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PPP policy can change the way the industry works, and boost EPC players
To provide further impetus to the governments ambitious Housing for All 2022 mission, the Ministry of Housing and
Urban Poverty Alleviation (MHUPA), on September 21, 2017, announced a public-private partnership (PPP) policy,
segregated into eight models, to promote private investment in affordable housing.
While at an overall level, the policy aims to provide the most critical resource to the real estate industry - land, few
models also provide financial resources to the builders, in the form of central assistance, upfront payment, and / or
annuity payment.
The eight PPP models aimed at tapping private and public lands for affordable housing are:
Under models 3-8, beneficiaries, identified as per the norms of the Pradhan Mantri Awas Yojana (Urban), can avail
central assistance of Rs 1.00-2.50 lakh per house.
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Assessment of the announced policy
Land as a Government
Sr. resource Construction to intervention in Form of funding by Land allotment
PPP model
no. (Land be done by handing over units to government based on
ownership) beneficiaries
Extension of
1 Private Private Yes CLSS Not applicable
CLSS
Extension of
2 central Private Private Yes Central assistance Not applicable
assistance
Design, build Based on progress of Bidding: Least cost
3 and transfer Government Private Yes project as per agreed upon of construction per
model milestones unit
Cross- Cross subsidy from revenue Bidding: Maximum
4 subsidised Government Private Yes of high-end housing or no. of affordable
model commercial development houses to be built
Annuity-based
Bidding: Low
5 subsidised Government Private Yes Deferred annuity payments
annuity payment
housing
Annuity-cum-
Upfront payment + deferred Bidding: Low
6 capital grant- Government Private Yes
annuity payments annuity payment
based housing
Direct
Bidding: Least cost
relationship Cost recovery directly from
7 Government Private No of construction per
ownership buyers
unit
housing
Direct Bidding: Least cost
Cost recovery directly from
8 relationship Government Private No of construction per
buyers (rentals)
rental housing unit
Source: Ministry of Housing and Urban Poverty Alleviation (MHUPA), CRISIL Research
Developers have been cautious in taking on affordable housing projects, mainly on account of stringent cost and time
schedules. Therefore, the low margin-high volume affordable housing projects require stricter adherence to project
management, construction progress and project quality.
CRISIL Research believes that, of the eight PPP models, developers could find the following three models attractive
on account of the relatively high returns despite the higher risks associated with the models:
Extension of CLSS (Model 1): MHUPA released the operational guidelines for the implementation of CLSS for
the middle income group (MIG), on March 22, 2017. The scheme, launched by the Prime Minister in June 2015
to provide Housing for All by 2022, initially offered CLSS benefits only to the economically weaker section (EWS)
and lower income group (LIG). Accordingly, those in the MIG with annual income of above Rs 6 lakh and up to
Rs 18 lakh are eligible for interest subsidy; beneficiaries will get a 4% relief on loans up to Rs 9 lakh (for those
with an income up to Rs 12 lakh) and 3% for loans up to Rs 12 lakh (for those earning up to Rs 18 lakh). It should
be noted that the guidelines include dwelling units with a carpet area of up to 110 sq metres that occupy the lions
share in overall residential supply, especially in the peripheral micro-markets. Developers in metro cities are
already aligning their new launches in line with this area definition.
Extension of central assistance (Model 2): While PMAY-U guideline mandates developers to construct at least
35% housing units for EWS beneficiaries, the remaining housing units (at maximum 65% units) in the project are
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available to developer at market value. This gives the developer an opportunity to recover part of cost for
affordable housing units through central assistance whereas the remaining project can fetch relatively higher
profitability.
Cross-subsidised model (Model 4): The private developer will be allowed to construct and sell high-end
housing on a portion of the land allotted. The value creation for the private developer may be further enhanced
by providing higher floor area ratio, Transferable Development Rights as well as fast track clearances for
undertaking the development of the high-end housing projects.
In exchange for all this value creation, the private developer will be required to provide affordable housing free
of cost. In this model, though the private developer is exposed to risks associated with market dynamics (demand
for high-end housing), profitability can be achieved, based on the location and scale of the project.
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In fact, this policy has the potential to change the way the industry operates. At present, many renowned developers
use their brand to market their projects, and outsource construction - the core of real estate - to engineering,
procurement and construction (EPC) companies.
In the announced policy, most of the models suggest an intermediary role of the government, i.e. link between
beneficiaries and private builders. In other words, the developers are tasked with designing and building the structure,
and handing it over to the government. This arrangement effectively paves the way for EPC companies to enter the
space, given that the focus is on construction.
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Analytical contacts
Binaifer Jehani Anjali Nathwani
Director, CRISIL Research Associate Director, CRISIL Research
binaifer.jehani@crisil.com anjali.nathwani@crisil.com
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Saman Khan Khushboo Bhadani Shruti Muddup
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