The Hindu Business Line : Marry growth with goodwill

Large Industrial Projects or LIP must be wedded with Providing Urban amenities in Rural Areas or PURA, for Sustainable Enhanced Economic Development, the true return on investment, says P.V. INDIRESAN.

The Tatas have all but abandoned their Rs 2,500-crore titanium project in Tamil Nadu. Ostensibly, excessive price demanded for land is the reason. That is unlikely to be the real issue: A cost increase of a hundred crore will not kill a Rs 2,500-crore project. Political corruption and social obstruction are probably more to blame.

Why do people listen to corrupt politicians and self-serving social activists and not to firms with impeccable reputation as the Tatas? Partly because the motives of the rich are always suspect. Mrs Sudha Murthy of Infosys writes of her experience in installing sanitary facilities in pilgrim centres.

In order to instil a sense of discipline, she had imposed a nominal charge for the use of those facilities. Instead of appreciating her charity, local people spread a rumour that a very rich woman from Bangalore had constructed the facilities to make more money for herself. Like Krishna in the story of the Syamantaka Mani, rich people have a cross to bear: they are ever liable to be wrongly suspected.

At the same time, entrepreneurs too should do some introspection: Even as their good intentions are suspected, canards by corrupt politicians and social activists are believed because most of the time Large Industrial Projects (LIPs) are designed to maximise Return on Investment, not to generate goodwill, let alone maximise it.

Attract the honey bees

In this connection, Adam Smith is often quoted mistakenly. His famous sentence on butcher’s self interest giving us our daily bread is preceded by “ . . he has no other means of engaging them to act according to his inclinations, endeavours by every servile and fawning attention to obtain their good will.” Industrialists do not offer “servile and fawning attention” to the people whose lands they want to acquire; they do not do enough to earn goodwill.

LIPs that concentrate more on Return on Investment than on goodwill may be compared to a sturdy tree that offers no flowers; hence, attracts no honey bees. In direct contrast, PURA — Providing Urban amenities in Rural Areas — enjoys considerable goodwill among villagers: few villagers, if any, will object to better quality services. However, PURA cannot survive on its own; it needs an external base of middle-class customers. Therefore, PURA is like a creeper that has fragrant flowers which honey bees love but, in the absence of external support, cannot spread or sustain on its own.

A smart marriage

For this reason, in recent weeks, some interest is developing in a marriage of LIP and PURA: With that matrimonial alliance, LIP will produce the customers that PURA needs. In turn, PURA will provide the goodwill that LIPs lack.

Promoters of LIPs face two choices. (a) Organise housing for employees or (b) take the view: “I am not my brother’s keeper. My responsibility ends when I pay market-determined wages. What they get or cannot get with that wage is none of my business.” In the latter case, employees are compelled to reside in a nearby large city paying a heavy penalty in the form of high rents and commuting costs.

Alternately, the entrepreneur may interest a real-estate developer to build a housing colony close by. Then employees enjoy low rents; waste less time and money in commuting. Then, without any additional expenditure of money, the entrepreneur earns much goodwill. As a bonus, improved living conditions will decrease employee turnover.

A chance to spread goodwill

Any real-estate developer who organises a housing estate for an LIP has two choices: The estate may be gated and confined to employees only or it may be open and accommodate those who provide incidental services — from poor domestic servants to rich merchants. The real-estate developer can take the view, ‘I will maximise my returns and minimise my risk by building exclusively for rich employees.’ In that case, those left out will create unsightly, unhygienic slums on the boundaries of the housing estate. They will often be resentful. Both ways, they will lower property values.

On the other hand, the real-estate developer may accommodate even domestic servants and street vendors at prices they can afford by charging them marginal prices. That way, he will incur no financial loss; instead he will earn goodwill; as a bonus, there will be less expense in policing the estate, less damage to property values.

The real-estate developer has two additional choices: Accommodate everyone in one large compound or distribute — on the PURA model — the dwellings among several villages wherever land is infertile and prices are low. With the former option, the developer has more control; security guards in fancy uniforms inspire awe. In the latter case, more villages and many more villagers benefit. Costs are less, goodwill is greater.

If the real-estate developer opts to distribute development among several villages, he has two options: He can seek the cheapest land available. Alternately, he can copy the way the Dharavi slum is being modernised: He can rebuild existing rural habitations (which too are slums), convert them into modern habitations with space for newcomers too. Newcomers meet the cost both for themselves and for old inhabitants. Villagers get better dwellings, protected water supply, modern sanitation, stable power supply, better roads, schools, nursing homes and markets — everything built to attract middle-class employees of the LIP. Participating villagers may even get dakshina, some money on top of a brand new dwelling.

Chhattisgarh has embarked on this form of integrating old villagers with newcomers, providing villagers dwellings with a full complement of urban services free of cost. That is an experiment worth emulating.

Transparent competition

In order to earn goodwill, we need not confine ourselves to the ‘servile and fawning attention’ that Adam Smith recommends. We can take the next piece of his advice: try competition. Transparent competition is no less important for goodwill.

Let us consider a real-estate developer who approaches some 30-50 villages and invites them to bid to get the amenities of PURA by subscribing whatever land or space; they can specify the price too. After two-three rounds of bidding, the real-estate developer chooses the best offers from 10 or 12 villages.

The auction is transparent. No villager can complain because what land is offered and at what price is entirely decided by the villagers themselves. The final choice depends on how well they compete.

SEED of development

I call this model SEED — Sustainable Enhanced Economic Development. SEED has three stakeholders: One, the LIP entrepreneur who contracts with a real-estate developer to build a housing colony for employees.

Two, the real-estate developer: he contracts with villagers for space to develop well appointed housing colonies. The colonies will be relatively small habitations, small enough not to damage rural ambience. Three, villagers: They auction their space (their homes even if they so like) to secure, in return, modern dwellings with affordable access to all urban amenities — which they cannot even dream of otherwise.

Goodwill is the coin of harmonious development. SEED maximises goodwill for all three stakeholders. It can maximise profits too for each one of them. However, there is one catch.

(To be continued)

(The author is a former Director, IIT Madras. Response may be sent to indiresan@gmail.com)

This is 225th in the Vision 2020 series. The last article was published on April 14.

More Stories on : New Projects | Vision 2020

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