security deposit not as a deterrent against violations, but a component of the building fee which accounts for the cost of violations!

Apart from vaastu considerations (the resulting deviations are generally small facade or orientation related modifications), builders deviate from approved plans because it effectively increases the built-up area of their properties or enhances its market valuation. With property and rental values ruling at spectacular levels in cities, any incremental built up area is worth its weight in gold.

With monetary penalties not an adequate enough deterrent, in the last two years Town Planners in a few states have sought to penalize violators by appropriating a share of the built-up area. The builders were mandated to mortgage a small share (say 10%) of their constructed area before the plan is approved, which would revert to the Urban Local Body (ULB) in the event of violations.

However, despite this "draconian" provision, initial impression is that builders continue to violate. Fundamentally, violations occur because either the cost of losing the mortgaged area is not prohibitive (which is less likely) or the belief persists that Government will not enforce the mortgage rule (more likely). Now here comes the dilemma facing policy makers.

The simplest solution would be to immediately get the mortgaged space transferred to the ULB, which could then use it for some public purpose, say a local sanitary or engineering office or a quarter for employees or a community reading room. To drive home the deterrent effect, it can use the space to store sanitation materials, with all the attendant negative externalities on its surroundings! Such a stance would be a clear signal of the Government's resolve to uphold the rule of law.

However, enforcing this will not be easy as it will invariably spawn court litigation besides the usual political and other pressures. Given the fact that the violations will be larger in the bigger apartment and commercial complexes, appropriation of space is likely to adversely impact their valuations. In other words, there is an economic inefficiency dimension to appropriating the mortgaged area. Further, with time and increasing number of plan approvals, administering these spread out properties will become a challenge.

Another solution would be to lease back the space to the builder at market rents, prohibitively high enough in most urban centers. This will be easier to administer (can be collected along with property tax), besides earning substantial revenues to the ULB. But this course of action will effectively monetize the penalty, thereby carrying the moral hazard of condoning the violation of rules. Under this dispensation, the builders will continue to deviate, so long as the economic benefits from the violation exceeds the expenditure on the rent.

Under the circumstances, what should the government do? Both the possible choices, and their variants, have ramifications that go beyond the immediate stage one. In many ways, this dilemma is typical of the many that face policy makers on a regular basis. Most often the choices are a reflection of the inevitabilities and complexities of social and political realities in India.

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