Business World/ 10/ 11/ 08

Business world/ 10/ 11/ 08

http://www.businessworld.in/index.php/Infrastructure/Bridging-The-Gap.html

Bridging The Gap

Modernising Indian cities could boost the weakening economy and give millions of Indians the chance of a quality urban life

GURBIR SINGH

31 Oct 2008

Till a year ago, Anita Jadhav, who trekked to Mumbai in 1991 from Paithan in Maharashtra’s Satara district, was just one of the thousands of the city’s faceless poor eking out an apology of a living in India’s commercial capital. Living in a slum on the borders of the city’s Sanjay Gandhi National Park, Jadhav’s life was forever altered by a rehab scheme brokered by NGO Nivara Hakk and the Bombay High Court. On 1 May 2007, she was given the keys to a 225-sq. ft mini apartment on the first floor of a seven-storey building. The scheme freed up the 103-sq. km national park from encroachments.

The story of Jadhav is uplifting, but, sadly, an exception. Her family is one of 12,000 slum families that are being re-housed in Chandivili, a suburb in north-east Mumbai. The rest of the estimated 80 million families — mostly migrants from rural areas — who live in slums in India’s urban areas, are not so lucky. They continue to ‘enjoy’ little or no access to normal civic facilities such as water, electricity and health services, or decent homes.

And their numbers are exploding, worldwide. In 2008, for the first time, the world’s urban population outstripped that of rural areas. According to a recent report by UN Habitat, more than 70 per cent of the world’s population would live in cities by 2050. In the developing world, urban population would skyrocket to 5.3 billion people by 2050, not too far off from today’s total world population of 6.7 billion. In India, half the population will live in cities by 2041, according to the World Bank — today, it is close to 30 per cent. “The massive movement of humanity to cities and towns in the coming two decades will be a huge demographic transition,” says Junaid Ahmad, the World Bank’s sector manager-urban for South Asia.

It is a transition that India is not prepared for. The process of urbanisation, as it happens now, is chaotic — a massive, unregulated movement of humanity from rural areas to cities that chokes these cities, triggers astronomical real estate prices, and creates major infrastructure and transport nightmares. “It will place the challenge of governing urban centres as India’s primary policy challenge,” says Ahmad.

At the same time, building new cities and ramping up urban infrastructure provides big business opportunities. Several corporates have already made urban renewal part of their business plans. Anil Ambani’s ADAG, in partnership with the Maharashtra government, is building Mumbai’s first Metro Rail — an 11.5 km east — west corridor, at a cost of Rs 2,500 crore. Sahara Infrastructure is well into developing its 20,000-acre leisure city near Pune called Amby Valley at a humungous cost of Rs 30,000 crore. The Ajit Gulabchand-promoted Hindustan Construction Company (HCC) is setting up a 15,000-acre hill station resort called Lavasa, 200 km from Mumbai. HCC has also roped in Starwood Hotels & Resorts for managing the resort’s two hotel properties. In the long-term, the investments required to set up quality public infrastructure such as water and roads, as well as homes for all segments of society, is mind-boggling (see ‘Building Cities is Big Business’ ).

The returns are likely to be as good. Urban centres generate close to 50 per cent of the country’s GDP. Between 1991 and 2001, 79 per cent of all new jobs — around 19.3 million — were generated in urban areas; rural India offered only 5 million jobs in the same period.

More importantly, urban renewal could be India’s next big growth accelerator. Keynesian economics suggests that in times of downturn, governments must increase infrastructure investments to provide business to entrepreneurs and revenue for the government, give jobs to the jobless, and help lift the financial gloom gradually enveloping the nation.

Urbanisation: A Virtue, Not An Evil

Cities are proven engines of growth. “Ever since (American libertarian thinker) Leonard Read’s pencil theory, which showed that it takes 1,600 enterprises to make a simple lead pencil, we have understood that cities are economically good,” says Peruvian economist Hernando de Soto. “Modern business needs better division of labour and it’s much easier to do that in cities, where everything is close by.”

Besides diversity of labour, cities herald the end of feudalism, provide better incomes, higher standards of living, and offer better education and career opportunities. On World Habitat Day (6 October) this year, UN Secretary-General Ban Ki-moon said, “Cities have tremendous potential to be places where balanced development prevails, where diverse people live in harmony, and where healthy living conditions coexist with low levels of energy consumption, resource use and waste.”

In fact, the World Bank is of the view that well-managed urbanisation actually boosts rural economies. As people migrate to cities and fewer people depend on land for a living, it diversifies income sources of the rural poor, and eventually encourages more risk-taking and adoption of new technologies by farmers spurring agricultural growth. “The process of urbanisation integrates the hinterland with the cities,” says Sanjay Ubale, former secretary of special projects with the Maharashtra government, and currently CEO of Tata Housing.

That kind of integration requires connecting infrastructure, both within cities and without — roads, railways, seaports, airports, electricity transmission lines — a $475-billion opportunity between now and 2012, according to Asian Development Bank (ADB).

Modern India’s Biggest Bugbear

“A serious lack of infrastructure is seen as India’s Achilles’ heel,” says Cheolsu Kim, ADB’s principal financial sector specialist. “It is estimated to cost the country 3-4 per cent in terms of GDP every year.” In recent years, the government’s stance on infrastructure has changed, with the realisation that public financing alone would not be able to cough up the required $475 billion.

Instead, policy makers are now pushing public-private partnerships (PPP), which encourage companies to participate in infrastructure projects as lead promoters along with government bodies. For example, the redevelopment of Delhi and Mumbai airports by GMR and GVK groups, respectively, with the government-owned Airport Authority of India (AAI) holding a 26 per cent stake, is a prominent PPP endeavour. While ensuring adequate returns to the private players, this envisages a 44 per cent share of revenue for Delhi and 39 per cent for Mumbai returning to the government.

There is also the ‘build-own-operate-transfer’ (BOOT) model, where the need to ensure financial viability ensures greater efficiency. For instance, the Bangalore-Mysore Infrastructure Corridor (BMIC), a six-lane 111-km expressway between Bangalore and Mysore, is being developed by Nandi Infrastructure Corridor Enterprises (NICE). And the consortium of Pune’s Kalyani Group, US-based Vanasse Hangen Brustlin (VHB) and SAB International has been given a 40-year concession for maintaining and collecting toll to recover its Rs 2,500 crore of investments.

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The Investment Commission of India estimates that the country’s transportation systems will see $40 billion being pumped in over the next 10 years. And significantly, margins in India at 20 per cent or more give higher returns than developed markets’ 5-6 per cent.

Apart from connectivity, there is also basic infrastructure such as water supply and sanitation, which the Investment Commission foresees will attract $30 billion in investments. Besides, under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), the Central government envisages spending Rs 80,000 crore over seven years to support 63 cities; to fix water, sanitation and sewer systems; and to address the housing shortage and basic services. Under JNNURM, Mumbai was given Rs 1,600 crore for renewing its storm water drains, after the July 2005 rain floods. Similarly, Ahmedabad has been granted Rs 1,100 crore to upgrade its sewers and bus transport system.

More such projects need to happen, and at greater speed, if India is to overcome its infrastructure bottlenecks anytime soon.

Homes For All

Housing is another area that requires large investments. The Central government’s National Urban Housing & Habitat Policy 2007 estimates that by the end of this decade, India would be 26.5 million houses short; and the investment required for renewal and fresh construction, a whopping Rs 3,61,318 crore.

While housing has been the monopoly of private developers with government bodies occasionally stepping in to fill the gaps, the sheer scale of the shortfall demands that government bodies lead-manage construction of homes.

In recent times, government bodies have demonstrated that they recognise that imperative. Delhi Chief Minister Sheila Dikshit recently announced a Delhi government initiative to construct 200,000 homes for the poor on the banks of the Yamuna that will be sold at Rs 1 lakh a unit. Mumbai’s Metropolitan Commissioner Ratnakar Gaikwad, who spent much of his youth in a 160-sq. ft chawl tenement in Mumbai, has proposed the construction of 50,000 rental homes for Rs 1,800 to Rs 2,200 per month on land confiscated under the now repealed Urban Land Ceiling Act in the first phase. Gaikwad hopes it can be ramped up to 500,000 no-frills homes in the long term.

Then, the Maharashtra government has set in motion legislation to impose a mandatory quota for the construction of one-room, small apartments in all housing projects. Recently, private developers — who earlier said it was economically unviable to build 600 sq. ft homes for the poor — have also come around after real estate has seen a drying out of middle-class demand. Builders such as Delhi-based Omaxe and Parsvnath, and Bangalore’s Puravankara Group have come forward with low-cost housing schemes. “We have launched a dedicated subsidiary — Provident Housing — for the mass sector that will build affordable homes in the Rs 10-20 lakh segment,” says Ashish Puravankara, a director with Puravankara Housing.

The government’s opening up of infrastructure and real estate to 100 per cent foreign direct investment (FDI) in March 2005 has also helped. Investments by GE Commercial Finance, Tishman Speyer, Ascendas and Farallon Capital have ensured that the share of FDI in real estate increased from 10 per cent in 2004-05 to over 25 per cent in 2006-07, and to nearly 40 per cent in 2007-08. Of course, with the financial crisis hitting Wall Street and the rest of the world, much of these committed investments could dry up.

Building New Cities

Considering the crowding and haphazard growth of existing cities, planners have rightly encouraged the development of satellite cities and new cities. “A satellite city is a national level planning tool to deal with urban decongestion,” said Raja Mani, joint secretary in the Union Ministry of Urban Development & Poverty Alleviation, at a workshop in Chennai. The seven nodes of Navi Mumbai have helped relocate a part of the migrating hordes into well-planned neighbourhoods. The Hyderabad Urban Development Authority (HUDA) has proposed 22 satellite townships along the city’s 162-km Outer Ring Road. Work on two satellite townships at Tellapur and Srinagar has commenced.

However, much of the movement into, and development of, satellite cities has to do with the spiralling prices of real estate — up 150-200 per cent since 2005 — in bigger cities. Ironically, high prices have caught up with satellite cities such as Gurgaon, Noida and Whitefield (near Bangalore) as well — a two-bedroom apartment could cost upward of Rs 50 lakh.

Last year saw a rush of announcements for ‘private’ city development. Al Nakheel LLC, a Dubai government-owned realtor, said it would, along with DLF, build two ‘Manhattans’ at an investment of $30 billion near Mumbai and Gurgaon, spread over 20,000 acres each. Australia’s Macquarie Bank announced that it would invest $25 billion along with three other partners to create an integrated township on 65,000 acres in Andhra Pradesh, 170 km off Bangalore. Tishman Speyer — which owns New York’s renowned Rockefeller Centre — along with ICICI Bank and Nagarjuna Construction announced a $2-billion residential and commercial township for 30,000 people, spread over 400 acres near Hyderabad.

The fact that satellite cities have similar problems as bigger cities — bad roads, poor public transport, water scarcity, power shortage — presents an opportunity again for further investments in these areas and, therefore, returns. The Pimpri-Chinchwad Municipal Corporation, which administers the satellite industrial belt of Pune, rivals Pune Municipal Corporation’s tax collections and investments that are being pumped into the rapidly burgeoning urban spread.

Saving The Old City

Most cities are known by the icons of history that dot their landscape. For Delhi, the Qutab Minar and the Red Fort give it character, as does the Charminar to Hyderabad. In the process of urban renewal, these need to be protected. Mumbai pioneered heritage regulations in 1995 to protect 700 old buildings spread over 30 heritage precincts. But many ancient monuments around Badarpur, near Delhi, have been pulled down by developers frantically constructing ugly residential buildings on Delhi’s outskirts. Heritage regulations for Delhi were notified only on 9 February 2004, and till today, only six monuments around Badarpur have been notified for protection. Corporates, too, have pitched in. The ‘heritage mile’ in Mumbai from the old Victoria Terminus to Flora Fountain on Dadabhai Naoroji Road has Standard Chartered Bank, HSBC and American Express headquartered in tastefully refurbished heritage buildings.

But it has been hard work for the heritage-preservers. It took a shrill campaign by environmentalists in 2004 to block a Central Public Works Department plan to convert Delhi’s famous 1,000-acre Lutyens’ Bungalow District — the Capital’s central administrative area with farmhouse-style bungalows with large gardens and compounds — into a high-rise zone.

Managing Cities

Managing this gargantuan task of rebuilding India’s cities is going to be, perhaps, the biggest challenge. At the core of the problem is the refusal by state governments to relinquish power to local bodies. The 74th Constitutional Amendment, enacted in 1992, was aimed at delegating powers for urban administration to local bodies. That has remained only on paper, though. “Town planning is an area for municipal and local authority,” says V.K. Pathak, a former chief planner of the Mumbai Metropolitan Region Development Authority (MMRDA). “Yet when plans are modified for Mumbai, it is the state government that has the final say.”