//Cost of graft

Cost of graft

Piyush Tiwari,  Express Estates,
 June 02, 2006

The highlight of a symposium organised by the Independent Commission Against Corruption in Hong Kong last month was the keynote address by Daniel Kaufmann, the director of Global Governance at the World Bank Institute. Kaufmann said, “One does not fight corruption by merely fighting corruption”. His thesis was that “it is unrealistic and simplistic to believe that major progress in addressing corruption can be achieved by simply focusing on some mid-level bureaucrats who may be taking bribes. It is important to tackle the more fundamental governance weaknesses in key institutions, and not to focus exclusively on a few specific projects, or only on public sector, or solely on developing nations.”

Worrying aspect

One insightful finding presented at the conference indicates that though a large number of companies do not engage in corruption, a sizeable one-third of firms pay bribes to procure public contracts in emerging economies. Another worrying factor is “capturing” of institutions and regulations by powerful corporate entities. This not only distorts the investment climate but also has a detrimental impact on the growth of the private sector. Results from a survey presented by Kaufmann indicate that in South Asia, 60 per cent of the firms surveyed indicated corruption as the top constraint. This percentage was the highest among all regions surveyed.

An important negative consequence of corruption is the impact on growth competitiveness of a country and its per capita income. Usual thinking that high income is a pre-requisite for high governance is flawed. The causality works the other way. High governance countries have high income and that’s the dividend from controlling corruption. If India has to sustain her economic growth it would be important to beat corruption head on. The benefits are immense. A study by Kaufmann indicates that the output growth of companies in low “capture” economies has been double the growth in high “capture” economies and one standard deviation improvement in governance raises the per capita income by about 300 per cent in the long run.

Lessons for India

There are key lessons to be learnt from Kaufmann’s study. Real estate in India has long been dominated by corrupt practices, such as flouting of building by-laws and FAR norms. It takes two to tango. The private sector flouted building norms and the public sector deliberately overlooked it. The consequence: poor quality of stock, damaged skylines, disincentive to play by rules for those who would have liked to do so and depressed capital value of stock in the whole neighbourhood.

When this is being undone, there is a hue and cry even though it’s for overall benefit of the real estate industry. Then, occupancy certificates are needed after the building is constructed. It’s fine as a check to ensure whether the use and safety requirements as indicated in the development control rules have been complied with by the developer. This could be a powerful tool if there are indications of non-compliance but otherwise it should merely be a formality. In reality, many developers see this as a big hindrance.

Public sector’s role

The public sector must be commended for the efforts that it has undertaken in improving the real estate regulatory environment. Development control norms of CIDCO, new property tax system of MCD and new building by-laws by MCD are some major steps towards improvement in transparency by public sector. Karnataka has moved towards e-governance in many of its government departments. Municipal agencies such as MCD, NDMC, MCGM and government organisations such MMRDA have started to exploit e-media in their procurement process. Overall there is improvement on the public sector side of the equation even though it still has miles to go.

The weak link
Improved governance has a positive impact on the per capita income of a nation
The private sector side of the equation is the weak link, particularly in the real estate sector in India. It is still dominated by cowboys who are out to make money at any cost – real estate brokers, speculative investors, valuers who are keen to ignore basic principles of valuation to either undervalue/overvalue property depending on the gains and lessors who often hide part of the rent to avoid taxes. Cash payment as a portion of the purchase price has reduced but has not been completely done away with.

The overall environment, though, has improved significantly with large builders adopting international developmentpractices. The traditional system of regional concentration or “capture” (Mumbai and Delhi developers used to confine themselves to their cities) by big builders has changed. Now we see big builders participating in projects all over the country. Developments in the procurement system by NHAI for the Golden Quadrilateral project, the sale of mill land by NTC and procurement of land by MMRDA and other agencies have injected transparency to a large extent. This is a real plus for the future of the real estate sector in India.

The writer is senior lecturer (property), University of Aberdeen Business School, Scotland; [email protected]