Tuesday, March 27, 2012

The private Vs public sector debate in perspective

A dominant recurring theme in debates about development in India is about how the private sector can complement the government. In fact, there are a large number of influential voices who today feel that the private sector, if they are unshackled off their regulatory chains, can assume the dominant role in the development process.

In other words, they advocate that the government should put in place "the enabling framework" (translation - limited regulation and lower taxation) and should cede the space for the "markets to work its magic". At best, the government can continue to play a marginal role as service provider, if only to keep the markets competitive and honest.

Accordingly, it is suggested that governments should promulgate public policy that enables a dominant role for private sector in secondary and tertiary health care and education, urban infrastructure like water and sewerage, roads, electricity distribution and so on. In all these sectors, they argue, governments should step aside and free the private sector from regulatory restraints. They see government as having failed (and nonbody can dispute that) and therefore, as a corollary, the private sector should take over. So what gives?

There is no denying that over the past decade-and-half, the private sector in India has shown adequate capability to assume a greater role in this journey. However, this evidence cannot be stretched to conclude that the private sector is now capable of delivering the major share of the burden in delivering on these objectives. It is imperative that we place the role of private sector and governments in their proper perspective.

Let me illustrate this with the example of the provision of affordable urban housing. The mainstream debate on the issue is today focussed on putting in place an enabling framework that will help private developers bring more housing stock into the market, on unlocking the large chunks of government lands with various government agencies through public private partnerships (PPPs), and facilitating access to credit to home buyers. Supporters argue that these policies will help the private sector seize the initiative and meet the massive housing requirement for the economically weaker section (EWS).

This argument reveals a shocking level of disconnect with reality. The overwhelmingly major share of demand for affordable housing in cities comes from the EWS. Therefore, it is only appropriate that the priority for any policy that seeks to increase the supply of affordable housing should be on housing for EWS. This naturally means that LIG, MIG, and other categories of housing, while important, will be secondary priorities for public policy.

However, the aforementioned mainstream agenda is heavily skewed in the opposite direction. Private sector has an important, even dominant, role to play in the provision of housing for LIG, MIG, and other categories. But on purely commercial considerations, the burden of provision of EWS housing will have to vest with government.

Consider the commercials. The conservative cost of any decent 300 sqft multi-storied EWS house will be around Rs 2-2.5 lakhs. This is excluding the considerable cost of land and infrastructure. Assuming a tenor of 15 years and interest rate of 10%, a Rs 1 lakh loan will require an equated monthly instalment (EMI) of Rs 1100. This is about the maximum that an EWS household can pay. In fact, an EMI of Rs 800, which means a loan of Rs 75000 at the same terms, is a more realistic estimate. At the first estimate, assuming an upfront beneficiary payment of about Rs 20000, the subsidy will have to be Rs 0.8-1.3 lakh. Add in the land and infrastructure cost, the subsidy burden per unit will multiply a few times. Who is going to finance this construction subsidy? How many EWS beneficiaries can access banks for loan tie-up, especially given the massive NPAs banks have piled up in this category? Would it not be required for governments to use most of the available scarce pool of public lands for EWS housing?

Given this, governments will have to heavily subsidize any EWS housing schemes. Private participation will have to be confined to construction (on tenders), professional project management, and possibly outsourcing of rent collection and maintenance services. No PPP, innovative structuring of projects, or establishment of enabling policy framework can gloss over this reality.

In the circumstances, efforts to leverage private participation with allotment of government lands at concessional rates (or even free of cost) or provide generous fiscal concessions to developers, will merely constrain scarce public resources and detract from the more important and several times bigger challenge of building an adequate stock of EWS housing. In other words, by following the mainstream agenda, we will end up, at best, meeting the objectives with respect to a small part of the market, while overlooking the major portion of the market. None of this is to downplay the importance of LIG, MIG, and other parts of the market, but only to argue that its promotion should not come at the cost of the much larger market and public policy priority regarding EWS housing.

The choices that face public policy makers are stark. Should we allot scarce public lands to private developers or take up development on PPP so as to promote LIG/MIG housing or should we use them to develop stock of public EWS housing? Similarly, who should take precedence in the use of government's limited fiscal resources in the housing sector?

Similar analysis can be done for many other sectors to expose the ignorance that masquerades as informed opinion and knowledge in advocating a dominant role for private sector and a marginal role for government in the development process in those sectors. I believe that if governments have been found to fall short in delivering its objectives, the solution is not to simply abdicate the responsibility and cede ground to private sector. This would be unwise, especially in areas where the inherent nature of the problem makes the private sector unsuitable and government participation imperative.

In the circumstances, while encouraging private participation, the main focus of the debates should be on policies that strengthen the government's ability to manage such initiatives and increase their likelihood of success. The scarce financial and administrative resources of public agencies should be channeled towards ensuring bang for the buck with its full range of objectives. Simplifying the problem by taking the easy way out will only exacerbate the problem. Further, public policy should not be captured to fuel the interests of certain categories of consumers and participants within each sector.


Anonymous said...

Thanks Gulzar, for consistently writing on issues related to low-income housing. Reading your posts for the past two years have inspired me to contest in Hult Global Case Challenge (in Housing track) and qualify for the Boston regional competition (held in Feb 2012). I have also found TV9-Chetana's expose of slums problems in Hyderabad inspiring.

One of the thing I have wondered is if there aren't any laws in India that prescribe a certain quantum of land or housing dedicated for LIG housing. Such mandates can be fulfilled either by govt or private sector or both. Since serving LIG housing interests isn't commercially viable for private sector and isn't a much bother for govts either, state legislative laws imposing such LIG requirements met for cities in the state may address the problem. Would appreciate your thoughts on this.

gulzar said...

Thanks anon. I am really happy that you could find something useful in what i have been posting.

there are no laws which mandate that, in the aggregate, a certain percentage of all built-up space or development should be only LIG/EWS housing. However, there is the new earmarking requirement in the National Housing Policy, which a couple of states, including AP, have adopted. Under this 10-15% of all built-up space and 20-25% of all developed land should be earmarked for LIG/EWS housing. But its implementation and enforcement is becoming a huge challenge in both states.