The bills are finally coming due for the residents of Bahria Town Karachi
The suburban sprawl ponzi scheme that is Bahria Town Karachi
At first, we started out real cool
Takin' me places I ain't never been
But now, you're getting comfortable
Ain't doin' those things you did no more
You're slowly makin' me pay for things
— Beyonce (Bills, Bills, Bills)
Do watch the 9-minute video below. Watch it at 1.5x speed, if like me, you are pressed for time.
People often complain that why the rest of the city isn’t like Bahria Town. Not downplaying the corruption element, but to build infrastructure and maintain it, the city municipal services require funding. The funds the city raises from property taxes and fiscal transfers (ignoring corruption) aren’t sufficient to provide the kind of infrastructure that Bahria Town provides.
In lieu of property taxes (I don’t know if Bahria has property taxes) Bahria Town imposes maintenance charges and utility charges to provide and maintain the infrastructure that the residents have come to expect.
In addition, Malik Riaz subsidizes such expenses by raising funds from encroaching on land, china cutting it, and selling it to real estate agents. Such cross-subsidies enable Bahria Town to attract residents with initially low maintenance charges (teaser rates).
As long as Bahria can continue to attract more buyers for its encroached land sales, it can continue using the funds received to finance the maintenance budget and carry on this charade.
This is a model similar to the one followed by Chinese municipalities. The municipalities have been financing their budget by selling land. When the central government cracked down on debt and the land sales model, it sent the municipalities scrambling for other sources of revenue.
Fall in China's $1.3 trln land sales to test local finances, economy
Sagging demand at China's urban land auctions amid a crackdown on borrowing by private developers risks squeezing regional finances, pressuring local governments to scramble for other income sources to fund investments and support the economy.
Malik Riaz has been successful in keeping this model running for a long time. When he runs out of land to encroach and sell/auction in one city, he launches a project in another city, raising significant money by selling forms and pre-selling the land to real estate agents for a discount.
The second post I did on this substack (almost a year ago on Jan 8, 2021) was on Bahria Town Karachi where I showed how Bahria Town was a scam, to begin with.
In my ARY post, I covered how real estate agents/investors/platinum agents (PAs) provide startup capital as well as working capital to developers. The post was about ARY but Bahria has really excelled in this model.
A developer sells booking forms in advance to PAs for cash at a price that is at a discount from the market price. For example, the market price of a form announced by the developer may be Rs.15,000. The developer will sell the forms in bulk to PA for Rs.10,000 cash. This provides developers with cash infusion right away. It motivates the PA to market the project aggressively as they will now get Rs.5,000 whenever a purchaser buys a form from them.
Each form has the name of PA mentioned on it. If the buyer of the form ends up buying an apartment or a plot, the developer gives a kickback from 2%- 5% of the plot/apartment price to the PA.
Developer sells plots/apartments to PA for a discount. In the case of Bahria Town Karachi, the majority of the real estate brokers have bought plots from Bahria. When you buy a plot through an agent, it is technically being sold to you from PA's inventory. PA is making money for the difference between market rate and discount rate.
The developer also sells already pre-approved booking forms to PAs. Reportedly these are apartments that have been taken out of the balloting pool as "PA’s quota". The buyers of these pre-approved forms are guaranteed to receive apartments/plots when 'balloting' is held. Such forms are usually allocated to PAs based on the number of forms they sell providing additional motivation to PAs to sell the maximum number of forms. It is PA's discretion on how he wants to use these forms: sell these at a premium as they are guaranteed to win an apartment or sell them to their most lucrative clients i.e. those that buy the maximum number of forms.
Thus, PAs invest significant capital (buying forms, plots, apartments) and time (marketing and hyping the project). In return, PAs are guaranteed lucrative returns. If you are thinking, PAs are investing their own capital in the business, you couldn't be more wrong. There is one additional manner PAs and real estate agents generally make money. By charging fees for asset management/advisory. All PAs have investors who provide the capital to invest.
The PAs use this capital raised from investors to buy forms/plots/apartments. When the profit is realized, PAs take around 20% of the profit as advisory fees.
Being a PA or real estate agent is a pretty lucrative business. The best part: It is all cash-based and the income that PAs and their investors make is tax-free.
Now that the Bahria sales business is slowing down and inflation is increasing, Bahria cannot rely on form sales and platinum agents to finance its budget.
Let’s introduce the concept of “Growth Ponzi Scheme” or “Suburban Sprawl Ponzi Scheme” which is the raison d’etre for this post. The term Growth Ponzi Scheme was coined by Charles Mahon. He has multiple examples on this page, but these two are relevant for this post.
Suburban Road
A suburban road is in disrepair and needs to be resurfaced. The modest project involves repair of the existing paved surface and the installation of a new, bituminous surface. The total project cost was $354,000. We asked the question: Based on the taxes being paid by the property owners along this road, how long will it take for the city to recoup the cost of this project. The answer: 79 years, and only if the city adjusted upward its budget for capital improvements. For the city to recoup the cost of the repairs from the property owners in the development, an immediate property tax increase of 46% would be needed.
Street Serving High Value Homes
A group of high-value lake properties petition the city to take over their road. They agree to pay the entire cost to build the road -- a little more than $25,000 per lot -- in exchange for the city agreeing to assume the maintenance. As one city official said, "A free road!" We asked the question: How much is the repair cost estimated to be after one life cycle and how does that compare to the amount of revenue from these properties over that same period? The answer is that it will cost an estimated $154,000 to fix the road in 25 years, but the city will only collect $79,000 over that period for road repair. To make the numbers balance, an immediate 25% tax increase is necessary along with annual increases of 3% with all of the added revenue going for road maintenance.
Building shiny infrastructure isn’t enough. Maintaining it is important too, and that isn’t cheap. The shinier the infrastructure, the higher the maintenance cost.
The author concludes it with what I believe perfectly explains Bahria Town residents’ challenge:
This all works fine until the end of one life cycle, when large-scale maintenance or replacement is needed. At that point, the costs vastly exceed the ability of the city to pay.
And this is where the Ponzi scheme aspect kicks in, because what is the solution to this unsolvable problem? In America of the post-WW II era, that's easy: The solution is more growth.
When more growth is created, the city gets excess cash (in the near term). That cash can then be applied to the old obligations. So long as the city continues to grow at ever-accelerating rates, the system works just fine. But like any Ponzi scheme, as soon as the rate of growth slows, it all goes bad very quickly.
Now that rate of growth of Bahria sales has slowed (no cash coming or not coming in at a pace required to maintain a city that is Bahria Town Karachi), Bahria needs to increase the maintenance charges to maintain the infrastructure.
Unlike cities that can rely on fiscal transfers from the provincial or the federal treasury to pay for infrastructure, Bahria can only tap existing residents or launch new sales to pay for this.
In the video, despite appearances to the contrary, the shrewdest person was the one who wanted Bahria to work with Karachi Water and Sewerage Board. He wants the province or Karachi to subsidize his access to piped water. He also wanted all maintenance charges removed. Hahahaha
The below excerpt is from a recent article on the Canadian city of Mississauga, where the growth Ponzi scheme stands on its last legs as Mississauga runs out of new land to sell. This may also be a reason for reportedly inflation being higher in Mississauga than in Pakistan if overseas Pakistanis residing in Mississauga are to be believed, as their property tax rates are on an upward trajectory.
Mississauga a ‘cautionary tale’ as cities sprawl out across Southern Ontario
The basic approach to building out Mississauga was to generate development fees by opening up farmland. This had the twin political benefits of putting growth in places where it didn’t offend existing homeowners, while raising money that could be spread across the city.
But the math never really added up, in part because it costs more to provide many municipal services in less dense areas. Also, once the new infrastructure was built, it became the city’s responsibility to maintain and repair. So [more] new developments were approved, raising more money.
That approach is known in planning circles as “the sprawl Ponzi scheme,” said Ray Tomalty, founder and principal of the consultancy Smart Cities Research Services.
“You need your development in order to pay for the bad decisions that you made previously to allow the city to keep sprawling out and incurring commitments to more and more extensive infrastructure to support that sprawl. … And when the party, you know, when the music stopped and everybody had to grab a chair, there weren’t enough to go around.”
Furthermore,
“The infrastructure [in newly developed areas] that was put in place in a pretty compressed timeframe is coming due for repair and renewal in a pretty compressed time frame, without the waterfall of development charges accompanying it.”
With diminishing prospects for more sprawl – and the associated fees it generated – Mississauga in 2012 instituted a special levy to try to pay down the snowballing bill for infrastructure repairs. Property taxes also started to rise dramatically in the same decade.
This is exactly what is going on in Bahria. If the inflation continues as is and Bahria is not able to attract more funding by encroaching on more land to launch sales on it, then Bahria residents are looking at very rapidly increasing maintenance charges similar to the residents of Mississauga.
Next time, when overseas Pakistanis say that inflation isn’t as high in Pakistan as underseas Pakistanis are making it out to be, we can introduce them to Bahria Town Karachi residents.
UPDATE: