Affordable Housing: Is PPP Model The Best Way Forward?

Affordable Housing: Is PPP Model The Best Way Forward?

by Radha Krishna Tripathy - Jan 14, 2018 11:16 AM +05:30 IST
Affordable Housing: Is PPP Model The Best Way Forward?A construction site.
  • Public private partnership potential in affordable housing must be explored thoroughly and the government must build an ecosystem conducive to such a model.

Real estate business and affordable housing are two distinct concepts and both are poles apart in terms of business sustainability. There seems to be no common point of connection. While affordable housing is driven by the welfare schemes/social obligation of the government, real estate is completely driven by profit motive. To expect real estate developers to join the government initiatives to provide affordable housing sounds more a misnomer.

But the idea of public and private sectors joining forces is not dead and both are exploring options within the ambit of public private partnership (PPP) model of development. The idea is taking off after the central government accorded an infrastructure status to the sector. It is a good beginning, which would trigger banks to lend more to the sector over a long term period of time, and which in turn would attract private sector interest.

This may be a trigger to drive the private sector developer to look for opportunity. Following the recent slowdown after demonetisation in the sector and with a huge inventories pile-up, the developers might be interested to join the government to keep themselves afloat in the sector. So, any interest in response to a distressed call for short term viability would do no good either for the government or the developer. It may be a quick fix but there seems to be no long term strategy from the private developer’s perspective. There is also a possibility that they may wash their hands off the schemes after their objective is fulfilled.

Real estate developers joining hands with government through PPP may be far from reality in providing affordable housing. But profit motive apart, a decent return can be assured to them if they enter the sector. Big players may leverage from the government schemes as they have a huge portfolio to balance the shortfall if any and at the same time, be in the business for long term. Big project developers with portfolios ranging from low cost apartments to luxury apartments and having huge land assets may change their strategy to recover some losses by joining hands with the government. But, small developers would definitely be out of the game with no room to ascertain their position. Either they would join as joint venture partners and be content with small margins or be completely left out of the game. Also, the challenge may come from foreign developers with deep pockets trying to enter the market if the sector is opened to them. They may exploit the situation and grab a considerable market share. The government has to be very cautious while allowing foreign developers to enter the segment.

Private operators would always want to work as engineering, procurement and construction (EPC) contractor or turnkey developer as it suits their business strategy well. EPC model would provide them a safe passage to enter and exit. They would like to enter the segment with government support, build some of the housing projects and exit after making profit. But with PPP provisions, which come with stringent service standard delivery contracts with operation and maintenance for a longer duration, there is less scope for any misadventure as payment will be linked to delivery standards.

In many of the high rise societies, it is a common observation that the infrastructure works well for first few years after which it deteriorates rapidly. While operation and maintenance (O&M) rests with private developers for the initial years, it has to be finally handed over to the residents’ welfare association (RWA) or owners’ association. Just because of the construction loopholes, RWA and builders are always at loggerheads for maintenance related aspects of the building. Builders want to wash their hands off quickly without incurring any liabilities for maintenance after initial years of operation.

With faster growth and profit motive at the core, builders may not want to be invested in an affordable housing project for long time because of vested interest. Building a house for Rs 12 lakh to Rs 15 lakh with all basic amenities may be difficult for them to earn a decent profit for their business sustainability. Only in cases where the size and scale is enough for them to enter and be invested in for a long term, it makes some sense to get involved in affordable housing projects of the government. Land may be another attractive deal for the builders, which will be leased to them for a longer duration. The payment assurance from the government will also act as a prime driver for them.

As far as the government is concerned, it is clear in its perspective and has laid out the schemes in various components under Pradhan Mantri Awas Yojana (PMAY). The most lucrative and viable option is its credit linked subsidy targeted at lower income group (LIG) and middle income group (MIG) group. For loan amounts of up to Rs 12 lakh, a subsidy component is provided by the central government. For people earning below Rs 6 lakh, an interest subsidy of 6.5 per cent would be given. Similarly, for incomes between Rs 6 lakh and Rs 12 lakh (4 per cent interest subsidy) and for Rs 12 lakh and Rs 18 lakh (3 per cent interest subsidy) would be given. People would be much happier to get the interest subsidy for their dream home under this scheme. But for other components like transforming slum areas, housing projects in partnership with states/UTs/cities would be challenging given the risks and concerns involving various stakeholders.

The government has proposed a new PPP policy for the affordable housing segment. Eight different models have been proposed under two schemes with central financial assistance. The first is to provide Rs 2.5 lakh as upfront payment to the developer for constructing houses on private land under CLSS (credit linked subsidy component) and the second one by providing Rs 1.5 lakh per house to be built on the private land in case beneficiaries do not wish to take a bank loan. Other options involve innovative ways of incentivising private developers through a direct benefit transfer (DBT) model, mixed development cross subsidising scheme, annuity based subsidising housing, direct relationship ownership housing, direct relationship rental housing.

The government needs to change the whole perspective in developing affordable housing from stand-alone to lifecycle approach. It should not only focus on developing housing and distribute it to the needy but also examine the matter in totality ( i.e.) creating an eco-system where the operation and maintenance would be integrated in the system for the complete lifecycle of the project, say around 30 to 40 years. This approach would help government design various frameworks to attract private funding in terms of PPP mode of development and assure funding for long term from the financial institutions.

Also, the government can think of a model where beneficiaries would be made an integral part (in case of slum dwellers and economically weaker section of society) of the project. For instance, the government would permit them to stay in the units and take a monthly rent from them for a longer time period and finance the project on behalf of them. This would safeguard them from the complex process of loans disbursal by the banks and paying out on equated monthly installments (EMI) on a regular basis. For other amenities and facilities like drinking water, electricity and sanitation, a small user fee can be collected.

The government may also think of providing viability gap funding (VGF) for affordable housing development if required for the projects to remain financially viable. It may also rope in large PSUs like NTPC, ONGC and others to use their existing capacity and experience in developing large townships. Their expertise can be leveraged for some of the select housing development. The modalities can be worked out between the government and PSUs after arriving at a mutual understanding.

The concept of affordable housing should not be viewed only from the political mileage it would derive but the social impact at large. Thus, it requires a long-term strategy and futuristic blueprint to succeed. It is bound to fail if the 2019 Parliament election is the timeline for execution. There is no short term solution for a national level target to be achieved. Providing a roof over the head should be our national aspiration, which should not be confined to one political party only. The value chain consists of various stakeholders and it is very difficult to unite them under a common objective. But this dream for a new India must be realised, even if it means sacrificing a little for achieving a larger goal.

Radha is a senior fellow in CUTS Institute for Regulation and Competition, New Delhi, a think tank engaged in public policy advocacy, people-first PPP and matters related to competition and regulation. His interests include public-private partnerships, energy sector reforms and sustainable development.

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