Dharavi: While the ice cream cone melts
Did you ever fight with your sibling over who got the ice cream cone, only to see it splatter onto the sidewalk?
Who ordered the large?
That’s the sinking feeling probably being experienced by the government public-private team trying to recruit developers into their Herculean effort to redevelop Mumbai’s Dharavi slum, as the global credit crunch thins the ranks of potential development consortia. As reported on Live Mint:
Six consortia opt out of Dharavi project bidding
Five consortia have to be chosen to develop one sector each of the 535-acre shanty town in Mumbai, to make it a part of the growing residential and commercial development within Mumbai.
It always looks so easy on the maquettes
With only eight candidates in the bidding, it will be hard to create the sense of government leverage necessary to extract a favorable deal for each parcel.
“I am going to raise this issue with the committee of government secretaries that the number of participants does not give scope for adequate competition,” said Gautam Chatterjee, chief executive of the authority. “The committee will take a final call on what should be done with the bidding process.”
When it negotiates with the private sector on a macro project, government is usually out-traded: for several reasons: the talent updraft, government’s slow OODA loop, their information/ analytical disadvantage, and the necessity for government to have a consensus outcome. [And that’s even omitting entirely the possibility of corruption and bribery in the award process – Ed.]
Will Dharavi disappear in favor of high-rises?
On Friday, the Dharavi Development Authority asked the 14 short-listed groups to submit to it the memoranda of understanding among the team members.
A very good idea – it flushes from cover who is actually a team and who is simply a mob hoping to win the beauty contest and then plunder the opportunity.
We had fourteen, but six of us were shams
This was asked after rumours that many of the international and local companies wanted to opt out of the project in the wake of the global economic downturn.
The DDA asked a question, and got an answer it didn’t like to hear, but needed to hear:
Lanco’s flame has gone out
Videocon tuned out
Runwal ran away
Kalpataru got lost
Normally when you’re negotiating, you assume that any offer the other side makes will be on the table indefinitely. Public-sector and pro-poor groups conducting such negotiations, who are at an information and analytical disadvantage, tend to play their cards by instinct, judging what they can squeeze more by how the other side behaves than by their own internal analysis. Most of the time that works, especially when there are multiple private bidders competing for the same business.
When the number of bidders shrinks, the public sector’s disadvantage gets worse.
Financing their Dharavi development through an IPO?? You’re kidding, right?
That’s a joke, right?
Lodha has tied up with a Malaysian construction firm, LBS Bina Group Berhad, as its technical partner, and DB Realty has teamed up with its subsidiary, Conwood Agencies Pvt. Ltd.
Slum redevelopment is challenging, because it is so much more than simply large-scale construction. Further, the public-private negotiations are extensive, time-consuming, and fraught with uncertainty. The private sector converts uncertainty into cost, and cost reduces profit/ equity potential.
Less profit to work with
The value of urban land depends on the net residual profit to be derived from developing it; as a result, land price is the most volatile line item in the total uses of funds. To that uncertainty, add the uncertainty inherent in dealing with government.
Looks yummy but perishable
Then put another scoop of uncertainty for the slumdwellers themselves, who have an effective voice and are not shy about using it.
“Developing slums in Mumbai needs expertise because such projects have serious socio-political complications,” said an analyst with an international property consultancy, who didn’t want to be identified.
At some point it becomes unstable
With slums being hard to redevelop, the surprise is less than some opted out, but that that so many have stayed in so long:
In March, following a harrowing six months of liquidity crunch and slow property sales, five out of 19 teams had opted out, leaving only 14 in the fray. Some the prominent firms that exited were Housing Development and Infrastructure Ltd (HDIL), and Reliance Engineering Associates Pvt. Ltd and Urban Infrastructure Venture Capital Ltd.
Big bids always have big consortia – and if one or two team members get cold feet, the team can disintegrate.
HDIL, one of the country’s biggest slum redevelopers, was forced to opt out after its US-based partner Lehman Brothers Holdings Inc. went bankrupt in September 2008.
“We had been getting a little jittery about the project and don’t want to be a part of the project anymore,” Sandeep Runwal, director of Mumbai-based Runwal group, had said in September.
Don’t throw me out with the bath water, okay?
Property consultants who have tracked the Dharavi project closely said the biggest problem with the participants now is that none of them really has experience in redeveloping slums.
Said an analyst with an international property consultancy, who didn’t want to be identified, “besides DB Realty, no other team is equipped for that.”
Dharavi is still the fixable slum. Still, government may have played its cards too slowly, and there may be much less financial ice cream. If I were advising government, my advice would be move quickly and designate some developers. The ice cream cone is melting fast, and you may be contending over nothing.
The way to think about development opportunities