Affordable Housing Institute 18-Dec-15 Formalizing the informal slum: incentivize private

Affordable Housing Institute www.affordablehousinginstitute.org Apr 21, 2023

Formalizing the informal slum:incentivize private upgrading of durable but informal housing

When the law and the facts clash, how can this be resolved?

Scaling Up Upgrading and Affordable Housing, Udaipur, India, January, 2010

David A. Smith ♦ Founder ♦ Affordable Housing Institute

[email protected]

Affordable Housing Institute www.affordablehousinginstitute.org Apr 21, 2023 // Slide 2

Affordable Housing Institute:What we believe

1. Housing is the key to improving cities• Improve housing and cities improve• Fail to improve housing and cities worsen

2. Mission Entrepreneurial Entities (MEEs) are key to improving housing

• The part of “private sector” who will play• Focused subset of “NGO’s”

3. Scalable finance is key to MEE growth

4. Municipalities are the right level of government to ‘own’ slum upgrading

Recent book:Free (7 Meg)


What I’ve heard so far: 1

At AHI, we turn slums into financial assets– My US for-profit banking/ consultancy prevents financial

assets from turning into slums … for 34 years

If slums are a phase … you invest your way out– Give poor people assets that are fixed in place– Formal government must out-compete alternative power

structures

Government has to do four things it hates to do:– Cut through (“repeal”) existing rules, processes– Grant (“give away”) non-recoverable costs– Grant (“give away”) ramp-up per-unit costs– Take non-commercial risk (which is a shifting frontier)



“Ownership” is the hillside sod of society– If people perceive ownership, they stick in place

To solve complex problems, enlarge them and simplify them– Turn slum upgrading from an unsolvable political/

procedural/ legal conundrum into a problem of money … Then government pays the money (non-recoverable) Cash and non-cash forms of money

If you want allies, take a big risk– “Don’t get mad, don’t get tired, don’t go away”

“Formal” title today means past informality is lost in the haze– More than 25 years ago (Bimal Patel)– In the pre-urban period– “Offstage” (recorded but not reported, hence not noticed)



Since the housing budget is never enough, repurpose other parts of the budget

“You’re going to have to take some damage”– Political damage (criticism during the change)– Economic damage (non-recoverable costs)– Experimental damage (“oops, let’s back up”)– “Entropy” damage (unintended consequences)– Decide how much damage you are prepared to take

This takes political courage– “Break some glass” “Offend, confront, and overcome

something”– “Spend non-recoverable money”– “Change the facts on the ground”– “Dare to be stupid”– “Dare to look foolish”


“Prevailing winds” of slum formation and formalization

1. Unstoppable, continuing inflow of very poor people into cities

2. People become urban without moving

3. Informal markets have huge economic might Poor are a potentially effective counterparty

4. A home is a process, not a product Help people finance their home improvements

5. Self-organizing groups of poor people are emerging at unprecedented rates

6. All great cities grew by formalizing their slums


Slum resettlement and slum upgrading:Going up means formalizing

Mankhurd: co-op housing built after resettlement from right-of-way

Oshiwira II: SPARC/ NSDF new co-operative high-rise

Going up requires structural integrity formalized building

Going up is a radical change of life “vertical relocation”


Informal settlements and slums: Some economic/ political definitions

Private investment has outrun public infrastructure

Wealth-extraction machine– Investing in property does not yield increased

property value

Physical reality and legal documentation are wildly at odds– In the formal city, physical and legal are the

same


A theory of slum formalization:“Just do it … but pay for it”

“Just do it”: transfer land rights to the poor– Recognize they’re never moving out– Once transferred, state must be guardian of poor’s

ownership Poor become economic citizens

Theory of Change: to break the stalemate, durable rights transfer of built land to its very poor existing dwellers– Using eminent domain/ compulsory purchase– Simultaneous with low-cost public infrastructure


Vila Alice before

Favela rationalization in Diadema:Before


Ana Sofia before

Favela rationalization in Diadema:Before

Grim statistics

1985: 80/ 1,000 infant mortality1998: 100/ 1,00,000 homicides


Diadema, two snapshots,25 years apart

1985 12 square miles 30% living in favelas Total budget $200m Housing 2% = $4m

Choice: build new G+4 at $35,000/ home

Reurbanize favelas at $1,050/ home

2008 Population 400,000 Density 33,000/ mi² 1,800 industries Median income

$800/mo

3% living in favelas 190 of 210 favelas

reurbanized


Slum formalization in São Paulo: Financing slum upgrading as health and sanitation Collaboration between water company

SABESP, World Bank & city Water and sanitation retrofit Little demolition – streetscape transformed Cleaning up the water by cleaning up the

slums– Slum upgrading purely incidental

Link to formal registration systems– Named streets, numbered addresses

Upgrading package comprehensive– Pavement and landscape– Collection of sewerage– Channeling storm drains– Retaining walls– De-densification

Going up!


Favela rationalization in Diadema:How to fund it?

Percentage of annual budget

Health 30%

Education 26%

Public/ service works 20%

Transportation 4%

Safety 3%

Social care 6%

Housing/ urban care 2%

Others 9%


São Paolo: Financing slum upgrading – Guarapiranga: urbanization

Upgrading package comprehensive– Pavement & landscape

– Collection sewerage

– Channeling storm drains

– Retaining wall

– De-densification

Link to formal registration system– Named streets

– Numbered addresses


Vila Alice before Vila Alice after

Favela rationalization in Diadema:Before and after


Ana Sofia before

Ana Sofia after

Favela rationalization in Diadema:Before and after

Infant mortality

1985: 80/ 1000

1996: 26/ 1000

2008: 12/ 1000


Homicides per 100,000 inhabitants per year

Favela rationalization in Diadema:Reduction in crime


A theory of slum formalization:Eminent domain for benefit of the poor

To break the stalemate, durable rights transfer¹ of built² land³ to its very poor existing dwellers– Use eminent domain to transfer land ownership– Poor pay what they can afford– Land owner receives the land’s fair market value

As reflecting of market discounts for lack of infrastructure, adverse occupancy, political risk/ cost of relocation

– Government pays difference– Controlled at municipal-government level

Couple it with visible public infrastructure– Signals “government is on your side now”


Eminent domain as an equitable but compulsory resolution

Durable rights transfer¹ of built² land³ to poor1. “Perceived as irreversible in practice”

Grant, cheap sale, or sale with low debt– At payments people can afford

Landowner receives fair market value (appraisal) Government pays difference Durable occupancy title ideal but workarounds work too

– “Certificate of Comfort” ♦ “Statutory lease”

2. Built and occupied with informal housing That people have lived in for some meaningful time

3. In situ (if safe, habitable) or nearby equivalent


Eminent domain integrated urbanization: how government operationalizes it

“You take” Expropriate and cancel all previous titles

National authorization Municipal accountability

Receivership

“You give to the poor”

Transfer a ‘perceived permanence’

Municipal Workarounds (e.g. lease)

“You improve public”

Add value in public spaces

Municipal health, safety

“You pay private” Make them sue you …

Compensation at FMV … encumbered


Urban-improvement business space

Mission Entrepreneurial Entity– Non-government?– Non-profit?

Local government public goods public finance

Poor people private goods private small finance

The space: need MEE


São Paolo: Insights and takeaways from the slum upgrading experience

Slum upgrading costs predominantly non-recoverable– Slum dwellers can afford 5-35% of renovated home cost

– Excess cost is non-recoverable and must be financed via an outside source (direct or indirect taxing power of a municipality)

Spend public resources on public spaces, not private homes Completing the buildings is not enough

– Legal and social follow-up is essential (“vertical relocation”)

Protect financing schemes against a shift in government Slum upgrading is itself an agency that makes political change

– Mission Entrepreneurial Entities (MEEs) play a critical role

Slum upgrading requires specialized lenders – Direct lending Housing Bank (Mexico, Thailand)

– Credit enhancement (US FHA) or liquidity (Fannie Mae/ Freddie Mac)


São Paolo: Conclusions - Slum upgrading paves way for housing microfinance

“Consumer finance is the enemy of housing microcredit”– There is a clear need for a mission-oriented housing micro-lender

Slum upgrading prepares the economic conditions climate for housing microfinance/ home asset loan finance (HALF)– Stable macroeconomic environment for capital– Metropolitan environment with economic growth and rising overall

GDP per capita– Rising slum dweller class willing to invest in their homes– Civic acknowledgment of favelas and civic legitimization of slum

dwellers– Civic investment in slum upgrading and regularization– Consumer finance is the enemy of housing microcredit

Not classical microfinance, requires a new business model


Slum upgrading paves the way for Home Asset Loan Finance (HALF)

Duration of loan (tenor)

Am

ount

of

loan

½ 1 2 3 5 7 10 20

$3,000

$2,000

$1,000

$500Micro-

finance

Home Asset Loan Finance: Larger amounts

Longer tenor

The home as an asset figures in the credit decision

Use value, not exchange value


A new entity = (product + business model) x (concept + reality) = simultaneously

Product Business model

Concepts and governance

HALF loan term sheet, including

pricing/ risk

Business plan, growth, cash flow

projections

Reality and administration

HALF entity, with capitalization and value chain links

People, systems, offices, networks

To implement HALF, one must create both the fledgling enterprise and its market-making product … and do both simultaneously


For more information:

“Financing Housing for the Poor”World Bank Learning Note (in preparation)

or email me: [email protected]

Presented at the South Asia Housing Forum: Delhi, India, January, 2010


[email protected]


“It’s easy for you to say …”

Sao Paulo: “We’re building a house.”


Formalizing the informal slum:incentivize private upgrading of durable but informal housing

When the law and the facts clash, how can this be resolved?

Scaling Up Upgrading and Affordable Housing, Udaipur, India, January, 2010


[email protected]

Documents

Affordable Housing Institute 18-Dec-15 Formalizing the informal slum: incentivize private