09 February 2004	Monday	17 Zilhaj 1424

The construction industry is very old and today accounts for around one-tenth of the world's GDP, 7 per cent of employment, half of all resource usage, and up to 40 per cent of energy consumption, worldwide.

This sector encompasses a whole range of activities, from land use planning, siting and design to the use, management and, ultimately, decommissioning of individual structures.

The industry has enormous forward and backward linkages and roughly around 35 to 40 industries move with the activities in housing and construction sector. The sector has great employment generation potential and its employment elasticity is estimated at 0.8.

It can create low paid jobs of ordinary construction workers to medium paid of mason, carpenter, electrician, painter, plumber etc., and high paid of architects, engineers, designers, decorators, contractors etc.

Globally, the construction and engineering services industry is regarded as one of the largest (second largest in the US) and the most fragmented industry in many countries.

Pakistan has a track record of good construction activities before 1980s and the PSDP being the fore-runner of the sector accounted for as high as 9 per cent of the GDP at the end of 1980s. However, with substantial decline in the PSDP during 1990s, the sector went into oblivion.

The sector, once able to export highly-valued services, is today faced with the dilemma of losing ground to foreign firms in its own country. The sector has the potential to export services worth one-billion-dollar per year to Saudi Arabia, the Central Asian States and other Middle Eastern countries.

However, today it is faced with serious constraints. The government has declared the housing and construction as the fifth driver of economic growth. With the exception of information technology, all drivers seem to be drivers of bull-cart.

The main reason for this dismal display of the sector is evident from its meagre contribution of only 3.3 per cent to the GDP. The US spends 53 per cent of its gross domestic product (GDP) on housing, and even neighbour India where conditions are more or less similar to Pakistan, allocates 10 per cent of its GDP to this very important sector.

In contrast, Pakistan spends a measly 0.48 per cent of the GDP on housing. This shows the extent of neglect and ignorance of the sector.According to official figures, Pakistan now boasts 19.3 million housing units with a backlog of 5.7 million housing units. According to an estimate about 25 million housing units for the population of 149 million people are required (taking normal family size of 6 persons).

It means a shortfall of 6 million houses as of end June 2003. If Pakistan is to keep pace with the growing requirement of shelter with the increasing population it needs additional supply of 570,000 units per annum. On the contrary, the actual supply does not exceed 300,000 units per annum.

That suggest a net shortfall of 270,000 units per annum is added to the already precarious situation. This is adding to the woes of already alarming shortage of housing in the country. That means as the population grows, the gap between demand and supply will widen and create serious social problems.

A National Housing Policy was approved in December 2001 to address this acute problem on war footing. The government's role was that of a facilitator and regulator to stimulate the economic activity and generate employment through this very important sector.

The emphasis of the new housing policy was on ensuring housing for the poor and the rural population by giving free land and cheap finance. The housing finance - a critical input, is abysmally low in Pakistan and the outstanding stock of housing finance is below one per cent of the GDP or Rs3-4 billion, whereas, the demand for housing finance is close to Rs70 billion.

In developed countries the outstanding stock of housing finance is over 25 per cent of the GDP, while it is in the vicinity of 5 to 10 per cent in many developing countries.

The injection of a large dose of funds into the sector is the solution to the country's housing crunch. As the government has already granted the industry status to the housing sector and is also providing tax rebates and exemptions on machinery import, yet the results are not so encouraging.

The acute shortage of housing units has been a major contributing factor for massive growth of katchi abadis in the suburbs of urban areas. The growth of katchi abadis is not only a source of pollution but also becomes hideouts for the outlaws.

A proactive policy from the government is to contribute towards the change of cultural practices in the industry and the construction process, improvement of performance and the productivity. Improved availability of housing finance is not the panacea of all ills in the industry.

There is a need to spark or ignite competition among builders and to stay competitive, leading builders regularly compare their own products, services and business processes against the best from within or outside their industry - seeking to unearth and implement best practice from whatever source.

The government has already sparked such a competition through improved prudential regulations for housing finance.The reduction in average lending rates has also led to reduction in mark-up on housing finance.

The average rate has come down from above 18 per cent to around 10 per cent per annum. The debt equity ratio has been changed from 60:40 to 85:15 by the State Bank. The recent experience of commercial banks of lending under housing finance facility has encouraged them to increase their exposure in the housing sector.

Promulgation of the Foreclosure Law has also improved the working environment in the consumer lending in recent times. Legal framework for the loan recovery of financial institutions has also been streamlined.

The government by providing a network of housing finance has done well and it deserves felicitation. But the real challenge lies ahead. True is the fact that the government has lowered the central excise duty (CED) on cement by 25 per cent, abolished the CED on wire and cables (which was 10 per cent) and has reduced duty on the import of billets by the Pakistan Steel from 20 per cent to 10 per cent.

Tax rebate on mark-up to Rs500,000 or 40 per cent of the income, whichever is less, would be given to those individuals who construct their houses through loans from banks and non-bank financial institutions. These are important fiscal incentives but this is like putting the horse behind the cart because the government should have started from acquisition of land.

Land account for roughly 40 to 60 per cent of the cost in the construction of a house and more importantly issues like proper land titles, prolonged litigation on land acquisition, cumbersome inheritance and transfer of land procedures are major irritants and risks in the construction process.

The Securities and Exchange Commission of Pakistan (SECP) has done a right thing to impose restraints on collecting funds for housing schemes without proper procedures of securitization. The SECP need to extend its surveillance to protect the interest of consumers being exploited by fake and fraudulent housing societies.

Aspirants of houses are frequently being trapped by the network of fake housing societies and builders. There is need of some sort of standardization and rating of housing companies/ societies. The degree of corporatization is also missing in Pakistan. The SECP may look into the possibility of bringing this important industry under the ambit of prudential regulations or companies act.

The ambitious National Housing Policy has given a broad road map to boost this sector. The real problem is that there are so many stakeholders in this sector like the local governments, the provincial governments and the federal government.

There must be some kind of staggered arrangements to facilitate ordinary consumers and builders. The utmost thing in the housing sector is a computerized database of all land titles and prompt authentication of transfer of land or house from one hand to another.

Infrastructure is another irritant of housing sector especially, big housing schemes find it difficult to get provision of the infrastructure from public utilities. Proper infrastructure like sanitation, road, recreation facilities and basic amenities in all housing schemes should be made mandatory. In Karachi, especially in high rise buildings provision of public utilities is always a problem from the city government.

The government, as reaffirmed by the finance minister, should bring all stakeholders on the table and design a comprehensive housing policy which takes care of all issues from the legal matters to infrastructure bottlenecks to fiscal incentives at one go.

The government employees deserve some sort of mortgage arrangements with the financial institutions on concessional terms like army housing societies. The scope of army housing scheme should be extended for one residential allotment as it is being imposed on civil servants.

Malaysia is a role model in massive housing projects and housing and construction sector is the sector which is responsible for its entrance into the ambit of Asian Tigers.

We should invite expert housing companies to make and sell housing schemes in suburbs of our urban cities. The housing sector needs a push forward from the government and host of opportunities are available.

In the past too, the development expenditure used to be the driver of growth which mainly constitutes the construction sector. The fiscal space available with the government due to the reduced debt servicing liabilities, enormous revenues growth (hefty 14.4 per cent growth recorded in the CBR revenues during July-December 2003-04), stable exchange rate and lower inflation suggests enabling environment which is more than conducive for growth of housing and construction sector.

The development expenditure is already escalating. The only thing which is missing is the focus of the government and they should start with the housing schemes for government employees. Punjab has already taken the initiative and other governments are just to follow suit. The multiplier effect will contribute substantially to the economic growth.