Laborers work on a building construction site in Karachi, February 25, 2016. — Reuters

Who will benefit from relief package for construction industry — the vulnerable or builders and developers?

With the Covid-19 crisis, who will be able to demand and afford housing?
Published April 15, 2020

Recently, the Prime Minister announced a relief package for the construction industry with the twofold aim of providing employment to daily wage earners, and spurring economic activity. The package also includes additional incentives for builders and developers to build low-cost housing for the poor under the Naya Pakistan Housing Programme.

In the midst of the Covid-19 crisis, which is laying bare the deep and entrenched inequalities that exist within society, securing livelihoods for informal labour, stimulating the economy, and providing safe and adequate shelter is critical. But are the proposed measures the most effective way to do so? What are the implications of the current package in terms of urban growth? How will it shape access to affordable land and housing?

First, once more detailed provisions of the package are clearer in terms of timelines and approvals, we can expect an immediate surge in the demand for land, leading to a rise in land and property prices. This is particularly the case, as according to the notification issued by the Naya Pakistan Housing Authority, investors will no longer be required to declare the source of income for their investments until June 2022, and any untaxed or illegally earned income, can now more easily find a home in real estate. It is important to note here that housing in the formal sector already remains unaffordable for a majority of the population. Analysis of data from the Household Integrated Economic Survey (HIES) from 2015-16, for instance, shows that only the upper-most quintile can afford to spend 33% of income (a common indicator of measuring affordability) on housing given savings and spending levels. With incomes and savings further eroding as a result of the current crisis, and land prices potentially rising, the new package, therefore, runs the risk of further accentuating the housing affordability crisis. Further, dealings in this sector are already low on transparency, and with the introduction of this measure, are likely to become more opaque, resulting in less tax revenue for the government, among other factors.

Second, with the exemption from provisions of Section 111 of the Income Tax Ordinance, tax breaks and rationalisation of capital gains tax, the package effectively makes it easier to construct and sell property for speculative/investment purposes. A fixed tax regime (rather than taxes on profits) also allows developers to make greater profit margins. Speculative practices are a key bottleneck in the provision of affordable housing as they reduce the availability of affordable developed land in the market, and are designed to benefit the investor and not the end user. No measures to curb such practices have been proposed. As outlined above, the proposed measures, in fact, facilitate speculative practices.

Also read: Package may not reboot construction

Relatedly, while there is a housing shortage in the country, there is also an oversupply of low-density housing options for high-income groups and investors. A 2019 study by the Urban Unit in Punjab shows that in all recognised housing schemes in the province, about 68% of plots lie vacant and 10% are under construction. With the new incentives, are developers simply being subsidised to develop similar additional schemes that may provide employment, but remain out of reach for most, and in most cases also contribute to sprawl? There surely are better ways to provide employment to daily-wage labourers and stimulate the economy (some recommendations are mentioned at the end of this piece).

But, and you might say that, a key feature of this package is supporting housing for the poor under the Naya Pakistan Housing Programme. This is great. But is it placing any obligations on builders and developers to avoid past failures? There is a high risk that developers constructing new units under NPHA will simply construct in distant locations where the cost of land is low, and without effective mechanisms in place related to targeting, long-term affordability, occupancy, maintenance and social infrastructure. To benefit from government incentives, at minimum, there must be a pre-qualification criteria for developers around occupancy, affordability, community development, and maintenance. While it still does not ensure success, it is only fair that developers benefitting from tax breaks are required to demonstrate that they understand the market that they are proposing to build for. Else, we may see new units constructed, but these may remain vacant, or may benefit higher income groups in the long-run.

These outcomes wouldn’t be unique to Pakistan. In Malaysia, for example, in the 1980s, the government introduced the Special Low Cost Housing Programme (SLCHP). This was introduced in response to a downturn in the economy, and, in particular, the construction industry. The SLCHP focused on increasing the supply of low and middle income housing, and stimulating the economy. As part of the programme, the private sector was incentivised to build housing units (60% of the target were to build on public land). The incentives focused on reduced infrastructure standards, and faster approval processes for regulatory and land conversion purposes. Progress in terms of the number of units built was slow. This was particularly the case as demand for housing was low due to high prices, locations and house designs were poorly selected, and administrative constraints caused further problems. Similar outcomes have also been seen even in countries that have implemented largely successful housing programmes: a focus on quantity over quality, poor choice of locations, and a rise in corruption among other factors, with governments having to re-evaluate policies and programme design.

More recently, Tom Goodfellow’s work in Kigali, Rwanda, shows that the government offered a range of incentives including a flat tax on the imports of building materials, a 'one-stop centre' for investors with a promise to provide approvals in 30 days, and more easily accessible housing finance. However, formal housing supply continued to primarily cater to higher-income residents and the diaspora community, speculation on buildings became common, and many structures were left half-built as investors often with little experience in real estate, lured by potential high returns, entered the business but ran out of funds.

More on this: PTI’s focus on housing is laudable, but it’s wrong to suggest private sector can provide all units

This brings us to a critical point. With the Covid-19 crisis, who will be able to demand and afford housing? With economic activity slowing down in response to the crisis, both middle and low income groups (including non-resident Pakistanis) are dealing with unemployment, uncertainty in relation to their sources of income, a decline in savings. Household ability to demand housing is hence being constrained more so than ever before. Banks have been reluctant to lend to such groups in the past, and in all likelihood, will be more risk-averse now. Earlier, verifying informal income and high interest rates remained two key challenges. Given that there are severe and unprecedented shocks to both formal and informal incomes, lowering interest rates alone will not facilitate access to housing. For low and middle income groups to be able to access new housing units, government subsidies for the NAPHA must not simply be channelled through housing loans but be designed carefully, with clear targeting mechanisms in place. A few ideas on what can be done are shared below.

First, the homeless population requires urgent support. Much of the homeless population, as shown by Dr Noman Ahmad in his study of the homeless in Karachi, do not have CNICs and remain extremely vulnerable in the current crisis. The Prime Minister’s Panagah initiative should be expanded, and shelters should be constructed for the homeless. Second, efforts should be made to explore how support can be provided to low and lower-middle income groups who can no longer make monthly rental payments, as well as to those whose income depended upon such payments. Third, support should be provided to improve conditions in informal settlements (around upgrading, water, sanitation). Funds could be used to subsidise the construction of 'one additional room'. Overcrowding currently remains a key issue in Pakistan. A programme of this sort can help improve housing and also provide employment. Fourth, as mentioned earlier, a pre-qualification criteria should be created for developers building under the NAPHA. Infill development, mixed-income, mixed-use housing should be explored, existing regulations assessed to facilitate low cost housing provision, and an effective targeting system should be developed for the use of state subsidies. Fifth, public works programmes and social housing projects should be explored to provide employment and housing. The UN-Special Rapporteur on the Right to Housing has also published detailed Covid-19 Guidance Notes on protecting renters and mortgage payers, homeless populations, and residents of informal settlements, which can also be looked into.

Read further: All in the name of Covid-19

There is already enough evidence that suggests that the choices that are made today will have long-term economic, social and environmental costs, that cannot be undone. A study by the LSE says that "the life-span of capital intensive, largely irreversible urban infrastructure such as roads and buildings typically ranges from 30 to 100 years, and the path dependencies created by urban form are sustained even longer". Cities around the world are starting to look for solutions to help their vulnerable. While we can agree that the government faces many difficult choices, the construction industry requires support, and since the government truly wants to help the poor — we have to do it in a way that vulnerable groups — not builders and developers — are at the heart of such support.