Friday, August 08, 2008

Inefficient rain planning

India is famous for monsoons. Last month I was in Delhi and lamented the lack of city planning for rains. Here is an even more personal account of the inefficiency in the building markets in India. Four years back my parents contracted with a builder to build a house. This is in Hyderabad which is notorious for heavy downpours almost everyday between June and November. So you would imagine that the weather proofing of houses is pretty much a well developed technology. Wrong! After paying the builder close to $30,000 which is a lot of money for a middle class family in India (actually its several years' salary for my dad) we find that even the most basic weather proofing has not been done on this house. Its been raining since yesterday afternoon and water is actually seeping through the walls, and dripping and pouring into the house. I never imagined something like this would happen, especially to a willing-to-pay-for-quality middle income household in India. there is no legal recourse because there are no such guarantees. I know in the US builders give guarantees for roofs, walls etc, not here no siree!! The solution is to spend $2500 out of our pocket to fix it, and it cannot be fixed until the rains stop which means we have to live in a flooding house for another 4 months. What is appalling is that this seems to be common practice, and people are ok with it. In fact the owners of the apartments in this complex are willing to defend the builder cause they believe they would have been worse off in the absence of their ownership and living in this complex.
The builder's inefficiency is what is argued as market failure by people (and an excuse for government intervention in the building markets). I believe the failure is that of the government who for years have regulated the building industry to prevent efficient small and big players to enter the market by keeping prices of building materials artificially low and norms so silly that no entrepreneur in his right mind would venture into this. The only kind the building industry has attracted is the rent seeking type who have found ample opportunity for gains. There is no market failure. There is simply information asymmetry and we have been unable to find the guys with the right experience and knowledge. Since there is sufficient competition in the market, especially since demand for housing is increasing faster than supply of qualified builders there is bound to be such problems. Knowledge is the biggest problem in this market. There is an entrepreneurial opportunity here for a firm to simply engage in collecting knowledge about efficient builders and sell it to potential home owners for a fee, something like the CARFAX report. There are so much profits to be made in this market. But yeah! Until then we have to contend with a market that is inefficient due to knowledge problems and political intervention.

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