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!
Engineering Project
Consultancy & Property Advisory Services,
Residential-Commercial-Industrial-Infrastructure
Designs
Due-diligence studies
-Asset valuation services
Chennai -600 083
Telefax: 044-24743400
Mobile: 09340072281
bv.consultingengrs@gmail.com
No comments:
Post a Comment