Case Analysis On Dharavi: Developing Asia’s Largest Slum

Abstract

This case deals with the Redevelopment project designed by the Government of Maharashtra, in order to redevelop the slum area Dharavi. Dharavi is the largest slum in Asia. Real estate developers in the private sector were invited to bid for the project. There were many risk and potentials involved in the project which were to be considered by the Real estate developers before investing in the project. As per the terms of bid the developers had to construct free houses for the slum dwellers, and they would be getting the revenue from developing and selling the remaining land in the commercial market. Cost of construction, cost of capital, and the revenue from the sale of land were some the important factors to be analysed before investing in this project.

Further this project was also exposed to Political, Foreign exchange and Execution risk. This case also covers many contradictory arguments in relation to this project such as need for redeveloping slum areas, whether these types of projects had to undertake by Government alone or private sector had to allowed to participate in these projects and further weather such projects had to executed in one go or they had to implemented part by part. In addition, this discussion also covers effect of this redevelopment projects on the business activities undertaken by the various informal entrepreneur’s and weather the Slum dwellers will be permitted to resell their land after redevelopment or they will be compelled to stay in their land. Some other issues discussed in this case are the suitable timing for implementing this project, how the private parties would be able to mitigate the risk involved in this project, and whether this model can be extended to other slums in Asia, in case this project is successful.

Question 1. You are part of Rance Hollen’s team deciding whether to bid and how much to bid. Will you bid minimum, 10% more than the “bidder’s premium”, or walk away from the contest? Why?

Answer: As a part of Rance Hollen’s team I would take the decision of quoting minimum Bid amount. Because if we make a detailed analysis of the project we can understand that investing in this project will be very profitable. As the company will be having most valuable land in its procession along with the development rights of the land, this investment has the potential to generate greater profits for the company since there is greater demand for land. Taking into consideration the fact that property prices in Mumbai are among highest in the world, even though the company has the obligation of constructing the apartment free of cost for the Slum residents, they would be still profitable by making efficient use of the remaining land.

Question 2. What are the important risks and upside potentials in this situation? How might you mitigate the risks?

Answer: Important risks in this situation

• In the year 2009, the real estate prices in India had fallen by nearly 25% and prices were expected to fall further in the future. It was expected that project would take nearly 5-7 years to get complete and the company was not sure about the weather the project would remain profitable, considering this declining trend in the price.
• Modifications made to the original plan and process on the recommendations of the Expert committee formed by the Government may create many difficulties for the company and this committee may continue to have greater influence over the project.
• The state assembly elections of 2009 were also expected to have greater influence over the project. In case the ruling party was out of power, project might be exposed to greater risk as the new party in power may scrap the redevelopment scheme initiated by the previous administration.
• The company has the challenge of making all the stakeholders as an integral part of the project and make them to take the responsible for making the change.
• One of the major risks the company is likely to face by entering into this project is that, the Redevelopment project may be opposed by the Residents of Dharavi and informal entrepreneurs working there in case they feel that they may be forcefully evicted from the place and if they are going to lose their place of work and social interaction.
• Municipal Corporation of greater Mumbai owned about 70% of the land in Dharavi and remaining 30% was owned by State government and other private parties. But ownership of the land still remained questionable and the company had the challenge of dealing with this issue. Upside potential in this situation
• The company has good opportunity to earn greater return on its investments in this project by building the floor spaces and selling them in the commercial market in addition to building the rehibition component for the Residents of Dharavi.
• As real estate prices are highest among the word so the company will earn greater profits by exercising the free-sale component of the project.
• Dharavi is just 20 minutes away from the airport and is located two main railway lines of the city and is also very close to highways so the additional floor spaces created by the company will be having greater demand in the commercial market.
• The company also has an opportunity to lead a public/private development movement which will run over decades and it would create better image for the company in the market. Ways to mitigate the risk involved in the project Informal entrepreneurs residing in Dharavi can be made to support the project by conveying them that the Redevelopment project would focus on converting Dharavi into an industrial hub, so that they can expand and carry out their entrepreneurial work more efficiently. In order to eliminate the complexities involved in land ownership which one of the major hindrances to the Redevelopment project the company may request for the Government intervention and may ask the Government to release all ownership rights to Dharavi Community Land Trust, which would take the responsibility of solving this problem effectively.

The company also has the option of working together with other firms without any hierarchy in order to reduce the overall transaction cost and in addition they can also avoid the risk of loss of reputation because of delays in completing the slum redevelopment project.

Question 3. Are there alternative ways to redevelop slum areas of Mumbai? Why can’t private sector be allowed to do this on their own without paying premiums to Government? What are the pros and cons of allowing private sector participation in this redevelopment? Answer: One of the alternatives to redevelop slum areas in Mumbai is to make reforms to restrictive land regulations which would encourage the private owners to improve their land. There is also a need to increase Floor Space Index of the city which is considerably less when compared with major cities of economically developed countries. Another alternative could be legalising the existing slum communities. Brazil through a policy called Concession of the Real right to Use gave the private ownership to communities living on a publicly owned land. Even though this policy did not give the residents permanent ownership of the land, they were allowed to use their home as a collateral security and were given legal protection.

A similar approach was also followed by the Delhi Government in the year 2007, where in nearly 1500 unauthorised settlements were legalised. Similar approach can also be followed for redeveloping slum areas in Mumbai. Another way could be giving full ownership of the land to the residents at the existing market prices, which would encourage them to sell their land to the developers or improve the sites on their own. Government can encourage various NGOs to take active part in the development of slum areas in the city. Like wise CEMEX a Mexican cement company, private companies in our country can directly approach the slum residents and can think of formulating various programmes which can fulfil their several needs. In case private sectors are allowed to undertake slum redevelopment projects on their own without paying premiums to the Government they Private parties will be able to earn a greater amount of gains from this project and Government would not be able to earn any revenue from this project.

Moreover, Government may not be able to effectively control the activities of Private real estate developers in this project. Pros of allowing private sector participation in this redevelopment

• By allowing private sector participation in this redevelopment project Government would be able to save time and money and it can concentrate on other development projects in the city.
• This also would help in mobilising and more effective utilisation private capital.
• Private sector Real estate developers in association with other partners will be in a position to effetely mitigate various risks involved in this project. Cons of allowing private participation in this redevelopment
• There are high possibilities of Private Real estate developers exploiting the residents of Dharavi to increase their profits.
• Government of Maharashtra may not be in a position to have effective control over the project.

Question 4. Consider the circumstances in similar slums in cities or countries with which you are familiar. What are the similarities and differences? What are the important tactics available to policy makers, investors, and entrepreneurs in these comparatives situations?

Answer: Similar slum redevelopment projects were also undertaken in Singapore by the Government. However, it has to be taken into consideration that there were some notable differences between both the projects in terms of Political, Social, and Economical conditions under which they these projects were taken up. Dharavi has a vibrant social structure, that has developed there over decades, as a result following Community centric approach in slum redevelopment project would be more effective rather than Top-down approach which was followed in Singapore.

Further residents of Dharavi also apposed the idea of constructing high-rise towers, fearing that such structure would adversely affect their business. However, there was no such oppositions from the residents of slum areas in Singapore. Slum development projects in Singapore were executed through Affordable housing policy formulated by Housing Development Board of Singapore. Government of Singapore took actions to clear all the slum areas, in order to Build Affordable public houses. People were allowed to purchase these Flats by making use of the money from Central Provident Fund which is the mandatory saving scheme in the country. These policies used by the Singapore Government in the redevelopment of slums are some of the most important differences in the tactics used in both the projects, which can be taken in to consideration by the policy makers, investors and entrepreneurs.