Friday, July 27, 2012

More on India's urban housing challenge

FT points to this graphic from Bloomberg which highlights the exorbitantly high cost of housing in Mumbai. Though the absolute value of housing costs are smaller, in relation to its $3,700 per-capita purchasing power the average Indian would have to work 308 years to afford a 100 sq m luxury home at Mumbai.

The graphic would be representative of much of urban India and is one of the biggest development challenges confronting India. Further, a comparison of slum housing costs too would reveal much the same trends. In bigger cities, housing costs form an unsustainably large share of household income. Government housing programs under schemes like the JNNURM or the new RAY are enough to meet just a minuscule proportion of the demand. Compounding the problem is the very narrow market in lower income housing rentals.

In the circumstances, newer migrants find their way into non-notified squatter slums. They invariably develop all around the city suburbs. Alternatively, people encroach river and nala (storm water drains without boundaries) margins and hillocks, or wherever vacant government lands area available. Powerful land mafias, having nexus with local politicians and officials, are active in all Indian cities in promoting such illegal activities.

As I have blogged earlier, the only way out of this is to promote vertical growth, ease the stifling regulatory restrictions, and free up the massive extents of lands locked up with government agencies. In particular, defence, railways, and public sector entities, have large extents of vacant government lands in most large cities at central locations. Their locations, which were well outside the main city precincts when developed 40-50 years back, now form central parts of the vastly expanded city.

The cost of their relocation outside the city, including full reconstruction costs, would form a very small proportion of the potential value that can be unlocked from its redevelopment. Unfortunately, I am not aware of even a single case of such relocation anywhere in India. It would require commitment and co-ordination at the highest levels at both the state and central governments. The contrast with the plentiful such redevelopments in China could not be starker and is a reflection of the differences in development policy making in the two countries.

Even where such proposals have been discussed, they have revolved around simplified public private partnerships (PPPs). Such proposals, if they are pursued, are certain to fail and bring considerable disrepute to an already maligned concept. The uncertainties involved in such public real estate contracts - inter-departmental and state-central co-ordination, temporary resettlement issues, litigation, political opposition etc - are so huge that any private entity will simply hedge their risks and quote discounted values which in turn will invite populist criticisms of crony capitalism.

Governments, especially local governments, will therefore have to lead the redevelopment initiatives. Government owned Special Purpose Vehicles (SPVs) will have to be established and professional practices have to be adopted in managing such redevelopments. The financial structuring of these projects will have to be done with great care and detail. Private participation will have to be invited in carefully selected components and structured appropriately. It is only appropriate that in such projects the government assumes the construction risks (most of which are within their control) and allocate property rights to private entities only after those risks have been mitigated or eliminated. This will ensure the right risk allocation and enable fair price discovery in allotment of property rights within the redevelopment to private entities.

The initial funding for such projects will have to come mostly from the government, through equity and debt raised on the government's balance sheet. Once the construction and other government related risks are off-loaded, the SPV can be restructured and public ownership and debt swapped with private entities, wherever required, through transparent competitive bidding. This process increases the likelihood of ensuring the most optimal value capture by government, risk allocation among entities, and price discovery in allotment of property rights. The challenge will be with ensuring transparency and professionalism in this process and preventing its political capture.  

1 comment:

Anonymous said...


The graph simply appears to be indicative of income inequalities in Mumbai. In presence of such bipolar distributions of income, averages predictably are going to be surprising.

About the public housing projects, I would like to share the following videos by TV9-Chetana on JNNURM housing woes. It is surprising that authorities can get away with such criminal negligence in constructing these LIC housing projects where the construction is often incomplete and of poor quality. Hard to believe, but such large scale projects have no access to drainage, electricity, drinking water, and road connectivity. Wonder what is the purpose of these grandiose projects, when in first place, there is no state capacity or will to implement and manage them appropriately. Hope to hear your thoughts on this.