PPP as a tool for promoting Affordable Housing

The public-private partnership model in India has attracted huge private sector investments in sectors like Roads and Highways, Railways, Power, and Urban infrastructure. With investment in infrastructure expected to double to US $ 1 trillion during the Twelfth Five Year Plan (2012-17), the PPP story in India’s infrastructure development will be of major consequence. About half of the targeted investment in the 12th Plan is to be achieved through private sector investment.

Still, there exists a huge untapped potential for PPPs in real estate projects in the mass housing space. Currently, the housing shortage in the country is to the tune of about six crore units with the level of annual investments in the housing sector being about USD 110 to 120 billion at present. India would require about 11 crore housing units on a pan India basis by 2022 to achieve the government’s vision of “housing for all”.

To meet this ambitious housing agenda, investments of more than USD 2 trillion or about USD 250 to 260 billion annual investment until 2022 would be required. About 85 to 90 per cent of the total investments needed to fulfil the country’s housing agenda would go into developing urban housing, where development costs are high due to factors such as land prices, construction cost, fees, and taxes.

Mobilisation of such huge resources (funding, construction capacity, labour, technology, etc.) for mass scale affordable housing development by the central and state governments may be difficult, without participation from the private sector. Though PPP projects can play an important role in bridging the gap between the housing need and supply and can be instrumental in attracting private capital for financially viable affordable housing projects, some important issues need to be addressed first.

To make the PPP model successful in the mass housing segment, the government would need to address several structural issues first. These include liberalising urban planning process, providing access to adequate funding sources for private players, putting in place a mechanism for quick clearances of licences and approvals so that cost overruns and project delays can be minimised.

The PPP framework can be effectively used to address important issues in housing development such as land availability, approval delays, funding, and affordability by the poor. Among the more obvious advantages of the PPP model in affordable housing are:

• Easier land acquisition and consolidation – It is estimated that to meet the needs of urban housing, about 1.7 to 2.0 lakh hectare of land would be required till 2022. Expedited and easier land acquisition, made possible by the public sector, could enable reduction in project lifecycle and project costs. The central and state governments should provide the land acquired, at competitive prices to the private sector, which is often better in term of managing construction risks and project delivery. A deep analysis of these PPP policies in housing reveals that a PPP policy should aim at aggregating land for housing development, while the private sector should focus on managing operation risks (construction and finance). Land cost, which is anywhere between 20 to 60 per cent of total project cost (depending on project location), and lack formal funding channels for land acquisition (both debt and foreign equity), are major bottlenecks restricting overall housing development in the country.

• Faster Regulatory approvals – Issues relating to project implementation, monitoring and dispute resolution are among the key concerns of the developers. PPP mechanism can help ensure timely clearances of regulatory approvals, which can reduces the risk of cost and schedule overruns.

• Improved financing — A joint pool of private and public funds may be more effective and efficient in financing housing projects. Further, a PPP project with government guarantee may help secure lending from institutional lenders at lower cost.

• Improved affordability – With some relief on stamp duty and development fees, and tie-up with banking institutions, the affordability of houses by EWS/LIG sections could be improved.

For instance, to encourage PPP in affordable housing space, Rajasthan has drastically reduced the stamp duty in the case of EWS/LIG houses from 8% to mere Rs.10 in the case of EWS and Rs.25 in the case of LIGH. As a result, so far, over 75,000 houses (60% of budgeted target) for EWS / LIG groups have been delivered through PPP in locations such as Global city, Neemrana, Greater Bhiwadi and New Jaipur.

States like Haryana and Tamil Nadu have made good use of transferable development rights and a liberalised FSI approach to encourage PPP in the affordable housing sector. In fact, Tamil Nadu offers 50 percent extra FSI for projects targeting EWS in Chennai Metropolitan Area and 30 percent extra FSI for projects targeting MIG. Haryana has a proposal to increase the density norms from 300 persons per acre to 900 persons per acre, allowing developers to increase the maximum number of units per acre from 60 to 180. Cities like Delhi and Ahmedabad have drafted Township Development Schemes or Land Pooling Policy (type of PPP models) to encourage affordable housing developments through PPP route.

Going forward, it will be possible to motivate more private developers to take up construction of affordable housing in various urban centers of the country if the authorities can offer an enabling policy framework and in-built incentives.

About P. Sahel

As Vice Chairman of Lotus Greens, Sahel is responsible for giving directions on overall business strategy and key investments decisions of the firm. Being one of the founding members of Lotus Greens, Sahel has been instrumental in formulating various company policies, setting up systems and processes, and building a strong team of professionals. Prior to Lotus Greens, Sahel worked for more than 16 years in some of India’s largest and most respected real estate companies like Jones Lang LaSalle for 13 years as the Managing Director of the Markets & Solution Development and DLF prior to that. The views expressed are personal

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