01 Mar 2010
Slum for Sale
A New Development Paradigmby Julia HannaTopics:
Located in Mumbai, India, Dharavi is home to an estimated 700,000 people living on just 551 acres. Featured in the 2008 Oscar-winning film Slumdog Millionaire, Dharavi embodies the characteristics of a slum as defined by the United Nations: inadequate access to safe water and sanitation, poorly built housing, overcrowding, and insecure residential status (i.e., most people hold no legal title to their property). Despite these difficult conditions, Dharavi’s residents occupy a centrally located parcel of land in a rapidly growing city of some 14 million people with one of the highest real estate values in the world.
In “Dharavi: Developing Asia’s Largest Slum,” HBS assistant professor Lakshmi Iyer and lecturer John Macomber detail the history of Dharavi and examine ongoing efforts to forge a public-private partnership between the state government and for-profit developers. The goal is to transform Dharavi into a neighborhood offering desirable, market-rate residential and commercial real estate while providing its longtime residents with free housing and improved services in the same area. Written with the assistance of Namrata Arora, a research associate at the HBS India Research Center, the case considers the potential risks and rewards of approaching an area like Dharavi with a new model in mind: slums as lucrative and socially entrepreneurial business opportunities.
“The basic idea is that the slum dwellers are living on very valuable land in one- or two-story shacks,” says Iyer. “If you build multistory buildings, you can give them accommodation and still have space to sell so that it will be a for-profit project.”
When the case opens, a fictitious developer, Rance Hollen, is at a critical juncture: Weighing the cost of capital, construction, and expected market prices for developed units, should Hollen meet the government’s minimum bid for one of five development contracts, submit a proposal well above minimum, or walk away entirely? The case’s calculations show a potential rate of return as high as 40 percent, but there are significant hurdles to clear, too.
For one, private investors could find themselves at the whim of the Maha-rashtra state government, which is itself often swayed by powerful blocks of voters in slums such as Dharavi. And with the daunting prospect of determining which residents would receive 300 square feet of free housing (limited to families in residence before January 2000), it’s easy to imagine a nightmarish scenario of unpopular evictions and shutdowns of thriving, unregistered businesses that would quickly turn public opinion against the project.
“Government is not one person, obviously; it’s many people with many agendas, particularly in India,” says Iyer. “That’s why this project has been starting and stopping.” (Plans for the redevelopment were launched in 2004; expressions of interest were invited in June 2007, but in July 2009, the government postponed the call for bids just a few hours before deadline.)
The case elicited a broad range of student responses when HBS associate professor Gunnar Trumbull taught it for the first time last December in the elective course Managing International Trade and Investment. Some said flatly that they would walk away from the deal, while others thought that it was a worthwhile risk to take, particularly since the project could inspire similar such developments. (In fact, two other projects are under way and progressing more quickly in other parts of India.)
Whatever the final outcome of the Dharavi project, the issues it raises are not going away anytime soon, with 200 million people expected to move from the Indian countryside to New Delhi, Kolkata, and Mumbai over the next ten years. “There are three huge trends occurring in the lifetimes of our students: urbanization, resource scarcity, and the private financing of public infrastructure,” remarks Macomber. “When those three factors come together they alter conventional conceptions of ‘real estate’ and the built environment.” Dharavi brings students face-to-face with the realities (and potential opportunities) of that change, however bullish or bearish they may be on the role of public-private partnerships in tackling one of the world’s most troubling problems.