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July 31, 2020

Revolutionary reforms introduced for construction sector

National

July 31, 2020

The foundation of a successful economic growth in a country begins with activities triggered in a mother industry. Ideally, the chosen industry to focus resources and efforts should have a significant social impact as well.

With its great potential to lift the entire economy, the construction industry- including real estate development- is one of the most potent economic segments. The country has a large pent up demand for its product (housing), and this sector has the capacity to absorb a substantial number of skilled and un-skilled workers. It is said that the construction industry triggers an impressive chain of activity in more than 40 industries. It is estimated that every one house constructed will in turn create two jobs of permanent nature, either directly or through allied industries.

Promoting construction and real estate development business and providing housing to all is a consensus economic objective of all political parties. However, there are vast challenges and obstacles to putting the wheel of a mother industry, construction, into action. An entire eco-system covering both suppliers and buyers needs to be designed and made functional: the regulatory framework, organizations, economic incentives, tax regime, financing program, delivery channels, a system of check and balances. When a system is built from scratch, the complexity of the job multiplies significantly. This sector’s contribution to the GDP, which is slightly over 2% (as compared to 9% for other regional economies such as India and UAE), and the quantum of mortgage finance, which is approximately 0.5% of the GDP (one of the lowest in the world), are clear indicators of the current state of this sector.

With reference to an estimate, Pakistan is facing an overall deficiency in housing of up to 10 million housing units. Urban housing shortage is estimated to be 3.4 million housing units, while rural housing shortage is over 7 million housing units. It is expected that the annual incremental housing demand will grow from 800k units in 2020 to 1.24 million housing units per year in 2025. The youth escalation and urbanization, which is fastest in the region, is putting an acute pressure on civic infrastructure, including housing. As an estimate, around 40%-50% of the urban population in Karachi lives in slums. In turn, large cities will soon be facing a similar challenge.

Given the health of public finances and its resultant impact on the balance sheets of financial institutions, this sector couldn’t get the requisite government attention and support. Fifty per cent liquidity is diverted towards government securities. Constitutional division of roles and responsibilities of the federal, provincial and local governments further complicates the task. As mentioned earlier, creating an effective eco-system for this industry is especially challenging as it involves multiple governments and agencies. Management of diversified resources from land to different types of utilities like water, sewerage, electricity and gas and amenities like schools, hospitals and retail is crucial.

The present government deserves credit as not only it did not shy away from the challenges and remained focus on the task but also elicited participation from the private sector in a positive manner. It undertook an elaborate process of consultation and engaged all relevant stakeholders. Instead of rushing to force any half-baked plan, the government maintained a steady and gradual progress towards developing an effective system through creating and reforming institutions.

Furthermore, it set up a national housing task force, which culminated its working by creating Naya Pakistan Housing and Development Authority (NAPHDA), which is now creating vehicles and systems to develop housing with a special focus on affordable housing.

Earlier this year, the government announced a special Construction Industry Package, consisting of commendable measures. This included recognizing construction and real estate development as an industry, introducing ‘Fixed Tax Regime’, rationalizing the immovable property transfer duties and taxes and encouraging investors and buyers, especially end-users, to participate by giving exemption from declaring source of income while investing in real estate projects.

The government is working closely with banks and financial institutions to develop a mortgage finance portfolio equivalent to 5% of banks’ advances. It has also announced interest rate subsidy for the buyers of small housing units (5/10 marlas; bank financing will be available for these smaller units at 5% and 7% p.a. respectively).

The government is also contemplating formation of Real Estate Regulatory Authority ‘RERA’ to promote and develop the real estate industry and protect all stakeholders especially consumers as per best international practices. At the same time, creation of ease-of-doing-business and reforms in the fore-closure laws will enable institutional funding support, which is extremely positive. This includes refinance facilities from the Pakistan Mortgage Refinance Company ‘PMRC’ backed by funding from the World Bank, which is working towards making long-term affordable developer and end-buyer mortgage, a reality in the country.

Till the public witnesses a few projects taking off the ground, the progress on all these fronts may appear slow. It is imperative that reforms do not create duplications and redundancies.

We strongly believe the government has fulfilled its promise of creating an enabling environment for the private sector. Now, it is the private sector’s obligation to come forward and respond to government’s incentives.

(The writer is director of Arif Habib Corporation Limited)