Builders in the private sector: a case study of Bangalore, India

In the past two decades, studies of the the third world have typically distinguished not only public from private sector housing, but also formal or legal housing from popular or informal housing. It is often assumed that formal housing differs from informal housing not only in its legal status but also in its construction methods, standards and materials. The distinction is then used as a basis for policy. However, very little research has been conducted on housing supply and residential construction in the third world to test this assertion.

This paper argues that this distinction between the private formal and the private informal sectors is arbitrary and unsuitable for the analysis of housing supply. In reality it is only the absence or presence of the building permit that classifies housing as formal and informal, and not the manner in which the construction is organized. Firms in both the sectors use the same production factors. Inputs such as labor, building materials and in some cases finance for the formal houses come from the informal sector and vice versa.

To test this hypothesis, we have conducted an empirical study of the housing supply in one Indian city, Bangalore. The study is based on interviews with personnel associated with different aspects of the construction industry, and on data obtained from official city development authorities. Interviews with building contractors, construction workers, and materials suppliers corroborated the statement that the private formal and the private informal sectors are more intricately interrelated than suggested by conventional distinction. We found that:

Houses with a building permit are often built by informal contractors using materials and labor from informal sources. The laborers are employed by contractors in both the private formal and the private informal sector to perform similar tasks at similar wages. A given building material supplier very often caters to the formal as well as the informal markets. In many instances we find informal housing units which have been added on top of formal units.

Policy-making has hitherto been based on a distinction between formal and informal units. Although the informal sector plays the key role in housing supply in Bangalore, the government has not addressed the needs of this sector while formulating housing policies. For example, since “informal” units lack building permits, they are unable to get formal financing or access to subsidized building materials. Water and sewage connections are restricted to “formal units,” yet electricity is provided to all units that pay a deposit. Our findings put such arbitrary distinctions into question as a guide to policy.