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In India, a cautionary tale of private-sector urbanization

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Lavasa, India

As you pass the last of the dusty, forlorn hamlets and begin the steep climb along hairpin curves carved into the newly reforested hillsides, then over the crest and down toward the town of pastel-colored buildings arrayed along the lake below, you might think you are in Italy, not India.

In fact, you are entering one of this country’s biggest and boldest development projects, the first of five new urban villages to be nestled among 23,000 acres of hill country between sprawling Mumbai and the booming industrial and high-tech city of Pune. When construction is completed more than a decade from now, 300,000 people are expected to live and work and study here, with an additional 2 million visiting each year.

The master plan, created by HOK of St. Louis, calls for 60,000 homes, rental apartments and retirement bungalows, half a dozen hotels, a glitzy convention center, a hospital, schools and colleges, recreational attractions, offices, shops and enclosed malls, all tied together by networks of roads, water and sewer lines, public transit and high-speed broadband connections. The total cost is expected to exceed $10 billion, virtually all of it private investment.

If India is going to continue to climb up the economic ladder, expanding old cities, and creating new ones like this, is crucial. Every country that has achieved middle-income status has done so by moving large numbers of people away from low-productivity farming and into urbanized areas where they can earn the higher incomes that come with specialization, trade and economies of scale.

A recent study by McKinsey & Co. found that India’s urban areas will have to absorb 250 million new residents during the next 20 years. That’s the equivalent of relocating 83 percent of the entire U.S. population. Only China has experienced urbanization of this scale and speed.

While China’s authoritarian system of governance has been well-suited for forcing and managing such a transformation, India’s might be the worst. City governments have limited power, no independent taxing authority, poorly trained public officials and absolutely no tradition of urban planning. Even minute land-use decisions are made by huge state governments whose political fortunes are tied to placating rural rather than urban voters.

As a result, basic urban infrastructure and services have failed to keep up with the influx of villagers migrating to cities. In the biggest cities, the majority of the population lives in overcrowded slums that squat next to gleaming new office towers and apartments. Even seemingly modern new edge cities, such as Guragaon outside of Delhi, have sprung up overnight without municipal sewer and water systems, let alone a rationale street plan.

Perhaps the biggest obstacle to further urbanization, however, is the challenge of assembling large parcels of land for development. Indian land records are a mess. And laws make it difficult, if not impossible, to buy agricultural land for any other use. A political backlash developed in the wake of stories of villagers conned into selling out at below-market prices by unscrupulous land aggregators. Everyone knows it’s better to hold out for tomorrow’s higher prices, driving land values in major Indian cities to some of the highest in the world.

“In the development process, the key political issue is who captures the value of the land,” said Rajiv Lall, chief executive of IDFC, one of India’s largest infrastructure finance companies. In China, Lall says, it is the state, which reinvests it in infrastructure. In India, it is privatized by farmers and land aggregators.

Lavasa could provide a model for working around many of these problems. The project is the brainchild and obsession of Ajit Gulabchand, chief executive of Hindustan Construction Co., which for most of its 90 years has concentrated on big public-works projects such as bridges, dams and nuclear power plants. Although he retains some of the rough edges of a building contractor, Gulabchand loves sitting in his cavernous office in HCC’s spectacular new headquarters in Mumbai and riff on global finance, Indian politics and urban planning. He travels by Porsche and helicopter, favors jeans to suits and, unlike most other members of the Mumbai corporate elite, is not shy about speaking his mind in public.

Gulabchand launched his Lavasa project more than a decade ago, when the state of Maharashtra solicited proposals for development of “hill stations” to attract tourists and weekenders. The state designated the areas to be developed, but left it to HCC to acquire the land and finance the project. A special zoning status expedited the arcane and often corrupt government approval process.

Before HCC’s arrival, there were 18 small villages in the Lavasa area with 3,000 inhabitants, most of whom scratched out a meager existence growing sugar cane and cutting trees for charcoal. Much of the land was owned by “farmers” who had moved to urban areas and were only too happy to sell out.

It was only after planning started that Gulabchand began to envision Lavasa more as a new hill city than a hill town. He poured hundreds of millions of dollars into land acquisition, planning and infrastructure and began attracting corporate partners to develop the hotels, schools, medical facilities and nursing homes. He hired an American city manager, Scot Wrighton, to guide development and provide city services until some form of city government could be chartered. To pay for those services, fees were written into land titles and lease agreements, along with a transfer fee that will give HCC a steady flow of profits even after most of the project is sold.

As of last summer, Lavasa was moving ahead full steam. Hotels and shops and schools had begun to open while 10,000 construction workers worked on 50 new structures. The entire first town was sold out. It was only then that a small group of self-styled public interest advocates, working from a well-worn political playbook, began accusing HCC of raping the environment, stealing the land and displacing protected tribal communities.

The accusations were groundless, as anyone who has taken the trouble to visit the site would quickly conclude. From almost any standpoint — social, environmental, economic — Lavasa is a huge improvement over what was there before. Instead of slash-and-burn agriculture, HCC has planted 600,000 trees and built hundreds of miles of drainage ditches to prevent erosion. It directly employs 500 villagers, with dozens of others busily engaged in selling food and other necessities to construction workers. Every village child below the third grade is now bused daily to a school that provides education, two meals, uniforms and medical attention at no charge, with an additional grade added every year.

Still, the accusations made headlines in a country where voters remain distrustful of private-sector development and ambivalent about urbanization. The new national environment minister, who was also making a name for himself by blocking construction of giant foreign-owned steel and aluminum plants elsewhere in the country, stepped in. Citing widespread environmental damage and lack of approvals, he ordered all construction at Lavasa to cease and everything that had been built to be torn down. Only later would his lawyers acknowledge that the same department had granted dozens of approvals for the projects over the years, and that no ranking official of the department had visited Lavasa to see the alleged environmental damage first hand.

Four months later, the matter is still tied up in the Indian courts. An initial stock offering for the project had to be canceled after HCC’s stock price fell by half, and the company now says it is losing $1 million a day while construction is shut down. Rather than providing a model for how to build and finance new cities, Lavasa has become a cautionary tale about urbanization in India.

That said, there is certainly a legitimate critique to be made of the private-sector approach to urbanization, which like Lavasa or Guragaon tends to focus on creating entirely new cities on green-field sites.

To some, it may seem crazy to look to the hopelessly over-crowded and unmanageable cities of Mumbai and Calcutta to absorb millions. But others argue that, for all their problems, big Indian cities are doing what great cities have always done — providing millions of poor and ambitious people an entry point into the modern economy.

Where some of us see squalid slums, others see an ecosystem of temporary housing, small-scale entrepreneurship and information sharing, all of it held together by mutual support and a collective will to survive and prosper. Just as Victorian London had its East End and New York its Lower East Side, Mumbai’s Dharavi is a place where each generation of slum dog millionaires plots its future, where talent and ambition is routed into the formal economy.

“Indian slums are not like today’s American slums,” author and former banker Sanjeev Sanyal says. “They are places of hope, not hopelessness.”

“If you strive for too much formality, if you try to clean things up too much, you might end up with cities that are dysfunctional in a different way,” says Partha Mukhopadhyay, of the Center for Policy Research, a New Delhi think tank. “The oddness of the fabric is what makes Indian cities work.”

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