ASSESSMENT OF THE UN-HABITAT SLUM … of the un-habitat slum upgrading facility final report submitted to swedish international development cooperation agency (sida) may 24, 2006 prepared

ASSESSMENT OF THE UN-HABITAT

SLUM UPGRADING FACILITY

FINAL REPORT

SUBMITTED TO SWEDISH INTERNATIONAL DEVELOPMENT COOPERATION AGENCY (SIDA)

MAY 24, 2006

PREPARED BY

ASSESSMENT OF THE UN-HABITAT SLUM UPGRADING FACILITY MAY 24, 2006

PM Global Infrastructure Inc. 2

PM GLOBAL INFRASTRUCTURE INC


PM Global Infrastructure Inc. i

ASSESSMENT OF THE UN-HABITAT SLUM UPGRADING FACILITY

FINAL REPORT

Table of Contents Table of Contents............................................................................................................................. i Acronyms .......................................................................................................................................iii Executive Summary........................................................................................................................ v 1 Introduction............................................................................................................................ 1

1.1 Study Background .....................................................................................................................1 1.2 Objectives of the Study..............................................................................................................2 1.3 Basic Approach ..........................................................................................................................3 1.4 Outline of the Report .................................................................................................................4

2 Urbanization and the Financial Challenge........................................................................... 5 2.1 The Urban Setting......................................................................................................................5 2.2 The Financial Challenge............................................................................................................5 2.3 Mobilizing Local Resources for Housing.................................................................................7 2.4 Mobilizing Local Resources for Municipal Infrastructure ....................................................9 2.5 Risk Mitigation Strategies.......................................................................................................11 2.6 The Role of Credit Enhancements..........................................................................................13 2.7 The Rationale for SUF.............................................................................................................15

3 The Need for a Slum Upgrading Facility ............................................................................ 16 3.1 Slum Upgrading Experiences..................................................................................................16 3.2 Donor Support for Slum Upgrading ......................................................................................18 3.3 The Objective of SUF...............................................................................................................24

4 The Slum Upgrading Facility .............................................................................................. 25 4.1 SUF’s Functions .......................................................................................................................25 4.2 SUF’s Clients ............................................................................................................................26 4.3 SUF Organization ....................................................................................................................27

5 The Pilot Program................................................................................................................ 30 5.1 The Contracting Out Solution ................................................................................................30 5.2 The Selected Team ...................................................................................................................30 5.3 The Pilot Operations................................................................................................................31 5.4 The Operations Manual ..........................................................................................................34 5.5 Coordination Issues and Other Issues....................................................................................34

6 SUF Budget and Work Program ......................................................................................... 36 6.1 General Considerations ...........................................................................................................36 6.2 Work Plan and Staffing Considerations ................................................................................36 6.3 Tentative 3-Year Budget .........................................................................................................38

7 Other Issues .......................................................................................................................... 39 8 Benefits and Risks ................................................................................................................ 40

8.1 Benefits of Slum Upgrading ....................................................................................................40 8.2 The Benefits of SUF .................................................................................................................40


PM Global Infrastructure Inc. ii

8.3 Main Risk Factors....................................................................................................................41 9 Conclusions and Recommendations.................................................................................... 43 ANNEX 1: Terms of Reference .................................................................................................. 45 ANNEX 2: SUF Pilot Operations............................................................................................... 48 ANNEX 3: Persons Met or Interviewed ..................................................................................... 53

Text Tables Table 1: Technical Assistance and Small Grant Facilities Part 1 ................................................ 22 Table 2: Technical Assistance and Small Grant Facilities Part 2 ................................................ 23 Table 3: Indicative Budget for SUF in 2008 (US$) ..................................................................... 38

Text Boxes Box 1: SUF Implementation Phases .............................................................................................. 2 Box 2: Are Mortgage Loans Right for the Urban Poor? ................................................................ 8 Box 3: The Community Led Infrastructure Financing Facility (CLIFF) ..................................... 13 Box 4: Common Types of Credit Enhancements......................................................................... 14 Box 5: The Kampung Improvement Program in Indonesia ......................................................... 16 Box 6: Pilot Phase Terminology .................................................................................................. 29

Text Figures Figure 1: SUF’s Development Partners ........................................................................................ 18 Figure 2: The Organizational Context of SUF............................................................................. 28

The PM Global Team

This report was prepared by Per Ljung, team leader, and Ann Elwan, urban development specialist


PM Global Infrastructure Inc. iii

Acronyms

ADB Asian Development Bank

CBO 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


PM Global Infrastructure Inc. iv

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


PM Global Infrastructure Inc. v


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—orsome 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


PM Global Infrastructure Inc. vi

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


PM Global Infrastructure Inc. vii

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

Feasibility StudyConsultation & Mobilization of Financing 1Design PhaseConsultation & Mobilization of Financing 2Pilot PhaseConsultation & Mobilization of Financing 3Full-Scale "Global" Implementation

2007 2008 2009 20102003 2004 2005 2006

The main functions of SUF, in the words of UN-HABITAT, are:

¾ “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

¾ 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


PM Global Infrastructure Inc. viii

reform, strengthening the capacity of municipalities, and improving other aspects of slum upgrading.

¾ 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.

¾ 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 Division1 (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.

1 The organization chart for the Human Settlements Financing Division, see Figure 2 in Section 4.3.


PM Global Infrastructure Inc. ix

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 PMU will 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.


PM Global Infrastructure Inc. x

However, it is important to realize that SUF represents a long-term investment for the donors. In the short run (i.e. over the next couple of years) the benefits in helping to improve slums will be modest. However, as SUF reach more countries and projects, as innovative tools are disseminated the impact will multiply and the benefits can become very large. The development of new financial instruments and packaging of projects to attract long-term financing will also provide new investment opportunities for pension funds, insurance companies, etc. and contribute to financial deepening. Recommendations

UN-HABITAT has proposed that the SUF-PT (i.e. the consultants from EMG) focus on eight priority schemes in four countries:

¾ 1st Priority Physical Projects: o Ghana: Pilot Slum Upgrading Projects in Shama Ahanta East Metropolitan

Area (SAEMA); o Indonesia: Cooperative Housing Project in Yogyakarta; o Sri Lanka: Pilot Slum Upgrading Projects in Moratuwa; and o Tanzania: Housing Project with TAWLAT Cooperatives.

¾ 1st Priority Financial Products: o Ghana: Low Income Home Improvement Finance Product; o Indonesia: Scaling up of Co-BILD Initiative; o Sri Lanka: Low Income Housing Finance Product; and o Tanzania: Additional Housing Loan Guarantee Facility.

It has also proposed that the SUF-PMU (rather than the SUF-PT) undertake work in six other countries (Bangladesh, Cambodia, Kenya, Senegal, Uganda and Zambia) using its own staff and its own consultants (i.e. not from EMG). We believe that that there is a high risk that a large percentage of these projects might not be completed within the Pilot Phase. We also consider it important that the SUF-PT works with a broader set of projects and products, reflecting a greater variety of client groups, participatory approaches and country situations. In addition, we see coordination problems with the suggested “split” of countries handled by the SUF-PT and the PMU. For these and other reasons, we recommend that the mandate for the EMG consultants should be expanded to cover field activities in all the ten countries proposed by UN-HABITAT. The PMU should not undertake field activities on its own but participate in the field work undertaken by EMG. We and other observes have long felt that UN-HABITAT has lacked adequate expertise in urban and housing finance. The establishment of the Human Settlements Financing Division and SUF represents a first step in addressing this problem. The EMG team will ensure that the field activities are competently handled. In addition, UN-HABITAT needs to build-up its own in-house capacity to deal with financing issues. This requires significant increases in staffing compared to the present situation.


PM Global Infrastructure Inc. xi

We regard the basic staffing of PMU, as described earlier, to be inadequate for its tasks of monitoring progress, digesting the lessons learnt as well as handling SUF’s advisory and referral functions. The Programme Development Branch (PDB) is not yet staffed. The PDB is expected to carry out the normative work and develop new tools, etc. We believe that in the near term, it makes more sense to have the PMU responsible for these activities (to ensure a rapid learning from the field). The PMU should be properly staffed to do so. We believe that SUF should not act as a financial institution or a donor. There is a significant moral hazard involved: “catalytic financing” could become a substitute for poor project preparation and financial packaging. Still, during the pilot phase, the amounts involved are likely to be small and it might be too time consuming to mobilize this type of financing from donors or other donor facilities. Thus, any such funding should be limited and granted only in exceptional circumstances and be approved in a transparent manner. We believe that the procedures adopted by the Cities Alliance for “medium” and “large” grant requests can serve as a suitable model for review and approval of proposals for pilot operations and bridge financing. Similarly, we believe that SUF in the longer term should not provide guarantees and other forms of credit enhancements. During the Pilot Phase, however, the amount of credit enhancement for any given project is likely to be modest. The transaction cost (and time involved) would not justify participation by GuarantCo or other guarantee facilities. Thus, we recommend that SUF should be able to provide guarantees and other forms of credit enhancements during the Pilot Phase. Appraisal and approval procedures for credit enhancements must be very stringent and meet sound commercial standards (which imply, inter alia, that the risk of a guarantee being called has to be appropriately low). We regard this as an “expedient exception” to the general principle that SUF should not be a financial institution. We recommend that the amount of catalytic financing and credit enhancements be limited to no more than 30% of the SUF budget (with credit enhancements accounting for the major share of this amount). Any proposals for credit enhancements should be subject to an external, professional review. The choice of financing channel (through Cities Alliance, which is the case at present, through the Habitat Foundation or directly to a specific project) is essentially a policy or operational decision for Sida. However, if Sida and other donors decide to “by-pass” Cities Alliance, the governance structure for SUF should be strengthened. We believe that the risks associated with the SUF Pilot Phase are moderate and can be mitigated. We recommend that Sida supports the next phase of SUF.




FINAL REPORT

Introduction

Study Background On January 1, 2002, the UN Centre for Human Settlements was transformed into the United Nations Human Settlements Programme, known as UN-HABITAT. In order to meet its expanded mandate, UN-HABITAT decided to create a new Sub-Programme 4 titled Human Settlements Financing. A 2003 study2 financed by DFID and Sida recommended the creation of a Slum Upgrading Facility (SUF) that would play a catalytic role in mobilizing local financing for slum upgrading, low-income housing, and related infrastructure for the urban poor. SUF would bring together and leverage four strategic client groups: municipalities and government agencies; NGOs and CBOs; local banks and other financial institutions like housing microfinance organizations; and existing or planned donor programs and facilities. The study also recommended that SUF would operate under the umbrella of the Cities Alliance but be managed by UN-HABITAT as an independent program. After a series of consultations with potential donors (especially DFID and Sida) and the Cities Alliance, SUF was established in December 2004. During the consultations it had been decided that the main operational part of SUF would be contracted out rather than being run “in-house” as proposed by the consultant study. In order to better define the tasks to be carried out by the consultants and to initiate the work while the consultancy services were being procured, a “SUF Design Phase” was introduced. During this phase, a core team was established at UN-HABITAT and several short term consultants were hired with interim financing from DFID and Sida. The SUF Design Team (SUF-DT) was established in September 2004. It has undertaken some 20 scoping and follow-up missions and identified four countries (Ghana, Indonesia, Sri Lanka and Tanzania) for implementation of pilot operations. Although the design phase was expected to last only 10-12 months, it will de facto end only in May 2006 when the consulting team will be mobilized and the pilot phase will start (see Box 1). UN-HABITAT has received a commitment of US$10 million from DFID for the pilot phase and has approached Sida and other donors for financial support to reach a funding level of US$30 million for the three year pilot phase. However, Sida has declared that its support for the pilot phase will depend on a comprehensive evaluation of the pre-

2 PM Global Infrastructure Inc. Meeting the Challenge: Proposal for the Creation of a Global Slum Upgrading Facility. Final Report submitted to UN-HABITAT on December 31, 2003.



implementation/design phase. Sida has employed PM Global Infrastructure Inc. (PM Global) to undertake this evaluation.

Box 1: SUF Implementation Phases

Objectives of the Study The main objectives of the Evaluation of the Pre-Implementation Phase of the Slum Upgrading Facility, as set out in the Terms-of-Reference3 are:

¾ To provide a general overview of the short-term and long-term purpose and organization of the Slum Upgrading Facility;

¾ To evaluate the effectiveness of the Slum Upgrading Facility;

¾ To evaluate the effectiveness and capacity of the Slum Upgrading Facility in relation to other methodologies and alternative implementing organizations;

3 The Terms-of-Reference are provided in Annex 1.

A Feasibility Study was undertaken by PM Global Infrastructure Inc. in 2003. This study demonstrated the need for SUF and outlined the basic operations of the facility. After consultations with DFID, Sida and the Cities Alliance, SUF was established in late 2004. The Design Phase that followed was aimed at validating the conclusions of the feasibility study and refining SUF’s staffing, policies and procedures. The design phase also involved defining in detail the terms-of-reference for and recruitment of consultants that would be responsible for the bulk of the field activities during the next phase. The Pilot Phase is expected to last 2-1/2 to 3 years. During this phase, the consultants and UN-HABITAT are expected to work with clients in four countries (Ghana, Indonesia, Sri Lanka and Tanzania) and to successfully help mobilize financing for at least two slum upgrading schemes (with at least two more projects being close to “financial closure”). Operations will also be initiated in 5-6 other countries. Full-Scale “Global” Implementation would follow after successful completion of the pilot phase. This phasing of the work is captured in the chart below.

Feasibility StudyConsultation & Mobilization of Financing 1Design PhaseConsultation & Mobilization of Financing 2Pilot PhaseConsultation & Mobilization of Financing 3Full-Scale "Global" Implementation

2007 2008 2009 20102003 2004 2005 2006



¾ To evaluate the goals of the Slum Upgrading Facility and to what extent it fills identified financial gaps in housing provision systems in developing countries; and

¾ To evaluate the goals of the Slum Upgrading Facility and to what extent it fills identified financial gaps in housing provision systems in developing countries in relation to other methodologies and alternative implementing organizations.

Basic Approach In order to approach the work in a cost-effective manner, PM Global divided the work into several elements:

¾ Review of relevant documents. The SUF Programme Management Unit shared with the PM Global team all relevant documents (in total around 100) that had been prepared during the design phase, including (but not limited to) scoping papers, trip reports, country strategy papers, progress reports, budget proposals and the proposal by the winning consortium for the SUF-PT. In assessing the overall objectives and approaches of SUF, we have primarily relied on the Operations Manual and the SUF Design Phase--Draft Final Report (dated March 31, 2006) as providing the most comprehensive and up-to-date description of SUF and the progress to date.

¾ Field visits for “ground proofing.” Since virtually all the documents were produced by UN-HABITAT and the SUF-DT, there was a need to examine whether these documents reflected actual progress on the ground and to assess the likelihood that the identified pilot operations will go ahead, as well as to examine the merit of each pilot program. This was undertaken by visiting two of the four identified pilot countries: Sri Lanka and Tanzania. These visits were arranged with the help of the Habitat Programme Managers in the two countries. In the field, we met with most of the relevant stakeholders in the proposed pilot operations.

¾ Interviews with UN-HABITAT Staff. Useful perspectives on the progress so far and the prospects were obtained through interviews and discussions with UN-HABITAT staff at the headquarters in Nairobi.

¾ Interviews with other people familiar with SUF. We also had brief discussions with people who had served as consultants to the SUF-DT and been part of the SUF Consultative Board.

¾ Mapping of related donor initiatives. We have examined the operations of related donor initiatives to examine the relevant niche for SUF.

¾ Report preparation. The findings of all the above elements of our assessment have been incorporated in the present report.



Outline of the Report Chapter 2 provides the rationale for the creation of SUF. It discusses the challenges associated with financing rapid urbanization and addressing the problem of mushrooming slum settlements. The chapter also reviews the approaches that have been taken and could be taken to mobilize local financing for slum upgrading, low-income housing, and associated infrastructure. Chapter 3, after an introductory review of global slum upgrading experiences, examines the role of SUF in relation to other donor supported programs. It reviews in some detail the technical assistance facilities that deal with urbanization and/or financing issues. This review concludes that SUF provides a type of service that is not provided by any other facility. Chapter 4 assesses the key features of SUF, namely its functions, clients and organization. It raises certain concerns regarding SUF’s present focus, and makes recommendations regarding its future orientation and staffing. Chapter 5 looks at the Pilot Program. It first makes an assessment of the selected consultants. This is followed by a review of the proposed pilot operations. Finally, the chapter raises some coordination issues. Chapter 6 builds on the observations in the preceding chapters. It examines the work program and budget for SUF from a strategic perspective (rather than commenting on individual line items in UN-HABITAT’s budget proposal). Chapter 7 raises a couple of issues concerning the process of channeling money to SUF and related governance arrangements. Chapter 8 discusses the benefits of SUF and outlines the major risk factors. Chapter 9 provides our overall conclusions and summarizes our recommendations.



Urbanization and the Financial Challenge

The Urban Setting 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—orsome 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. Urban slums are not only eyesores; they also pose multiple threats to the health and safety of their inhabitants. The lack of the most basic infrastructure makes the provision of social services, such as health care, ineffectual. Similarly, the lack of infrastructure increases the cost of necessities, such as drinking water or fuel for cooking, to the urban poor and reduces their productivity and economic opportunities. 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).

While urban poverty is certainly one factor contributing to the growth of slums, they are also the product of failed policies, bad governance, inappropriate legal and regulatory frameworks, dysfunctional land markets, unresponsive financial systems, and—last but not least—a lack of political will. Addressing this multi-faceted problem requires not only the concerted effort of governments, enterprises and civil society in the developing world, but also financial and technical assistance from the international community.

The Financial Challenge Housing and related infrastructure investments in developing countries tend to be in the range of 3-8% of GDP, depending largely on the per capita income level of the country concerned. In aggregate, these investments are around US$300 billion,4 including around US$ 100 billion for urban infrastructure (excluding health and education facilities in urban areas) and around US$ 200 billion for housing. These investments fall well short of the needs and often do not reach the poor.

4 Dillinger (1994) estimates that annual government expenditures on urban services in developing countries were in the range of US$100 to US$200 billion (or 2.5-5% of GDP). This estimate included water supply, sewerage, intra-city roads, subsidies to mass transit, primary education and health. (UMP, 1994)



The total investment for 670 million slum dwellers would, according to the Millennium Project , be close to US$ 300 billion (annually US$18.5 billion) during the period 2005-2020 and would include security of tenure, housing improvement, physical infrastructure (water, sanitation, drainage, roads, electricity), primary schools and health clinics.5 The Millennium Project’s Task Force on slums assumed that 30% of this funding would be in the form of small loans to slum dwellers to help them build and improve their houses and that the families would directly contribute 10% from their own savings. Governments and donors were assumed to finance another 30% each. These assumptions imply that micro-housing finance institutions and donors each would contribute around US$5.5 billion annually for improvements in slum areas. The World Panel on Financing Water Infrastructure (2003) estimates that, in order to meet the MDG targets related to water supply and sanitation, annual investments need to double from the present level of US$30-35 billion. Most of these investments would be made in urban areas. This estimate includes water and sanitation in slum areas and, consequently, there is some double counting. Multilateral and bilateral assistance for housing and urban infrastructure appears to be less than US$5 billion annually, of which less than US$1 billion is earmarked for slum upgrading.6

While private investments in infrastructure facilities increased rapidly during the 1990s and amounted to more than US$890 billion over the 1984-2004 period, only about 5% of this total has been devoted to urban water supply and sanitation.7 After a peak in the late 1990s, it appears that the amount of investments in private water and sanitation projects have stabilized in the range of US$1.5 billion to US$2 billion annually. However, most of the private sector investments have gone to projects in middle income countries. Investments in private water and sewerage projects located in low income countries amounted to only US$17 million over the 2001-2004 period. Thus, it is clear that international financing, be it from private or public sources, only plays a miniscule role in meeting the financing needs.

The scarcity of foreign funds for urban infrastructure, housing, and slum upgrading is not the main reason why such investments should be financed domestically to the extent possible. Such investments generate no revenues in foreign currency and expose the borrowers to significant foreign exchange risks. Nearly all expenditures are in local

5A home in the city, Achieving the Millennium Development Goals, Task force 8, Millennium Project,

2005, Earthscan, London. 6 Multilateral financing is around US$3 billion per year, of which around 14% is dedicated to slum upgrading. 7 Source: the World Bank’s Private Participation in Infrastructure (PPI) database at ppi.worldbank.org. It should be noted that the investment amounts in this database give a somewhat exaggerated picture of the amount of private investments. First, the investment figures are commitments (that may or may not materialize). Second, the figures comprises investments from all sources (including governments and donors) and not only investments made, or to be made, by the private equity investors and lenders.



currency; payments from beneficiaries of the projects are in local currency as well; and the government, investors, lenders and project beneficiaries are generally not able to assume the foreign exchange risk.8 Indeed, the use of foreign currency loans, channeled through domestic banks, for real estate investments was a major factor contributing to the Asian financial crisis in 1997. With foreign currency loans, the lender faces the risk that the recipient country will not have adequate foreign exchange reserves to service the debt or make other payments in foreign currencies. This “country risk” is included in the interest rate that the lender would charge or in the fee that a guarantee institution would impose. Thus, the cost to the borrower/beneficiaries of local funding would be lower, as it would only include the cost associated with the commercial risks of the program/project and not that associated with the sovereign and currency exchange risks. In short, financing for urban development, slum upgrading and housing should, as far as possible, be mobilized locally through taxes, user fees and loans from banks and capital markets. Indeed, housing and infrastructure projects can offer pension funds and insurance companies suitable instruments for long-term investments. Thus, such long-term financial instruments would contribute to financial sector deepening and development of capital markets.

Mobilizing Local Resources for Housing In industrialized countries, formal housing finance institutions, (i.e. commercial banks providing mortgage finance, specialized housing banks, building societies/savings and loans schemes, cooperatives, etc.) constitute a large and important part of the financial sector and the overall economy. In the US, Norway and Sweden, the value of all outstanding mortgage loans is around 50% of GDP. In developing countries, and especially in low income countries, these institutions play only limited roles in meeting the housing needs of the urban poor (as well as the broad middle class).9 In Uganda, for example, only about 200 mortgage loans are issued every year while the number of new dwellings (however modest they may be) in urban areas probably approaches 50,000. In Kenya, less than 5% of new dwellings in urban areas are constructed with mortgage financing; indeed, there is a common saying in Nairobi that “only bankers can get mortgages.” In Zambia the total stock of mortgages is less than US$2 million and in Tanzania less than US$3 million.

8 Since most developing country currencies tend to depreciate against those of the industrialized countries, the loan amount would continuously (but unpredictably) increase in the domestic currency, making financial planning and management difficult. 9 Because of the embryonic nature of housing finance markets in low and lower-middle income countries and the lack of credit information, property titles, informal sector incomes etc., innovations in mortgage lending that have swept the industrialized and upper-middle income countries have largely bypassed most of the developing world.



Of low-income countries, India has the best developed housing finance industry. More than 80 private housing finance institutions have been established during the last decade, some of whom rely on refinancing from the National Housing Bank, an apex bank. They are also responding to incentives that form part of India’s system of directed lending. Still, only about 22% of new dwellings in urban areas are financed with mortgages. However, some mortgage lenders have started to address the needs of low income borrowers. The Housing Development Finance Company (HDFC), the leading private sector mortgage lender in India, relies on NGOs and self-help groups to channel loans to low income families. HDFC had experienced a recovery rate of nearly 100% on such loans. Birla Home Finance has a new scheme that targets urban poor households with monthly incomes less than INR 6,000 (about US$135). In recent years, a new—and often more appropriate10—option has become available to some of the urban poor: small loans for home improvements from micro-finance institutions (MFIs) such as Grameen Bank in Bangladesh, the Self-Employed Women’s Association (SEWA) Bank in India, the National Cooperative Housing Union (NACHU) in Kenya, or Mibanco in Peru. Most of these organizations are general micro-finance institutions while a few, such as NACHU, were originally set up to provide housing loans. Micro housing finance represents an evolution of the model for lending to micro-enterprises. Traditionally, these institutions have provided small, short term loans to low-income families only for “productive” purposes. House improvement loans respond to strong client demand, and reflect the realization that, in the words of SEWA Bank, “especially for poor women, their homes are not only their place of shelter, but also their workplace, storehouse, security and usually their biggest asset.”

Box 2: Are Mortgage Loans Right for the Urban Poor?

A few micro-lending institutions have reached significant scale in their housing finance operations such as Mibanco with a housing portfolio of US$15 million, Grameen Bank and Bolivia’s Banco Sol with US$20 million. What is striking, however, is the relatively small scale of the operations of many of the leading actors: SEWA Bank has a housing finance portfolio of about US$900,000; the Homeless People’s Federation of the Philippines (HPFP) has assets of about US$700,000; and NACHU “recycles” about US$600,000 in funds once received from USAID and the Ford Foundation. These figures pale in comparison with the assets of the formal housing finance system. While

10 See Box 2

Traditional mortgage instruments tend to be inflexible and not suited for situations where people build their houses in stages. There is also a growing awareness that traditional mortgage loans might not be attractive to the urban poor, even if they might be able to obtain such loans. Most slum dwellers not only have low incomes, but they also suffer from a high degree of income insecurity. Thus, they can ill afford fixed monthly mortgage payments and face the risk of losing the house in case of temporary loss of income



exact aggregate figures are hard to come by, it appears that, in aggregate, micro-finance institutions in most countries have an outstanding housing loan volume of only a few percent of the assets of the formal mortgage lending institutions. Thus, in most developing countries, not only the poor but also the broad middle class have no access to finance for house construction and improvements. What is required is a two-pronged approach—both from-the-top-down and from-the-bottom-up:

¾ Making the formal housing finance institutions “move down” and reach people with lower incomes. This will require: adoptions of new corporate lending policies and procedures; strategic and operational partnerships with NGOs and/or micro-finance institutions; creation of secondary mortgage markets; etc.

¾ Scaling up the operations of micro housing finance organizations. Inter alia, this involves providing them with resources to expand the client base as well as getting access to longer term sources of financing.

Mobilizing Local Resources for Municipal Infrastructure The provision of basic services and local infrastructure is usually seen as the domain of municipal governments that are closer to the inhabitants and, thus, better understand their needs. In reality, local governments have typically failed to keep pace with rapid population growth and to meet the needs of the urban poor. In Sub-Saharan Africa (with the exception of South Africa), municipalities are marginal actors, generally accounting for less than one-twentieth of all public expenditures. Municipalities in Asia have some greater capabilities and resources, especially in the middle-income countries. The financial problems of many municipalities have worsened over the last decade. Many countries have sought to decentralize service delivery to local governments but this has often not been associated with a commensurate increase in their revenue sources. In most low-income countries, municipal investment budgets are extremely limited. The Lusaka City Council, for example, has an annual investment budget of around US$1.50 per inhabitant. The corresponding figure for Douala is around US$2.00.11 Thus, central government ministries and agencies tend to finance and build all major infrastructure facilities, leaving local governments with responsibility for only marginal activities, such as solid waste collection and disposal, bus terminals and slaughterhouses. In Senegal, for example, most urban projects are built by Agetip, the central public works organization, and financed through grants from FECL, the government’s municipal development fund. In Sri Lanka, the Urban Development Authority is responsible for slum upgrading and general environmental improvements (as well as urban planning); NWSDB, for water supply and sewerage; Department of Roads and Highways, for major roads. The Colombo Municipal Council is only responsible for solid waste collection and minor investments in roads and public spaces. The situation in Tanzania is basically the same—central government agencies implement all major infrastructure projects. However, at least in Sub-Saharan Africa, the amount of public sector investments appear to have

11 This can be compared with US$400 per resident in Stockholm.



dropped drastically from over 4% of GDP in the early 1980s to less than 2% of GDP around 2000 (Estache et al. 2005). Municipal budgets are typically approved by the central government. In Tanzania, until recent reforms (supported in part by Sida), the central government approved all municipal budgets and determined the amount of transfers based on “scaled-down” expenditure programs, taking into account what the municipalities can raise on their own. (Thus, improved revenue performance was partly “rewarded” through reduced transfers.) By implication, the central government would need to approve any long-term borrowing by municipalities and its approval is often perceived as a guarantee that sufficient funding would be available for debt service. Central governments control all major revenue sources. What municipalities are left with are a few rather inelastic revenue sources, often best described as “nuisance” taxes. In Senegal, for example, municipalities levy more than 300 different fees and business taxes. Often, the central government also limits the local governments’ freedom to set tax rates, thereby further reducing their ability to mobilize resources. In spite of the importance of transfers to local governments, most countries do not have a rational, transparent system for allocating funds to municipalities. Transfers tend to be determined based on political considerations and vary from year to year, which make it virtually impossible to plan large-scale infrastructure investments that may require several years of capital outlays. However, a few countries, such as Bolivia where municipalities receive 20% of all central government revenues, have established automatic systems for such transfers. Statutory restrictions on municipalities’ ability to borrow frequently preclude this option. The reasons for such restrictions vary from a desire to control or limit public sector debt and prevent moral hazard problems (in that the central government might have an explicit or implicit obligation to “bail out” municipalities that cannot service their debt). For example, municipalities in Sri Lanka have the legal right to borrow and to issue general obligations bonds. However, the Municipal Ordinance does not allow municipalities to pledge assets or revenue streams as security, which in practice has prevented them from accessing financing from banks and bond markets. Even where municipalities do carry out and finance their own projects, commercial lenders are extremely cautious about dealing with them. Municipalities’ basic lack of creditworthiness is due, in part, to the generally inadequate fiscal and regulatory frameworks (including lack of clarity in service responsibilities among the various government levels, and inadequate capacity for revenue generation at the local level, as discussed above). Strengthening municipalities’ ability to effectively deliver services to their inhabitants requires actions on many different levels. In most developing countries, the fiscal system needs to be reformed, increasing local governments’ taxing authority. Transfers to municipalities should be made automatic, predictable, and transparent. The amount



should be linked to some easily established criteria such as population, number of school children, etc. Municipalities should generally be given greater fiscal autonomy and be free to determine their expenditures without central government approval (subject, of course, to proper audits). Given the difficulties that municipalities face in accessing funds on the commercial market—whether through bonds or through bank loans—more than 50 countries have established special credit intermediaries, commonly referred to as municipal development banks, to lend funds to local governments. Although some of these institutions have been around for almost three decades, they have largely remained vehicles for channeling funds from international institutions and central governments. Generally, their financial performance has been poor—except for those institutions that have collateralized the loans, generally through the right to intercept transfers from the central government to the borrowing municipality. Thus, if they operate on sound commercial principles, municipal development banks can help local governments gain access to domestic capital markets. Careful attention to the need for collateral has opened up a municipal bond market in India. In 1998, Ahmedabad was the first city to place a bond without guarantee from the state government. The bond issue was rated AA by CRISIL, the Indian rating agency. Ahmedabad managed to achieve an investment grade rating by channeling its octroi12 revenues through an escrow account. The bond holders have first claim on the money in the escrow account. A similar approach is being adopted for a planned bond issue by the municipality of Douala in Cameroon. In the Philippines, the bankers’ association took initiative for the creation of the Local Government Units Guarantee Corporation (LGUGC) that guarantees municipal bond issues. The LGUGC charges an upfront fee of 2.5% to 3.5%. In case of a default, LGUGC assumes the debt service obligation. However, LGUGC has the right to intercept the transfers from the central government to the municipality. Since its creation in 1998, LGUGC has provided guarantees for about 20 municipal bond issues. The above examples show that with creative approaches, municipalities can gain access to debt financing for infrastructure development.

Risk Mitigation Strategies While successful examples have been given above, the fact remains that slum upgrading involves the two categories of actors that are least creditworthy: the urban poor and municipalities. Banks and bond buyers generally lack the ability to assess and mitigate risks associated with this type of lending. The nature of the risks varies from country to country and from case to case. Thus, various approaches are needed to mitigate the risk for the lenders.

12 Octroi is a tax levied on goods brought into the city.



Risks are allocated and mitigated not only through the loan documents but through the whole design and implementation of a project. For example, some risk can be mitigated by designing the project in such a way that part of the land can be sold to middle income families who make a significant down payment up front; and risks can be minimized by using a fixed-price turnkey contract. Some factors cut across all aspects of a project. Land ownership and tenure security is perhaps the most important. If an upgrading project is associated with enhanced tenure security, experience has shown that slum dwellers are willing to pay more for the infrastructure services and are more interested in using their savings for house improvements. This in turn will enhance the financial viability of the project. Although micro housing finance lenders typically do not require a mortgage, they often want to see some evidence that the borrower has the right to stay on the site and be satisfied that the risk of eviction is minimal. Thus, enhanced tenure security will also make the slum dwellers more creditworthy. Similarly, a commercial bank or investor is more interested in supporting a project if there is no risk that ownership disputes will halt implementation. Zoning regulations and building codes similarly impact all aspects of an upgrading project. They will, for example, influence the ability to sell some lots or houses on fully commercial terms and to utilize the proceeds for cross-subsidies to the existing residents. (The sale of residential and commercial space and transferable development permits is a key element in the financial viability of the CLIFF residential projects in Mumbai—see Box 3.) In other cases, they might impose too costly standards and spoil the financial viability of the scheme. Ambiguous or changing codes and regulations can also introduce new risk elements that keep lenders away. Once the basic steps have been taken to reduce the overall risks, the next is to identify the various revenue streams of a project and assess how dependable they are. Lenders (or types of lenders) are likely to vary in their assessment of the risks associated with different project components and revenue streams. For example, a commercial bank might be willing to take the risks associated with sale of developed land but not those associated with financing house construction for low income residents—a risk that might be taken willingly by micro housing finance institutions. One key problem might occur when a municipality or government agency, which is not creditworthy, seeks to implement a project that in itself is highly justified and profitable. In such a case, the lender would like to make sure that the revenues from the project are “ring-fenced” and not used for meeting non-related spending needs. This is typically achieved by creating a separate development company or a “special purpose vehicle” (SPV). An SPV in its simplest form is not much more than a special banking account through which project expenditures and revenues as well as loan disbursements and repayments are channeled.



Box 3: The Community Led Infrastructure Financing Facility (CLIFF)

The Role of Credit Enhancements Once all steps are taken to mitigate risks along the lines discussed above, there might be a need to consider what is commonly referred to as “credit enhancement” or more loosely “guarantees.” Examples of credit enhancements are provided in Box 4. No low-income or lower-middle income countries have any institutions that can provide the kind of varied credit enhancements that are required for slum upgrading, low-income housing and municipal infrastructure. The LGUGC in the Philippines and a “Credit Support Facility” being established by the Government of Uganda (with World Bank funding) for private rural electrification projects are exceptions that confirm the rule. However, the donor community has stepped in and created various instruments and facilities to assist in the mobilization of local funding for this type of project.

The Community Led Infrastructure Financing Facility (CLIFF), which has been operational for four years in India, combines many of the elements that have contributed to success of upgrading schemes. Under the auspices of the Cities Alliance, with initial funding from DFID and Sida, it features local currency guarantees provided by Homeless International, a UK-based NGO; repayment on commercial terms for financial sustainability; and active local participation to ensure that the investment is the highest priority for the community. The scheme seeks to attract commercial, local, and public sector finance for further schemes; thus accelerating or scaling up the response to the challenge of urban renewal. It depends on the successful track record of the implementing agency and on local government performing its role in infrastructure provision. In 2005, a second phase (CLIFF 2) was initiated in Nairobi, Kenya. The pilot will be undertaken in the huge Kibera slum by Kenyan partners Pamoja Trust and Muungano wa Wanavajiji. The initial schemes in Mumbai were (i) construction of toilet blocks for more than 200,000 slum dwellers and (ii) construction of multi-storey apartment buildings for about 1,500 families. For the toilet blocks, CLIFF provided guarantees and (revolving) seed money to mobilize commercial construction loans. Upon completion, the municipal government paid subsidies covering the construction cost and, thus, enabling the slum community to repay the loans. For the apartment buildings, CLIFF utilized the enormous distortions on the land and housing markets in Mumbai to generate revenues from sale of “surplus” apartments and commercial space. In addition, the Mumbai authorities provided implicit subsidies by issuing Transferable Development Rights (TDR) that the slum community could sell to private developers. (TDRs are issued by the Slum Rehabilitation Authority to any organization or person that improves the living conditions for slum dwellers. Given restrictions on development in Mumbai, the TDRs can have a significant value.) Thus, the apartment buildings were constructed at a cost of US$11.5 million with only US$36,000 in community contributions and no long-term debt after construction was completed. In most of the schemes outside Mumbai, CLIFF has taken advantage of government subsidies and commercial sales. At the end of the third year of operation, CLIFF had not mobilized any long-term debt (although reportedly, it has done so subsequently). Thus, it remains to be seen if the CLIFF model is viable in more traditional slum upgrading situations where infrastructure deficiencies are severe, government subsidies are not available and land and housing markets are less distorted than in Mumbai.



Box 4: Common Types of Credit Enhancements

Some of the institutions that are currently are in the business of structuring and providing credit enhancements in one form or another include:

¾ GuarantCo. Set up by DFID, Sida and selected other donor organizations, GuarantCo provides credit enhancements on private and municipal (including publicly owned utilities if they meet certain criteria) infrastructure related projects. These generally take the form of guarantees.

¾ USAID’s Development Credit Authority (DCA) Facility. The DCA has been used to provide guarantees (covering up to 50% of the principal) for a broad range of activities relevant to SUF’s mandate. The DCA was used to give credibility to the Local Government Unit Guarantee Corporation in the Philippines (by backing-up LGUGC’s guarantees). The DCA has been used to support municipal bond issues and “pooled funding” for water projects in the Indian States of Tamil Nadu and Karnataka. The DCA has also been used to support borrowing by micro-finance institutions, including housing.

¾ Sida and some other bilateral donors have guarantee programs that can be used to support housing and urban development projects.

¾ IFC (with staffing support from the World Bank) has created a “Municipal Fund” that can provide guarantees in support of borrowings by municipalities and municipal utilities. So far, these guarantees have supported projects that are located in countries that are considerably wealthier than SUF’s target countries.

Partial credit guarantees covering up to 100% of outstanding principal and accrued interest in case of borrower default. For bank loans, the percentage would be lower, requiring the lender to take some of the credit risk. In the case of bonds, the capital markets and/or other prudential authorities might require a full guarantee. The partial credit guarantees can be structured in many ways; for example with higher coverage for later maturities or be made to cover “first loss”, which limits the exposure of the lender.

Rolling guarantees that would temporarily “top-up” the borrower’s cash flow if the debt-service ratio fell below a certain level.

Financial options (put options benefiting senior lenders) if lenders have difficulties in managing maturity structure of their assets and liabilities. In case of a liquidity squeeze, the lender would have a right to “put” the loan to the guarantee agency.

A roll-over or refinance guarantee is also designed to address the problems associated with the lender’s asset-liability mismatch. However, it is structured in a different way: the borrower gets a short-term loan with the explicit understanding from the lender that the loan will be rolled-over as long as the borrower meets its obligations. The guarantee agency would provide an assurance that it would provide a loan if the original bank was not able to roll-over its loan.

Hedging via forward financial contracts provided by the guarantee agency could help mitigate interest rate or foreign exchange risks (since such markets do not exist in virtually all low income countries).



¾ The World Bank has recently established a local currency guarantee facility that could potentially be used for this type of projects.

The Community Led Infrastructure Financing Facility (CLIFF ) has also demonstrated the viability of using guarantees to help mobilize financing for low-income housing (see Box 3 above)

The Rationale for SUF The discussion in the preceding sections demonstrates both that mobilizing funding for urban development is a major challenge. It is also clear that innovative solutions have been found, but unfortunately, they are few and far between. There is a great need for cross-fertilization and systematic efforts to adapt these solutions so that they fit other country and project settings. Indeed, because conditions vary so much from case-to-case, mobilizing financing from commercial banks and capital markets for urban development project in general and for slum upgrading in particular, requires extensive “financial engineering” to mitigate risks and making projects “bankable.”13 At present, precious little expertise in this area exist. SUF is designed to fill this void.

13 “Bankable” implies that banks and other lenders regard the person, firm or project as an acceptable credit risk and are willing to lend. In simple terms, “bankable” means the same thing as “creditworthy.”



The Need for a Slum Upgrading Facility

Slum Upgrading Experiences Approaches to slum upgrading, low-income housing, and related infrastructure in developing countries are still evolving.14 They vary from case to case, depending on a large number of political, institutional, social and economic factors. Some government-supported upgrading schemes have managed to reach a scale that has had a city or country-wide impact on the living conditions of the urban poor. Tunisia, for example, managed to reduce the percentage of slum dwellings from 24% of the housing stock in 1975 to less than 3% by the mid-1990s. The Kampung Improvement Program in Indonesia has benefited almost 30 million people (Box 5).

Box 5: The Kampung Improvement Program in Indonesia

A new breed of ‘bottom-up’ initiatives in community-based approaches and micro-finance for housing has mushroomed. One of the earliest community driven schemes was the Orangi Pilot Project (OPP) in Karachi, Pakistan. The OPP as well as numerous other community based projects have demonstrated that slum dwellers are willing to contribute both their own labor as well as cash for such schemes. Furthermore, the schemes help to empower the residents and encourage them to actively lobby the government and thereby influence public sector priorities and investment programs. The work of the Society for the Promotion of Area Resource Centres (SPARC) and Mahila Milan in India are other examples of grassroots involvement in slum upgrading. Their work is now partly supported through CLIFF (see Box 3 above). Similar approaches have been used by housing micro-finance organizations like SEWA Bank in India and Nachu in Kenya that have used savings and home improvement loans as vehicles for organizing and empowering slum dwellers to be followed by active

14 For a comprehensive overview of the factors contributing to the growth of slums and slum upgrading approaches, see the Global Report on Human Settlements 2003: The Challenge of Slums prepared by UN-HABITAT (2003).

In 1969, the Government of Indonesia initiated the Kampung improvement Program (KIP). Since its inception the concept has spread to 800 cities to benefit almost 30 million people. It is considered to be one of the best urban poverty relief programs in the world. Initially, it was engineering oriented, but realizing the need to tailor upgrading to the varying conditions, the KIP soon started to use community based organizations (CBOs) as project initiators to encourage an active, innovative, and self-sustained community in which upgrading could take place. In the 1990s, the KIP was gradually decentralized and, in the process, it lost much of its momentum since local governments lacked the technical and financial capacity to properly implement the schemes. However, Indonesia is presently undergoing a much more drastic decentralization process and with significant increases in local government resources and with systematic efforts to build local capacity.



engagement with the local authorities. Thus, these grassroots initiatives can become powerful agents of change. In short, many of these ‘bottom-up initiatives’, with their strong rooting in individual and community resources, hold promise for ‘scaling up’ to reach more of the urban poor. Not only do these approaches offer ways to improve shelter conditions while longer term institutional reforms are taking place, they also offer opportunities to actively promote change.

Government sponsored upgrading schemes can also start a powerful transformation process. For example, an evaluation in the early 1990s of the national parastatal upgrading agency in Morocco showed that for every dollar spent by the public sector, the private sector invested nearly six dollars on house improvements. Similarly, unpublished surveys from World Bank sponsored upgrading programs in Jordan and Tunisia showed that every public dollar of upgrading expenditures encouraged two to four additional dollars in house improvements. Government sponsored schemes and community initiatives tend to reinforce each other. Thus, it is not a question of “either-or” but about complementarities. Indeed, in Tunisia, the central government’s Urban Upgrading and Rehabilitation Agency (ARRU) had the lead role in the upgrading process, but the success was to a large extent due to a number of supporting organizations such as the Housing Bank, the Solidarity Bank, the Municipal Finance Authority, the National Solidarity Fund, and various municipalities as well as NGOs and CBOs. Some of the most promising recent initiatives involve elements of both formal and informal financial systems, and benefit both types of institutions. For example, community-based initiatives have achieved more widespread success by incorporating elements of formal finance to achieve sustainability, replicability and scale. Examples include the Grameen Bank, SEWA Bank, and Mibanco, which started with localized micro-enterprise credit, and then achieved scale. Formal finance institutions have also reached more of the urban poor by working with community level organizations (e.g., the Housing Development Finance Corporation—HDFC—in India). The key challenge is to multiply and significantly expand such public, private and community initiatives in order to have a major impact on the lives of the urban poor and, especially, those living in slums. To achieve this, SUF is intended to play a catalytic role in bringing the various actors together and helping to mobilize domestic resources from both public and private sectors, in part by leveraging technical and financial assistance from the international community. Conceptually, this approach is captured in Figure 1.



Figure 1: SUF’s Development Partners

Donor Support for Slum Upgrading A broad range of institutions and facilities provide financial and technical assistance in areas directly or indirectly related to slum upgrading. As the lead UN agency for activities in human settlements, UN-HABITAT’s involvement in shelter and services for the urban poor is primarily through advocacy, policy formulation, capacity building, and

NGOs/CBOs

Private Developers

Municipal Utilities

Municipalities

Central Government Agencies

Micro-Finance Institutions

Housing Finance Institutions

Commercial Banks

Bond MarketInsurance Companies

Pension Funds

Municipal DevelopmentBanks

Glo

bal

Sh

elte

rA

ssis

tan

ceF

acili

ty

Collaborating Institutions:GuarantCo, Multilateral Development Banks, Bilateral Donors, etc.

Slu

mU

pgra

ding

Fac

ility

(SU

F)



technical assistance -- mobilizing support for a range of initiatives, and working with a wide range of partners, at the international, regional, national and local level. However, until the creation of Sub-Programme 4 on Human Settlements Financing and the establishment of SUF, it gave scant attention to financing issues. The multilateral development banks (i.e. the World Bank and the regional development banks) have been financing urban infrastructure and low-cost housing for four decades. Until the second half of the 1980s, they focused on the direct provision of infrastructure and basic shelter for the urban poor, primarily through slum upgrading and sites-and-services projects. These schemes were generally implemented by central government departments or by special development agencies (often created for the purpose of implementing the schemes financed by the development banks). The development banks now emphasize the creation of an “enabling environment” within which the private sector, broadly defined, can play a greater role in meeting the urban development challenge. They seek to strengthen the administrative and financial capacity of municipalities and support housing finance institutions and assist programs aimed at providing secure tenure for the urban poor. In money terms, the bulk of their annual US$3 billion lending for urban infrastructure and housing goes to transport and water infrastructure. Slum upgrading projects that directly address the living conditions of the urban poor account for only about one-seventh of the total. Lending volumes vary significantly from year-to-year, but indicate a slightly downward trend (when the amounts are adjusted for inflation). The development banks’ charters mandate that they lend only to governments or to other entities—such as municipalities and utility companies or private organizations—only with government guarantees. The size of their lending operations makes it difficult for them to directly support CBOs, NGOs and private enterprises. Similarly in their housing finance operations, they generally support mortgage lending institutions rather than micro-lending organizations. They are trying innovative approaches to make their projects more responsive to local needs and to have NGOs and CBOs play a greater role in project design, implementation and operation.15 Still, their comparative advantage lies in supporting policy reform, institutional strengthening and delivery of trunk infrastructure. The development banks are also important sources of technical assistance and capacity building. A review by PM Global of ten recent World Bank financed urban development projects found that between 4% and 24% of the loan/credit amount was devoted to various types of technical assistance, with an average of 9.4%. We believe that the amount of technical assistance provided by the regional development banks is of the same order of magnitude. Thus, in aggregate terms, the development banks together provide US$250-300 million annually for technical assistance and capacity building.

15 For example, ADB has an on-going housing finance project for Vietnam where part of the money is channeled through community-based financial institutions.



Many of the bilateral donors, such as DFID and Sida, have urban assistance programs that tend to be well suited for supporting community and NGO schemes as well as micro-finance institutions.16 They can often back innovative programs, such as CLIFF. An occasional drawback with grant-financed programs is that they can place too little emphasis on cost recovery and discourage the mobilization of domestic resources. For over three decades, USAID used its Housing Guaranty Program to support housing and municipal investments. Under a new program titled Development Credit Authority (DCA), USAID can guarantee loans made by domestic financial institutions to municipalities, micro-finance organizations and other entities engaged in development activities. Over the last few years, the development finance institutions (DFIs) have also increased their support for mortgage lending institutions, both the primary lenders and secondary market institutions. Most of the DFIs’ assistance takes the form of foreign currency loans and equity investments. However, IFC recently provided a guarantee that would help mobilize local financing for a municipal water project in Mexico. The Inter-American Development Bank (IDB) has a new guarantee program that supports domestic borrowing by private infrastructure enterprises. Over the last couple of years, the DFIs have started to support micro-finance institutions; both IFC and IDB, for example, have made equity investments in funds affiliated with ACCION International. Indeed, IFC has made micro-finance one of its priority areas. While the DFIs generally do not provide direct technical assistance, their involvement in various enterprises tends to result in a significant strengthening of their clients. Some relevant multi-donor initiatives have emerged from the Private Infrastructure Development Group (PIDG), comprising several European bilateral aid agencies and the World Bank. Several donors have used PIDG to fund the Emerging Africa Infrastructure Fund (EAIF) that finances private infrastructure projects in Sub-Saharan Africa. While there are private equity funds available in the market, EAIF is the first fund to provide long-term debt capital in that region, where it is in short supply. EAIF, created in 2002, helps catalyze private investment by evaluating investment opportunities in a professional manner and structuring and negotiating sound investments. PIDG has established GuarantCo, a facility that provides guarantees for mobilization of local funding for private and municipal infrastructure projects. Thus, GuarantCo is designed to mitigate some of the risks faced by domestic long-term investors and encourage them to extend long-term funding for infrastructure projects. The instruments guaranteed by GuarantCo are expected to be especially attractive to insurance companies and pension funds that need to match their long-term liabilities with long-term assets. The most recent PIDG initiative is InfraCo that prepares and acts as initial sponsor of private infrastructure projects.

16 Japan (through JBIC) has the largest bilateral assistance program. A significant share of this program is devoted to urban infrastructure, especially in Asia. Although some of the funding goes to microfinance institutions and community infrastructure, it appears that the JBIC focus is on major trunk infrastructure.



The Public-Private Infrastructure Advisory Facility (PPIAF) has financed a feasibility study on an Asia Private Infrastructure Financing Facility (AsPIFF) modelled after EAIF but serving low-income countries in Asia. Once again, the driving force behind the scheme is PIDG. Coming out of the AsPIFF study was a proposal to establish a Mini-Infrastructure Apex Programme (MIAP) which would deliver increased financing to small-scale infrastructure providers via wholesale lending to local intermediaries such as micro-finance institutions and NGOs. It would provide technical support during the early stages of establishment of a new service delivery program and act as a catalyst to help ‘jump start’ local private sector infrastructure. MIAP could potentially become a useful instrument useful in slum upgrading projects. A number of multi-donor technical assistance programs address, to varying degrees, the problems of urban slum dwellers.17 The main programs are:

¾ Cities Alliance

¾ Cities Alliance’s Africa Facility

¾ Cities Alliance’s Community Water and Sanitation Facility

¾ Consultative Group to Assist the Poorest (CGAP)

¾ DevCo Advisory

¾ Financial Sector Reform and Strengthening Initiative (FIRST)

¾ InfraCo

¾ Managing Water for African Cities

¾ PIDG Technical Assistance Facility (PIDG-TAF)

¾ Public-Private Infrastructure Advisory Facility (PPIAF)

¾ Public-Private Partnerships for the Urban Environment (PPPUE)

¾ UNDP-World Bank Water and Sanitation Program (WSP)

¾ Urban Management Programme (UMP)

¾ UN-HABITAT Water and Sanitation Trust Fund

¾ Water for Asian Cities Programme These key features of these TA and small grant facilities are summarized in Tables 1 and 2 below.

17 We regard CLIFF (see Box 3 above) as project implementation vehicle rather than as a technical assistance facility. Thus, it is not included here.



Table 1: Technical Assistance and Small Grant Facilities Part 1

Facility Mission/Objectives Sectors Primary Clients (Top)Secondary Clients (Below)

PPIAF Promote private infrastructure investments

Telecom, toll roads, ports, airports, pipelines, power generation, transmission & distribution, water & sanitation

Central GovernmentsMunicipal Governments

PPPUE Promote public-private partnerships Primarily water & sanitation, solid waste and other environmentally oriented services

Central GovernmentsMunicipal GovernmentsPrivate enterprisesCommunities

DevCo Advisory(IFC-PSAPT)

Expand the role of private sector in the provision of pro-poor infrastructure, esp. in low-income countries

W ater & sanitation, power, telecommunications/ICT and transport as well as housing and solid waste management

Central GovernmentsMunicipal Governments

InfraCo Expand the role of private sector in the provision of pro-poor infrastructure, esp. in low-income countries

W ater & sanitation, power, telecommunications/ICT and transport as well as housing and solid waste management

Primarily private sector infrastructure companies

PIDG Technical Assistance Facility

Enhance the ability of public and private sector clients to attract private capital for infrastructure

All infrastructure sectors Municipal governmentsCentral governmnetsRegulatory agenciesPrivate firms

UMP Strengthen municipal management and promoting participatory urban management

All municipal infrastructure sectors and social sectors, including HIV/AIDS prevention

Municipal governmentsCentral governmnets

Cities Alliance Cities W ithout Slums Slum upgrading, i.e. municipal infrastructure and housing

Municipal governmentsCentral governmnets

Cities AllianceAfrica Facility

Cities W ithout Slums by assisting municipal and central governments in Sub-Saharan Africa access funding from the Cities Alliance

Slum upgrading, i.e. municipal infrastructure and housing

Municipal governmentsNGOs/CBOs

Cities AllianceCommunity Water & Sanitation Facility

Cities W ithout Slums through partnerships with private and non-governmental organizations

W ater and sanitation Municipal governments

WSP Improve water and sanitation services, especially fror the poor

W ater and sanitation Central GovernmentsMunicipal Governments

Water and Sanitation Trust Fund(UN-HABITAT)

Improve water and sanitation services, especially fror the poor

W ater and sanitation Central GovernmentsMunicipal GovernmentsW ater Utilities

Managing Water for African Cities

Improve water water management in seven African cities through capacity building and networking


Water for Asian Cities Programme

Improve water and sanitation services, especially fror the poor, through better investment design and water management


CGAP Improve financial services for the poor Microfinance Financial institutions, esp. micro-financeGovernment policy makersRegulator

FIRST Strengthen the financial sector in developing countries

Financial sector Central governmentsRegulatory agencies



Table 2: Technical Assistance and Small Grant Facilities Part 2

Facility Main Products General Mode of Intervention Comments

PPIAF Policy adviceCapacity buildingKnowledge sharing

Provision of consultants

PPPUE Policy adviceCapacity buildingDesigning innovative partnershipsImplementating partnerships

Provision of consultantsGrants for partnerships

Focuses on municipalities with less than 500,000 people

DevCo Advisory(IFC-PSAPT)

Transaction support IFC-PSAPT managed teams of staff and specialized consultants

Still in start-up phase

InfraCo DevCo Principal would act as a developer and would "sell" the projects to private investors/operators

DevCo Principal would finance its own project development expenditure by investing equity and assuming debt

DevCo would assume the risky, up-front investments and recover the costs by selling the project to private sector investors

PIDG Technical Assistance Facility

Infrastructure development studiesSupport policy & regulatory reformsPioneer/pilot operationsCapacity building

TA grants channeled through PIDG investment vehicles (EAIF, GuarantCo)

PIDG-TAF is designed to support the work of PIDG investment vehicles

UMP City consultationsCapacity buildingKnowledge sharingPolicy advice

Uses own staff, operating from regional offices, and finances staff from regional & local anchor institutions

Cities Alliance City development strategiesPolicy adviceCapacity buildingKnowledge sharing

Provision of consultants Knowledge sharing among donors is an important aspect of CA’s work

Cities AllianceAfrica Facility

Assistance for proposal preparation Provision of consultants Mostly small grants (<$75,000)

Cities AllianceCommunity Water & Sanitation Facility

Assist indeveloping innovative financing and partnership arrangements

Provision of consultants Still in its early stages

WSP Policy adviceCapacity buildingKnowledge sharing

Uses own staff, operating from W ashington and four regional offices

Water and Sanitation Trust Fund(UN-HABITAT)

Policy adviceCapacity buildingKnowledge sharingPublic awareness building

Uses own staff and consultantsNetworking & information sharing

Still in start-up phase

Managing Water for African Cities

Capacity buildingInstitutional strengtheningKnowledge sharing

Networking and information sharing facilitated and supported by UN-HABITAT and UNEP staff

Water for Asian Cities Programme

Preparation of investment projectsInstitutional strengtheningKnowledge sharing

Uses own staff and consultantsNetworking & information sharing

Implicit link with ADB lending program for water and sanitation (amounting to US$500 million)

CGAP Institutional strengthening for MFIsStrengthen government institutionsSeed capitalFacilitating access to funding

Provision of consultantsLimited amount of seed capital (on commercial terms)

Improving aid effectiveness is an important aspect of CGAP’s work

FIRST Policy adviceInstitutional strengthening

Provision of consultants



It is striking that virtually all of these facilities focus their activities on public sector organizations (central government ministries, agencies, regulatory authorities and municipalities). Only InfraCo works on behalf of (un-identified) private sector clients. Some of CGAP’s operations are directed towards individual microfinance institutions. However, none address the assistance needs of NGOs and CBOs. Most of the facilities basically provide financing for consultants rather than using their own staff. Furthermore, most of the facilities are geared towards policy reform and (long-term) capacity building, rather than financial “packaging” to make individual projects financeable. The two facilities that do, to some extent, address financial packaging are InfraCo for private infrastructure projects and the Community Water and Sanitation Facility under the Cities Alliance. It is also noteworthy that most facilities address basic infrastructure services like water, sanitation, electricity, etc., but, with the exception of the Cities Alliance, none addresses housing and land—the two asset classes fundamental to successful slum upgrading and improving the lives of the urban poor. Thus, 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.

The Objective of SUF However, SUF does not seek to fill all of the identified gaps. Rather, as stated in SUF’s Operations Manual:

“The central objective of SUF is to assist developing countries to mobilize domestic capital for their own slum upgrading activities by facilitating links among local actors and by packaging the financial, technical and political elements of development projects to attract such investment. This will entail identifying projects, building local capacities, networking, and providing direct technical assistance and, where appropriate, seek initial credit enhancements to demonstrate the viability of these processes.”

None of the organizations reviewed above has this objective. The one that comes closest is, of course, Cities Alliance. However, Cities Alliance works in a different manner. It primarily provides grants for technical assistance and capacity building. Although it has increasingly focused on finance issues, it does not—and is not set up to—provide day-to-day advice to clients. In terms of its mode of operations, DevCo, which provides direct transaction support for infrastructure privatizations, is the most comparable, but its mandate is quite different. Thus, SUF’s objective is to provide a type of service that is not covered by other facilities.



The Slum Upgrading Facility

SUF’s Functions As described in the latest Progress Report, SUF’s functions are:

¾ 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

¾ 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.

¾ 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.

¾ 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. We believe that SUF should not act as a financial institution or a donor. There is a significant moral hazard involved: “catalytic financing” could become a substitute for poor project preparation and financial packaging. Still, during the pilot phase, the amounts involved are likely to be small and it might be too time consuming to mobilize this type of



financing from donors or other donor facilities. Thus, any such funding should be limited and granted only in exceptional circumstances and be approved in a transparent manner. We believe that the procedures adopted by the Cities Alliance for “medium” and “large” grant requests can serve as a suitable model for review and approval of proposals for pilot operations and bridge financing. Also implicit in the SUF documents is the provision of credit enhancements of different forms, most likely in the form of guarantees. There are, as discussed in Section 2.6, a number of organizations that provide guarantees and other types of credit enhancements. We recommend that, once the Pilot Phase is over, SUF would not provide credit enhancements.18 During the Pilot Phase, the amount of credit enhancement for any given project is likely to be small. The transaction cost (and time involved) would not justify participation by GuarantCo or other guarantee facilities. Thus, we recommend that SUF should be able to provide guarantees and other forms of credit enhancements during the Pilot Phase. Appraisal and approval procedures for credit enhancements must be very stringent and meet sound commercial standards (which imply, inter alia, that the risk of a guarantee being called has to be appropriately low). We regard this as an “expedient exception” to the general principle that SUF should not be a financial institution.

SUF’s Clients 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.”

However, it is quite clear from the various documents that SUF has adopted an upgrading paradigm that places municipalities and communities at the center of the action. We have some concerns about this paradigm, especially in Sub-Saharan Africa. In most of Africa, NGOs and CBOs working with slum dwellers are weak or non-existent. Even where decentralization has taken place and the revenue base (including transfers) has been strengthened, local governments are poor and have little or no money for infrastructure investments (see section 2.4). Most successful upgrading programs19 outside Latin America were run by central government agencies such as ARRU in Tunisia, UDD in Jordan, and ANHI in Morocco

18 There is a possibility that such credit enhancement would not be available, for example, because GuarantCo has reached its exposure limits or a certain operation is not consistent with the assistance strategies of the bilateral donors. If this turns out to be the case, a changed focus can be worked out when more experience has been gained. 19 With the exception of the Orangi Pilot Project in Pakistan (see Section 3.1). The slum upgrading program in Thailand was centrally funded through the Community Organizations Development Institute (CODI, previously UCDO), a central government agency, but implemented by communities.



(in all cases they put great emphasis on consulting with the slum communities). The largest of them all, the Kampung Improvement Program (KIP) in Indonesia, was started and mostly operated as a central government program. When it was gradually decentralized, it lost momentum and financing (see Box 4 above). While much argues for having municipal governments responsible for slum upgrading, specialized agencies seem to have a comparative advantage in attracting staff, mobilizing financing and implementing projects. Indeed, the Kenyan Slum Upgrading Program (KENSUP) is essentially a central government initiative. There are many different approaches to community participation (CODI in Thailand, PRODEL in Nicaragua, Parivartan/SEWA in India, etc.). However, we are concerned that SUF appears to favor what can best be called the SDI/SPARC approach. This is illustrated by the following statement in the most recent Progress Report:

“Highest priority has been placed on establishing working relations globally (through the SUF Consultative Board) and at country level (in SUF pilots) with affiliates of Slum and Shack Dweller International (SDI). UN-HABITAT has developed specific cooperation agreements and action plans with SDI affiliates and the local authorities in Sri Lanka, and is developing similar arrangements in Ghana.”

This approach to community participation has been adopted by SPARC in the CLIFF projects in India and is being implemented in the CLIFF program in Kenya. We believe that it is important that the SUF Pilot Program includes a broad range of participatory approaches.

SUF Organization The organizational context for SUF—as we understand it—is depicted in Figure 2. SUF is part of the newly created Human Settlements Financing Division (also referred to as “Sub-Programme Four”). The Program Development Branch (PDB) of the division 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. The Program Management Unit (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 Pilot Team20 and pursue—on its own—projects in Bangladesh, Cambodia, Kenya, Senegal, Uganda and Zambia. The PMU will 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. We understand—and find it surprising—that the SUF Program Manager still has not been appointed although the recruitment process started a year ago. The reason, reportedly, is uncertainties about the interface between SUF and the Water and Sanitation Trust Fund whose task is to mobilize development bank loans. This may reflect confusion about the mandates and operational modes of the two units.

Figure 2: The Organizational Context of SUF

20 For a discussion of the terminology used by UN-HABITAT in describing the activities during the Pilot Phase, see Box 6.

Director Human Settlements Financing Division

SUF PMU

SUF Pilot Team

SUF Program Manager

Program Development Branch

Manager

Consultative Board



SUF operates under the general guidance of the Consultative Board, which comprises donor representatives as well as persons with extensive experience from slum upgrading and finance. However, as its name implies, the Consultative Board is only advisory and has no real decision making power. The Human Settlements Financing Division and the SUF-PMU and the Design Team have demonstrated a high degree of “on-the-job learning.” The understanding of financing issues is significantly greater than it was two years ago. However, both the division as such and the SUF-PMU are clearly understaffed. We strongly believe that UN-HABITAT—as an institution—requires a much greater in-house competence in the financing field than it presently possesses. In principle, we would argue for a significant reallocation of budgetary resources to the Human Settlements Financing Division (Sub-Programme Four). Given how little discretionary money there is in UN-HABITAT’s budget, additional resources for the Financing Human Settlements Division probably has to come from new donor support. Capacity to carry out the normative functions needs to be created by establishing and properly staffing the Program Development Branch. Similarly, we believe that the PMU is understaffed for the tasks at hand. Our assessment the staffing needs for SUF-PMU is provided in Section 6.2.

Box 6: Pilot Phase Terminology

The terminology used to describe the various activities during the Pilot Phase is not always clear to an uninitiated audience. (See Box 1 on the various implementation phases.) During the Design Phase, SUF identified four Pilot Countries (Ghana, Indonesia, Sri Lanka and Tanzania) where the Pilot Team (a specially recruited consultant team) will work on selected 1st

Priority Physical Projects and 1st Priority Financial Products (one of each in the four Pilot Countries). These Priority Projects/Products are also referred to as Pilot Projects.

However, SUF also proposes that the PMU would undertake “Pilot Programs” in another six countries (Bangladesh, Cambodia, Kenya, Senegal, Uganda and Zambia). However, these countries are generally not referred to as “Pilot Countries” nor are the operations referred to as “Pilot Projects” –presumably because the “Pilot Team” would not be responsible for these activities. However, we argue below that it would be most appropriate if the consultant team became responsible for all activities in the field (i.e. advisory services, financial packaging and development of financial products) in all ten countries. In this report, we have used, as far as possible, the terminology used by UN-HABITAT. However, we suggest the following changes in terminology for the future.

¾ Donor financing would be provided for a 3-Year Pilot Program;¾ The consultant team would be called the SUF Advisory Team;¾ All ten countries (Bangladesh, Cambodia, Ghana, Indonesia, Kenya, Senegal, Sri

Lanka, Tanzania, Uganda and Zambia) where activities would be carried out during the Pilot Phase would be referred to as Pilot Countries;

¾ Ghana, Indonesia, Sri Lanka and Tanzania would be referred to as Focus Countries;¾ All physical projects and financial products that SUF would work on during the Pilot

Phase would be called Pilot Operations; and ¾ The identified 1st Priority Projects/Products would continue to be referred to as Priority

Operations.



The Pilot Program

The Contracting Out Solution After an analysis of various options, the Feasibility Study for SUF envisaged that SUF would be operated by a small core team of about six persons augmented by retainers for individual consultants and indefinite quantity contracts (IQCs) with a small number of relevant institutions/firms. The ratio of consultants to staff was assumed to increase from 2-to-1 in the first year to 4-to-1 in the third year. During the consultations with potential donors and Cities Alliance, it was decided to contract-out most of the operational work during the pilot phase to a consulting firm or a consortium of firms, which would provide the international expertise needed and would hire, on a reimbursable basis, the local experts. After a 16 month period, UN-HABITAT is close to signing a contract with a consortium led by the Emerging Markets Group. The procurement process for the Pilot Team was long and cumbersome. UN-HABITAT has also experienced severe difficulties in hiring local experts for SUF. In one case the process took five months. In another case, the local financial expert found the UNDP mandated maximum rate to be unacceptable (but agreed to work for the project on a pro bono basis). Thus, in retrospect, it is clear that the decision to contract out the pilot operations was correct: It is unlikely that UN-HABITAT would have been able to recruit and manage a large team of international and local experts through retainers with individual consultants and IQCs with firms. However, there was a trade-off involved: There are only a small number of organizations that have competence in the areas relevant to SUF (and any one firm could only belong to one bidding consortium). Thus, it is likely that “cherry picking” (i.e. selecting the “best” micro-finance firm, the “best” engineering firm, etc.) rather than selecting a pre-formed consortium would have resulted in an even stronger team.

The Selected Team The SUF-PT has been assembled by, and will be managed by, Emerging Markets Group (EMG). EMG Emerging Markets Group (EMG) is an international development consulting firm that serves donor agencies, private clients and sovereign governments. It is a “spin-off” from Deloitte Touche Tohmatsu and still retains a strategic relationship with this firm. EMG is headquartered in Washington D.C. and has major offices in London and Brussels. It has a staff of more than 200 professionals. EMG’s core competence is in the financial sector, ranging from micro-finance to capital markets and financial sector reform. In recent years, the firm has also gained significant experience in municipal finance and management and public-private partnerships in the infrastructure field, as well as limited recourse financing of infrastructure projects. EMG has a proven track record in managing large, multi-year contracts. The team leader selected by EMG has extensive experience in project finance and public-private partnerships. We



understand that the Pilot Team plans to use Deloitte Touche Tohmatsu’s Nairobi office as a liaison office and local base.

EMG has joined up with Buro Happold (BH), an international engineering firm with some 900 employees. BH’s operations in developing countries are quite limited. However, the staff that it has assigned to the Pilot Team has more than adequate knowledge and understanding of urban development and slum upgrading in developing countries. Two team members should be highlighted: Ruth McLeod and Michael Lea. Ms. McLeod is founder and Chief Executive of Homeless International, a leading international NGO in the slum upgrading field. Unlike the staff and management of many other NGOs, Ms. McLeod combines a dedication to poverty alleviation and development with a strong emphasis on financial viability, replicability and sustainability. She designed, and is presently managing, the Community Led Infrastructure Financing Facility (CLIFF).21 CLIFF is probably the most important innovation in the financing of slum upgrading during the last decade. Mr. Lea has two decades of international experience in housing finance reform, dealing with both primary and secondary markets. He has published more than 70 articles and book chapters, but he is no way a pure academic. Rather, as a consultant (working for agencies like the World Bank, IFC, Inter-American Development Bank and USAID), he has initiated and guided housing finance reforms as well as the creation or restructuring of housing finance institutions in various parts of the world. While it is hard to “rank” experts in a field like housing finance, he certainly is one of the two or three top experts in the field. In short, the SUF Pilot Team is very strong: it has good skills in project and municipal finance, first rate slum upgrading expertise and a top housing finance expert. This team is likely to be significantly better than what UN-HABITAT could have assembled in-house using existing or newly recruited staff.

The Pilot Operations The SUF Design Team undertook scoping missions to 10 countries.22 The team subsequently ranked the countries based on three criteria in order to identify the “pilot countries.” The criteria were:

¾ Confidence of Central Government in Local Government’s capacity for and commitment to slum upgrading;

¾ Strength of local civil society activity for slum upgrading; and

¾ Depth of capital market.

21 CLIFF is supported by Sida and DFID through the Cities Alliance. 22 Bangladesh, Cambodia, Ghana, Indonesia, Kenya, Senegal, Sri Lanka, Tanzania, Uganda and Zambia.



During repeat visits to the four pilot counties—Ghana, Indonesia, Sri Lanka and Tanzania—the SUF-DT identified what appeared to be the most promising projects and financial products in each country. These are commonly referred to as “1st Priority Physical Project” and “1st Priority Financial Product.” The team also identified other potential projects and products categorized as “further projects under development.” The various projects are briefly discussed in Annex 2 and listed below:

¾ 1st Priority Physical Projects:o Ghana: Pilot Slum Upgrading Projects in Shama Ahanta East Metropolitan

Area (SAEMA); o Indonesia: Cooperative Housing Project in Yogyakarta; o Sri Lanka: Pilot Slum Upgrading Projects in Moratuwa; and o Tanzania: Housing Project with TAWLAT Cooperatives.

¾ 1st Priority Financial Products: o Ghana: Low Income Home Improvement Finance Product; o Indonesia: Scaling up of Co-BILD Initiative; o Sri Lanka: Low Income Housing Finance Product; and o Tanzania: Additional Housing Loan Guarantee Facility.

¾ Future Projects under Development: o Ghana: Area Development Project in Tema; o Ghana: City-wide Slum Upgrading Programs in Accra, Tema and

SAEMA;o Ghana: Support to National Government in implementation of municipal

finance framework, housing policy and urban policy; o Ghana: Market borrowing for property tax reassessment to enhance

municipal revenues; o Indonesia: Area Development Project and Housing Association Model in

Karet Tengsin and Kampung Pulo, Jakarta; o Indonesia: City-wide Slum Upgrading Programs in Yogyakarta and

Surabaya; o Indonesia: Establishment of a nation-wide housing association for slum

upgrading; o Indonesia: Implementation of national/provincial level market-based

municipal borrowing program; o Indonesia: Implementation of national/provincial level market-based

housing finance mechanisms for low-income households (including potential support for the recently established Secondary Mortgage Facility);

o Sri Lanka: Colombo City-Wide Slum Upgrading Program; o Sri Lanka: National-Level Low-Income Housing and Upgrading Program; o Tanzania: Slum Upgrading Projects in Dar es Salaam; and o Tanzania: Housing Finance Institutions and Instruments.



We see no problems, per se, with the criteria used for identifying the pilot countries. However, we find the general approach to be very much “top-down.” In the longer run, SUF should respond more to client demand. If such an approach had been taken already at the design stage, we believe that the list of priority projects and products would have been more varied and, possibly, at a more advanced stage of preparation. Three of the physical projects are likely to involve housing cooperatives and new construction at a place different from where the cooperative members live at present (Indonesia, Sri Lanka and Tanzania). At least one of them involves construction of apartment buildings (i.e. Tanzania) —the available documentation on Indonesia is unclear on this point). In Sri Lanka, the proposed construction accommodates two housing units in each building. We see some problems with affordability (in Tanzania, the average apartment appears to cost well over US$20,000), and potential delays (land issues need to be resolved in Sri Lanka, and the Indonesia project was initiated in 1998 but has been stalled because the cooperative has not been able to get electricity to the site). Given their nature—new construction of houses but no infrastructure—these projects seems to be more “financial products” than “physical projects. Only one of the priority projects (in Ghana) appears to involve traditional in situ upgrading activities. Unfortunately, this project appears to be furthest from possible implementation. The home improvement loan product in Ghana which is being developed jointly between HFC Bank and the CHF International (a US based NGO with more than three decades of global experience in micro housing finance) appears promising. The challenge faced by SUF is to make sure that the amount of any potential credit enhancement is kept to a minimum. Co-BILD is a donor supported micro housing finance institution with a default rate of about 20%. There should be a few organizations (in Indonesia and elsewhere) with a better track record, and with greater potential for gaining access to commercial financing with more limited credit enhancement than Co-BILD. Indeed, without any drastic improvement in performance, any loan guarantee provided by SUF or another party is highly likely to be called. The other two finance products are essentially mortgage lending, and appear to involve scaling up the approaches taken for the physical pilot projects and to use a guarantee instrument. We have serious doubts that mortgage loans are appropriate for a majority of the urban poor (see Box 1). The SUF Pilot Team—i.e. the EMG consortium—is limited to the four pilot countries, but will have an opportunity during the first three months to “refine these project proposals”23 We hope that the SUF-PT will use this opportunity to come up with a broader set of pilot operations.

23 TOR for the SUF Pilot Team, paragraph 19.



The Operations Manual SUF has prepared a comprehensive Operations Manual. We believe that the manual is very well prepared. 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. In terms of policies and procedures, we are in general agreement. However, we want to highlight one issue: i.e., the approval procedures for grants and other catalytic financing as well as credit enhancements. The SUF Programme Manager who according to the manual, approves requests for grants and credit enhancements, can not act completely impartially. He might have an interest in demonstrating that SUF is making progress in “getting projects done” and, thus, be too lenient in approving requests. (The problem is even more severe if the request comes from SUF-PMU—a clear possibility since the PMU is expected to handle potential operations in six countries.) While the review and “no objection” by the Cities Alliance might mitigate this risk, we believe that stronger safeguards should be put in place through, for example, the use of external reviewers to examine the merits of each request for funding or credit enhancements. The Operations Manual also includes appropriate procedures for progress monitoring (and a Monitoring and Evaluation Officer has already been recruited to the PMU).

Coordination Issues and Other Issues The EMG team is assembled from people located in different places, which makes sense given the need to get the best possible group of people irrespective of their place of residence. However, we understand that the SUF-PT will not have any permanent representation in Nairobi (although Deloitte Touche Tohmatsu will provide a liaison office, see Section 5.2). Thus, we see a risk that there might be too much of a gap between the SUF-PMU and SUF-PT. Significant thought and effort has to go into the design of feed-back and collaborative mechanisms.

There is also a risk that contracting arrangements (and annual work plans) are too rigid and that the SUF-PT will focus too much on the identified pilot operations and neglect other schemes or activities that potentially could have much higher payoffs. We have not seen the draft contract negotiated with the consultants, but believe that it should be highly flexible and in essence take the form of a framework or IQC contract. The PMU will appoint Country Consultants in each of the four pilot countries. Also, the Habitat Programme Managers attached to the local UNDP offices are expected to provide—on behalf of the PMU—liaison with the Pilot Team and local stakeholders. We believe that these arrangements might lead to: mixed signals to the local stakeholders; conflicts with the Pilot Team on approaches etc.; unclear lines of communication; and



reduced or unclear accountability. The Habitat Programme Managers have a broad range of responsibilities that go far beyond SUF and we do not suggest any change in their tasks or reporting arrangements. However, we believe that the Country Consultants should be hired by and report to the Pilot Team.



SUF Budget and Work Program

General Considerations We believe that SUF must reach a certain size to be effective. Success of any one project depends on a large number of factors, many of which can not be influenced by the SUF-PT or the other stakeholders. For example, the cost might simply be too high for the beneficiaries (this is an apparent risk in Tanzania) or land title issues might take too long to be resolved (an identified risk in Sri Lanka). Consequently, there is a possibility that a large share of the identified pilot operations will be significantly delayed or not materialize at all.24 Thus, with a small number of pilot operations in four countries, there is a significant risk that too few projects are implemented over the next three years to form a sufficient basis for learning appropriate lessons. Furthermore, we believe that, at present, there are significant economies of scale in SUF’s operations. Once a certain minimum level of activity has been reached, the cost of supporting additional projects is modest. Also, we believe that if SUF is too small, its credibility will suffer and spin-off effects will be limited. On the other hand, SUF can also become too big and lose focus. In short, we think that the benefits of SUF (over the next few years) follow some kind of S-curve where the benefits (as a function of funding) initially are very low, followed by an interval where the benefits increase rapidly, and subsequently a segment where there are diminishing returns to scale. If the budget for SUF is too small, the program is likely to be another UN sponsored “feel-good” program which allows UN-HABITAT and the donors to say: “we are working on it” but with little real results on the ground. Our basic assessment is that if funding for SUF remains at the level of US$10 million for the pilot phase, it might not be worth going ahead with the present concept.

Work Plan and Staffing Considerations EMG has provided a staffing plan for 30 months involvement in the four pilot countries, which adds up to 7.75 staff years or about 1.9 staff years per country. This is line with our estimates of the cost per operation (see below). UN-HABITAT assumes that financing for four pilot projects will have reached “financial closure” within 30 months. We believe that UN-HABITAT (and EMG) have overestimated the probability of success. Thus, in order to bring one scheme to fruition, several must be under active preparation. The time to bring a project to fruition is likely to average about 2 years, with some proceeding significantly faster and others slower. To bring 3- 5 operations to

24 There is no basis for assigning any probabilities at this stage. However, a comparison with private infrastructure projects is illustrative. Only a small fraction (1/5 – 1/3) of projects that developers pursued reached financial closure. In India, for example, only two of eight high priority “fast track” power generation projects were actually implemented.



financial closure within three years will require that SUF works on a significantly larger number of operations. We also believe that SUF must have a reasonable capacity to deal with client requests from the start. It cannot be seen as an exclusionary institution that focuses on a couple of favored clients. Thus, the advisory work and financial packaging should extend, as a minimum, to the six other countries that PMU has identified as target countries for its assistance, i.e. Bangladesh, Cambodia, Kenya, Senegal, Uganda and Zambia. For our budget estimate, we have assumed that, by the second year of operation, SUF would be actively supporting about ten projects and have more modest involvement in another 10 schemes. Active projects will probably require from ½ to 1 person-years/year for two years (i.e. a total of 1-2 person-years in total) and the less active projects about 1/3 of this amount per year. This would imply a total annual staff input of 7- 13 persons in the second year of operations, which can be rounded to 10 for planning purposes of which at least 3 would come from EMG About 60% of the balance should come from specialized consultant inputs and 40% from SUF-PMU Staff. Much of the consultant input could come from the persons who served on the Design Team. UN-HABITAT should consider amending the contract with EMG to have SUF-PT carry out the bulk of the work in Bangladesh, Cambodia, Kenya, Senegal, Uganda and Zambia. SUF-PMU would, instead of carrying out these activities on its own, become more directly involved in all pilot countries. Given the potential coordination difficulties we highlighted earlier (Section 5.4), this might lead to a better cross-fertilization between the PMU and the Pilot Team. Taking into account other tasks that SUF-PMU has to undertake, we see the need to augment the SUF-PMU staff to around 5 persons with a balanced set of skills:

¾ A program manager appointed by UN-HABITAT who will be responsible for taking forward implementation and providing the key linkage to existing international financial initiatives and facilities

¾ a project finance specialist with infrastructure transactions packaging expertise;

¾ a municipal management professional with appropriate institutional and financial skills;

¾ a slum upgrading/ urban regeneration finance specialist with extensive experience of working with community groups and NGOs; and

¾ a housing finance expert, preferably also with experience of micro-finance. As noted earlier, there is a real need to build up the normative and dissemination aspects of SUF and the broader area of human settlements financing. We believe that at least two full-time persons are needed for this. Under presently proposed organization for the Human Settlements Financing Division, this staff would probably be located in the Programme Management Branch (see Section 4.3). However, we believe that there is



clear merit in merging the Programme Management Branch with the PMU. Over the next couple of years, both units will remain relatively small and, thus, size of a merged unit would not pose any management difficulties. On the other hand, a merger would lead to closer linkages between the operational and normative tasks, potentially enhancing the quality of all aspects of the work.

Tentative 3-Year Budget Throughout this report, we have made a number of recommendations regarding the strategic orientation of SUF during the Pilot Phase, the organization and staffing of the work, as well as SUF’s mode of operation. Most of these recommendations have implications for the budget. Since what we have made are strategic suggestions, we think that there is little merit in dissecting and making changes to the latest budget suggested by UN-HABITAT. Based on the above considerations and taking into account that staff and consultants would be needed also for other PMU tasks, we get an indicative budget of US$8.8 million in 2008 (Table 3). Of course, there would be a gradual build-up over the next couple of years.25 Thus, we believe that in order to ensure the effectiveness of SUF and its credibility, a three year budget of between US$22 and 25 million is required for 2006-08. SUF should be able to make productive use of up to US$30 million, but any amount above this figure is likely to produce limited benefits. There is one important assumption in these calculations: We assume—and recommend—that the amount of seed money and credit enhancements/guarantees should not exceed 30% of the budget.

Table 3: Indicative Budget for SUF in 2008 (US$)

Person-Years

UnitCost

Total

Normative work (PDB or PMU) 2 250,000 500,000PMU Core Staff 5 250,000 1,250,000PMU Consultants (or through EMG) 5 250,000 1,250,000EMG (present Pilot Team) 2,000,000Local Experts 7 80,000 560,000Travel (PMU staff & consultants) 600,000Operational Work 6,160,000

Seed Money & Credit Enhancements 2,640,000

Grand Total 8,800,000

25 The budget for the remainder of 2006 and for 2007 will depend on how soon EMG will start work and how quickly UN-HABITAT can recruit staff and consultants (incl. modify the contract with EMG). Thus, we do not think it is meaningful—at this stage—to provide details on the build-up of the budget in 2006-7.



Other Issues The Operations Manual provides for three different ways of channeling money for SUF.: through Cities Alliance, through the Habitat Foundation or directly to a project. The latter is clearly appropriate if the support to SUF comes from a donor’s country assistance program rather than from a central fund. We believe that the Cities Alliance has played a useful and constructive role, imposing “discipline” on SUF. Since the DFID money is being channeled through Cities Alliance, it will be a participant in the process, irrespective of how Sida’s money is channeled. From a technical point of view, we are indifferent on which financing channel of Sida should select. Rather, we think this is a policy decision for Sida. The Cities Alliance is playing an important fiduciary role in ensuring that the donors’ money is used appropriately. We believe that the structure and role of the Consultative Board are such that it can not provide the same kind of oversight. Thus, if funding “by-passes” the Cities Alliance, we believe that a governance arrangement similar to what has been adopted for most trust funds managed by the World Bank would be more appropriate. Such a governance structure would involve (i) a decision making body representing the donors, which would approve budgets and any significant expenditures or financial commitments and (ii) an advisory body representing actual and potential stakeholders (similar to the non-donor representatives on the present Consultative Board). Similarly, we believe that requests for seed financing and other catalytic financing as well as credit enhancements should be subject to an independent, professional review prior to approval The PMU does not have—and is not likely to acquire—the capacity to evaluate requests for credit enhancements. Thus, an outside review is a necessity. Also, as we mentioned in Section 4.1, there is a moral hazards problem associated with SUF-PMU evaluating and approving any type of financing.



Benefits and Risks

Benefits of Slum Upgrading The lack of the most basic infrastructure in urban slums makes the provision of social services, such as health care, ineffectual. Similarly, the lack of infrastructure increases the cost of necessities, such as drinking water or fuel for cooking, to the urban poor and reduces their productivity and economic opportunities. Well designed upgrading schemes can have drastic impact on the lives of slum dwellers. New infrastructure improves access to employment and enhances the productivity of home-based enterprises. Water and sanitation-related diseases are a main factor in infant and child health, and part of the vicious circle of diarrheal diseases, malnutrition, and increased susceptibility to other diseases. Poor hygiene and substandard living conditions are linked in many ways to poor health, which in turn is a major cause of poverty and income insecurity. Moreover, high infant and child mortality are in turn linked to increased maternal risks associated with frequent childbearing. Upgrading directly address these problems through improved water supply and sanitation. However, slum upgrading also tends to improve access to education, health and other social services. Consequently, women and children are the main beneficiaries of upgrading projects. In most cases, women are actively involved in the whole upgrading process from community action to saving for house improvements. HIV/AIDS is more prevalent in urban areas than in the countryside, and more prevalent in slum areas than in middle and high income areas. The physical works associated with slum upgrading do not have any direct impact on HIV/AIDS as the have on many other diseases. However, there are significant indirect linkages: improved employment opportunities and better access to education, health and social services will over time also have a positive effect on the prevalence of HIV/AIDS.

The Benefits of SUF As we noted in Section 2.1, slums are not only the result of urban poverty but also the product of failed policies, bad 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 construction and increased public sector infrastructure investments are essential elements in any strategy to prevent or upgrade slums.



Unfortunately, the urban poor and municipalities in low and lower middle income countries have virtually no access to credit. The fact that they 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 (see Chapter 2 and especially Section 2.5). To make the urban poor and municipalities “bankable” requires the development of new financial instruments and a high degree of “financial engineering.” We have demonstrated that, besides SUF, no other donor supported (and certainly no commercial) organization exist that can work with slum dwellers and other low income urban households, with municipalities and government agencies involved in slum upgrading, and with lenders to help structure projects, mitigate risks and develop new approaches to lending. This leads to the question: Is SUF organized and staffed to effectively carry out these tasks? We believe that SUF has made a credible start during the Design Phase and that the team of consultants assembled by EMG has the required skills and experiences. Provided that SUF has sufficient resources to bring a reasonable number of projects to the stage that commercial financing has been mobilized and it can develop new financial instruments, it should be successful in carrying out its mandate. However, it is important to realize that SUF represents a long-term investment for the donors. In the short run (i.e. over the next couple of years) the benefits in helping to improve slums will be modest. However, as SUF reach more countries and projects, as innovative tools are disseminated the impact will multiply and the benefits can become very large. The development of new financial instruments and packaging of projects to attract long-term financing will provide new investment opportunities for pension funds, insurance companies, etc. and contribute to financial deepening.

Main Risk Factors The greatest risk we see at this stage is that SUF would remain too small, working with too few schemes to provide adequate lessons and experiences. This risk will be significantly reduced if SUF is provided with the level of funding that we have recommended. Even with adequate funding, there is a risk that too few projects materialize due to factors outside the control of the SUF team: political commitment might be missing, concerned NGOs and CBOs might be too weak, problems related to land tenure might impose excessive delays, etc. The best way to mitigate such risks is to work with a large number of pilot operations, have a responsive monitoring system and to be flexible in the allocation of resources, i.e. to reduce efforts on “losers” and quickly identify potential



“winners.” However, it might be difficult to do so if the contract with EMG is too rigid or if political considerations are allowed to influence resource allocation. Indeed, the nature of UN-HABITAT might exacerbate this problem. It might lead to a too rigid “top-down” approach, emphasizing regional balance in pilot project selection, rather than a demand-driven “bottom-up” approach. A related risk concerns the selection of development partners and project types. This might limit the experience gained and the applicability of the tools and approaches developed. We have highlighted the need to work with a broad range of participatory approaches (Section 4.2) and to engage with a broad range of government agencies besides municipalities (Section 5.3). The Cities Alliance and the Consultative Board will play important roles in addressing these risks. Another operational risk concerns catalytic financing and credit enhancements. There is a possibility that such financing becomes a substitute for solid project preparation and financial engineering, which would significantly reduce the value of the experiences gained during the Pilot Phase. This risk can be mitigated by putting a limit on the amount of SUF’s funds that can be used for these purposes and by introducing the governance recommendations we have suggested (Section 4.1 and Chapter 7). There is also a risk that the projects and products developed by SUF will not reach the urban poor but primarily benefit the broad middle class. We believe that this should not be a major concern at this stage. As we discussed earlier, 70% of the urban population in Sub-Saharan Africa lives in slums. Only a few percent of the urban population has access to formal housing finance and micro housing finance organization serve only a tiny fraction of the slum dwellers. Ultimately, the objective should be to “fill” this enormous gap, which essentially consists of many in the “upper class” as well as the whole middle class and all the urban poor. Thus, a two-pronged approach has to be adopted: (i) Making the formal housing finance institutions “move down” and reach people with lower incomes; and (ii) Scaling up the operations of micro housing finance organizations (Section 2.3). This means that we believe it appropriate if SUF’s operations target the urban poor and the lower middle class. We regard the risk that SUF would target the urban rich and the upper middle class as minor. Similarly, we believe that the risk of leakages (i.e. that those with high incomes would become the primary beneficiaries) is quite modest.

In short, we believe the risks associated with SUF are acceptable and manageable.



Conclusions and Recommendations Financing urban development and, especially, slum upgrading is a major challenge. Mobilizing local resources for slum upgrading, low-income housing and associated infrastructure requires an intimate knowledge about the factors that lead to the creation of un-serviced informal settlements, the lives and livelihoods of the urban poor, as well as the functioning of financial markets. At present there is no organization—public or private—that has competence in all these areas. SUF was created to fill this void. SUF is designed as a technical assistance facility that will primarily help “package” slum upgrading projects to make them financially viable and “bankable.” To achieve this, SUF will work with municipalities and other government departments and agencies, with slum communities as well as with financial institutions. In most cases, neither municipalities nor slum dwellers are “creditworthy.” This does not mean that they will not or can not repay loans. (Indeed, the experience is that under the right circumstances, both types of borrowers have good repayment records.) Rather, their lack of access to finance is primarily due to the lenders’ inability to assess and mitigate risks. Thus, much of SUF’s work will involve various risk mitigation strategies and “disassembling” projects so that different components can be financed by those institutions that have the best capacity to assume each risk. While SUF in principle is a technical assistance facility, we believe that during the Pilot Phase, SUF should be able to provide seed money, guarantees and other forms of credit enhancements. However, seed money should be provided only in exceptional circumstances. The aggregate amount of seed money and credit enhancements should not exceed 30% of SUF’s budget. The proposed procedures for approving such assistance should be further strengthened to ensure transparency, objectivity and high quality professional review (which should be carried out by external reviewers). During the Design Phase, SUF has made great progress. The (small) core team is highly competent. This is especially reflected in the Operations Manual which is of high quality and which will provide an essential guidance for the Pilot Phase. Although the selection process was long and cumbersome, UN-HABITAT is now ready to sign a contract with a consortium led by the Emerging Markets Group to act as the SUF Pilot Team. We were impressed by the quality of the staff that EMG will provide to the Pilot Team. The team has good skills in project and municipal finance, first rate slum upgrading expertise and a top housing finance expert. During the Design Phase, SUF has identified four “pilot countries” (Ghana, Indonesia, Sri Lanka and Tanzania) as the main target areas for SUF-PT. In each country, SUF also identified one “1st Priority Physical Project” and one “1st Priority Financial Product” as well as several “Future Projects under Development.” We believe that the priority operations are too limited in the type of interventions they represent and in terms of the stakeholders involved. Thus, we recommend that SUF-PT should “cast a wider net” and



pursue a broader range of operations. We would especially like to see some greater emphasis on in situ upgrading of infrastructure facilities and house improvements. The very nature of market financed infrastructure and housing development is such that many projects might take a long time to reach financial closure and quite a large percentage might never materialize. In a narrow sense, the objective of the Pilot Phase is to test the usefulness of SUF before it gets an even broader mandate. Thus, SUF should work on a large set of potential operations in order to be sure that a sufficient number will have reached financial closure at the end of the three year Pilot Phase to allow a realistic assessment. We believe that the number of priority interventions in the four pilot countries is too small. Thus, we consider it essential that SUF also is engaged in the six other target countries (Bangladesh, Cambodia, Kenya, Senegal, Uganda and Zambia). SUF has suggested that PMU would handle the interventions in these six countries, presumably with help of consultants. We believe that this split of responsibilities between SUF-PMU and SUF-PT would be unfortunate. We would like to see a deeper involvement of SU-PT in all ten countries and a more direct participation by SUF-PMU in the four pilot countries. This would improve coordination and consistency between SUF-PMU and SUF-PT. It would also accelerate learning and build-up a better knowledge base. We believe that SUF must reach a certain size to be effective; if SUF is too small, its credibility will suffer and spin-off effects will be limited. Indeed, we would question the usefulness of SUF and the Pilot Phase is total funding remains at the presently committed level of US$10 million. 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. Given the international commitment to achieving a significant improvement in the lives of at least 100 million slum dwellers by the year 2020 (MDG Target 11) and cutting in half the number of people without safe drinking water and basic sanitation facilities by 2015 (MDG target 10); given the need to build-up the capacity of UN-HABITAT to deal with financial issues related to urbanization, slum upgrading and low-income housing; given the promising start that has been made during the Design Phase, especially in terms of establishing a small but competent core team in Nairobi and producing a comprehensive and high quality Operations Manual; and given the caliber of the selected Pilot Team, we believe that SUF merits continued support from Sida.



ANNEX 1: Terms of Reference Evaluation of the Pre-Implementation Phase

of the Slum Upgrading Facility 1. Background The Slum Upgrading Facility (SUF) is a UN-Habitat programme that initiated in December 2004. Sida and Dfid has jointly supported the Pre-Implementation Phase. Sidas contribution is SEK 6,750,000. These donor funds have been channeled through Cities Alliance which therefore has received SEK 500,000 from Sida for SUF programme support. The pre-implementation phase was by HABITAT suggested to be completed within one year but implementation has been slower. SUF implementation team now expects that the Pre-Implementation Phase, which is the first stage of the three-year-long design phase, will be completed by April 2006. The general background of SUF is the enormous and quickly growing need for improved living conditions for disadvantaged groups in urban areas, mainly in developing countries in Africa, Asia and Latin America. Currently 1 billion or more people live in informal settlements in so-called slums and the number is expected to be roughly 1.6 billion by the year 2020. Three major obstacles have been identified which hinders resources being extended to upgrading housing and infrastructure in slums:

• Lack of reforms and lack of a conducive environment to change basic parameters for the operation of the sector affecting the urban poor.

• Lack of bankable projects. • Lack of local capital willing to engage in slum upgrading.

The overall objective of SUF is to assist to meet these gaps. In the longer-term, SUF expects to fulfil the following four functions:

• To provide technical advisory service designed to assist slum dweller groups, NGOs, municipalities, commercial banks, etc. in the financing aspects of their upgrading, low-income hosuing and associated infrastructure projects.

• To adopt a referral function connecting various stakeholders to implement local projects.

• To package various forms of investments so that they become “bankable” resulting in commercial finance institutions getting the necessary confidence to lend for longer term investments such as slum upgrading.

• To assist in the design and application of new financial instruments and products reflecting the different form of available domestic capital (bonds, loans, etc) and term-based financing from the local capital market.

The objectives of the Pre-Implementation phase are to develop a project pipeline and establish partnerships on the ground in five pilot countries (Now decided to be Ghana,



Kenya, Tanzania, Sri Lanka and Indonesia). Work would thereafter commence on the implementation phase of the design phase in the pilot countries. The provisional budget for the remaining part of the design phase between 2005-2008 is USD 30,000,000 but the scale of operations will depend on the availability of funds. Dfid has already allocated USD 10,000,000 for the Design Phase but Sida has declared that its support will depend on the outcome of a comprehensive evaluation of the pre-implementation phase. Norad has shown an interest in SUF but indicated that its support to will depend on Sida’s position regarding SUF.

2. General objectives The objectives with the Evaluation of the Pre-Implementation Phase of the Slum Upgrading Facility are as follows:

- To provide a general overview of the short-term and long-term purpose and organisation of the Slum Upgrading Facility;

- To evaluate the effectiveness of the Slum Upgrading Facility; - To evaluate the effectiveness and capacity of the Slum Upgrading Facility in

relation to other methodologies and alternative implementing organisations; - To evaluate the goals of the Slum Upgrading Facility and to what extent it fills

identified financial gaps in housing provision systems in developing countries; - To evaluate the goals of the Slum Upgrading Facility and to what extent it fills

identified financial gaps in housing provision systems in developing countries in relation to other methodologies and alternative implementing organisations.

3. Content

Below is a list of items that should be included in the evaluation.

- A general description of the background of the Slum Upgrading Facility (SUF) and its original purpose

- A description of the present and suggested development of SUF in relation to the original objectives and the needs

- An analysis of the effectiveness of the methodology used for increasing access to finance for low-income households

- An analysis of the capacity of SUF and UN-Habitat to implement the objectives of SUF.

- An discussion and analysis of other comparable organisations and initiatives doing similar efforts, and to what extent SUF is the best instrument to carry out the objectives described above.

- Recommendations for changes in the setup and objectives of SUF in its next phase - Recommendations regarding SIDAs support to SUF in its next phase and what

support (especially regarding TA) should be provided.



- Recommendations on improved and more consistent terminology to facilitate an easier understanding of the setup of SUF and its phases.

4. Implementation It is expected that the consultant will visit the SUF head office in Nairobi and at least two of its case studies within the framework of the budget estimate below. It is expected that the consultants would meet the relevant stakeholders during the countries. The stakeholders will include the pilot teams, proposed project sites and the SUF secretariat, and should include most of the following stakeholders: The central government ministries and agencies, municipalities, financial institutions and non-governmental organizations, as well as other relevant sources of information.

5. Timeframe and reporting It is expected that a draft evaluation should be submitted to Sida before 20 April 2006. A final evaluation should be provided before 20 May 2006. All reports should be provided electronically. It is expected that the report should be written in English and not exceed 40 pages (excluding appendices). The terms of reference and list of persons interviewed should be included among the appendices. The report should include an executive summary with recommendations in bullet points. In general, the report should be easy to comprehend for non-specialists in housing finance.



ANNEX 2: SUF Pilot Operations The descriptive information about the pilot projects is primarily from information in Progress Report No. 4 –which appears to be the most recent SUF summary on the pilot projects – as well as from the country-specific SUF documents. 1. GHANA

Pilot Slum Upgrading Projects in Shama Ahanta East Metropolitan Area (SAEMA) (1st Priority Physical Project) The SUF Design Team advised the city of Sekondi-Takoradi in SAEMA to develop a financing plan for city-wide slum upgrading. SAEMA has agreed to revise property tax rates by 25% in 2006 and to improve the collection system. It has also agreed to earmark some of the increased tax revenues to fund some infrastructure components as part of slum upgrading, and potentially establish an Urban Poor Development Fund, leveraging the funds by attracting attract community resources and market finance. SUF plans to support PDHS in undertaking an enumeration exercise on a pilot basis in two locations: New Takoradi (with 2885 households) and Kojokrom (with 1100 households), to start by end-March, 2006. The follow-up actions for Phase 1 include: completion of the enumeration exercise; financing plans for the slum upgrading in the two locations; escrowing of part of municipal revenues from property tax improvements for slum upgrading; and potentially establishment of Urban Poor Development Fund to facilitate (through guarantees) or provide credit to low-income upgrading. Low Income Home Improvement Finance Product (1st priority financial product) HFC Bank and the Cooperative Housing Foundation (CHF) of the US are preparing a business plan for a joint venture (JV) to originate and service loans to poor communities, following the signing of a Heads of Agreement in December, 2005. HFC’s Board has mandated its management to establish the JV by mid 2006. It is envisaged that the loans will be on the books of HFC Bank, which will wholesale the loans to micro-finance institutions for on-lending, or lend directly, to low income communities. SUF is working with HFC Bank, CHF and community groups such as Peoples Dialogue on Human Settlements (PDHS)26 to design the JV and develop loan products for affordable housing and home improvement products. The scheme would need to work with organized end-borrowers (households or individuals): PDHS is actively involved in two of three identified locations (i.e., Tema -- especially in Ashiaman; and Accra --particularly Avenor and Agbogbloshie).

26 PDHS is a community-based, non governmental organization that works in partnership with the Ghana Homeless People’s Federation, and is affiliated with Slum/Shack Dwellers International (SDI).



Further Projects under Development Area Development Project in Tema: PDHS is currently exploring the possibility of an area development project; and SUF has supported PDHS in conducting an enumeration exercise in Tulaku, located in Ashaiman -- a mixed income community in Tema Municipality. (2000 households). City-wide Slum Upgrading Programmes in Accra, Tema and SAEMA: SUF is preparing pre-feasibility reports for city-wide slum upgrading programmes with domestic capital in these cities. For the SAEMA City-wide Slum Upgrading Project – SCSUP(UN-HABITAT SUF-Gha-PP01, the pilot projects are in Kojokrom (est. pop. 6000, popn. Growth rate of about 11%) and New Takoradi (2000 population 13,556) Support to National Government in implementation of sustainable municipal finance framework, housing policy and urban policy. Market borrowing for property tax reassessment to enhance municipal revenues in cities such as Accra. Support to other cities such as Kumasi, etc. 2 INDONESIA

Cooperative Housing Project in Yogyakarta (1st priority physical project) The Lugur Setia Mandiri (LSM) Housing Project was initiated in 1998 with UN-HABITAT support. The housing cooperative was established (150 households), land was purchased and considerable preliminary work has been done -- but bank financing was not secured because of lack of permission from the power utility. Agreement in principle has been given by the Sultan (also Governor) of Yogyakarta to provide land certificates for greenfield projects. This project, either independently or along with other similar community projects in Yogyakarta, will be assisted with project development and financial closure. Scaling up of Co-BILD Initiative (1st priority financial product) The Community-Based Initiatives for Housing and Local Development (Co-BILD) pilot project27 provides loans for housing improvement, new housing, land acquisition, up-grading of land titles and provision of basic infrastructure in 12 locations (cities and provinces). ‘Seed funds’ of maximum Rp. 2.4 billion in each location are used to establish a revolving fund, which provides loans to community-based organizations (CBOs), which on-lend to member families with incomes between Rp 600.000 and Rp 1.5 million. Loan demand far exceeds the capacity of the revolving fund.28 SUF could assist by examining ways to attract additional resources into the programme and,

27 funded by UNDP with the financial support from Netherlands. 28 however, as SUF points out, its high default rate of 25% indicates serious operational weaknesses



possibly, to extend the repayment periods to facilitate mortgage financing which is currently non-existent. Initial ideas on scaling up and institutionalizing Co-BILD were discussed at a recent national workshop, and the Dutch government is interested in supporting such an initiative. The scaling up may also be done in conjunction with the on-going Government-ADB Neighborhood and Shelter Upgrading Project which is providing low-income housing finance through a national financial intermediary (PNM) and MFIs.

Further Projects under Development Area Development Project and Housing Association Model in Karet Tengsin and Kampung Pulo, Jakarta: A plan for mixed development of Kerit Tengsin29 is an opportunity for a housing association model using domestic capital; and the SUF Design Team is involved in project development for Kampung Pulo, another low income area in Jakarta. City-wide Slum Upgrading Programmes in Yogyakarta and Surabaya: The potential for city-wide slum upgrading programmes in Yogyakarta and Surabaya-- discussed at the national workshop -- is being reviewed. The Yogyakarta government is interested in developing a city-wide approach to financing sustainable slum and urban upgrading projects with domestic resources. It also has large cash balances and a conservative investment portfolio, and is one of the few municipalities that is current in its repayments to the Asian Development Bank. The municipality should, therefore, be in a position to raise longer term financing through a bond issue, possibly secured by the investment portfolio of its regional bank, to finance infrastructure for greenfield projects targeting the urban poor. The province of Yogyakarta has also expressed interest in establishment of housing and municipal finance framework for slum and urban upgrading, which offers an opportunity to support the provincial government. Similar opportunities are indicated in Surabaya. National Level Activities include:

¾ establishment of a nation-wide housing association for slum upgrading; ¾ implementation of national/provincial level market-based municipal borrowing

programme; ¾ implementation of national/provincial level market-based housing finance

mechanisms ) for low-income households. (including potential support for the recently established Secondary Mortgage Facility

3. SRI LANKA

Pilot Slum Upgrading Projects [in Colombo] and Moratuwa (1st priority physical project)

29 and, under SUF, the University of Westminster and the Institute of Town Planning of Bandung (ITPB) are working on a project development report.



The Slum Dwellers International (SDI) is working with the Municipal Council of Moratuwa (MCM), the Women’s Development Bank Federation (WDBF) and SUF in preparing a city-wide slum upgrading programme, with three settlement in the first phase. Of these, the settlements of Usavi Watta and Alawai Watta, encompassing 88 households, have been determined to be the first priority; and project preparation for these two settlements is more advanced than for the third settlement, Dandaneyia Watta. Janarukula, a local NGO, is assisting in preparing community-led development plans. The first phase will also include the establishment of the Moratuwa Urban Poor Development Fund (MUPDF) by mid 2006 as well as planning for the city-wide programme. SUF and partners currently are in discussions with local banking community to secure construction and mortgage finance. Low Income Housing Finance Product (1st priority financial product) SUF is in discussions with local banks on developing a low-income housing finance product – i.e., to make long term (5-15 years) loans available to low income households in the entire country, within the existing banks, and is exploring guarantee options, e.g., first loss guarantees, the establishment of national-level guarantee fund, etc. SUF is aiming to launch the product by mid 2006, with initial loan size of $1.5 million in the first year; and, believes that, given the conducive environment in Sri Lanka, a total loan portfolio of around $15 million can be reached in the next three years, benefiting some 15,000 households. Further Projects under Development Colombo City-Wide Slum Upgrading Programme; National-Level Low-Income Housing and Upgrading Programme; and Support to other cities such as Kandy, Galle, etc. 4. TANZANIA

Housing Project with TAWLAT Cooperatives. (1st priority physical project) The Tanzania Women’s Land Advancement Trust (TAWLAT) and the Azania Bank have agreed that Azania Bank will provide 10-year loans, with TAWLAT oversight, to a cooperative for the construction and ownership of housing. TAWLAT will arrange the loans obtained at below market rates for cooperatives at 17% (slightly below market rates), and take a top-slice (“spread”) to cover its costs associated with educating cooperative members, securing land titles, and developing property. Azania Bank has agreed to use USD 100,000 deposited by UN-HABITAT’s Gender Programme30 as a preliminary loan guarantee to partially underwrite loans to TAWLAT valued at USD 400,000. The 1 to 4 guarantee to loan ratio, the term of loan (10 years) and the interest rate to borrowers (17%) are regarded by UN-HABITAT as viable for modest house

30 UN-HABITAT’s Gender Programme (with assistance from the Government of Germany – according to the ‘methodologies’ note) has been assisting in building TAWLAT’s capacity since 2002.



construction. The Dar City Council has taken interest in the project, offering ways to fast track clearances and procedures. Additional Loan Guarantee Facility. (1st priority financial product) TAWLAT proposes to scale up its interventions to five other women’s cooperatives; and the SUF Pilot Team will provide TA for development of an additional loan guarantee for one or more such housing project(s) during Phase 1. Projects under Development Slum Upgrading Projects in Dar es Salaam: Several opportunities will be pursued. The World Bank (WB) is supporting infrastructure investments in 31 low-income areas in the city, and providing technical assistance for property tax reforms in order to enhance the creditworthiness of city governments. The City Council is interested in area development projects that could attract community and commercial finance; and the SDI network is actively engaged in building community organizations in four locations. CA is providing a grant to prepare and implement a city-wide slum upgrading programme and municipal finance programme. Housing Finance Institutions and Instruments: The new government of Tanzania has recently established a Standing Committee on the Second Generation of Financial Sector Reforms at the Bank of Tanzania (central bank). The Bank of Tanzania and UN-HABITAT are exploring the possibility of establishing a Working Group on Housing and Human Settlements Financing as a part of the sub-committee on Development Finance. . This Working Group, with strong private sector participation, would focus on designing the policy framework for, and promotion of, market-based sustainable financing mechanisms for housing and human settlements, with special emphasis on low-income groups.31

Support to other cities: such as Arusha, where the Cities with Slums Programme is being implemented; and cities under the Lake Victoria Development Programme.

31 Following up on the plan developed by the Tanzanian delegation during the peer exchange organized by UN-HABITAT in November 2005 between US Housing and Urban Development Department and three East African countries (Kenya, Tanzania and Uganda).



ANNEX 3: Persons Met or Interviewed SRI LANKA

Bank of Ceylon B. A. C. Fernando, Deputy General Manager, Branches and Development Banking R. U. De S. Dharmawickrama, Assistant General Manager (Branch Credit)

Colombo Municipal Council.

Prasanna Gunawardena, Mayor of Colombo N.S. Jayasundera (Mr.), Deputy Municipal Commissioner,

Dendeniya Watta Community

Chandrani Silva, Chairman of the Committee Aruni Champika, Secretary of the Committee

Hatton National Bank

N. Premarajah, Senior Manager, Consumer Banking and Housing Finance P. Sridharan, Assistant General Manager PFS & BD Supun Dias, Manager –Shanthi Housing

Janarakula

Upali Sumitra, Chairman A. L. S. Malvenna (land issues) S. Gunaratna

Lak Jaya Micro Finance Limited Lasantha Mendis, Founder and Managing Director

Susantha Suraweera, Head of Operations Lunawa Environment Improvement and Community Development Project

Anura Dassanayake (Mr.), Co-Project Director, Ministry of Housing and Plantation Infrastructure.

Ministry of Urban Development and Water Supply.

H.E.A.L Perera (Mr.), Director, Project Coordination & Programming Sida at Embassy of Sweden, Sri Lanka Mr. Goran Schill, First Secretary, Deputy Head of Mission Sri Lanka Women’s Development Services Cooperative Society (Women’s Bank)

K.V. Rupa Manel Silva, President (resident at Bo Sevana community) Nandasiri Gamage, General Manager



UN-HABITAT

Mr. Disa Weerapana, Regional Advisor Conrad H. De Tissera, Programme Manager for Sri Lanka, UN-HABITAT. W. Don Barnabas, Financial Advisor (and Chief Executive Officer, NDB Housing Bank). A.H. Indranie de Silva, Coordinator for the mission Thilak Hewawasam, Consultant, Social Development Specialist

Urban Settlement Improvement Programme (USIP),

Sewwandi Gamage, Community Development Co-ordinator. Usavi Watta Community

Wijaya Lechchami, Group Leader W. Dayawathi, Group Leader

Womens’ Development Bank Society.

Miurin Fernando, Head Jayanthi Jayaweera, Director Swarhamali Jayasinghe, Assistant Priyanka Nishanthi, Treasurer (Moratuwa)

KENYA

UN-HABITAT Inga Björk-Klevby, Deputy Executive Director Chris Williams, Acting Head, Human Settlements Financing Division Michael Mutter, Acting Head, Slum Upgrading Facility V. Satayanaraya, Project Finance Advisor, Slum Upgrading Facility Xing Quan Zhang, Human Settlements Officer, Human Settlements Financing Division

Embassy of Sweden Petra Menander Åhman, Deputy Permanent Representative to UNEP and UN-HABITAT

Pangaea Holdings

Bruce E. Bouchard, Managing Director (Member of the SUF-Design Team) TANZANIA

UNDP/UN-HABITAT



Phillemon S. Mutashubirwa, Habitat Programme Manager

Serengeti Capital Mr. Bertram Eyakuze, Director (Tanzania SUF Financial Advisor)

Tanzania Women Land Access Trust (TAWLAT)

Lettice Rutashobya, Chairperson Doris W. Marealle, Executive Secretary Grace Kisiriga, Administrator

UNDI Consult Ltd

Phillip Makota, Managing Director (Engineering Consultant to TAWLAT) OGM Consultants

Oswald G. F. Modu, Principal (Architectural Consultant to TAWLAT) Azania Bancorp Limited

Charles Singili. Chief Executive Officer Orbit Securities Limited

Laurean R. Malauri, Chief Executive University College of Lands and Architectural Studies (UCLAS)

J.M. Lusugga Kironde, Ph.D.Department of Land Management and Evaluation (Also Managing Director, TKA Company Ltd)

Sida

Erik Wallin, Senior Programme Officer, District Development and Local Governance Jennifer Matafu, Programme Officer, Urban Development & HIV/AIDS

Kinondoni Municipal Council

Hussein Kattanga, Municipal Director Joyce Ndsamburo, Monitoring/Planning Officer, Waste Department Anna Tesha, Town Planner Hidaya Kessy, Land Officer

World Bank

Judy O’Connor, Country Director SOUTH AFRICA

Rebecca Gaskin, Independent Consultant (Member of the SUF Consultative Board)



WASHINGTON

Cities Alliance Billy Cobbet Pelle Persson

Jim Hicks, Urban Development Consultant

Documents

ASSESSMENT OF THE UN-HABITAT SLUM … of the un-habitat slum upgrading facility final report submitted to swedish international development cooperation agency (sida) may 24, 2006 prepared