To get the builders' perspective, BR Research met with the former chairman of Association of Builders and Developers (ABAD), Mohammad Hasan Bakshi. Following is the edited transcript of the conversation:

BR Research: The law to enact Naya Pakistan Housing & Development Authority (NPH&DA) is still pending with the National Assembly. Once approved, what will be the main functions of NPHA?

Mohammad Hasan Bakshi: The NPH&DA has been created through an ordinance. The government has created an island under which the NPH&DA will have all the authority required to kick start housing and construction industry. This includes land allocation, town planning, approval of project and issuance of construction permits, provision of infrastructure, registration, taxation and availability of utilities in the projects under NPH&DA.

Currently, in order to obtain construction permits for a project, builders and developers must seek 18 different No-objective certificate (NOCs) from government departments. The NPH&DA will have the legal authority to provide all the approvals under one roof. It is a one-window operation and extremely balanced and hopefully will replace the prevailing system where it takes more than two years for issuance of construction permits. This will significantly cut down delivery times and eventually help in reducing prices of housing units due to improved supply.

BRR: What is the target income group for the program? There is the poorest of the poor which are eligible for BISP, then there are above that income segment who are still poor but may not be eligible for BISP. Are there any income benchmarks that have been created?

MHB: I would say, the eligible category for NPH&DA are first time buyers. Priority is the poorest of the poor up to the middle-class. That is where the supply is absent, but demand is only growing. If we are thinking about income cut-offs, I would say there are three income categories. The first one would be a combined family monthly income category of Rs 25,000 to Rs 45,000, then there is the second category with a monthly income of Rs 45,000 to Rs 90,000. This is typically our middle class.

And the third category which will come under upper middle class would have monthly income ranging from Rs 90,000 to Rs`130,000. For income group over and above these three categories, housing is being provided by builders and developers. At the moment, the project might not cater to households that earn below Rs 25,000 per month in urban areas but I'm sure as supply picks up, this is certainly an income group that will be addressed—with the right policy prescriptions.

BRR: What are the different policy interventions that will be necessary to cater to the housing supply of each of these income groups?

MHB: For the lowest income segment, as per my estimate and the same has been discussed with the PM as well, that land will have to be provided by the government at zero cost. And it is certainly possible because today, land worth billions of rupees is being encroached. The land will not be given to the builder or the developer. The land will be provided to the homebuyers who will ultimately hold the title deed of the property. The builder will come in for construction.

This way, the cost of housing unit will consist of cost of construction only thereby substantially reducing the final price of the property for the lower-income segment through cross sub-subsidy model. For instance, if the actual cost of construction is Rs 2 million per unit for a builder, the builder would sell certain number of units in open market at market rates but will be bound to provide certain number of housing units for the NPH&DA registered applicants at a fixed price of Rs 1 million per unit. In another option the commercial areas can be used to subsidies the cost of residential units. This seems to be one way where the government does not have to spend anything at all.

Secondly, the SBP has defined a low-cost housing unit to be up to Rs 3 million. Subsidized finance facility is available at 6 percent per annum for special segments. This should be extended to all low-income groups. With the devaluation of Pak rupee low cost housing unit shall be defined up to a value of Rs 5 million.  The facility should be available on first-come-first-served since the government has limited funds.

BRR: There is another mortgage product in the market being provided by House Building Finance Corporation (HBFC) and some banks who are attaining refinancing from the Pakistan Mortgage Refinance Company (PMRC). The HBFC project called Ghar Pakistan is providing mortgage at a fixed rate of 12 percent but the existing financing will cover about 2,500 borrowers for now. Similarly, the SBP product also cannot cover too many borrowers. This is against the 1.9 million applications that the government has already received. Isn't the gap huge?

MHB: As a builder, when I sell 1000 units in a project, by the time that building is constructed in 3-5 years, there is only 3-4 percent buyers that go for any kind of bank financing. I think this has a lot to do with a culture and Islamic values.  Generally, people are able to find informal means of financing such as inheritance, or help from a family member, friends, employers or relative or they sell-off an existing asset such as jewellery. This is predominantly common in urban settings. Whereas mortgages are available for a period of 10 to 15 years and are usually availed by educated people or people with stable jobs or businesses.

I feel that borrowers in the second income category I mentioned earlier would fit the HBFC subsidized financing model better. Since the government cannot provide free land for this category, we would have to enhance affordability by subsidizing the financing cost.

BRR: What other interventions do you feel are important to enhance affordability and cut down the cost per unit?

MHB: One important intervention is that the government should collect a record of prospective buyers that are applying for this program and ensure that the recipients are first-time buyers only and fall in the right income category. Other mechanisms are restriction on the buyer not being able to sell off the property for at least five years from the date of possession.

Another important intervention that would cut down the cost of construction would be to do away with the sales tax on construction material. This would spur demand which would in turn push manufacturers to expand production facilities thereby increasing employments and revenue.

All these interventions however will have to go hand in hand. There is a very strong reason why property is so expensive in Pakistan. The demand is for 100,000 units, but the supply is only 25,000. The approvals for any project take up to two and a half years, then it takes another 3-5 years for the property to be delivered to the buyer. During this time, the builder incurs a financial cost if he borrows from the bank. All this builds into the price of the property. But when supply is increased, approval times are cut down from 2 years to 3 months through digital process, developed land is made available at reasonable rates the prices will automatically go down and people will have more affordable property available in the market. Today, land trade is politically motivated. The government will have to develop a land bank which is made available to developers and builders directly.

BRR: After the 18th amendment, do you think the government will face push-back. How will the one-window operation function with different provincial departments involved?

MHB: I agree but technically, the PTI government might only face issues in Sindh. It can definitely start with Punjab and KP and Islamabad, where it has formed the government. What it needs to do is to form a compliance regime, as opposed to the NOC regime. They can set up a portal where all approvals are provided within a designated time period by the 18 NOC agencies. I would suggest a period of 30 days.

This would reduce delays and ensure both sides are compliant. We cannot keep running on the current system of bureaucracy and red tape. This portal will also increase transparency and reduce incidences of bribery and corruption. It is a win, win situation on all fronts.

BRR: Walk us through the current plan of action when it comes to land acquisition and development. Who will provide the land for these projects?

MHB: The federal as well as provincial governments both have ample lands. The major issue is that most of the federal land is owned by government departments such as Railways, or PIA etc. All of this will have to be pooled so they can be utilized. Generally, unutilized land by a government body should revert to the federal/provincial land bank—since the land originally belonged to the government and was only awarded to the departments for a certain purpose — but that has not happened over the years.

However, the current government can easily start the process of acquiring this land back from departments in Punjab and KP and once a workable model is created, it can iron out the inefficiencies and gaps. We should assume that the Sindh government would come on board as well. So far, land mapping has not been done — who owns how much land where and how it is utilized — but this is where the crucial role of the federal government comes in.

BRR: From your responses, it seems the government does not even yet know where the land exists. There also has been no real survey that would indicate what the actual demand is, and the actual supply is since most estimates are outdated. At this level of planning, how successful can this project really be?

MHB: According to a Ministry of Planning report, formal and informal housing supply stood at 300,000 in 2014 but it is unclear how accurate this number is. The major problem is that transactions are not getting recorded. In Karachi, it is more formal because all the maps have to be approved by the Sindh Building Control Authority (SBCA). The record of formal housing construction exists.

But in Punjab, nearly everything is informal. There is no centralized system, as there is no system of sub-leasing the property. The builder simply signs the transfer documents into the buyer's name—in his own books — while keeping the original title deed. This is also why property taxes from Punjab are so low.

Nearly 80 percent of the total real estate taxes collected in Pakistan are from Sindh, particularly Karachi. There is a reason for it. The culture in Sindh is different. There are existing by-laws dating back 1972 and the sector is a lot more organized and formal. Property buyers here also understand that they require the original title of the property for it to become a bankable property. In Punjab, buyers are simply satisfied with getting the allotment papers in order to avoid paying government taxes.

BRR: What happens to the title of land that gets approved for construction under NPH&DA?

MHB: The possession of land will be provided to the builder to undertake construction of the project. The builder's involvement will be limited to the extent of delivering the project according to the pre-decided specifications, at a pre-determined price. The government will directly lease the property in the buyer's name. This is to safeguard the project. If the title deed is transferred to the builder, he will have the incentive to hold the property and delay it until land prices go up which are constantly increasing.

There will be a formal arrangement which will be spearheaded by the NPH&DA. This will by-pass the current status quo in property transfer that are happening in Punjab which are informal as I mentioned earlier.

BRR: When the project was first launched, it seemed like the government would be working as a facilitator—providing the land, streamlining approval process, indemnifying title deeds, ensuring projects are running on time etc.—but since then, a subsidy was announced, construction taxes have been announced to be cut on NPH&DA projects, there might be cases where land will be provided to builders for free. Then if most projects are constructed in the outskirts, the government will have to provide the infrastructure. That's a lot of fiscal burden.

MHB: For the developing infrastructure and providing utilities to the doorstep of the project, ABAD has requested the government to allocate funds from PSDP. They need to utilize the PSDP funds more efficiently and what better way to do it but through this housing project. The project is certainly not a fiscal burden, it will have immense economic benefits which will lead to industrial development, massive employments generation and improvement in socio economic conditions of millions of people.