Tuesday, January 3, 2012

Maharashtra CM shows the right way to fight corruption….

One of the most corrupt sectors of the economy – especially in a city like Mumbai – is the real estate sector. With prices of land and built-up structures at sky-high levels, the incentives for corruption are enormous. No wonder then that no previous CM of Maharashtra or Municipal Commissioner of Mumbai was keen to stop the corruption in this sector. Prithviraj Chavan and Subodh Kumar have shown some rare determination to solve the problem.

There are two major reasons (there must be others as well) why there is so much corruption in the Mumbai real estate market. First, the city is land locked and the demand for real estate is such that prices have risen to unaffordable levels. The high prices provide a ready opportunity for a cosy builder-government nexus to emerge. Essentially, what the CM has done is to remove discretionary powers from the hands of senior officials including himself and the municipal commissioner. Now builders will have to follow the rules and all approvals will be done in a transparent manner. This should cut out the nexus that exists and reduce corruption. The CM has taken care of this first reason.

The second reason is that the FSI permitted in the city is so out of touch with requirements that the supply always remains constrained. This leads to a price spiral and an even more reason for the builder-government nexus to thrive. The only way that Mumbai can accommodate so many people is by growing vertically. That is currently severely restricted by unrealistic FSI limits. In most of “town” (downtown Mumbai), the FSI is limited to some 1.3 or so; in the suburbs it is at 1 or so. These are the kinds of FSI limits that should exist in cities where land supply is not a problem – like Gurgaon or Noida or Ahmedabad or Pune. But in Mumbai, there is a need to have a much higher FSI limit – say 4 or 6 – as in the developed world. A builder who wants more FSI has to “buy” “TDR” rights from those builders who have the TDRs to sell – TDRs stands for Transfer of Development Rights – a mechanism through which builders who surrender land in “sending” areas like “town” get extra FSI rights in “receiving” areas like the suburbs. But this method of getting more FSI is fraught with risks of corruption. The other way to get extra FSI is to ask for favors from the authorities – who use their discretionary powers to grant such favors to those who grease their own palms. While the CM has cleaned up the first reason, he still needs to get this second hurdle to a clean real estate sector out of the way.

In the past, innovative (and happy to bribe) builders and powerful bureaucrats and politicians (happy to take bribes) have conspired to break the artificially low FSI limits. Builders design innovative extentions to apartments called “flower beds”, “voids” and “lilly ponds” (all under the garb of beautification of the building!) and the government exempts these structures from calculations of FSI, using its discretionary powers. In short, a lot more FSI is permitted under these dubious methods. The actual FSI achieved is thus a lot more. Buyers of apartments are encouraged to merge these areas into their rooms so that they get much bigger apartments. No one raids them for doing this since the entire “system” works together like a well oiled machinery. This cosy system of working has encouraged many big ministers and politicians (belonging to all parties) in Maharashtra to enter the real estate sector. Since everyone has his hands in the till, no political party has ever raised the subject of corruption in the real estate sector. Even now, when the CM took this decision, there were some in his own party who were dissuading him from taking this decision.

What is needed in Mumbai is a more practical FSI regime. A regime that allows for taller buildings to come up. A regime that lets the builders know “in advance” (without having to scurry around for favors) what kind of FSI would be permitted. A regime that would remove hidden and mischievous architectural designs and make it all more transparent. In the recent past, there have been proposals mooted to increase FSI to realistic levels – but for some reasons those haven’t come into play yet. Permissions for higher FSI are again granted in a discretionary manner. Raising FSI will make the real estate sector a sector mostly free from corruption.

Here’s what I like about all this. An entire sector could be cleaned up by just making the processes more modern; the rules more practical. More transparency means that it is the government that makes the “premiums” and not corrupt ministers and bureaucrats. This is what I call solving the problem from deep inside. It’s not a little patch of ointment put over the skin when there is a much deeper problem that is existing out of sight. The Lokpal in some senses is like putting a patch over the problem of corruption. It is woefully short of understanding of the real reasons which lead to corruption in the first place. There can be one single law – the Lokpal – or several like the government have proposed. But until the root causes are removed, corruption will find creative ways of existing. What is needed is “homeopathic” treatment (removal from the roots) and not necessary “allopathic” treatment (remove of the symptoms).

This is also similar to the “elephant in the room” syndrome (with due apologies to Mayawati!). What it means is that there is a large elephant sitting in a small room, taking away most of the space and inconveniencing all those who also occupy the room. Everyone knows that this elephant exists, but no one wants to acknowledge it. If it’s not acknowledged, how can it be removed? We all know what the real reasons for corruption are. There are outdated laws which inconvenience people – who then become willing to pay to get rid of them. There are artificial supply constraints which lead people to pay to jump the queue. There are real problems with the kinds of salaries we pay our government servants – so they innovate to earn a little more. In many ways, we all know the real reasons for corruption to exist, but we don’t want to acknowledge those problems. We prefer to deal with them externally. Corruption will never go away that way.

My recommendation is specific. Overhaul the laws of the country. Remove anything that is impractical (the recent law in Maharashtra which enhances the age limit for drinking to 25 is one such. It’s pretty impossible to distinguish a 25 year old from a 22 year old – leading to a situation when some 22 year old will bribe to drink. If the age limit were 21, this problem wouldn’t be there since a 21 year old looks distinctly different from an 18 year old). Bring in new processes (I wrote on this yesterday – in the passport address verification process, outsource to private companies to speeden up the process). Bring in new technologies that lead to more transparency (the Aadhar scheme; mandatory computerization; mandatory websites to provide status). Raise government salaries to practical (though lower than private sector) levels. Increase competition with liberal economic policies so that scarcity situations are avoided. Reduce the size of the government and make it focus on issues of governance rather than on doing business. After we have done all this, a strict corruption ombudsman is required. What have we done? Discussed bringing the ombudsman in; but forgotten to clean up the rest.

The real truth is that the solution to corruption lies deep inside the system. The Lokpal is the last step in the process of cleansing – though an important step. The Maharashtra CM has shown guts in realizing this. He has started cleaning up the reasons that cause corruption in the real estate sector in Mumbai. I hope more people understand this reality…..

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