The Jeb Bruggman Interview

I normally don't do interviews related to subjects like urban planning and development but I'm glad I made an exception in this case. Some of Jeb's replies are thought-provoking and although this interview is very info-heavy, it provides an insight into how screwed India's urban planning policies are and how they need to be fixed urgently. Read on.

Off late, in India, people have started aping the West in terms of the way we live. The EMI/mortgage system, for instance, is an example. Do you think that we are blindly aping the West or is it due to economic factors that Indians have also started living this way?

The critical thing about the consumer finance system is that the value of the collateral must be fully understood. Secondly, the balance sheet of the borrower must be fully understood. Let me elaborate on these two points. What happened in the United States' context is that they stopped caring about the true, underlying value of the collateral and used financial risk management to sort of understand other giant bundle of mortgages would fall rather than using the traditional system of mortgage financing where a local bank truly understands the local market and what real value lies in that market. And this was being done at a time when local property markets were changing rapidly in a way that no one was really studying it. For instance, when you shift in building the kind of residencies that you have in say, Delhi, to an entirely different residential life in Gurgaon, the value of the asset (collateral) is not only determined by the base property cost but also by operational and maintainence cost which have changed dramatically. So, a young person living in Gurgaon would also require to own an automobile which changes the cost structure. And that is exactly what's happening in the United States

They're building these suburbs called 'starter mansions' which have central vaccuming, central airconditioning etc. so their maintainence and operational costs are going way up. Plus, they're far away from employment so the mobility costs are going up. And in all of this, the banking system is not re-calculating the balance sheet and P&L (Profit n Loss) account. So in essence banks are just looking at the base cost of the property rather than looking at the cost of living in that property as well.

So basically, they're (banks) looking at it as just one part as opposed to looking at it as a sum of all parts

They're not looking at the eco-system that borrowers have to manage. And the same question needs to be asked of Gurgaon.

But do you think India can sustain this sort of livelihood?

The first thing that needs to be asked is whether India's financing system is even calculating the total cost? Does it determine whether the borrower actually has the means to support the loan? The second issue is India's growth trajectory such that there will be a demographic that has that level of affluence to support such a cost structure. I don't think India knows that yet. To me it seems that the young, rising, middle-class India's consumer profile is not very clear. Are these people going to be savers like their parents? Or are they going to be flagrant, irresponsible spenders?

And how long do you think it'll take to get a clear-cut consumer profile? Are we looking at a specific time-period?

I think it has to be watched through a few business cycles. We've just seen the first business cycle of this demographic. There was some some sort of exuberance and it just amazes me as to how the industry and finance system got caught into it. People went to the US understood the mortgage system there and just planted it over here. Now, there's a downturn and let's see what happens when we come out of it. Consumer preferences may change In the mean time, its not that people shouldn't invest and innovate with new products. But they need to do so within a deeper degree of diligance and not just assume that some standardised risk management models will apply to every circumstance. And the American system shows that even in an extremely mature mortgage finance system, is vulnerable to collapse.

In the past few years both Delhi and Bombay have seen such drastic changes in their demographic and geographic identities as a result of small-town/rural-to-urban migration. Do you think these two mega cities should have dedicated and empowered governments of their own? Delhi does have one but its powers are curtailed.

I'm not sure what's needed to make them (Delhi and Bombay) effective states in the context of federal India. My guess is that it's a political non-starter. But I would argue that mega-cities or any growing city for that matter needs to have a form of government where fiscal and regulatory powers are there in order to shape the development of the city and manage it better in a manner which serves the different population groups in the area. It should also have executive powers which would make it accountable to the electorate. So de-centralisation is critical. There is no way that the central govt. in India can do the kind of innovation it wants to.

About Delhi, I don't know much about the institutions so I can't comment but let's speak about Bombay. It needs a directly elected government. The Chief Minister who manages Bombay is the Chief Minister of the entire state (of Maharashtra) which is very much a rural state as well. Bombay has a unique set of problems which require thousands of innovations; all of which need a financial component, a design component, a planning component, a political component. This just one end of it. At, the other end is the citizen who needs to be looked at like a consumer - the end user - of this product if we can talk in a business sense about it.

And the reason for directly elected governments is that the end-user should be able to give feedback directly to those who allocate resources.In a business, nobody would ever develop a product where there is no real time feedback between the consumer and those who've developed and marketed it. That's a dead business. And what we're creating in the Mumbais of the world is that there is no effective, real-time feedback going on. There is no accountability whatsoever. The result, in an urban context, is that not only do the products fail, there's the additional risk of actual conflict. What they've tried to do is so disruptive to the economic life of a certain segment of the population that their entire livelihood is threatened. So in Mumbai, as I write about it in the book, you have more than half the city living in an informal sector and what allows that to function is the people who take decisions and the decision-making process is not very transparent.

When you say informal sector what exactly do you mean? Are you hinting at Dharavi?

What I mean is more than half of Mumbai lives in slums. Dharavi is the most mature formation of the slums. Its the ultimate development of the slum to a sort of lower-middle class industrial district. Most of these slums are on that pathway of development if they are not disrupted. What are the market's requirements for these enterprises? I think its not quite understood by the people who take decisions to clear the land and redevelop it. And I think it comes out in quite stupid notions that when you redevelop a slum area and tear down what exists there, nobody bothers to think that the primary utility which the slumdweller wants is the space to do their livelihood, to do their business. For them the sleeping space, the kitchen space are in some respects secondary. So when these slumdwellers are given 250 sq ft. of space to eat and sleep in, its of no use to them. What they want is a place to work in.

So in a business sense there's no insight into what the consumer needs.

I recently read a media report which said that people are giving up well-paying jobs in urban India - in the Gurgaons and Noidas- and going to rural areas to work there. Buying farmland, starting NGO's etc. Do you think that this is a peril or the flip-side to an urban revolution? That life is a lot more meaningful than working in a glass-n-steel structure and earning lots of money.

That sounds to me like a particular demographic which is a very small percentage of India

Yes, but do you think that this percentage might increase in the next few years?

Not in a way, that it will even register because we have this phenomenon as well in Europe and America. It tends to be professionals who've already made it and they have a hefty balance sheet. Whereas in India most professionals are spending time getting their balance sheet in order. Its the hefty balance sheet which these people have which allows them to make investments - in a market sense - they can take risks. These are lifestyle oriented experiments more than market oriented experiments. And, in fact, I would argue that it is one of the benefits of urbanisation in India is that you have a demographic which creates businesses in urban markets, creates capital, becomes succesful and then bring all of it back to rural markets. They're agents of rural development.

One of the most controversial issues recently in rural-urban development has been the advent of SEZ's (Special Economic Zones) in India. Do you think the manner in which we are developing our SEZs? Are policymakers factoring in the consequences SEZ's will have on rural India?

I think India should aim for more than SEZs. SEZ is a very blunt instrument which creates a space for some outsiders to make money. And I think thats just a way of making companies attract investments.

So what you're saying is that SEZs just benefit a small number of congolomerates?

No, no, no. Look I think India has gone beyond the need to just create a space for the pure interest of getting FDI. There's already a lot of FDI interest in India so you should get a little more choosy. Let's get FDI which actually works for India's policy interests rather than putting policy interests in place which accept just any sort of foreign money that comes in. What China did with SEZs was very important because you had a closed economy and a lot of doubts among the capitalists about whether could find a match with a Communist economy. SEZs were created with the thiking that 'come and do what you want to and we won't get in your wat'. India doesn't have much to benefit from that. What Indians ought to do is say 'we'll relax the rules, but what you have to do is build an industrial district or a new city that is designed to achieve a set of policy interests for our country' In other words, put the burden on the investment to engage with the government in creating something that really adds value to India in the long-term rather than the desparate opening up of a space. Indian companies have a very hefty balance sheet and are buying companies all over the world so why are you selling yourself cheap?

So if you were given a chance to improvise on India's SEZ policy, what would changes would you make?

I would require that the set of urban designs passes extremely high standards in terms of not just buildings but services and infrastructure and also in terms of standards for how a financially viable lifestyle can be created for the people who live there and an efficient urban area so that the State doesn't have to come in and bail it out at some point because the private sector is willing to do just the least common denominator of things.

You talk a lot about how SEZs etc. will help benefit people who come and live there and those who invest there. But what about those whose land is being taken away? There was a huge controversy regarding SEZs in West Bengal as a result of which the Reliance SEZ has been put on hold. How should these people be accomodated?

In the case of West Bengal, it showed a lack of sense of urbanism on the part of Tata. It shows how the business elite of India is still so unfamiliar about an urbanising society because there was every opportunity there to design something which would've uplifted the former landowners. Not only to give them a place to have a better life but also to make them shareholders in the upcoming system. Instead, landowners were just being given money and were told to simply move out which was the wrong thing to do.

Do you think the Indian government has realised that this is the wrong way to do things and that this method of simply purchasing the land won't work?

My sense is that the Indian voter, in 2 elections now, has told the government that they need to get innovative and that this way of working is not acceptable to them anymore. And I do see signals coming out of the new government that they want to do things differently - even to the extent of figuring out how to deal with slums. For the first time, one's starting to hear conversation about that in India. So the slum dweller is a citizen and the government is thinking of ways to bring them into the fold.

Lastly, what is your prediction for India's economy and its urban development system for the next 20 years?

On the one hand what I see is a country of incredible talent and drive. I love coming and working in India because there's not only a dedication amongst professionals and middle-class to a high standard of education but there's an incredible work ethic and there's native entrepreneurialism. And it has the capital to translate innovation into reality. What stands in India's way is a kind of top-down thinking; whether it comes from corporate heads or from government - that there is a standardised set of solutions to fix the country. That has to change. India needs to stop and take a breath and create a decentralised space - a sort of national laboratory - to figure out how to make India the most responsive and resource-efficient country in the world - both to the citizen and the end user.

(A slightly different and well-edited version of this interview can be read here)