Monday 22 December 2014

Curb the transaction costs! Kick-start the economy!!

Curb the transaction costs! Kick-start the economy!!
Everyone talks of investments not happening and demand not picking up in Indian economy. This is in the backdrop of heightened expectations of the new Union Government taking over the reins of power in May’14.

The construction sector is particularly badly hit. Shrinking pipe line of new orders for contractors; huge backlog of sale of new apartments; construction permits and clearances continuing to get delayed; red tapism ruling the roost in various sectors; shortage of skilled labour; high interest rates; poor credit facilities; problems related to environmental clearances ; no fresh investments; power shortage; the problems seem to continue as they were in the previous UPA regime.

I for one believe the transaction costs of doing a business is one area where there could be visible improvements with minimal changes and efforts. Take for example, the task of buying such varied goodies like pizzas to pancakes , mobile phones to movie tickets or computers to credit cards, from home. We all know it has become quite simple, hassle free and just a phone call away.

Why can’t we have the equivalent of it in getting a construction permits; or obtaining completion certificates for occupation ? Why should it be so onerous that a developer shudders to think of investing money in a new green field project?; the task of getting various clearances and approvals is so riddled with procedural bottlenecks and regulatory minefields, that a developer’s productive energies are mostly consumed in dealing with this rot in the system. He is left with that much lesser time to think of technological improvements, quality, better customer service, cost reduction, innovation and the like.

In my own case I have found it takes anywhere between 3-5 months to get through this process of getting water, sewer and power connections in Chennai, even if your building is perfectly complying with all norms. This is after relentless follow up and countless no. of visits to various offices of Metro water HQ, Area office, Unit office, Corporation’s zonal office, unit office and division office, EE office dealing with road cut permits, TANGEDCO’s AE’s office, AEE’s office and EE’s office. One just can’t estimate the transaction costs of dealing with such levels of stupid bureaucracy and wanton dealys. It is as if these officials are doing a big favour to the citizens by agreeing to provide these utility connections, which should actually be given as a matter of right!

Look at this! About 200 completed apartment projects in Chennai are not in a position to be commissioned due to the huge backlog of issuance of ‘completion certificates’ by Chennai Metropolitan Development Authority (CMDA). It is quite likely the average delay due to the pile up of such a certificate is about 75-100 days. During this period the apartment owners are not able to occupy the flats and are forced to live in rented houses. The builder is not able to apply for power, water and sewer connections. He continues to use DG power which is about three times costlier as compared to grid power, not to speak of loss of foreign exchange in buying fuel. He spends unnecessary overheads and administrative time on maintaining the flats till the time of handing over. Sometimes he is forced to compensate the buyers of apartments for the delay.

All these will wipe off about 10% of his legitimate profits which are very limited in any case. So this leaves him with that much lesser capital for the next investment. We are not talking of the other aspects of Government created delays in plan approvals, property registration, delay in power, water & sewer connections and the ubiquitous costs of corruption involved in every stage. If we take all these together the cost imposed on the developer (which is either passed on to the buyer or borne by the developer as reduction in profits) will be about 25% of the fair profit estimated by the developer.

Let us say in a 100 apartment project with one lac sq.ft. developed space, the developer estimates a profit at Rs.300/- per sq.ft.; if 25% of it is knocked off as the increased transaction costs as explained above, the additional cost paid by the flat buyers is Rs.75/- per sq.ft.; in other words, Rs.75,000/- for a 1000 sq.ft. unit. This is a huge amount for a home buyer. If the developer does not pass on this cost to the buyer he is poorer by Rs.75 lacs which will have to be funded by bank credit or additional equity. Had this money been deployed in some other project, it would have created corresponding economic activity and incremental addition to GDP.
We can thus see the increase in transaction cost for both the buyers as well as the developers on account of the mindless delay, blighted procedures and slothfulness on the part of the Government agencies in a small area of one particular economic activity. Multiply it by million times you can see the crippling effect of unnecessary transaction costs on the economy overall.

Is it not time to think of cutting down the transaction time and costs so as to make our national economy more robust?
The accent should be on providing service to the customer; if a power connection is given on time, the department earns revenue from it and the inflows add to the government’s kitty. So is the case with water and drainage. Why this delay which hurts the customer as well as the service provider?
What we need are,
a) clarity of rules and procedures, which should be simple enough
b) minimal documentation and avoidance of duplication
c) online processes for each application
d) time limits for each approvals and service connection and
e) self-certification for most of the approvals
Imagine how much time and energy will be saved if the above were to be truly implemented. It is entirely doable and will divert substantial resources from useless tasks like follow up, chasing government officials and filing endless types of forms to productive usages which will add significantly to the nation’s wealth creation!


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