CONSTRUCTION SECTOR DRIVES MANY INDUSTRIES
LACK OF HOUSING FINANCE IS THE BIGGEST HURDLE.
SHABBIR H. KAZMI
July 4 - 10, 2011
Construction industry not only builds housing units but also commercial building and infrastructure projects. A vibrant construction industry provides impetus to more than three dozen other industries as well as jobs to millions of people. A closer look at the industry also shows that Mughals constructed forts and mosques during droughts to provide jobs to the people. Other dynasties were also found following their footsteps.
Lately, construction industry in Pakistan has been facing some serious challenges. The outcome is mushroom growth of 'katchi abadis' creating other contentious issues i.e. acute shortage of basic amenities like water and electricity in these dwellings, inadequate public transport and above all undesirable elements taking refuge in these areas.
Population of Karachi is now estimated at around 20 million or 10 per cent of the total population of Pakistan. It has one of the fasted population growth rates, not because the birth rate is high but because thousands of people entering daily into Karachi from other parts of the country in search of employments. Added to this has been the massive influx of Iranians, Bangladeshis, Africans, and Afghans. Therefore, the city needs addition of one million new housing units annually. However, achieving this mammoth target is not possible unless a comprehensive housing policy is developed by the city district government and also fully supported by many other entities, i.e. electric and gas utilities, water and sewerage department.
Let one point be very clear that construction industry cannot become vibrant without a fully supportive housing finance facility. Since the average tenor of such loans goes beyond quarter of a century, the lenders need full support of the central bank to keep the interest rates low. It is an irony that over the last six decades Pakistan has not been able to develop housing finance companies, except one operating in the public sector. Though, a few companies have been created by the private sector, absence of long term credit lines has kept the interest rates prohibitively high.
Though almost all the commercial banks claim having housing finance department, the quantum of credit extended remains miniscule. The reason is simple, mismatch of maturity of deposits and tenor of housing finance. Tenor of bulk of the deposits maintained with the commercial banks is less than one year, whereas housing finance loans maturity ranges from minimum 10 years to 25 years. This clearly indicates that commercial banks are incapable of undertaking such financing. It was suggested that the central bank should provide funds to banks on Kibor plus 2.5 per cent and banks may be allowed to add another 2.5 per cent as service fee, which comes to almost 20 per cent keeping in view the prevailing discount rate. However, banks were reluctant to undertake such a business because they could earn a spread up to nine per cent by investing in government securities alone.
The 'Big Five' banks have billions of rupees of cost free deposits and they can undertake housing finance business but also have the pressure to invest in government securities to meet the credit appetite of the government. In fact, now bulk of the investment of all the commercial banks is in government papers offering around 13 per cent per annum. At the best, these banks are paying less than five per cent return on savings bank accounts. This provides them an opportunity to earn around 7.5 per cent spread. Therefore, the central bank must establish a credit line to which all the banks contribute up to 2.5 per cent of their total deposits every year. To keep the interest rate low this deposit may be declared part of statutory liquidity requirement.
The second but more contentious issue is availability land at a decent price. Since the government has stopped auctioning/allotting land for the new housing schemes, builders have to acquire land by paying very high price. This has led to construction of multistory buildings, many having shops on the ground floors. This results in some serious problems that include shortage of potable water, overflowing sewerage lines, overloading of electricity and gas distribution networks. The added problem is congested side lanes and roads.
In an attempt to make more money, often the covered area exceeds permissible limits. Either the builders end up in fruitless legal battle or get the site plan/final plan approved by paying huge bribes. One can find out both the examples as abandoned building and very shabby dwellings.
One of the serious issues faced by those making bookings in a project is inordinate delay in handing over of units by the builders. Builders hold the clients responsible for this and say most of the clients do not make timely payment, which slows down the construction work and also results in additional cost. As against this clients say that after completing a few projects, builders mostly become greedy and announce projects in quick succession. This not only overstretches their involvement but also leads to serious liquidity crunch. The result is increase in overall cost and delays.
The real precarious situation arises when the notorious 'Qabza Mafia' grabs such projects. Often the builders abandon such projects and those having bought units in such projects are at the mercy of the mafia. In some cases, the mafia vacates the units by taking huge ransom but mostly clients emerge the losers. Such situations normally arise in areas where certain groups also enjoy power. As they are the ruthless people, they don't hesitate in killing and kidnapping and law enforcing agencies look completely helpless.
As a result of acute shortage of house units, prices are skyrocketing. Now most of the people find it almost impossible to buy a house. This provides 'land grabbers' an opportunity to grab more of government and private land. In Karachi, many of the areas have developed only because of the land grabbers. They usually occupy a piece of land and split into small plots on which initially huts are constructed but soon RCC houses are constructed. Since these groups are 'well connected' electricity and gas connections are also granted and sewerage system is developed on self help basis.