The recent sealings in Delhi have been carried out due to the non-payment of “use conversion charges”. In common parlance, a “use conversion charge” allows for residential properties along certain earmarked roads to be utilized for commercial purposes.
“Cities have the capability of providing something for everybody, only because, and only when, they are created by everybody” said Jane Jacobs, the noted journalist and urban planning activist, in her book “The Death and Life of Great American Cities”. The dictum is as appropriate for a city such as Delhi as it for other places, where the commercial needs of the city need to be balanced with the residential needs of the citizenry. The recent sealings of commercial markets in Delhi bring to the fore crucial issues revolving around urbanization, regulations, state revenues and commercial needs of an expanding urban population. There are two core issues involved here. The first that mixed use of property, i.e. allowing a part of residential property to be used for commercial purposes creates congestion and the attendant problems, including solid waste management around residential areas. Second, the need for commercial real estate for a city such as Delhi far outstrips the supply of affordable commercial real estate in appropriate quantity and quality.
The recent sealings in Delhi have been carried out due to the non-payment of “use conversion charges”. In common parlance, a “use conversion charge” allows for residential properties along certain earmarked roads to be utilized for commercial purposes. True the sealing of properties cannot be faulted, but it is as much true that land use change charges can be financed in a more efficient manner. Currently there is a “use conversion charge” to be paid along with an annual conversion charge depending on the property location. These charges have varied and have been also waived off at times. Without debating the “ideal charge”, what merits discussion is whether an upfront fee is the right payment structure to finance the change in use of property. An upfront fee creates a huge cost for the business or the landowner given that a lot of the businesses operating in the mixed-use properties are small to medium sized businesses. Such a cost can entail closures and consequent loss in employment. At a very basic level if one gets their property converted with the fee, and an economic slump were to follow one could end up with an unrented property with a significant cost paid upfront. A more practical solution would be modelled around the government land authorities selling one year certificates that allow the use for commercial purposes on a monthly payment basis. These annual certificates can be renewed the year after with inflation adjusted fee hikes priced in. Such a certificate system would encourage fee payment and yet provide a practical solution for smaller businesses to run commercial operations without a significant initial capital outlay. We are not advocating condoning the non-payment of “use conversion charge”, but we are suggesting an alternative model that in the long run serves the interests of the various stakeholders involved.
According to the Master Plan for Delhi – 2021 of the Delhi Development Authority about 4-5% of land in Delhi is available for commercial use and according to a 2014 study conducted by Hoornweg & Pope (at the Global Cities Institute), Delhi is expected to have a population of 36 million people by 2050. Both the data points tell us that there is an urgent requirement to innovate on the creation of commercial real estate in Delhi, since the population will need access to facilities that serve their commercial needs and at once create employment. Policymakers should recognize that sealing and shutting shops may be the right initial step but not a permanent solution to the problems associated with commercial establishments in residential location, because it leads to a reduction of consumption points for consumers, loss of tax revenues for the government and most importantly a loss of employment. Fee waivers are also not a solution since it reduces tax revenues and creates a moral hazard problem of non-fee payers expecting fee waivers in the future. The need is to innovate on the financing aspect of the “use conversion charges” and to enforce policies without demure or recourse.
The second aspect that merits attention is ensuring that even with mixed use of property, residential colonies are habitable and ideal for residents. One idea could be to utilize a certain percentage of the license fee collected from conversion for improvement of the local area in a transparent and structured way. For instance, funds per region can be used for creation of parks, improvement of pavements and creation of parking facilities. We also need to find a way to make residents better aware of how the funds collected are being utilized. Making these funds region specific is important so that regions facing higher commercialization can benefit from a larger fund. The key point is that with increasing urbanization and higher population density, local infrastructure that creates societal value must be funded using a part of the conversion proceeds.
In summary, we argue that granted the economic needs of the people, employment generation capacity of the commercial properties, and the lack of available commercial property, it is important that policymakers think hard about how to create value for the entire ecosystem by using mixed use properties for commercial purposes and the revenue therefrom in cities such as Delhi. Using the right financing mechanism to change property use, creating social value for residents and most importantly implementing and enforcing the policies are essential. Delhi needs both affordable commercial property and liveable residential environment. Finding the right balance is a challenging aim but an aim we must strive for!
(The views expressed in this article are personal and that of the author. The author heads Development Tracks, an infrastructure advisory firm. He can be contacted at firstname.lastname@example.org or @Taponeel on Twitter)