There is a new mystery abound. The foundation stone of the Naya Pakistan Housing Program (NPHP) launched by PM Imran Khan has been found missing. Who stole the plaque and what happened to it is unfortunately beyond the scope of this particular piece but the fact that the inaugural stone is missing is pretty symbolic. Because the scheme itself is pretty lost. That’s a whodunit worth exploring!
To quickly review: the government announced a construction package that invites investment in real estate development—no questions asked for wealth source. The package also changed the tax regime to a fixed rate system based on square footage. There is an added bonus for those developers willing to put in money into low-cost housing where 90 percent of the tax will be waived off. However as earlier argued: “[developers] will realize that the fixed tax regime itself is an incentive to build high-end properties, rather than low-cost ones. Since tax depends on size, rather than property price, expensive properties will incur a lower tax burden” (read more: “Naya Pakistan Housing: Supply-side snags”, May 29, 2020). Since the return will be significantly high, the tax waive-off to develop low-income housing may not be enough.
The second and much publicized proposal to promote NPHP comes in the form of a subsidy of Rs30 billion. There is a lack of clarity about this subsidy. What is the mechanism behind this subsidy, who will benefit from it, how long is it for, and how will it be funded? It is also evident that this subsidy is not enough. Earlier calculations suggest that if the government goes through with its plan to build 400,000 urban houses in Pakistan, the subsidy required—for one year—will be Rs47 billion (read more: “Naya Pakistan Housing: The lies we tell”, May 21, 2020). But again, the more important question is, whatever the amount of the subsidy may be, will it be legislated and how will it be financed every year?
There is a certain seduction to subsidies but where they are “good” or even can result in a net gain are up for contention. Pakistan has a history of never-ending subsidies cannibalizing the starved fiscal space with nothing to show for it. Typically, subsidies have fallen on the hands of rent-seekers and cronyism adding distortions to the market. Studies suggest that housing subsidies are costly and complex to execute and a gateway to public and private corruption.
In this particular case, it is integral to understand that there are costs to administering a subsidy, aside from the subsidy itself. There are administrative costs associated to implementing the subsidy. The government will have to develop an eligibility criteria which would have to be equitable and tied to some affordability metric—in the case of households receiving the subsidy.
This means, the government will have to develop an affordability criteria for Pakistan. The global metric for affordability is 30 percent—i.e. if rent or mortgage payment is more than 30 percent of the household income, that property is not affordable. But recall that Pakistanis spend nearly 34 percent of their income on food alone—this is 45 percent for the poorest households. If they spend 30 percent on rent, they have a very small share left for expensive fuels, utilities and travel.
In the case of a production subsidy or even an interest rate subsidy, some mechanism and eligibility criteria tied to performance will have to be designed. Moreover, the government will require administrative resources to identify, allocate, and award the subsidy. There will have to be a data driven formula that ensures the subsidy is not misused. There are also very obvious concerns on transparency and accountability. Who will ensure that the subsidies are being utilized in the right way, and then subsequently, “Quis custodiet ipsos custodes?”—i.e. who will guard the guards?
All these will add to human resource and administrative costs, make processes burdensome, add even more regulatory steps, not to mention, will require technical expertise to make the subsidy viable. Since this is a state-level subsidy, how will it be devolved at the local level, is also an important question.
The projects that have so far been announced by the government are those limited to public-sector employees. One wonders whether these employees will be receiving these subsidies and if they do, how would the government justify this. After all, any subsidy being provided to government employees is a subsidy not provided to private individuals and households that may are eligible and in need for affordable housing.
All of these lay bare the challenge and absolute necessity for actual planning that needs to go into a subsidy program, assuming this is not just a one-time payout. Just simply putting aside Rs30 billion for housing believing it will help fill the housing gap in Pakistan is naïve, if one is being kind and misleading, if one is not. Without addressing these instrumental concerns, the likeliest scenario is that Rs30 billion will fall into the hands of developers and investors who will make a quick profit and exit the market. The other possibility of course is that the subsidy will never be utilized simply because the government does not know what to do with it. Evidently, Pakistan is no stranger to both these likely scenarios and if this must indeed be the fate of the housing subsidy; what’s naya about Naya Pakistan housing?