Assessment of the UN-HABITAT
SlumUpgrading Facility
FinalReport
Submitted to
Swedish International Development Cooperation Agency (Sida)
May 24, 2006
Prepared By
PM Global Infrastructure Inc
1
PM Global Infrastructure Inc.
Assessment of the UN-HABITAT Slum Upgrading Facility / May 24, 2006Assessment of the UN-HABITAT
Slum Upgrading Facility
Final Report
Table of Contents
Table of Contents
Acronyms
Executive Summary
1Introduction
1.1Study Background
1.2Objectives of the Study
1.3Basic Approach
1.4Outline of the Report
2Urbanization and the Financial Challenge
2.1The Urban Setting
2.2The Financial Challenge
2.3Mobilizing Local Resources for Housing
2.4Mobilizing Local Resources for Municipal Infrastructure
2.5Risk Mitigation Strategies
2.6The Role of Credit Enhancements
2.7The Rationale for SUF
3The Need for a Slum Upgrading Facility
3.1Slum Upgrading Experiences
3.2Donor Support for Slum Upgrading
3.3The Objective of SUF
4The Slum Upgrading Facility
4.1SUF’s Functions
4.2SUF’s Clients
4.3SUF Organization
5The Pilot Program
5.1The Contracting Out Solution
5.2The Selected Team
5.3The Pilot Operations
5.4The Operations Manual
5.5Coordination Issues and Other Issues
6SUF Budget and Work Program
6.1General Considerations
6.2Work Plan and Staffing Considerations
6.3Tentative 3-Year Budget
7Other Issues
8Benefits and Risks
8.1Benefits of Slum Upgrading
8.2The Benefits of SUF
8.3Main Risk Factors
9Conclusions and Recommendations
ANNEX 1: Terms of Reference
ANNEX 2: SUF Pilot Operations
ANNEX 3: Persons Met or Interviewed
Text Tables
Table 1: Technical Assistance and Small Grant Facilities Part 1
Table 2: Technical Assistance and Small Grant Facilities Part 2
Table 3: Indicative Budget for SUF in 2008 (US$)
Text Boxes
Box 1: SUF Implementation Phases
Box 2: Are Mortgage Loans Right for the Urban Poor?
Box 3: The Community Led Infrastructure Financing Facility (CLIFF)
Box 4: Common Types of Credit Enhancements
Box 5: The Kampung Improvement Program in Indonesia
Box 6: Pilot Phase Terminology
Text Figures
Figure 1: SUF's Development Partners
Figure 2: The Organizational Context of SUF
Acronyms
ADB / Asian Development BankCBO / Community based organization
CGAP / Consultative Group to Assist the Poorest
CLIFF / Community Led Infrastructure Financing Facility
CODI / Community Organizations Development Institute (Thailand)
DCA / Development Credit Authority (USAID guarantee program)
DFI / Development finance institution
DFID / Department for International Development (UK)
EAIF / Emerging Africa Infrastructure Fund
ECA / Export credit agency
FIRST / Financial Sector Reform and Strengthening Initiative
GDP / Gross domestic product
GEF / Global Environmental Facility
Habitat Foundation / The United Nations Habitat and Human Settlements Foundation
HDFC / Housing Development Finance Corporation (India)
HFI / Housing finance institution
HI / Homeless International, an NGO
IBRD / International Bank for Reconstruction and Development (the World Bank)
IDA / International Development Association
IDB / Inter-American Development Bank
IFC / International Finance Corporation
INR / Indian Rupees
IULA / International Union of Local Authorities
LGUGC / Local Government Unit Guarantee Corporation (Philippines)
MDB / Municipal Development Bank
MDG / Millennium Development Goal
MFI / Micro-finance institution
MM / Mahila Milan (an Indian NGO)
NGO / Non-governmental organization
NSDF / National Slum Dwellers Federation (India)
Nurcha / National Urban Reconstruction and Housing Agency (S. Africa)
O&M / Operation and maintenance
ODA / Official Development Assistance
OPP / Orangi Pilot Project (Pakistan)
PIDG / Private Infrastructure Development Group
PIDG-TAF / PIDG’s Technical Assistance Facility
PM Global / PM Global Infrastructure Inc.
PMU / SUF Program Management Unit
PPIAF / Public-Private Infrastructure Advisory Facility
RFP / Request for Proposals
SEWA / Self-Employed Women’s Association (India)
Sida / Swedish International Development Cooperation Agency
SPARC / Society for the Promotion of Area Resources Centres (India)
SPV / Special Purpose Vehicle
SUF / Slum Upgrading Facility
SUF-DT / SUF Design Team
SUF-PMU / SUF Programme Management Unit
SUF-PT / SUF Pilot Team
TA / Technical assistance
TOR / Terms of Reference
UCDO / Urban Community Development Office (Thailand)
UMP / Urban Management Programme
UNCHS / United Nations Centre for Human Settlements (Habitat)
Since 2002 known as UN-HABITAT
UNDP / United Nations Development Program
UN-HABITAT / United Nations Human Settlements Programme
USAID / US Agency for International Development
1
PM Global Infrastructure Inc.
Assessment of the UN-HABITAT Slum Upgrading Facility / May 24, 2006Assessment of the UN-HABITAT
Slum Upgrading Facility
Final Report
Executive Summary
Background
Governments in the developing world find it difficult to cope with unprecedented urban growth. The most visible signs of their failure to manage this process are the mushrooming slum areas that permeate the larger cities. About one billion people—or some 40% of the urban population—live precariously in these settlements and, if present trends continue, the number of slum dwellers will increase to around 1,600 million by 2020. The situation is most acute in Sub-Saharan Africa and South-Central Asia, where around 70 % and 60 % of the urban population, respectively, live in slums.
Given the well-established links between poverty and inadequate housing and related infrastructure, the international community has given increased importance to upgrading existing slums and slowing down the creation of new ones. Indeed, at the UN Millennium Summit in September 2000, world leaders pledged to achieve a significant improvement in the lives of at least 100 million slum dwellers by the year 2020 (MDG Target 11). They have also agreed to cut in half the number of people without safe drinking water and basic sanitation facilities by 2015 (MDG target 10).
Slums are not only the result of urban poverty but also the product of failed policies, poor governance, inappropriate legal and regulatory frameworks, dysfunctional land markets, unresponsive financial systems, and—last but not least—a lack of political will. Thus, the slum problem in developing countries needs to be tackled in many different ways. First, the growth of slums needs to be slowed down and eventually stopped through legal and land market reforms (in part to provide security of tenure) and revamping zoning and regulations and building codes to make housing more affordable. Improved access to credit for housing construction and increased public sector infrastructure investments are essential elements in any strategy to prevent and upgrade slums.
The financing needs for addressing the slum problem are massive and external financing from donors and private investors and lenders can play only a minor role. Thus, the bulk of the financing has to be mobilized locally. Unfortunately, the urban poor and municipalities in low and lower middle income countries have virtually no access to credit. Indeed, in most of Sub-Saharan Africa only a few percent of the urban population has access to mortgage loans for home construction or home purchases. Local governments have little resources available for investments. The fact that the urban poor and the middle class as well as municipalities are regarded as not creditworthy does not mean that they can not or will not repay loans. Rather it is because lenders (commercial banks or capital market institutions) can not assess and mitigate the risks associated with lending to the urban poor or to municipalities. To make the urban poor and municipalities “bankable” requires the development of new financial instruments and a high degree of “financial engineering.”
Over the last half-dozen years, a number of donor initiatives have been established to help mitigate the risk associated with lending to people and organizations—especially municipalities—that earlier had no access to credit. Under its Development Credit Authority (DCA), USAID has provided guarantees for loans to micro finance institutions and municipalities. The Private Infrastructure Development Group (PIDG—comprising a number of European donors) has established GuarantCo that provides guarantees in support of local currency borrowings by private infrastructure developers and municipalities. Sida and some other bilateral donors have guarantee programs that can be used to support housing and urban development projects. IFC, in cooperation with the World Bank, has set up a Municipal Fund that can provide guarantees for local government borrowings. The Community Led Infrastructure Financing Facility (CLIFF)and organizations like ACCION have also demonstrated the viability of using guarantees to help mobilize financing for low-income housing and slum upgrading.
Making slum upgrading schemes “bankable” (i.e. able to attract commercial financing) requires creative use of targeted subsidies, the formation of “special purpose vehicles” (i.e. organizations that undertake parts of a project in a financially viable manner and are creditworthy), “financial engineering” to attract financing from various sources, development of new financial instruments, and reshaping of project plans to minimize risks. The approach will have to vary from country to country and from project to project. However, no organization (donor supported or commercial) exist that can provide advice to slum dwellers and municipalities on how to go about doing this.
The Slum Upgrading Facility(SUF)
This realization led UN-HABITAT in 2003 to commission a study (financed by DFID and Sida) concerning the feasibility of establishing of a Slum Upgrading Facility (SUF) that could play a catalytic role in mobilizing local financing for slum upgrading, low-income housing, and related infrastructure for the urban poor. After consultations with potential donors and the Cities Alliance, a SUF Design Team (SUF-DT) was established in September 2004. The SUF-DT undertook scoping missions to ten countries, verified that there was a need for an institution like SUF and identified a number of pilot operations in four countries (Indonesia, Ghana, Sri Lanka and Tanzania). A comprehensive Operations Manual was developed and a team of consultants were recruited.
The consultant team is lead by Emerging Markets Group, a major international firm specializing in financial markets development but with broad expertise also in areas like municipal finance and micro finance. The team also includes veteran consultants with extensive experience in slum upgrading, housing finance as well as private-public partnerships and infrastructure project finance. Indeed, in both slum upgrading and housing finance, the senior staff is “top-notch.” Overall, the team is very strong.
SUF is now ready to go into the Pilot Phase (expected to last 2-1/2 to 3 years—see chart below). UN-HABITAT has obtained US$10 million from DFID but is seeking more money from the donor community. The purpose of this report, which was commissioned by Sida, is to review the progress so far, examine the proposed operations of SUF during the Pilot Phase, assess the financial resources needed, make an overall evaluation of the benefits and risks associated with SUF during the Pilot Phase, and make appropriate recommendations regarding Sida’s eventual financing and the future operations of the Facility.
This report is based on: (i) a review of the original feasibility study and all relevant documents that were prepared during the design phase, including (but not limited to) the Operations Manual, scoping papers, trip reports, country strategy papers, progress reports, budget proposals and the proposal by the winning consortium for the SUF-PT; (ii) visits to two of the four identified pilot countries (Sri Lanka and Tanzania); (iii) interviews with UN-HABITAT staff at the headquarters in Nairobi as well as interviews with other people familiar with SUF; and (iv) a mapping of related donor initiatives.
Chart: SUF Implementation Phases
The main functions of SUF, in the words of UN-HABITAT, are:
“Advisory Services. In the first place SUF is a technical advisory service designed to assist SUF partners (slum dweller groups, NGOs, professional bodies, municipalities, commercial banks, and capital market institutions) in the financing aspects of their slum upgrading, low income housing, and associated infrastructure projects. An advisory hub will be created in each of the SUF Sub-regions (West and East Africa; South and South-East Asia), and this service will extend to neighboring countries
Referral Functions. SUF will adopt a referral function, connecting identified needs with local, regional and international institutional support by others, bringing to local projects the expertise and partnership networks of multilateral programs and international NGOs. Institutional support of this kind can augment the financial packaging assistance of SUF, promoting policy and legislative reform, strengthening the capacity of municipalities, and improving other aspects of slum upgrading.
Financial Packaging. Taking slum upgrading and low income housing projects to scale requires access to multiple forms of investment, and the use of several kinds of corresponding financial instruments and products. A major focus of SUF will be to structure and package financing for such projects such that they become “bankable” – so that they will provide domestic providers of private capital (the largest available source of finance in the world) with the necessary risk/return profile and confidence to lend money into, and to invest in, longer term investments that target infrastructure and superstructure projects for the urban poor.
Development of Financial Products. SUF seeks to assist in the design and application of new financial instruments and products that will enable investors to work with and provide loans to various upgrading initiatives. The types of instruments and products developed with the assistance of SUF will reflect the different forms of available domestic capital (loans, municipal bonds, etc.) and term debt financing from the local currency capital market. In some cases this will also involve international guarantees.”
Implicit, but not explicit in SUF’s functions, is the provision of catalytic financing in the form of seed money, bridge or working capital financing, and funding of pilot operations to help promote innovations as well as jump-starting upgrading schemes. Also implicit in the SUF documents is the provision of credit enhancements of different forms, most likely in the form of guarantees.
SUF is part of the recently created Human Settlements Financing Division[1] (also referred to as Sub-Programme Four). Besides the SUF, the Division will have a Programme Development Branch (PDB) that is expected to carry out normative functions including the consolidation and analysis of financial tools and instruments, fund raising, and partnerships with international financial institutions. The branch will also be responsible for the development of longer-term programs that can fulfill the mandate of the Habitat Foundation -- to mobilize resources for shelter and related urban infrastructure. PDB will make tools and practices available to SUF, and draw upon, consolidate and disseminate lessons learned from SUF field operations. PDB will be staffed by professionals with expertise in project and investment finance, micro finance, grant-making, and inter-institutional relations. It is our understanding that the PDB is still to be established.
SUF will be headed by a Programme Manager who oversees two units: the Programme Management Unit (PMU) and the SUF Pilot Team (SUF-PT). The SUF-PT is made up by the team of consultants led by the Emerging Markets Group (EMG) and will be responsible for the pilot operations in Indonesia, Ghana, Sri Lanka and Tanzania.
The PMU manages the day-to-day activities of SUF. The PMU will be staffed with a Regional Advisor for Asia (serving also as Deputy Program Manager), a Regional Advisor for Africa, and a Communications, Monitoring and Evaluation Officer. Further, the PMU is to include Country Project Consultants (national experts in project finance) in Tanzania, Ghana, Sri Lanka and Indonesia. The PMU will monitor the activities of the consultants (SUF-PT) and pursue—on its own—projects in Bangladesh, Cambodia, Kenya, Senegal, Uganda and Zambia. The PMUwill also work with SUF-PT in developing generic SUF assistance, monitoring, and response methodologies for the implementation of the Pilot Projects in the pilot countries, and in the other SUF countries on a regional basis.
The SUF Operations Manual defines SUF’s clients in the following terms:
“The key clients of SUF are municipal authorities, CBOs, NGOs, together with their relevant departments of central government, as well as the local, private sector, including retail banks, property developers, housing finance institutions, service providers, micro-finance institutions, and utility companies.”
Assessment
A review of related donor facilities indicates that there are important technical and financial assistance needs related to slum upgrading, low-income housing, and related infrastructure that are not adequately met at present. Most importantly, there is no organization that provides direct “hands-on” advice to slum dwellers, municipalities and other government agencies in how to structure slum upgrading and low-income housing projects and related infrastructure facilities to mitigate risks and make it possible to mobilize commercial financing for such projects. SUF is designed to fill this void.
During the Design Phase, SUF has made progress in creating an in-house capacity to deal with financing of slum upgrading. SUF also prepared a comprehensive Operations Manual. We believe that the manual is very well written and thought through. It reflects an in-depth understanding of the issues involved in the mobilization of financing for slum upgrading, low-income housing and related infrastructure. The manual provides a solid foundation for SUF’s operations during the Pilot Phase. As noted earlier, the consultants hired to staff the SUF-PT are of high caliber and should be able to come up with innovative financing solutions. Thus, the basic requirements for a successful implementation of the SUF Pilot Phase have been met.
We have estimated that an indicative budget for the next three years would be in the range of US$22-25 million (with the potential to productively absorb up to around US$30 million). This estimate is based two premises: the capacity of UN-HABITAT to do meaningful normative work in the Human Settlements Financing area needs to be gradually built up; and the number of potential projects and financial products pursued during the Pilot Phase needs to be increased beyond the limited priority projects identified in the four pilot countries. The target should be to bring at least four operations to the stage where commercial financing has been committed.