The Slum Upgrading Facility (SUF) Handbook by UN-Habitat

SUF

UN-HABITAT SLUM UPGRADING FACILITY A Response to the Challenge of Slums

THE SUF HANDBOOK DESIGN PHASE VOLUME 1 : An Approach to Financial Action Planning for

Slum upgrading and New Low-income Residential Neighbourhoods.

JUNE 2006 VANCOUVER, Canada HABITAT + 30 United Nations Human Settlements Programme Slum Upgrading Facility UN-HABITAT P.O BOX 30030 Nairobi 00100 Kenya suf@unhabitat.org www.unhabitat.org

1st D R A F T

The UN-HABITAT Slum Upgrading Facility (SUF): A Response to the Challenge of Slums

Introduction – The Challenge of Slums

It is estimated by UN-HABITAT that nearly one billion people live in slums in the cities of the world. That is one-sixth of humanity! Most of these slums are in the cities of the developing countries of the world. If not dealt with in planning for the expanding urban populations of these countries, the number of slum dwellers is predicted to double by 2030. Slums are the precarious, environmentally degraded, and unplanned areas of cities. With good planning and a political will to make land available for housing, these problems should not need to exist.

Millennium Development Goal 7 on Sustainable Development, Target 11: “To make a significant improvement in the lives of at least 100 million slum dwellers by the year 2020” The target also refers to the requirement to make provision of new housing areas so that new slums are not formed.

2005 World Summit Outcome Document (GA 60/1 Paragraph 56M ) The summarized earlier resolutions by the United Nations General Assembly mandates for UN-HABITAT “In pursuance of our commitment to achieve sustainable development, we [the Heads of State and Government] further resolve...to achieve significant improvement in the lives of at least 100 million slumdwellers by 2020, recognizing the urgent need for the provision of increased resources for affordable housing and housing-related infrastructure, prioritizing slum prevention and slum upgrading, and to encourage support for the United Nations Habitat and Human Settlements Foundation and its Slum Upgrading Facility; ”

Slum Upgrading Facility

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

The SUF Handbook: An approach to Financial Action Planning for Slum Upgrading and New Low-Income Residential Neighborhoods A key element of the Millennium Development Goal for improving the lives of hundreds of millions of slum dwellers This Handbook provides new thinking about how to pay for improvements to existing underserved lowincome neighborhoods, and how to pay for appropriate new low-income residential neighborhoods. Both require dedicated and assigned land, paved access, storm water drainage (together with workable solid waste management systems to keep them clear), workable sanitation systems, water supply and other basic infrastructure services, matched by suitable credit facilities for low-income home owners and tenants to build or improve their homes. The key is information. This handbook is designed to provide information about seeking commercial finance for these development projects. Environmental improvements to slums achieved in this way give simple health gains that are gains for the entire urban economy with more very low income economic workers able to contribute and share in its success. This also brings hard-won (and all too easily lost) improved socio-cultural well-being. Slum improvements and the provision of new land for expanding the low-income residential opportunity, are thus essential municipal and local authority functions. They need formal municipal budget lines that recognise these functions. We call these residential areas Strategic Low-income Urban Management Systems since they respond to the needs of the city as well as the Low Income Groups (low-income, economically active) at the same time – it is where the services and trading associated with these groups need to be provided (close to markets, transport interchanges, meeting places, offices, streets where people pass and expect to find affordable fast food) in a sustainable development approach, and where Low Income Groups therefore need to live. Integrating these strategic places is necessary in all Strategic Development Plans and Spatial Plans for all cities. They are ‘Urban’ since this is where people come together to exchange goods and services; it is where villages become urban places, and neighborhoods act as urban villages. They concern Management in the way in which cities are managed – the control of land and land use, taking into account transition and transitory uses (for example, how buildings can change use, people living in warehouses, or trading from homes).

A Response to the Challenge of Slums

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Slum Upgrading Facility

Finally, these need to be ‘Systems’ recognizing each component part is necessary for the success of the urban economy without exclusion, and necessary for the success of the cultural individualism that each diverse part of society will need to bring to the successful cities of the future.

So how does the SUF approach work? Commercial Banks can be friendly too! Banks generally need to expand their markets. For them any sound diversity of its operations is regarded as a strength. But they do need very clear information on which to make their assessment of risk. It is important for them to understand who shares this risk. Good information is therefore the key to ensuring that everyone understands the risks involved and how they have been assessed.

The paradox is that it is the slum dwellers who regularly assume the greatest risk for their investments – investments that have been valued by Hernando de Soto at something like the equivalent of $9.3 * trillion . They are the ones that are paying for the initial investment, and for the upgrades, even if they are helped along the way by the forms of support and subsidy that are deemed essential for the wellbeing of the city as a whole, its health, its stability and its economy. And yet it is the city as a whole that is the beneficiary of the slum dwellers’ actions. Information for strategic slum upgrading and low income group housing is best focused through participatory Urban Resource Centres. These bring together communities with civil society activist and municipal representation. They enable local concerned professionals, activists and NGO’s to provide coordinated inputs. They are the starting pint for CBOs and the development of common purpose cooperatives such as housing cooperatives. These all provide rich potential inputs to more formalized structures for development – Mutual Development Companies, housing associations, etc. Such structures also provide opportunities for learning-by-doing capacity building, by being interpretation points for global information, localized dissemination, and community awareness. This SUF Handbook provides a starting point for all upgrading activities to be assessed, to see what forms of financing may be relevant for making sure that the ideas, aspirations and plans made by the low-income groups stand as good a chance as possible for being implemented.

de Soto, Hernando. 2000 The Mystery of Capital New York: Basic Books p. 47

A Response to the Challenge of Slums

Slum Upgrading Facility

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Overall what does ‘slum upgrading’ aim to achieve? The term Slum Upgrading is a multi-functional concept embodying many differing approaches to localized urban development from the provision of new infrastructure in existing informal settlements where residents would then be helped to upgrade their own homes, or relocating slum dwellers in new housing often built by themselves, to extended layouts with services for self-build, or ultimately to cooperatives undertaking new area developments of affordable housing combined with enterprise opportunities. In understanding the benefits of pouring resources into ‘slum upgrading’, we should first look at the desired outcome and the reasoning behind it being in everyone’s interests. Cities are the acknowledged principal generators of society’s wealth in most national economies, and this contribution by cities tends to grow as a proportion of overall national wealth across time. It is wealth, fairly distributed, that ‘eliminates poverty’. And so only when cities are allowed to grow systematically, and fairly, will poverty be eliminated in all areas, in both rural and urban areas. It is the natural outcome of development that all developed countries have experienced. Cities in less developed countries need exactly the same opportunities if the Millennium Development Goals – to at least halve the proportion of poverty in the world by 2015 – are to be achieved. It is estimated, for example, that the city of Mumbai, and its immediate sub-region, in India, generates 40% of the central direct taxes of India. And yet it is also estimated that 55% of the inhabitants of Mumbai live in ‘slums’. Are these contradictory concepts? Not at all – the existence of slums and a vibrant economy go hand in hand. All cities in history have been built on their lowest cost places to live – commonly resulting in slums. This is true of London, Paris, New York and Tokyo. In time the slums become other normal upgraded parts of the city. The process by which this takes place is key to the understanding of the inclusive development of cities. The term ‘slum’ is based on the condition of these lowest cost places to live, reflecting on the often-degraded environments, lack of services, and building condition that typifies such areas. But they undoubtedly perform a function, and a very valuable function at that. By being the place where the lowest income worker can afford to live and perform the lowest cost tasks within the economy, slums facilitate the existence of their economic comparative advantage – that tasks can be performed as a function of the economy at a cost that is competitive in a city, region and global economy. Thus the lowest income worker becomes the ‘gold-dust of the urban economy’. And the place where they can afford to live becomes the ‘gold-mine of the city economy’. Looking after such places is therefore vital to the success of any economy and the democratic stability that is thus ensured (with, or without, elections as such, merely the ‘will of the people’). In providing the city with an available and affordable workforce, slums work within the city economy only if the workforce is in the right place – not far from the places of work and commerce, and that the people can afford to live there – not, for example, having to incur exorbitant transport costs in order to get to work.

A Response to the Challenge of Slums

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Slum Upgrading Facility

Slums are a dynamic response to the demand for labour and the opportunity this represents for attracting new labour to the city economy. Slums are therefore an indicator of the success of the city economy. However, degraded slums are an indicator of a failure of government policy in being able to understand this dynamic and respond to it with policies for the adequate supply of land, services and finance.

The shape and quality of this response relates to the way it is facilitated by Government and, most importantly, Local Government. As a goal, and to promote the urban economy in everyone’s interest, existing and prospective slum dwellers should be able to move into what we call Strategic Low-income Urban Management Systems (SLUMS!) Where such systems are integrated into the spatial development plans. Since in so many places the informal sector (remember – the gold-dust of the city economy) has already taken the initiative to produce their own affordable response to be available to fuel the city economy. The problem is that since these slums (not SLUMS) have not been adequately facilitated by the government, and local government, the inadequacy of poor servicing and overcrowding become apparent and indeed, without proper assistance, result in a downward spiral of stress – the environmental degradation and squalor that so often typify slums in all parts of the world. In these circumstances (where there has been a failure of policy and adequate provision) assistance in the form of slum upgrading is essential in order to maintain the city economy. However, it is a fine balance – too much change, and too much investment, too quickly, can result in gentrification and the place becomes unaffordable for the intended accommodations. Prices then spiral upwards and services decline since the workers can no longer afford to live there. Success comes in the form of action taken by municipalities that respond to action taken by slum communities. Beyond this the private sector normally invests in the built form, complete with services. The responsibility of government is then to provide the social services that complete a community’s place in the city, and thus in society. Available liquidity in the market place seeks investment opportunities that have a sound return in sensible developments – with recognizable growth and tangible products for all cities ‘future land so that low income housing and work areas can be integrated in manageable ways that form the strategic directions of growth for the sustainable city of the future’ – construction of new and improved houses and infrastructure, in serviced, regulated, urban layouts, and in the regeneration of existing high density urban areas. The responsibility of ensuring an adequate supply of serviced land belongs to government – the planning regulations and infrastructure components. This combined with policies on upgrading provides the building blocks of successful economies. Beyond this the private sector can provide the management and financial resources to ensure cost effective and timely solutions.

A Response to the Challenge of Slums

Slum Upgrading Facility

SUF Observations

Private sector investment capital is consistently attracted to development projects with dedicated (ring-fenced) repayment schemes that generate attractive financial returns with manageable and acceptable credit risk, that are operated outside mainstream government systems and control, but where regulated on a fair and equitable basis. Federations of urban poor savings and lending groups (the slum dwellers’ Community Based Organizations) demonstrate first-class structured repayment schemes with extremely low default rates (in many cases less than 1%) making their performance suitable for private capital investment. Municipalities are best placed to lead the planning for capital investments in land and services (infrastructure such as roads, drainage, sanitation and water supply) required for the development of sustainable neighborhoods. All three groups (private sector investment capital, federations of savings groups, and municipalities) together are able to design bankable projects that lead to appropriate, affordable and accessible developments of low-income, inclusive, residential areas (the backbone of all successful city economies and stable societies). Government’s role and duty at the national level is to facilitate and support this process (it is how development is made available to all citizens and poverty eliminated on a sustainable basis).

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Contextual Observations

a. An ‘Assumptions Strategy’ (see SUF Development Plan Framework at part 5) is required in order to outline all the parameters necessary for SUF-type projects and interventions to be made including the enabling environment for security of tenure, citizen’s rights, and the rights of lending institutions, so that everyone has a clear statement of what has been agreed, and by whom, for any development project. b. Accommodating low income workers in improved, Strategic Low-income Urban Management Systems within the core areas of cities is essential for the sustainable development of city economies. Participants in slum upgrading processes (private sector, slum dwellers and municipalities) are best placed to structure the financing, implementation, monitoring and evaluation of such developments. c. Improved living conditions in slums, and improving the urban environment go hand-in-hand and benefit the entire urban community, its economy and its safety. d. Planning ahead for the availability of land and services (access, drainage, water and sanitation infrastructure) for lowincome housing is under-estimated in quantity, quality and time terms in most developing countries, and this has resulted in the global epidemic of slums – the ‘tsunami’ of urbanization has not been sufficiently recognized to bring about the massive release of land for low-income housing that is required. e. The most successful Savings Groups (as in 2 above) tend to be ones run by women, based on a peer-level learning processes that have been promoted by Slum/Shack Dwellers International (SDI) in some 17 countries world-wide, and others. f. All these processes can be defined as essential elements in the approach known as “Removing un-freedoms to Development” that can transform economies and social conditions. (Removing un-freedoms: Nobel Laureate Professor Amartya Sen has put forward a simple observation technique called ‘removing un-freedoms to development’. This has been applied in many countries to inclusive processes of citizen-led urban development).

A Response to the Challenge of Slums

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Slum Upgrading Facility

The Response : the Four Functions of SUF Advisory Services. In the first place SUF is a technical advisory service designed to assist SUF partners (slum dweller groups, NGOs, professional bodies, municipalities and commercial banks and capital market institutions) in the financing aspects of their slum upgrading, low income housing, and associated infrastructure projects. An advisory hub will be created in each of the SUF Sub-regions (West and East Africa; South and South-East Asia), and this service will extend to neighboring countries.

Referral Functions.

Financial Packaging.

Development of Financial Products

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 programmes 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.

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.

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.

Clarity on How SUF Works in Practice

Operationally, the Design Phase of SUF concluded that clarity is always required in describing how it is intended that SUF works. It is important to remember that SUF works in relationship to existing partners in slum upgrading and low-income housing development. SUF does not design and implement the physical projects itself, but brings a facility that develops the projects from a financing perspective. In some cases this may be a fairly fundamental design exercise in its own right. However, the concept is to establish simple methodologies and approaches for others engaged in physical implementation to follow. A Response to the Challenge of Slums

Slum Upgrading Facility

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

1. SUF brings a financial analysis to other people’s Slum Upgrading Projects and Programmes (SUPPs), aiming to develop those projects into ‘bankable projects’, such that they are appropriate for approaching the domestic capital markets in their respective countries for the core investment finance, be they commercial loans or bondtype instruments issued on the capital market itself. This is the advisory function of SUF combined with the ‘financial packaging’ function. See Box 4.

2. Critical in the analysis of the financing aspects of the ‘bankable project’ is the repayment structure at the core of the ‘SUF Business Plan’ for the individual SUPPs. Where there are Savings Schemes or Housing Cooperatives organized by the slum dwellers themselves, these help to inform the scope of the repayment structure with a track record of affordability, and provide a basis for the analysis of risk management that will be performed by the capital market institutions. Only when the capital market believes that they can see that all elements of risk are under control, and the returns are attractive, will they ever make capital available for SUPPs. 3. Where the element of perceived risk is still high SUF is able to bring into play various forms of ‘credit enhancement’ to the SUF Business Plan, so that the risk can, to a certain extent, be off-set by guarantees, seed capital grants, or other credit enhancement structures. These can involve international institutions set up specifically for this kind of operation, as in the SUF Referral Function. See the SUF Operations Manual for the ways in which this kind of support can be implemented.

4. Similarly, where there is a lack of financing products and instruments in a particular country, or the regulatory framework requires strengthening, SUF can assist in the development of these products and frameworks.

5. The individual SUPPs will be developed by the implementing agencies - the Municipalities and their local slum dwellers’ organizations. The SUPP Implementing Agencies responsibilities primarily deal with the social and physical aspects of the SUPPs, but also keeping construction and other implementing costs under strict control in accordance with the realities of the SUF Business Plan.

6. Where there is a need for a strong new Implementing Agency, SUF can assist in the formation of appropriate implementing structures that can address the management requirements from a capital markets point of view. The key to developing capital market confidence in an implementing process is by safeguarding the local SUPP operations in a dedicated housing or upgrading Development Entity or Company or DEV-CO. Housing Associations also perform a similar function on a Not-For-Profit basis. Essential in all cases are the shareholding structure, and the quality, independence, and focus of the management of the DEV-CO. Safeguarding the management and board member champions of DEV-COs will be the focus of the private sector investors. Transparency in all the business operations of the DEV-COs will be the major key to their success, and the way in which they are differentiated from other implementing agencies. Company law, and the regulatory frameworks for other development entities such as Public Trusts, and Housing Associations, can give the opportunity for public scrutiny that provides the necessary assurance that such bodies are well managed, and that investors have the opportunity of recourse through the judicial system.

A Response to the Challenge of Slums

Part One:

Conceptual and Institutional Context

• Conceptual Framework: Why is SUF necessary? • Institutional Context: The United Nations • Definition and Scope of the SUF Design Phase

Slum Upgrading Facility

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

The establishment by UN-HABITAT of the Slum Upgrading Facility (SUF) is a response to four distinct but related trends. The first is to deal directly with what is referred to as the “finance gap” in slum upgrading. That is to reckon with the stark reality that combined public and private investment and official development assistance meets only 5% to 10% of the financing required for improvements in housing and basic services in Sub-Saharan Africa, South Asia and Southeast Asia. The gap – made all the more profound in light of chaotic, rapid urbanization -- undermines seriously the efforts of Member States to achieve the targets set out in the Millennium Development Goals, particularly target 11 on significantly improving by 2020, the lives of at least 100 million slum dwellers. SUF is a contribution to wider efforts worldwide to identify new sources of finance. It does this by creating the conditions for development initiatives in slums to capture community savings and private capital such that public investment and official development assistance is not the sole source of financing but rather, leverage for savings and investment. The second trend that SUF seeks to respond to and make better use of is decentralization of public administration from central government departments to local authorities. This trend varies from de-concentration such that central government retains power to devolution resulting in genuine control by local authorities of revenue collection and disbursement. The degree to which central government empowers local government impacts directly on the ability of the latter to engage with community organizations and the private sector to plan, manage, and finance the delivery of urban infrastructure. SUF is designed to work with local governments operating with different degrees of local self-governance strengthening where possible their capacity to package infrastructure projects in slums and informal settlements. The goal here is to encourage local authorities to support and coordinate community-led projects that are commercially operated through private sector partnerships. The liberalization of the domestic financial service industry is a third trend SUF seeks to capture and harness for the purposes of financing slum upgrading. While Mexico, India, South Africa and Brazil have gone through significant liberalization of the banking sector and opening of domestic capital markets, a similar, largely unnoticed trend is also unfolding in lower-income countries in Sub-Saharan Africa, South Asia and Southeast Asia. Private commercial banks are now operating in Tanzania, Kenya, Ghana, Sri Lanka and Indonesia (and to a lesser but notable extent, in Senegal, Zambia, Bangladesh and Cambodia). Pension funds, insurance companies and private investors in these countries maintain enormous stocks of domestic capital (estimated annual value in Nairobi is USD 1 billion) and are increasingly trading on local stock exchanges. SUF has been established to design, field-test and scale up financial instruments that will capture domestic capital be it wholesale/retail lending from banks for affordable construction, mortgages or home improvement loans, or debt financing from local capital markets for infrastructure in slums.

A Response to the Challenge of Slums

PART ONE

Conceptual Framework: Why is SUF necessary?

PART ONE

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Slum Upgrading Facility

Concurrent with decentralization and financial sector reforms, another trend that SUF is responding to is increasing levels of community mobilization and savings in slums. Simply put, slum dwellers are taking matters in their own hands in the absence of affordable housing and related urban infrastructure – and the absence of public and private resources to finance such improvements. The result is a proliferation of daily savings associations, work-based savings and credit schemes, revolving loan funds, and micro-finance lending. While social lending arrangements of this kind vary from slum to slum, city to city and country to country, they share in common powerful mechanisms for both mobilizing savings and undertaking community-based initiatives to improve housing and infrastructure. SUF seeks to tap this innovation in slums and connect it to parallel innovations in the domestic financial service industry, local capital markets, and local authorities.

Institutional Context: The United Nations

UN-HABITAT has established the Slum Upgrading Facility (SUF) since early 2004 as a strategic element of the United Nations Habitat and Human Settlements Foundation, and as the initial working element of the new Sub-Programme, the Human Settlements Financing Division of UN-HABITAT as reflected in the 2004/5 and 2006/7 Work-programmes. Specifically, the establishment of SUF is a response to the request of the General Assembly 2001, to revitalize the Foundation as part of the process of transforming the Centre for Human Settlements into the United Nations Human Settlements Programme (UN-HABITAT). The resolution calls upon the World Bank Group and other international and regional financial institutions to work with the Secretariat to ensure the Foundation achieves its objectives to assist Member States mobilize resources for housing and related infrastructure. In April 2005, the Governing Council of UN-HABITAT at its 20th Session, adopted a resolution of similar nature entitled, “Strengthening the Slum Upgrading Facility of the United Nations Habitat and Human Settlements Foundation.” And in September 2005 the United Nations World Summit, held in New York, underscored the importance of the facility, stating in its Outcome Document (GA 60/1, paragraph 56, subsection ‘m’) the following: “In pursuance of our commitment to achieve sustainable development, we [the (191) Heads of State and Government] further resolve….to achieve significant improvement of the lives of at least 100 million slum dwellers by 2020, [reference MDG Goal 7, Target 11] ….recognizing the urgent need for the provision of increased resources for affordable housing and housing-related infrastructure, prioritizing slum prevention and slum upgrading, and to encourage support for the United Nations Human Settlements Foundation and its Slum Upgrading Facility”.

SUF therefore is designed to provide global assistance for the design and implementation of locally produced ‘bankable housing projects’ so that groups of very low income residents and their local authorities can attract domestic commercial capital as a significant part of the funding for their sustainable neighbourhood slum upgrading and low-income housing on a community-led repayment scheme basis. A Response to the Challenge of Slums

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

In order to establish SUF, UN-HABITAT agreed with its immediate development partners in this field – the Swedish International Development Agency (Sida), and the United Kingdom’s Department for International Development (DFID) – to provide initial support for a Design Phase for SUF, specifically leading to a SUF Pilot Programme to field-test the concepts for private commercial finance playing a significant part in the financing of slum upgrading projects, and finance for low-income housing projects and their associated infrastructure. In June 2004, the Swedish Development Assistance Agency (Sida) approved a grant to UN-HABITAT for USD 900,000. The purpose of the grant was to support the initial start up or Design Phase of the Slum Upgrading Facility. SUF is a technical assistance and seed capital facility of the United Nations Habitat and Human Settlements Foundation anchored institutionally within the Human Settlements Financing Division of UNHABITAT. The purpose of SUF is to assist member states and Habitat partners at country level to mobilize domestic capital for their respective slum upgrading initiatives. The United Kingdom, Department of Foreign International Development (DFID), matched the contribution from Sweden making available to UN-HABITAT at total of USD 1.8 million for the Design Phase. The contributions for the Design Phase were made in response to a proposal submitted in March 2004 by UNHABITAT to Sida and DFID for USD 30 million for the Slum Upgrading Facility as an initial 3-Year Pilot Project. Following consultations in May 2004, Sida, DFID and UN-HABITAT agreed it would be constructive to start SUF with an initial 10-12-month Design Phase. It was felt the Design Phase would allow UN-HABITAT work out the institutional arrangements including those with the Members of the Cities Alliance, identify member states and Habitat partners that SUF could support with technical assistance and seed capital for the 3-Year Pilot Project, and continue efforts to capitalize SUF at USD 30 million. In June 2004, DFID pledged USD 10 million for the 3year SUF Pilot Project in addition to the USD 900,000 for the Design Phase. Sida at that time expressed interest in matching the DFID contribution for the 3-year SUF Pilot Project upon assessing positively the progress made by UN-HABITAT during the Design Phase. Sida indicated that, unlike DFID, it lacked sufficient global funds, needed to approach other departments for regional funding, and would be better placed to secure funding for the SUF 3-year Pilot once UN-HABITAT had identified the location and type of upgrading projects SUF would support.

Definition and Scope of the SUF Design Phase

The SUF Design Phase is defined by a variety of Project Documents in accordance with the reporting requirements of UN-HABITAT and the various development partners. The starting point is the UN-HABITAT Concept Paper used to elicit support from the donors. This was later transformed into the UN-HABITAT – Sida SUF Design Phase Agreement; the UN-HABITAT SUF Pilot Programme Project Document; and the joint DFID, Sida and UN-HABITAT Cities Alliance Application for the Pilot Programme. The scope of Design Phase as captured in the above documents was essentially to prepare the groundwork for the 3-Year Pilot Phase. This entails establishing a Design Team, a group of professionals with varied competencies in finance (investment, municipal, community, project, etc.) and undertaking a series of scoping missions to countries in Sub-Saharan Africa, South Asia and Southeast Asia. The purpose of the scoping missions being to identify pilot projects and partners that would benefit from the technical assistance and seed capital offered by SUF. It also entails working with the partners of the Cities Alliance, the donors, international finance facilities, A Response to the Challenge of Slums

PART ONE

Slum Upgrading Facility

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Slum Upgrading Facility

PART ONE

organizations of slum dwellers, and associations of local authorities to iron out the institutional arrangements for SUF and to establish a Consultative Board to provide advice and guide the initiative. The Design Phase involved tendering an international service contract for the Pilot Team of the SUF 3-Year Pilot Phase to perform specific services in project packaging and field testing of financial instruments. Finally, the terms of reference of the Design Team has been working intensively in four of the countries identified, working with local governments, community groups, and private banks to foster agreements and field test design instruments.

A Response to the Challenge of Slums

• SUF Design Team • Agreements, Operations Manual, Implementation Plans, and SUF Consultative Board • Strengthening Institutional Relations with SUF Partners • Development Partners • Financial Partners • Bilateral and Multilateral Financial Institutions • Cities Alliance Working Group • Developing a Pipeline of Potential SUF Pilot Projects • Selection Criteria and Country Strategy Papers • Field Testing Design Instruments and Detailed Pilot Project Proposals • Tanzania • Ghana • Sri Lanka • Indonesia • Preparing SUF for the 3-Year Pilot Programme • Programme Management Unit • International Service Contract for the Pilot Team

Part Two:

How SUF was designed

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Slum Upgrading Facility

PART TWO

SUF Design Team

UN-HABITAT has been fortunate in attracting exceptionally bright and creative people to serve as members of the SUF Design Team. The intention of the Acting Director of the Human Settlements Financing Division and the Executive Director in establishing both the Division and SUF has been to create a space for innovation that can pull out the wood work individuals who have excelled in their respective institutional cultures and offer them a unique environment for exploration and creativity. That is, to attract different types of expertise in finance (investment, municipal, project, community, mortgage) and channel these toward thinking about how best to mobilize domestic capital for slum upgrading. The space has been filled by five people from significantly different institutional cultures, including: international development cooperation agencies and private sector project design companies (Mutter), international investment finance corporations (Bouchard), Asian municipal finance and capital markets initiatives (Vejella), nationally-owned, commercially operated mortgage and housing corporations (Patrick), and African banks and micro-finance institutions (Kyalo). In different combinations, these five individuals together with professional staff and HPMs of UN-HABITAT have proven, as suggested in the original project submission to Sida and DFID, that the SUF Design Team is greater than the sum of its parts. They have in less than 15 months succeeded in undertaking 20 scoping missions and follow-up consolidation missions that have resulted in a clearly articulated project portfolio (see below). The Design Team has as well successfully prepared documentation, prepared for and convened Consultative Board meetings, and represented SUF in various internal consultations and international forums.

Agreements, Operations Manual, Implementation Plans, and SUF Consultative Board

UN-HABITAT devoted a significant amount of time during the reporting period to setting up requisite agreements and procedures for SUF. In December 2004, UN-HABITAT signed an agreement with the World Bank Infrastructure Vice Presidency to utilize funds of the World Bank Trust Fund (Cities Alliance) designated for the SUF 3-Year Pilot. DFID had previously signed a separate, related agreement with the World Bank Infrastructure Vice Presidency authorizing the use of USD 10 million of the World Bank Trust Fund for the SUF 3-Year Pilot Project. The agreements were the culmination of months of work by the World Bank Infrastructure Vice Presidency (including its accounting office and urban anchor), the Secretariat of the Cities Alliance, DFID, and UNHABITAT. An important vehicle for facilitating cooperation among the urban anchor, the CA secretariat and UN-HABITAT was the preparation of the SUF Operations Manual and an Annual Implementation Plan for 2005. A detailed description of how the procedures governing the SUF 3-year Pilot, the Operations Manual offered an opportunity to detail how SUF would work in practice and how funds would move through the system – funds channelled through the World Bank Trust Fund, the United Nations Habitat and Human Settlements Foundation, and directly to the SUF pilot partners at country level. The 2005 Annual Implementation Plan outlines the specific activities to be undertaken by the SUF Design Team for the coming 12-month period. A Response to the Challenge of Slums

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Also in December 2004, UN-HABITAT convened the first meeting of the SUF Consultative Board to review the draft Operations Manual and the Annual Implementation Plan, and to advise the Design Team on future directions for SUF. The composition of the Consultative Board includes representatives of federations of slum dwellers (SDI), associations of local authorities (UCLG), formal financial institutions (HFC Bank Ghana, Stanbic Bank), local capital markets (Dar Stock Exchange), development cooperation agencies (UK, Sweden, and Norway, the World Bank Group, and UN-HABITAT (Executive Director, as chair). The Consultative Board convened again in March 2005 on the eve of the Governing Council of UN-HABITAT in a two part meeting. The first part entailed a substantive discussion on the conditions necessary to mobilize domestic capital for slum upgrading, including the depth and innovation within local capital markets, the strength of organizations of the urban poor and supporting NGOs, and the political will of governments and local governments. The second part involved the review by the Consultative Board of five Team Leaders representing consortia that had bid on an international service contract to serve as the SUF Pilot Team (see below).

Strengthening Institutional Relations with SUF Partners

UN-HABITAT worked aggressively during the reporting period to build a network of partners in order to situate SUF within a wider set of inter-institutional relations outside of the United Nations system. This includes three sets of partner networks: development partners (slum dwellers, local authorities, central governments), financial partners (micro-finance, banks, capital markets), and multilateral and bilateral financial institutions (finance facilities, multilateral development banks).

Development Partners

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). UNHABITAT 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. UN-HABITAT has consulted with local authorities in all countries that the Design Team has undertaken scoping missions, and is working directly with the city councils to support upgrading projects in Sri Lanka, Tanzania, Ghana and Indonesia. In Ghana, Uganda and Indonesia, the Design Team has also worked with associations of local authorities with a view to make available to these networks the tools developed in SUF pilots for mobilizing domestic capital.

Cities Alliance Consultative Group nominated Norway and the World Bank Group to serve on the SUF Consultative Board A Response to the Challenge of Slums

PART PART TWO ONE

Slum Upgrading Facility

PART TWO

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Slum Upgrading Facility

UN-HABITAT has provided a seat on the SUF Consultative Board to the United Cities and Local Authorities (UCLG) and engaged in consultations during the World Urban Forum II. However, to date, UCLG has not been able to attend a Consultative Board meeting and their involvement in SUF has been limited (see below). As with networks of slum dwellers and local authorities, UN-HABITAT has been keen also to situate SUF within networks of central government line ministries of Housing, Local Government and Finance. This is emerging well in Africa. At its annual meeting in Libya in July 2005, the African Union formally endorsed the establishment of the Africa Ministerial Conference on Housing and Urban Development (AMCHUD). Chaired by South Africa and with Kenya serving as the Secretary, the inter-governmental body of African Housing Ministers meets biannually on the occasion of the sessions of the Governing Council of UN-HABITAT, and held its special session on January 2006. The Kenyan Secretariat has worked closely with the Human Settlements Financing Division and a presentation on SUF is being planned for the next special session. A similar engagement strategy is planned for the ASEAN countries in 2006.

Financial Partners

UN-HABITAT has augmented its networking efforts with core constituencies of slum dwellers, local authorities and central governments (referred to as “development partners”) by working directly with networks of microfinance, mortgage banking and local capital markets (referred to as “financial partners”). The engagement by SUF with financial partners has been greatest at country level where in all scoping missions SUF has established close working relations with representatives of the domestic financial service sector (see below). The representatives on the SUF Consultative Board of Stanbic Bank, HFC Bank of Ghana, and the Dar Stock Exchange have offered important inroads into international capital markets that UN-HABITAT hopes to pursue in the coming years. The Canadian Mortgage Housing Company (CMHC) has expressed interest in working with UN-HABITAT to explore areas of collaboration in countries that SUF will support with technical assistance and seed capital. The availability of affordable housing in many countries in Sub-Saharan Africa and Asia is mitigated in part by the absence of mortgage default insurance. Banks are reluctant to lend where there is perceived risk and little insurance against that risk. CMHC and UN-HABITAT are considering undertaking research in SUF pilot countries on the viability and potential impact of mortgage default insurance.

Bilateral and Multilateral Financial Institutions

UN-HABITAT has maintained strong working relations with a number of international finance facilities and with multilateral development banks. The purpose of such engagement is to appraise these institutions of the emerging work of SUF with a view to secure loan guarantees for specific SUF-supported pilots, and to package upgrading projects such that local partners can access soft-loans, particularly for infrastructure.

A Response to the Challenge of Slums

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

UN-HABITAT participates as an observer in twice annual meetings of the Private Sector Infrastructure Group (PIDG). It is anticipated that once SUF pilots are operational, UN-HABITAT would work directly with GuarantCo, a local currency, partial guarantee facility of PIDG. Similarly, regular consultations have been held with the Development Credit Authority of the United States Agency of Development Cooperation (USAID) to explore ways of aligning SUF pilots with the strategic objectives of USAID country missions, a pre-requisite for access of local partners to DCA loan guarantees. Engagement with other international finance facilities is planned for 2006. UN-HABITAT held consultations in September 2005 with the Africa Vice Presidency of the World Bank Group that included Bank Country Directors from East and West Africa where SUF is currently developing support mechanisms designed to assist local partners mobilize domestic capital for their upgrading projects. Agreement was reached to harmonize cooperation in selected countries under the framework of the World Bank Country Assistance Strategies and to explore ways to integrate efforts by UN-HABITAT to mobilize private investment with efforts by the Bank to extend soft-loans at sovereign and sub-sovereign levels for urban infrastructure. In a subsequent mission the SUF Design Team held a series of consultations with Urban Managers of the World Bank Urban Anchor to discuss progress made and identify ways of supporting countries where SUF is presently engaged.

Cities Alliance Working Group on SUF The Cities Alliance has become active in the way in which the SUF Pilot Programme is operationalised. The UNHABITAT Governing Council resolution on SUF (GC20/11) recognizes the collaboration of the Cities Alliance in the development of SUF. A small working group has been set up by the Cities Alliance to advise on the ways in which SUF relates to Municipal Finance mechanisms as a whole. SUF also relates to their Municipal Finance Task Force which provides information on finance mechanisms for municipalities in developing countries (see http://www.mftf.org). The ways in which the Cities Alliance is involved in SUF is outlined in the SUF )Operations Manual- see accompanying Resource CD-ROM for details.

A Response to the Challenge of Slums

PART PART TWO ONE

Slum Upgrading Facility

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Slum Upgrading Facility

Developing a Pipeline of Potential SUF Pilot Projects

PART TWO

Scoping Missions to South East Asia, South Asia, West Africa, and East Africa.

From October 2004 to March 2005, the newly established design team commenced a series of 10 scoping mission to identify local partners (a combination of governments, communities and domestic financial institutions) that might benefit from SUF technical assistance and seed capital for the purposes of mobilizing domestic capital for slum upgrading. The mission portfolio included countries of East Africa (Kenya, Tanzania and Uganda), West Africa (Ghana and Senegal), South Asia (Bangladesh and Sri Lanka) and Southeast Asia (Cambodia and Indonesia). The Design Team undertook a further scoping mission to Zambia. This mission also afforded the opportunity to learn from and assess the financial mechanisms and partnership arrangements for the Lilayi Housing Estate Development Project. The Design Team found that in each of the 10 countries there was significant interest in and scope for SUF technical assistance and seed capital. So much so, that if asked in future after the initial SUF 3-Year Pilot Phase, UN-HABITAT would find significant demand for SUF support services in all 10 countries. A large part of the interest in SUF is its conceptual appeal. Governments, communities, and the domestic financial service sector in each country find attractive the notion that it could be possible – and desirable-- to finance improvements in housing and basic services in slums by drawing upon indigenous banks, and the local capital markets with acceptable notions of risk. While the interest to identify local, sustainable approaches to financing slum upgrading existed in all 10 countries, the capacity of local actors to do so varied greatly, and for different reasons. In some countries the local governments are very strong but the urban poor are not well organized and the capital markets relatively weak. In other countries the communities are mobilized and the banking institutions and capital markets are well poised to structure instruments for financing upgrading initiatives, but the local governments lack proper governance and autonomy from central government to support efforts led by communities and domestic financial institutions. And in other countries local governments and urban poor movements are working in partnership on a range of upgrading actions, but the private banks, financial intermediaries and local capital markets are weak or non-existent. In all cases the perceived risk for the private sector and capital markets are considered locally to be too high.

Selection Criteria and Country Strategy Papers

In March 2005, UN-HABITAT provided the SUF Consultative Board for its consideration a selection criteria matrix (see SUF Consultative Board Progress Report). The matrix serves as a tool to make sense of the strong, compelling demand for SUF support services on the one hand, and the varied capacity of local actors and institutions on the other. It assigns weights to three clusters of variables, namely: the strength of urban poor

A Response to the Challenge of Slums

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

organizations and supporting NGOs; the political will of central government to local government to lead the upgrading initiatives in partnership with slum dwellers and their organizations; and the depth and level of innovation in the domestic capital markets (pension funds, stock markets, capital markets authority, private investors) and among mortgage banks (wholesale and retail), micro-finance institutions, and other financial Intermediaries. The considered opinion of the SUF Design Team endorsed by the SUF Consultative Board at its meeting in Nairobi, Kenya in March 2005, has been to select Tanzania, Ghana, Sri Lanka, and Indonesia as countries for in depth pilot activity. It has also been agreed to work closely with the Government of Kenya to support the financial strategy for the Kenya Slum Upgrading Programme (KENSUP) (see Part 3), and to provide advice/ assistance to Uganda, Senegal, Bangladesh, Cambodia and Zambia, where possible engaging in regional and sub-regional forums that offer opportunities for advocacy and peer exchange (see below, HUD Peer Exchange on Housing Finance in East Africa). From June 2005 to March 2006, the SUF Design Team undertook further rounds of missions to the pilot countries and in order to develop selected projects and prepare “Country Strategy Papers.” The papers offer details of projects that local actors have indicated are for SUF support in terms of targeted technical assistance (financial packaging, convening of stakeholders, structuring of agreements, etc.) and seed capital (preliminary loan guarantees, grant assistance, other forms of credit enhancements, etc.). Country papers for Tanzania, Ghana, Sri Lanka and Indonesia also outline the modalities for SUF support including the recruitment of “Country Project Consultants” with specialized skills in project and investment finance, and the support role of Habitat Programme Managers (HPM).

Field Testing Design Instruments and Detailed Pilot Project Proposals

Since June 2005, the SUF Design Team deepened its engagement in the four countries identified for focused SUF support by developing detailed project proposals and field-testing design instruments. Although few project proposals in the pilot countries are available upon request, the following examples from Tanzania, Ghana, Sri Lanka and Indonesia provide an insight to the Pilot Programme envisaged in each of these countries.

Tanzania In Tanzania, the Design Team has supported the work of the Gender Programme of UN-HABITAT that has since 2002 been building the capacity of the Tanzania Women’s Land Advancement Trust (TAWLAT), a financial intermediary that assists women’s housing cooperatives. In August 2005, the Design Team in Nairobi, the Habitat Programme Manager, and the country project consultant with expertise in investment finance facilitated a cooperation agreement between TAWLAT and Azania Bank of Tanzania. Azania has agreed to provide loans, with TAWLAT oversight, to cooperatives and their members for the construction and ownership of houses. TAWLAT will arrange the loans obtained at below market rates for A Response to the Challenge of Slums

PART PART TWO ONE

Slum Upgrading Facility

PART TWO

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Slum Upgrading Facility

cooperatives at slightly below market rates, and take a top-slice (“spread”), thus earning income that will cover costs associated with educating cooperative members, securing land titles, and developing property. UNHABITAT Gender Programme has deposited USD 100,000 in Azania Bank that the Bank has agreed to use as a preliminary loan guarantee to underwrite partially loans valued at USD 400,000 to TAWLAT. The leveraging ratio of guarantee to loan (1 to 4), the term of loan (10 years) and the interest rate to borrowers (17%) are regarded by UN-HABITAT as viable for modest house construction. The Dar City Council has taken interest in the project, offering ways to fast track clearances and procedures, with a view to support housing develop engineered by financial intermediaries with requisite public infrastructure and basic services. During the SUF Pilot Phase, the TAWLAT is expected to replicate this model to five other cooperatives.

Ghana

In SAEMA, Ghana, the City Council has agreed to work with SUF and local banks to revise the property tax rates and system beginning 2006. The Council has agreed to ring fence for slum upgrading activities a significant portion of the increased revenues derived from the project to revise property rates and leverage that money to attract community resources and market finance. Similar efforts are being explored in Accra and Tema. SUF is also supporting enumeration exercises in Tema and SAEMA in order to develop area specific improvements projects for low-income upgrading. Also, SUF is working with HFC Bank and the US-based Cooperative Housing Federation (CHF) to develop a loan product for affordable housing. HFC Bank and CHF are entering into an agreement to establish a subsidiary company that can originate and service loans for low-income households. The SUF Design Team is in dialogue with HFC Bank and CHF to design the joint venture and low income home improvement products. The approach is that loans will be on the books of HFC Bank, which wholesales the loans to micro-finance institutions for on-lending to poor communities. The Business Plan for this initiative will be ready by end of March 2006. Again the approach will likely involve from SUF a mixture of technical assistance and seed capital in the form of a credit enhancement that readies the local actors for full loan guarantees.

Sri Lanka

In Sri Lanka, the Moratuwa Municipal Council (MCC) has agreed to partner with Women’s Development Bank Federation (WDBF), Shack/Slum Dwellers International (SDI) and SUF to develop three slum locations in the city during the immediate phase. The city and the partners are preparing development (or redevelopment) plans that can leverage domestic capital for infrastructure and superstructure. SUF and partners currently are in discussions with local banking community to secure construction and mortgage finance. SDI, MCM, WDBF and SUF also have agreed to establish Moratuwa Urban Poor Development Fund by middle of 2006 to facilitate/provide credit to home improvements in all slum locations of the city. The Colombo Municipal Corporation (CMC) is also proposing to develop a city-wide slum upgrading programme based on its lessons learnt from its on-going GTZ funded Participatory Improvement of Under served Settlements Programme (PRIMUSS) and in partnership with WDBF, SDI and SUF. Also in Sri Lanka, SUF with the support from reputed financial advisor worked with the banking community to design a strategy for sustainable low income housing finance programme in the country. SUF is worked with local banks, communities and government to launch a Low Income Housing Finance Product by May 1, 2006.

A Response to the Challenge of Slums

Slum Upgrading Facility

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

The product launch and administration will require technical assistance and seed capital in the form of a credit enhancement from SUF. Considering the successful experiences of community-led upgrading, housing finance, income levels and emerging innovations in Sri Lanka, SUF believes that it will be possible to reach a total loan portfolio of $15 million in next three years – likely to resulting in home improvements to 15,000 households.

Indonesia

In Indonesia work has been agreed with the Ministry of Housing and the Ministry of Public Works on the introduction of SUF to a variety of city-based projects. The World Habitat Day 2005 celebration in Jakarta gave an opportunity to formalize this approach with the Government of Indonesia by the signing of MOU for the introduction of SUF between the above Ministries, the Association of Provincial Governors, and UNHABITAT. The emphasis will be on city-led initiatives with a priority on Jakarta and Yogyakarta. The Provincial administration of Yogyakarta has shown remarkable progress in developing a province-wide inclusive urban development approach. The city of Yogyakarta is keen to develop an approach to slum upgrading and has requested SUF assistance, and the Housing Cooperatives in Yogyakarta seek to access commercial credit. The CoBILD micro finance project in Yogyakarta has demonstrated good performance, but wants to recapitalize with SUF assistance. The World Bank has expressed interest in working with SUF in Yogyakarta specifically and in Indonesia generally in the housing sector. In Jakarta the City Housing Authority has requested SUF assistance in developing a Housing Association type approach to upscale its housing and Kampung Improvement projects and provide new management processes such that the financial considerations and potential of local capital finance can be better addressed.

Preparing SUF for the 3-Year Pilot Programme

UN-HABITAT during the reporting period has taken a number of administrative steps to prepare the ground for the 3-Year Pilot Programme concurrently with its efforts to develop a project pipeline. Preparing SUF for the 3-Year Pilot has entailed a combination of recruitment, contracting and fund raising.

A Response to the Challenge of Slums

PART PART TWO ONE

The product is proposed to be main streamed within commercial banks with a credit enhancement from a proposed national Guarantee Fund (SPV) to be established by banks, government and multi-lateral facilities. This Guarantee Fund along with other financial intermediaries will introduce innovative risk sharing products such as First Loss Default Guarantees.

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Slum Upgrading Facility

Programme Management Unit

PART TWO

Establishing the Programme Management Unit (SUF-PMU) Overall coordination for decisions

The SUF Programme Manager, when appointed, will head the SUF Programme Management Unit based at the UN-HABITAT Headquarters in Nairobi. Each SUF country operation will agree its strategy and annual work plans with the Programme Manager. All lines of decision-making and agreement of activity are set out in the SUF Operations Manual. When appointed, the SUF Pilot Team will be responsible for carrying out the agreed annual work plans in Asia. The Programme Manager reports to the Director of the UN-HABITAT Human Settlements Financing Division on the content of the work plans and on agreements reached with each of the sources of programme funding on the budget. The SUF Consultative Board is chaired by the UN-HABITAT Executive Director and takes decisions on content and direction based on the reporting by the Programme Manager. The Programme Manager presents Progress reports to the Board on a six-monthly basis. Regular consultations are held by the Programme Manager with each of the funding sources for the SUF programmes and agreement reached on the utilisation of funds prior to presentation to the Board.

Control of the Operations Manual

The SUF Operations Manual (SUF-OM) is a living document that reflects the development of the SUF Programme generally, and guides the way in which activities take place and decisions are taken. The SUF Programme Manager is the keeper of the SUF-OM and proposes any changes to the SUF Consultative Board. With the members agreement the changes can be made and notified to all users.

SUF Pilot Team (SUF-PT) Headquarters at Nairobi SUF-PT work with SUF-PMU in developing generic SUF assistance, monitoring, and response methodology

The SUF Pilot Team (SUF-PT), when appointed, will relate closely to the SUF-PMU. The SUF-PT will work with SUF-PMU 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. Work with SUF-PMU in developing further and responding to the Pilot Team Performance Indicators, reporting, and monitoring methodologies as contained in the Operations Manual.

A Response to the Challenge of Slums

Part Three: SUF within UN-HABITAT

• Human Settlements Financing Division Support Activities to SUF Fund Raising Policy Reform East Africa Peer Exchange November 2005 • Special Projects: Social Investment Special Projects: Mortgage Insurance for Affordable Housing Applied Research • Strategies for Financing Slum Upgrading KENSUP and Special Purpose Vehicles Types of SUF Financing Products Required

Slum Upgrading Facility

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

The Design Team has worked closely with and benefited directly from professional and general service staff of the Human Settlements Financing Division. The latter have participated on field missions, meetings of the Consultative Board, and regular brainstorming sessions over the course of the past 15 months, offering the Design Team advice and support as well as a window into the other divisions and branches of UN-HABITAT. In addition, the Division has conducted a series of activities that complement and elevate the work of SUF in the areas of fund raising, policy reform, peer exchanges, special projects, applied research, and the Kenya Slum Upgrading Programme (KENSUP).

Fund Raising

The Division has worked actively during the reporting period to promote SUF among a wide range of donor organizations. In addition to maintaining ongoing working relations with DFID, this includes consultations in Stockholm with Sida. UN-HABITAT worked with the Urban Division at Sida in October 2005 to raise awareness about SUF in the Africa Regional Division, Asia Regional Division, Global Finance Division, and Swedish NGO cooperatives. This is a process that is expected to continue as efforts are made to source funds for the 3-year Pilot Phase outside of the Urban Division. Professional staff members of the Human Settlements Financing Division have adopted a similar approach in Oslo, engaging Norwegian government officials, private sector funds (Norfund), and non-governmental cooperatives. Progress is being made to situate prospective funding for the facility within the cooperation agreement between UN-HABITAT and the Government of Norway. The Human Settlements Financing Division has also undertaken several missions in the United States to apprise government officials and private foundations there about SUF. This is particularly important in light of the initial resistance the government of the United States expressed towards SUF in the early stages. Today, the Department of State is pleased with the approach SUF is taking and demonstrated their support with a solid endorsement at the Governing Council and the General Assembly where US officials were instrumental in mobilizing political support for SUF among member States. In addition the Development Credit Authority of USAID, the Overseas Private Investment Corporation, and the US Department of Housing and Urban Development are actively engaged with SUF preparatory activities, and future collaboration is anticipated for the 3-Year Pilot Phase. Finally, the Division has consulted on a number of occasions with representatives of the Rockefeller Foundation. The latter have expressed interest in supporting SUF activities in Kenya (see below).

Policy Reform

The Human Settlements Financing Division has worked extensively with a number of governments to promote policy reforms that will make more widespread the kinds of innovative partnerships and financing products field-tested by SUF. This process is beginning modestly in East Africa as a follow up to the Kampala Peer Exchange (see below) and will continue in West Africa after the Accra Peer Exchange planned for November 2006.

A Response to the Challenge of Slums

PART THREE

Human Settlements Financing Division Support Activities to SUF

PART THREE

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Slum Upgrading Facility

In Tanzania, the Division has facilitated an agreement with the Bank of Tanzania and the Ministry of Finance to establish a dedicated housing finance working group within the nation’s standing committee on Second Generation Financial Sector Reforms. The working group will comprise representatives of private banks, academia, and senior government civil servants. The group will harmonize policy reforms underway in Tanzania on housing, pension funds, cooperatives, and mortgage finance. It will also promote innovative loan products for affordable housing, as well as raise the visibility of creative partnerships such as those between TAWLAT and Azania Bank finalized by the SUF Design Team. Further the working group will advance data collection on housing conditions in Tanzania. Both product innovation and data collection will inform the policy making process. The Division is pursuing a similar strategy in Uganda with representatives from the Ministry of Finance, the Bank of Uganda, private banks, pension funds, the Ministry of Works and Housing, and emerging cooperative societies. In Kenya, the housing bill is currently before Parliament. Once passed, the Division will work with the Ministry of Finance, private banks, and the Ministry of Housing to ensure Kenyans have concrete applications of the Bill, beginning with KENSUP but extending to the product innovation in the domestic financial service sector and capital markets more generally.

East Africa Peer Exchange November 2005

The East Africa High Level Peer Exchange meeting on “Government Enablement of Private Sector Investments in Affordable Housing” was organized jointly by the Government of Uganda, the United States Department of Housing and Urban Development, and UN-HABITAT. Sub-regional participation included the Ministries of Finance and Housing of the Governments of Kenya, Tanzania and Uganda; Standard-Chartered Bank of Tanzania, Housing Finance of Kenya, Central Bank of Tanzania, Suntra Investment Company of Kenya, Azania Bank of Tanzania, Uganda Stock Exchange, Uganda Investment Authority. International participation included the Development Credit Authority of the United States Agency for International Development, and the International Housing Finance Program of the Wharton School of Business. The purpose of the meeting was to provide participating countries an opportunity to share experiences on how best governments can support the domestic financial service industry to invest in affordable housing. Major observations indicated that the need for housing finance in East Africa is great but so too are the opportunities. Currently a profound gap that exists between the limited supply and enormous demand for housing necessitates private lending for affordable housing. Macro-economic conditions, monetary policy frameworks, and popular participation are increasingly becoming favorable for private lending for affordable housing but reforms and regulations are not yet in place. Financial intermediaries provide a bridge between banks and the previously unbankable, therefore, a key ingredient in financing affordable housing. Government enablement of communities and markets are a pre-requisite for greater private lending for affordable housing. It also became apparent that collaboration in each country between the Ministries of Finance and Lands/ Housing is essential for the promotion of investment in affordable housing. In addition, East African countries share common history, problems and solutions; therefore, cooperation between the countries of East Africa would help accelerate reform and innovation. The Peer exchange meeting hence provided a platform for sound public diplomacy and effective development cooperation. The outcome of the meeting was that

A Response to the Challenge of Slums

Slum Upgrading Facility

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

representatives from each country drew up action plans to elevate the issue and further develop housing finance initiatives in their respective countries. Indeed implementation of the action plans prepared at the Peer Exchange is well underway in Kenya, Tanzania and Uganda. The Division has been actively involved in Kenya in working with private sector entrepreneurs in advancing social investment. As a financial strategy, SI is a mode of investment that leads to financial returns that equal if not exceed non-social investments, and also produces significant social returns. By integrating financial goals with personal values, social investment gives investors a voice in shaping the future of society, and provides an alternative and stronger financial strategy to alleviate poverty and promote development. Social investment can also be used to reinforce existing philanthropic and government attempts to fight poverty by incorporating successful investment methods with social justice objectives, while achieving reasonable rates of return. SI is an emerging field in Africa, and is steadily growing from having a marginal role to an increasingly mainstream role. This is evidenced through increased private’s sector awareness for the need for SI and its role in development. The recently launched Kenya Social Investment Forum is currently developing a range of direct and indirect strategies that can be applied in the promotion of social investment in Kenya. These strategies include; SI packages that would encourage individual and group investors support SI, for example social bonds in education, health and low-income housing, infrastructure bonds and community development finance institutions fiscal incentives, and more specifically tax incentives to encourage investment in SI products. Incentives include the removal of withholding tax on social investment institutions, tax credit on investments in social or infrastructure bonds, and tax credit for investment to accredited social investment products and vehicles. Pension funds could be used to support SI initiatives by both investing a certain percentage of funds in socially responsible ventures and adopting disclosure regulations to increase the level of scrutiny by civil society to the investment decisions of pension funds. The forum holds the view that the government has a central role to play in creating an enabling environment for the development of SI in Kenya. In order to continue the campaign of enabling private sector investments in housing finance, a number of financial mechanisms and instruments were discussed. One of the instruments discussed during the meeting was mortgage insurance. There was a general consensus among participants that UN-HABITAT, through it various partnerships, would undertake a study to assess the viability of mortgage insurance in the East Africa region and if found viable, would seek to implement.

Special Projects: Mortgage Insurance for Affordable Housing

The Division is developing a market study on mortgage insurance products in East Africa. Mortgage insurance offers a potentially significant contribution to wider efforts to promote private lending for affordable housing in East Africa. Mortgage insurance is a unique financial instrument that facilitates risk sharing and pooling of commercial and residential property risks, and in doing so, makes high risk, low-income potential clients more attractive by insuring lenders against borrowers’ default. Lenders are required by the insurer to carry out their

A Response to the Challenge of Slums

PART THREE

Special Projects: Social Investment

PART THREE

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Slum Upgrading Facility

due diligence, and in the case of foreclosure, the onus remains on the lender to prove that due diligence was carried out. Payments on claims are only made to cover the insured portion of the differences between the market price and the amount recovered during foreclosure. Currently Mali is one of the few countries in SubSaharan Africa with a thriving mortgage insurance business, which has been noted to catalyze the housing finance industry. Given that the per capita GDP of Mali is significantly lower than that of the countries of East Africa, there is reason to believe that mortgage insurance has potential application. The objective of the study is not only to promote a better understanding of the historical and institutional context for mortgage insurance and housing finance generally; but also to identify bottlenecks mitigating investments in the housing finance sector, to test the assumption that mortgage default insurance will create conditions that will accelerate the availability of housing finance, to increase the supply of housing, and to create conditions favorable to the production of affordable housing. The study would seek to implement in one country (Kenya) a pilot project on mortgage insurance, while at the same time advocate in the two other East African countries (Tanzania and Uganda) policy and regulatory reforms necessary to establish a workable system for mortgage insurance. It is anticipated that a pilot in Kenya will eventually pave way for implementation in Tanzania and Uganda, as the conditions in these two countries become more favorable.

Applied Research

HSFD actively conducts normative and operational research and analysis activities to provide support and guidance for field operations. During the scoping missions and field visits, government officials and private practitioners frequently mentioned the importance of data and guidance. The first debate by the British Parliament on urbanization particularly called for the decent data as a pre-condition for operations. HSFD conducts several areas of research and analysis which are crucial to SUF operations. HSFD surveys and evaluates the existing financing mechanisms for housing and infrastructure. It includes SUF pilot countries such as Indonesia and Ghana, as well as other countries to examine possible transferability of experiences between SUF pilot countries and from other countries to SUF pilot countries. Research also explores the innovative instruments and practices for housing and infrastructure financing and their adaptability/ replicability to other countries and to low income housing development and improvement. Various instruments have been examined such as housing micro finance, specialised lending, special savings schemes, government roles and subsidies, private and public partnership, housing cooperatives and community-based organizations as vehicles, SPVs and etc. These research and analytical activities pay particular attention to the issue how we can bring the mainstreaming funding sources into the slum upgrading areas. They lay a basis for SUF to develop bankable housing and infrastructure projects in pilot countries. Another important area of HSFD research is documentation and profile studies of slum areas and project experiences. These studies allow people to have a better understanding of slum situations, characteristics and challenges. They help to develop better targeted and more feasible slum upgrading projects.

A Response to the Challenge of Slums

Slum Upgrading Facility

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Strategies for Financing Slum Upgrading

KENSUP and Special Purpose Vehicles

In May 2005, the Rockefeller Foundation extended a small grant to UN-HABITAT to prepare for an international conference of 30 persons on housing finance at its facilities in Bellagio, Italy. Working with the Harvard University Joint Center for Housing Studies requested by Rockefeller to organize the meeting, UN-HABITAT convened meetings with the Ministry of Lands and Housing, the Ministry of Finance, and the Nairobi Stock Exchange to prepare a background paper for the conference. A high-level delegation led by the Minister of Lands and Housing presented the paper in Bellagio after which counterpart delegations from Thailand, Mexico, South Africa and the United States requested the organizers to zero in on how to finance upgrading in the slums of Kibera. What ensued was a discussion about the establishment of Special Purpose Vehicle (SPV), a publicly chartered, commercially owned and operated company that could serve as a property developer and mortgage finance bank for affordable housing in Kibera and other slums of Nairobi. Discussions during the conference also touched on the role of public trusts that would harness central government expenditure (GOK committed in its FY2005 budget USD 8 million specifically for slum upgrading) and pooled overseas development assistance; and on the central role of financial intermediaries (MFIs) and cooperatives of slum dwellers. The conference concluded with an agreement by Rockefeller and the Joint Center for Housing Studies to avail a consultant who together with SUF Design Team could assist the Government of Kenya to develop a comprehensive strategy for financing slum upgrading in Kibera and other Kenya slums. In July 2005, the SUF Design Team, GOK and the consultant organized a series of consultations with key stakeholders (NGOs, Nairobi City Council, retail banks, private investors, MFIs, Ministry of Finance, and Ministry of Lands and Housing). The consultant then prepared a report that was taken up along with presentations of other financial models in an Expert Group Meeting organized by SUF in September 2005. This event was followed by a multi-stakeholder meeting facilitated (not chaired) by the Minister of Lands and Housing who described the master plan and financial strategy of KENSUP. He urged the 150 participants to work over the following months in small groups to provide feedback and prepare for a high-level investment conference that would bring together all aspects of finance – community savings of cooperatives, micro-finance, public expenditure, overseas development assistance (loan guarantees, grants, soft-loans, equity investments), and private domestic capital investment. SUF Design Team remains engaged in this process, nurturing the facilitation of stakeholders and offering opportunities for targeted technical support and peer exchange. Future support from the Rockefeller Foundation to UN-HABITAT is being pursued for this purpose.

A Response to the Challenge of Slums

PART THREE

The documentation of project activities and processes help to disseminate the useful experiences of slum upgrading projects and promotes knowledge sharing in the field of financing and slum upgrading. It integrates its knowledge development process with the advisory and technical assistance.

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Slum Upgrading Facility

PART THREE

Types of SUF Financing Products Required

The SUF Design Phase has assessed a range of types of Financing Products. Each of these products will be field tested in the pilot countries as appropriate, some countries fielding more than one Financing Product. The products often have some history of experimentation in some of the countries. In no country, however, have they become established or mainstreaming. In these cases SUF aims to pick up where others have left off and examine in detail how to take them forward.

SUF Design Phase: Types of Financing Products 1. Accessible Low Income Housing and Home Improvement Loan Products - This is being undertaken in Ghana with HFC Bank, with National Development Bank in Sri Lanka, and in Indonesia.

2. Credit Facilities for Housing Cooperatives for retailing amongst members such as with TAWLAT and AZANIA Commercial Bank in Tanzania, and with CoBILD in Indonesia; likely also in Kenya, Sri Lanka and Ghana.

3. Special Purpose Vehicles (Joint Venture Development Companies able to raise debt finance – loans and bond

products on local capital markets) that can spearhead housing developments with Housing Cooperatives – this is being developed by GoK with SUF inputs for KENSUP; likely in other countries as well, and featured prominently in the Bellagio conference and recent EGM on SPV Formation, held in Nairobi on 5-6 September 2005.

4. First Year Capital Allowances (See EGM 2 papers) in the SUF Resource CD-ROM at the Back Cover).

5. Insurance Company involvement (See EGM 2 papers) in the SUF Resource CD-ROM at the Back Cover).

6. Property Unit Trusts (See EGM 2 papers) in the SUF Resource CD-ROM at the Back Cover).

A Response to the Challenge of Slums

Slum Upgrading Facility

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

8. Mortgage Insurance (see paper in the SUF Resource CD-ROM at the Back Cover). 9. Municipal Bonds for investments in housing land development, related infrastructure, and slum upgrading – an outcome of Type 4 in Accra, Ghana, and Lusaka, Zambia,

10. Credit Enhancements for lowering the perceived risks to any of the above (as with the TAWLAT Loan Guarantee Facility), for example the case of a proposed shared-risk Development Fund in Sri Lanka subscribed by SDI, SUF and the Municipalities. 11. Guarantee Facilities for any of the above lending products – negotiations for USAID’s Development Credit Authority to support the Accra model, and GuarantCo supporting Lusaka City Council.

Note: This list is not exhaustive, but provides an indication of progress made to date on field testing design instruments under the SUF Design Phase. All the examples are subject to change as the detail is worked out between the parties. Changes also occur when another development partner participates.

It should be emphasized that the products require Technical Assistance. Initially this is based on the expertise of the CPCs, and local consultants, but will become more comprehensive with the Pilot Teams. Further, Capacity Building is essential for continuity and sustainability. Building capacity needs to take place over a long period of time so that it becomes automatic that finance is considered early in the development of slum upgrading and low-income housing projects. Capacity Building also needs to be undertaken locally by specialist institutions. The international expertise needs to be brought to these local institutions.

A Response to the Challenge of Slums

PART THREE

7. Updating the municipal property tax base for enhanced revenue streams to service debt instruments for municipal-led slum upgrading and associated infrastructure, as in Accra Metropolitan Authority, Ghana; and in Lusaka, Zambia; SUF advocates this approach in all places.

Part Four:

The SUF Design phase Outcomes

• Achievements, Findings, and Methods • SUF Manuals, Action Plans, Annual Implementation Plans • SUF Country Operations • Findings of the Design Phase • Key Findings at Country Level • Key Findings on SUF Approach and Emphasis • Key Findings on SUF Organizational and Institutional Arrangements • Assessment of readiness of countries for SUF Pilot Programme • Credit Enhancement Support to Pilot Projects • Guidelines for proposed Credit enhancement • Types of Credit Enhancements considered • Potential Forms of Credit Enhancements under SUF • Guiding Principles for Credit Enhancements under SUF • Conclusions on the Design Phase and Strategy for Future Directions

Slum Upgrading Facility

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

The Design Phase Outcomes:

The Slum Upgrading Facility (SUF) has been established at UN-HABITAT as a global programme aimed at dramatically up-scaling slum upgrading activities at the municipal level. The outcome is expected to make a significant contribution to the achievement of the Millennium Development Goals, in particular Goal 7 Target 11: “to significantly improve the lives of at least 100 million slum dwellers by 2020”. In order to achieve the MDGs generally and prevent new slums forming, massive investments are required in housing that is Appropriate, Affordable, and Accessible. Since this is beyond the resources of the combination of governments and donors, the domestic capital markets need to be brought into the investment process. There is a gap in the assistance provided to governments, municipalities, and civil society that currently inhibits this from taking place systematically, and to any degree of scale. SUF is designed to assist in mobilizing domestic capital for slum upgrading and low income housing locally, country by country, utilising all the international experience and support that is available within the international community. SUF has set agreed parameters for assessing the viability of assisting developing countries in the financing of their own slum upgrading and low income housing programmes through the mobilization of domestic capital. These parameters are set out in thee SUF Operations Manual. By September 2005, SUF had become operational in at least five countries of the developing world representing the sub-regions of West Africa, East Africa, South Asia and South-East Asia. SUF will field test at least five types of financial instruments for upgrading in these countries. Five further countries are being considered for future SUF involvement. The 18 month Design Phase will lead to the more comprehensive 3-5 year Pilot Programme in early 2006. The Design Phase established frameworks for the development of SUF Pilot Projects, starting with an analysis of assumptions, through to guides for the understanding of land development, and the formation of Special Purpose Vehicles (SPVs) or Joint Venture Housing Development Companies that have the capacity to borrow from the capital markets, manage the development processes to the satisfaction of the private sector, on-lend to financial intermediaries such as housing cooperatives, and structure the repayment of all borrowing in a timely manner.

An Expert Group Meeting, bringing together experts in the field of SPVs, with SUF and Government representatives from Ghana, Kenya, Tanzania, Uganda and Zambia, was held in Nairobi in early September. For the Outcome of EGM see the SUF Resource CD-ROM at the Back Cover.

A Response to the Challenge of Slums

PART FOUR

Achievements, Findings, and Methods

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Slum Upgrading Facility

PART FOUR

SUF Manuals, Action Plans, Annual Implementation Plans

Please see attached as part of the annex the following documents: SUF Operational Manual, SUF Action Planning Methodology Guidelines, The SUF AIP 2005, and The SUF AIP 2006. The Operations Manual has helped define the remit of SUF, the PMU and the Pilot Team operations. It is an agreed document at Consultative Board level, and their agreement is required for any changes that may be proposed for the Manual.

SUF Country Operations

The Design Team has established initial field operations in each of the four pilot countries with the appointment of Country Project Consultants (CPCs) reporting to the SUF Design Team via the Habitat Programme Managers (HPMs) in those countries. The CPCs continue the negotiations required for establishing the first round financing products for identified partners’ projects. Where required the CPCs also coordinate specialist inputs from additional local consultants, for example, on finance, banking, physical design and costing, and community coordination.

Findings of the Design Phase

The Design Phase has set its priority in understanding the reluctance of private sector capital in being comfortable with investing in Municipalities generally, and in slum upgrading and low income housing in particular. The following box summarises the main Project Development and Financing issues and findings from the SUF Design Phase.

1. Defining who the ‘client’ is, and what their current financial status may be is the essential first step. The ‘community’ needs to define what binds them together – what their ‘common interest’ is, and how they are legally constituted. 2. Where there are ‘savings schemes’ in place, these give an immediate recognition to the group and its potential for regular payments.

3. Financial Institutions are interested in development proposals where there is a clear separation of responsibility and financing for the three areas of development, and a combined Business Plan is prepared to cover all three areas: i. Development of land with infrastructure (as with ‘sites and services’ and security of tenure – tradable title) ii. construction or improvement of houses (the ‘superstructure’) iii. Take-out finance for the completed dwellings (mortgage-type arrangements) In all cases the critical question is the source and reliability of repayment for any financing made available.

A Response to the Challenge of Slums

Slum Upgrading Facility

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

proposals only where there are properly costed physical plans for the buildings (except on onerous terms, and substantially guaranteed by others in totality) – they would expect to see these as part of realistic Business Plans for Development proposed for land with title, with known proposals for infrastructure (will the drains and sanitation provision be there, be adopted by the municipality, and be maintained?); with a timetable for the contractor to complete construction on time (only known with a critical path analysis on construction and methodology); and with the repayment scheme set out to be honoured (and, if necessary, credit enhancement to help guarantee repayment).

5. Commercial Banks and other Capital Market Institutions would only participate in a Joint Venture Special Purpose Vehicle (SPV or Development Company) to undertake 1 above, where the private sector retains a controlling interest (to protect the management arrangements); would expect to see some government (preferably local government) interest in the company; and would be governed by a Board that reflects the same proportional interests of the parties, with a Chair that can act as ‘champion’ of the development enterprise.

6. Where Developmental NGOs have at their disposal enthusiastic (sometimes young recent graduates, or indeed, recently retired) professionals who are keen to participate in ‘the improved built environment for poor people’ – these may be architects and engineers, quantity surveyors, specialists in low cost construction technologies, and construction programme managers, they provide the fundamental basis for guiding a community in assessing its development options and potential. Such guidance is critical and takes time and dedicated inputs. Where these factors are already in place, rapid progress can be made towards defining the Slum Upgrading / Low Income Housing Development Project in response to items 2 and 1 above. Where they are not available, time and resources need to be allocated for these purposes (see SUF Project Design and Development Guidelines).

7. Engaging the Local Government / Municipality / Local Service Authorities and Land Agencies is a vital first step in establishing the robustness of any ‘improved built environment for poor people’ project. Achieving land title and legal permissions for development are the valuable entry points that a lending institution will want to see established.

8. Best developmental innovations take between 2-5 years to develop for the mobilization of domestic capital. Typical development projects at all levels take this time. Rushing risks under development.

9. Understanding the Capacity of a Site and the Construction Costs is the critical first step for a development project – complying with regulation, and satisfying the lender that there is a cost control strategy in place for the development. Help is required in developing Urban Resource Centres and associated Cost Information Networks in each SUF sub-region so that slum dwellers can also participate productively in the Project Design and Development process (see SUF Project Design and Development Guidelines).

10. Capacity Building is desperately required in order to establish each of these findings within the local implementation institutions – Municipalities and other government/authorities, Slum Dwellers’ Organizations, Banks, and other Financial Institutions. This is a new requirement. It can be facilitated by the concept of Urban Resource Centres, as in 9 above. A Response to the Challenge of Slums

PART FOUR

4. Commercial Banks and other Capital Market Institutions are prepared to consider finance for development

PART FOUR

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Slum Upgrading Facility

The most commonly asked question from the field was ‘where can we obtain guidance on these processes’. The answer lies in establishing the processes for ‘Urban Resource Centres’ and relevant ‘Guidelines to local development’. SUF can play an important role in pursuing these processes, and in providing the relevant Guidelines. The issue of ‘time and resources for development preparation’ has become critical. Without a ‘pipeline’ of potential projects for the improved built environment for low income citizens, there is no starting point for the financing mechanisms to reach their goal. Yet it is not the responsibility of the financing processes to determine the product that should be built. Although this yawning gap has long been identified amongst housing and upgrading development professionals, there are only a handful of examples where this has been mainstreaming. The SUF Design Team believes that such processes should be institutionalized at the Local Government level specifically to provide a basis for the informal professional cadre to engage their services. National resources need to be allocated for these purposes. The SUF Pilot Programme has become very dependent on the opportunities that have arisen in this way, for example with TAWLAT in Tanzania, with Peoples’ Dialogue in Ghana, with Janarukula in Sri Lanka, and with Lugur Setia Mandiri (CF: Wing) in Indonesia. Nevertheless, these potential projects provide a good basis for demonstrating the SUF principles in taking these projects forward to the next stage of financing, ready for implementation.

Key Findings at Country Level

Demand for SUF products and services are high: Development partners and financial partners in all countries, as well as international finance facilities find SUF products and services necessary and useful. Domestic capital as an alternative to official development assistance touches on issues of national pride: Many government officials and private bankers are eager to finance housing and infrastructure through their own national resources (public, community, private), rather than orient the entire exercise around ODA. SUF is attractive because it at once mobilizes new sources of funding for development and deepens capital markets: Again and again, officials at country level and from international financial and development institutions remarked that SUF products and services provide a two-for-one deal: releasing for development purposes an as yet under-tapped resource AND contributing to a more vibrant climate for savings and investment. Demand-side is the challenge, not supply: Wholesale mortgage banks at country level, GuarantCo of the PIDG, the Development Credit Authority of USAID, and the Sida Capital Markets and Finance Division have large quantities of capital (loans, loan guarantees, and soft-credit) to but face problems identifying viable projects to invest in.

A Response to the Challenge of Slums

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Banks are liquid, need new markets and new products but lack long-term capital and perceive risks to outweigh returns: Bankers face serious liquidity problems and want to lend to a wider cross-section of the population, but they can not absorb long-term liabilities with short-term deposits and require better information on borrowers that can demonstrate their credit worthiness. Cooperation between Housing and Finance Ministries accelerates when issues of domestic capitalization are being advanced: Coordination between these two ministries is a prerequisite for establishing public trusts of pooled government expenditure and ODA, development companies (SPVs), a framework for asset-backed securities, regulations for MFIs and pension funds, guidelines for housing cooperatives, incentives for banks and private investors, and other requirements of domestic capital mobilization for upgrading. Financial intermediaries are a crucial factor in domestic capital mobilization: Banks are reluctant to lend directly to borrowers who can not verify income, lack a credit history and collateral, and who will borrow only in small amounts but they will lend to financial intermediaries who will on-lend to such populations. Financial intermediaries are few and far between, especially in Africa, and MFIs are not necessarily the solution: Governments, lenders and borrowers seeking to make credit available to slum dwellers face a choice between creating new financial intermediaries, urging banks to establish community development “second lending windows,” or strengthen existing micro-finance institutions to offer home loan products. How slum dwellers organize themselves to access capital and how they situate themselves in public-private partnerships is not yet clear: Slum dwellers are organized in daily savings associations, housing cooperatives, faith-based organizations and at their places of employment but lack an organizational structure that will enable them to access formal sector capital for their upgrading activities and to engage with special purpose vehicles. Slum Dwellers are not without resources. In fact it costs proportionally more to live in a slum than elsewhere in the city – water has to be bought at higher prices; borrowing is costly (because of lack of competition and alternatives, loan ‘sharks’ can charge anything from 50% per annum, and up to 100% per month interest), and coping with a lack of municipal services means paying more to obtain them. Where the environment is improved in slums, it benefits the entire city. Where municipalities are pro-active in slum improvement there is a wider benefit than just in the slum area, questioning who should pay for the upgrading work – the slum dwellers alone, or in combination with the City / State. Women tend to be the best savers. Women-led savings organizations have a better track record of consistent and bankable savings. This is the absolute key to SUF-type approaches to financing low-income housing and area improvements.

A Response to the Challenge of Slums

PART FOUR

Slum Upgrading Facility

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Slum Upgrading Facility

PART FOUR

Key Findings on SUF Approach and Emphasis

How SUF products and services are applied must reflect varying local conditions: The political will and capacity of local actors differs significantly in Tanzania, Sri Lanka, Ghana, Indonesia and Kenya. SUF needs to work with local actors to develop products in ways that make sense and to offer its services bearing in mind the political and institutional nuances of each country. Slum upgrading is a political, technical, and financial activity. The limited capacity but great interest of local actors suggests re-thinking the strategy of SUF to build capacity of local actors to mobilize domestic capital: SUF is not a capacity building initiative but the way that it develops and field-tests products and the way it offers its services must build local capacity and set in motion a longerterm strategy for local actors to continue to mobilize domestic for slum upgrading after SUF concludes is contribution. The strategy needs to consider several options that strike the right balance, enabling SUF to build capacity but not at the expense of distracting it from scaling up financial instruments, packaging projects and structuring deals. Local Capacity Building Institutions will need to be brought in to develop this approach. SUF needs to field-test its products before applying them widely or on a larger scale. The purpose of the Design Team is to field-test, the purpose of the Pilot Team is to scale up. It takes time to get the actors to commit themselves, even to field-test. In the time remaining in the Design Phase (November-January) the Design Team needs to field-test one or two SUF products. This will inform and give direction to the work of the Pilot Team to apply SUF products at scale.

Key Findings on SUF Organizational and Institutional Arrangements

Delays in securing a pilot team have produced mixed results. The Design Team has had more time to develop project proposals and field test design instruments, to engage partners locally and internationally, and to articulate the products and services of SUF. However, the credibility of SUF among some international partners and the business community is at risk the longer the award of the SUF Pilot Team remains uncertain. SUF must be structured in a way that will allow it to deliver products and support efforts to build the capacity of local actors to mobilize domestic capital in the long run. Product delivery (scaling up financial instruments, packaging projects, and structuring deals) is the remit of the Pilot Team. Building relations among local actors and strengthening their capacity to do the work of the Pilot Team after it leaves is the remit of the Programme Management Unit. Getting this distinction clear and structuring SUF accordingly is important. The strategic positioning of SUF within the Foundation as a vehicle for assisting member states to mobilize resources has direct implications for the SUF Programme Management Unit: The positioning of the Foundation within UNHABITAT awaits decisions by the Governing Council, the Executive Director and the newly appointed Deputy Executive Director on the 2008-2013 Strategic Plan for Implementing the MDGs. It is expected that the positioning of the Foundation in the 6-year plan will substantially elevate the role of SUF as called for by member states in the 2005 UN Summit Output Document. It is therefore important now to anticipate how these changes will unfold and to place the Programme Management Unit appropriately. A Response to the Challenge of Slums

Slum Upgrading Facility

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

There is a growing convergence of views in development community in the world that in the long term domestic capital is the key to development of sustainable financing framework for development projects in developing countries. It is well recognized that attracting domestic capital generally requires some form of “credit enhancements” to address the perceived and actual risks involved in slum and urban upgrading projects. Many studies have demonstrated that well structured ‘credit enhancements’ led to successful mobilisation of domestic private capital. A recent World Bank study presents the successful and emerging examples of domestic credit enhancements for municipal infrastructure.

Potential Forms of Credit Enhancements under SUF

While the nature of credit enhancement is likely to vary from country to country and project to project, the following paras present likely forms of credit enhancements under the SUF. To the extent possible, SUF will aim to make its credit enhancement support into local revolving funds (by recovery of some of its grants through project implementation and re-utilizing the unlocked funds under guarantees) to leverage many time over. a. Project Implementation (or Instrument Development) Support: The credit enhancement support may take the form of technical assistance grants for developing and implementing the projects/instruments; establishment of special purpose vehicles; establishment of urban poor development funds that facilitate/provide credit, matching grants to create demand for SUF type of projects, etc; b. Bridge Finance: In some circumstances, there may be a need for proving a partial finance for projects during the initial stages to kick-start the projects/instruments including financial products such as stand-by credit facilities; c. Guarantee Funds : Establishment of ring-fenced local guarantee funds that provide partial or full credit guarantees to local financial institutions without recourse to SUF.

The following sections present the brief history of some of domestic and international credit enhancement facilities and form and structure of credit enhancements under the SUF. This note is prepared based on literature review and the experience of SUF Design Team. The note is workin-progress and certainly not intended to be a comprehensive document in design of credit enhancements.

For slum upgrading projects, the need for non-mortgage based security measures is high considering the high costs of creating mortgage based credit enhancement measures. As a result, there is a need for multiple layers of cash and non-cash based collateral systems for attracting private capital into slum upgrading projects. A Response to the Challenge of Slums

PART FOUR

Credit Enhancement Support to Pilot Projects

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Slum Upgrading Facility

PART FOUR

Municipal Credit Enhancement Mechanisms in Developing Countries

World Bank (2005), “ Locan Financing for Sub-Saovereign Infrastructure in Developing Countries: Case Studies of Innovative Domestic Credit Enhancement Entities and Techniques”, Discussion paper by Robert Kehew, Tomoko Matsukawa and John Peterson for Infrastructure, Economics and Finance Departments of the World Bank as presented in the study, several countries (often with international donor community support) such as Colombia, India, Philippines and South Africa have established credit enhancement facilities. The credit enhancement structures vary from country to country, but mainly are in the form of: comprehensive full credit guarantee; partial credit guarantees; cofinance; sub-ordination; bond pooling; debt service reserve funds; state intercept mechanism; liquidity facility; and, grants for covering the costs of project development and bond issuance.

Community-Led Infrastructure Finance Facility (CLIFF)

The CLIFF was established to provide technical assistance and bridge the finance gap in slum upgrading projects initially in India and Kenya. The CLIFF is being funded by DFID of UK and SIDA. The Cities Alliance administers the facility. The role of the CLIFF is “to catalyze scaling up of slum development solutions that work for the poor and leverage additional loan finance from financial institutions”. The CLIFF provides finance for community-led slum development projects. The financial products under the CLIFF include: technical assistance grants; direct loans to communities or their organizations; knowledge and management grants; and financial guarantees. During March 2002-March 2005, CLIFF provided commitments of 3.9 million pound sterling to communityled projects in India. This financial commitment will help complete the projects worth 11.72 million pound sterling. The CLIFF experience demonstrated the criticality of credit enhancement support (through variety of financial products) for financing the slum upgrading projects and attracting commercial finance. See www.homeless-international.org for more details.

Credit Enhancements in Micro-Finance Industry

Limited literature review and discussions indicate that innovative credit enhancements are emerging in many countries to scale up micro-finance operations. One such example relates to ICICI operations in India. The ICICI bank has an ambition of scaling up its asset base of micro-finance type operations to $10 billion by 2010. In order to achieve this scale, ICICI is working on several comprehensive measures including credit enhancements. It has introduced the concept of “First Loss Default Guarantee (FDLG)” where the participating Micro-Finance Institution (MFI) provides FDLG for facilitating commercial finance at near AAA rates to poor households. In addition, ICICI is also provides technical assistance support to build the capacity of the micro-finance industry. ICICI is also working on venture capital for micro-finance equity and insurance for micro-finance products in order to reach the scale. Please see www.microfinancegateway.org for more details.

Please refer to World Bank (2005), “Local Financing for Sub-Sovereign Infrastructure in Developing Countries: Case Studies of Innovative Domestic Credit Enhancement Entities and Techniques”, Discussion Paper by Robert Kehew, Tomoko Matsukawa and John Petersen for Infrastructure, Economics and Finance Department of the World Bank, 2005. A Response to the Challenge of Slums

Slum Upgrading Facility

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

There are several regional and global international credit enhancement facilities. To name a few, these include: International Finance Corporation (IFC); United States Agency for International Development (USAID); GuarantCo; and, private sector-led micro-finance guarantee facilities. All these facilities were established to lead/attract private capital (both national and international) into development projects. The following paras provide brief description of some of these facilities. However, it must be highlighted that donor-led international facilities will require minimum ‘bite size’ for the engagement. This may preclude some of the slum upgrading projects, whose scale and size are likely to be lower than the ‘bite size’ of international facilities.

USAID Development Credit Authority (DCA):

PART FOUR

History of International Credit Enhancement Facilities

The DCA, established in 1999, is principally intended for credit enhancement purposes for advancing USAID’s strategic objectives in developing countries. The DCA provides partial loan and bond guarantees to nonsovereign entities where the “market imperfection” exists. During 1999 and 2004, DCA signed 114 guarantee agreements with private sector financial institutions which made available an additional $855 million in new loans in 36 countries. The DCA, even though, is based on market-based risk assessment, is not priced on markerbased principles. The USAID local missions provide partial credit risk subsidy for transactions under the DCA guarantees. The DCA provided several partial guarantees for urban sector projects. Please see www.usaid.gov for more details.

International Finance Corporation (IFC):

IFC has guarantee facility to attract private capital into development projects. Recently, IFC established Municipal Fund to provide direct loans or guarantees. The Municipal Fund has provided partial guarantees for municipal bond issues of Mexico and Johannesburg. The IFC prices its guarantee at market rates. However, IFC and its partners also provide project development grants. Please see www.ifc.org for more details.

GuarantCo:

The Private Infrastructure Development Group (PIDG), a multi-donor initiative has established GuarantoCo in 2003 to provide partial guarantees for attracting private capital to development projects in developing countries. The GuarantCo, whose pipeline of deals is emerging, has committed to support slum upgrading projects. The PIDG also established Emerging Africa Infrastructure Fund, which will also provide credit guarantees. Please see www.pidg.org for details.

A Response to the Challenge of Slums

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Slum Upgrading Facility

PART FOUR

Micro-Finance Guarantee Facilities:

There are several international micro-finance guarantee facilities, primarily led by the private sector and international MFIs. These facilities, even though recent in origin, have made progress in providing guarantees to private sector to attract commercial finance (local and international) for micro-finance operations in several countries.

Lessons from Experience from Credit enhancements

The World Bank provides some interesting lessons (see Annex 1). There is growing evidence that credit enhancements are critical for attracting domestic and international private capital into development projects. There is also growing acknowledgement that domestic credit enhancement facilities are important and they need to be scaled up. However, credit enhancement facilities must be designed to create the market and not result in market substitution. The credit enhancements must also be designed based on market-principles to the extent possible in order to avoid moral hazard and to be sustainable. The form of credit enhancement varies across countries and markets. The lessons from experience demand the flexibility and demonstrate the need for light governance structures and strategic intervention in design and implementation of credit enhancement support.

Credit Enhancements under the SUF

The PM Global Infrastructure Inc Report which formed the basis for establishment of the Slum Upgrading Facility (SUF) recommended that “SUF’s advisory functions are supplemented by catalytic injections of relatively limited amounts of money to build capacity, test new ideas or overcome key bottlenecks”. The report broadly identified the forms of credit enhancements as seed capital and bridge financing (please see Box 2 for extracts of the report). The DFID and SIDA, donors of SUF Design Phase, based on recommendations of the PM Global Infrastructure Inc Report have agreed to reserve up to 30 percent of SUF budget for credit enhancements. This is reflected in the current SUF Pilot Programme Budget 2006-8. A process for a SUF Credit Enhancement Terms Sheet has been agreed as part of the SUF Operations Manual. See Box 3 for Guidelines for proposed Credit Enhancement Terms Sheet. Since then, the SUF Design Team has undertaken scoping missions to 10 countries and several project development missions to four pilot countries. The following paragraphs reflect the lessons learnt from the missions and discussions with key domestic and international partner.

Please see PM Global Infrastructure Inc Report, “Meeting the Challenge: Proposal for Creation of a Global Slum Upgrading Facility”, December 31, 2003, prepared for UN-HABITAT. Extracts are presented in Annex 2 to this note.

A Response to the Challenge of Slums

Slum Upgrading Facility

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Guiding Principles for Credit Enhancements under SUF

It is possible that international credit enhancement facilities may find on-going pilot projects to be too small for their intervention. In those cases, SUF will provide initial credit enhancement support in order to demonstrate the track record as well as to create scale for international facilities to participate. One such example is a launch of Low Income Housing Finance Product in Sri Lanka. The SUF is working towards launching a $1.5 million low income housing finance facility – to be utilized over first 12 months of launch. The SUF and its partners hope to scale up this initiative to $15 million over next 3 years which may be supported by international credit enhancement facilities. A Response to the Challenge of Slums

PART FOUR

The SUF will adopt the following guiding principles in its determination and implementation of credit enhancement support. a. Market Imperfection: Many market imperfections exist in SUF pilot countries. These imperfections relate to credit markets as well as lack of appropriate policy frameworks and lack of capacities for development of bankable projects/instruments. The SUF will strive towards market creation rather than market substitution. The SUF will use the credit enhancement support as a strategic instrument to create the market. In addition, where available, SUF will seek to work with other local and international technical assistance and credit enhancement facilities. For example, if USAID or IFC or GuarantCo or other facilities are interested in a particular transaction, SUF will not seek to duplicate the support . Similarly, in the case of Bangladesh where DFID is expected to provide 60 million pound sterling for community-led slum and urban upgrading project, SUF will not provide technical assistance or credit enhancement support. b. Moral Hazard: Donor led or external non-market based facilities have tendency of creating a moral hazard. The SUF will aim to mitigate the moral hazard by variety of approaches and means such as: only supporting community-led and community-owned development projects; partial cost sharing and recovery of project development costs during project implementation; only partially sharing the risks; and through other appropriate incentives. c. Sustainability: The SUF will follow the principle of sustainability (both financial and institutional) in its determination of credit enhancement support. The credit enhancement support will be designed in such a way that risks are shared across multiple partners. For example, in the event of credit enhancement support to housing finance product, the SUF will seek to share the risks partially through innovative products such as First Loss Default Guarantee as well as with multiple partners such as participating community groups, urban poor funds, governments, micro-finance institutions and financial institutions. Similar principles will be applied in other types of credit enhancement support. Degree of Credit Enhancement Support: In the demonstration phase, both the transaction costs and credit enhancement support required are likely to be higher as a proportion to project costs/size. As the market for SUF type of operations gradually develops in each country and scaling up of pilot projects takes place, the transaction costs will come down and the degree of credit enhancement support will decline as proportion of project costs/size.

PART FOUR

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Slum Upgrading Facility

d. Liability to SUF: The SUF credit enhancement support is expected to be one-time support (in some circumstances, it is likely to be multiple fund transfers). The operation will be ring fenced locally. However, the support will be designed in such as a way that there will be no future recourse (either moral or financial) to SUF and its international partners in the event of default or litigations. Nonrecourse (no liability on SUF) mechanisms will be incorporated in appropriate legal documents with country partners. e. Treatment of Funds at the End Period: The implementation period for SUF supported projects will vary across types of projects. In the event of area defined projects such as land sharing schemes, the construction period is likely to be 12 to 36 months. In the event of housing finance product or municipal bond instrument, the length of the project is likely to be 5 to 20 years. As a result, the length of credit enhancement support is likely to vary from project to project. At the end of project, the SUF portion of the credit enhancement support will be utilized for other similar projects. The SUF, through appropriate agreements, will define the treatment of funds at the end period. For example, in the case of Moratuwa Urban Poor Development Fund (proposed to be established by SDI, Moratuwa city, communities and SUF), a revolving fund facility likely to be operational in perpetuity, will utilize funds for slum upgrading in the city of Moratuwa. In the event of closure of the Fund or meeting of original objective, the portion of the SUF funds may have to be mandated to be transferred to a public interest organization such as Moratuwa City Corporation for utilizing for similar projects. f. Others: The nature of institutions that are likely to receive credit enhancement support will include community associations, urban poor development funds, project development agencies, special purpose guarantees facilities and financial institutions. The SUF will under take fiduciary assessment of institutions prior to approving credit enhancement support as outlined in its agreement with the Cities Alliance. The SUF will work other partners who have the experience of providing credit enhancement support. In conclusion, in partnership with donors, the SUF will utilize the credit enhancement support as a strategic instrument to attract domestic capital into slum and urban upgrading projects in pilot countries. While doing so, SUF will adopt international best practices both in determination and implementation of credit enhancement support to projects/instruments.

Assessment of readiness of countries for SUF Pilot Programme

The Second Progress Report gave an assessment of the ten countries of SUF activities, according to the criteria set out in the First Progress Report. Estimates had been given at that time for Zambia and Senegal. Full assessments have now been made for these two countries. Subsequent missions have also slightly modified assessments. The following table gives us our overall assessment. The priority countries are thus Ghana, Indonesia, Sri Lanka and Tanzania

A Response to the Challenge of Slums

Slum Upgrading Facility

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Guidelines for Proposed Credit Enhancement Terms Sheet

There are already in existence a select group of institutions that provide different forms of credit enhancements for projects that the Management Support Team may identify and seek to have financed. These institutions include, for example, GuarantCo, USAID DCA Facility, and PIDG, among others. Initially, the MST will seek to secure any needed credit enhancements) from these existing institutions. If, for whatever reasons, none of these institutions is in a position to provide the type or extent of credit enhancement required, or can only partially meet the requirements), then the MST may request such credit enhancement support from the SUF. Such credit enhancement is expected to be for a limited duration with take-out finance identified for the longer term.

PART FOUR

It is likely that the SUF Programme Manager, together with the SUF Management Support Team (MST) will identify potentially attractive and otherwise qualifying project interventions that, for one reason or another, may require “credit enhancements” in order to enable the project to attract private capital.

In those cases where the MST specifically seeks SUF support for such a credit enhancement, it will be required to complete a Terms Sheet for submission to and approval through the SUF Programme Manager. The Terms Sheet must include the following information:

3. Nature of the proposed credit enhancements), including:

1. Summary description of the project. 2. Proposed terms and conditions of financing package, including: 2.1 Amount(s) 2.2 Sources 2.3 Borrower(s) 2.4 Tenor of facility(ies) 2.5 Costs, including; 2.5.1 Interest rate 2.5.2 Fees and commissions 2.5.3 Legal 2.5.4 Registration 2.5.5 Other 2.6 Repayment provisions 2.7 Security arrangements 2.8 Events of default 2.9 Remedial measures

3.1 Form (i.e. guarantee, interest rate subsidy, standby credit facility, bridge finance, defraying costs, etc.) 3.2 Amount required 3.3 Tenor (if applicable) 3.4 Cost of the credit enhancement 3.5 Source(s) of cost recovery and time frame—if applicable 3.6 Recipient of the proposed credit enhancements) 3.7 Ultimate beneficiaries)

4. Rationale for seeking the credit enhancements). 5. Impact on project if credit enhancements) is/ are not provided. 6. Reasons other institutions were not in a position to provide the credit enhancement(s). 7. Identification, Agreement and Timetable for anticipated Take-out Finance. 8. Risks/Mitigating Factors.

A Response to the Challenge of Slums

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Slum Upgrading Facility

PART FOUR

Conclusions on the Design Phase and Strategy for Future Directions

Â The Design Phase has demonstrated that there is interest in developing countries in pursuing the SUF programme in their countries to establish methodologies and parameters for mobilizing domestic capital for slum upgrading and low-income housing developments and financial products. A programme and strategy for the Pilot Teamâ&#x20AC;&#x2122;s activities for the Pilot Phase has been developed and will be implemented from April 2006. Â The Design Phase has identified further gaps in the necessary environment for the successful mobilization of domestic capital, mainly in the ways in which Municipalities and their partners can build the capacity required to lead such processes; and the ways in which civil society can develop and manage the cost information necessary for them to participate effectively with upgrading programmes.

A Response to the Challenge of Slums

Part Five:

The SUF Action Planning Methodology

• An Introduction • An Explanation of its component parts • SUF Action Planning methodology Diagram A) Guidelines for the preparation of a SUF Project Design and Development Guidelines B) Guidelines for the preparation of a SUF Business Plan profile C) Guidelines for the preparation of a SUF Project Implementation Plan

Slum Upgrading Facility

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

SUF aims to assist Municipalities and Poor Urban Communities in raising finance from domestic capital markets for slum upgrading and very low income housing (VLIH) projects in developing countries. In order to attract local financial institutions in participating in the financing of slum upgrading and very low income housing projects several factors have to be borne in mind. Any lending to either municipalities or to the general public is a risky business for private sector banks and other financial institutions. For this reason they base their assessment of risk on a process of ‘due diligence’ analysis of the credit worthiness of any particular project or proposed financial instrument. Helpful in the process of assessment of credit worthiness of a project is the quality and nature of information and data provided to the financing institutions. Any commercial developer is quite used to this kind of information, and makes it the central consideration of the viability of any development proposal. It is how towns and cities are built – a normal course of events. However, it is not the usual kind of information that people who normally deal with communities and poor urban groups and their poverty reduction scenarios are used to. SUF aims to assist the representatives of community groups – municipalities and community based organizations understand the kind of information that financiers require. We call this the SUF Action Planning Methodology. The attached Diagram shows the inter-relationship of the various pieces of information that is required in order to make a development proposal. Only when there is an assessment of each and all of these component parts will financiers be able to make their own assessment of credit risk.

The SUF Action Planning Methodology – an explanation of its component parts

The central feature of the SUF APM is the Project Business Plan. Quite simply, this describes the amount of finance required, what it will used for, and how the repayments of the finance will take place, by whom, and when. How each of these factors is described and corroborated (for example, who the people involved are), will provide differing degrees of assurance to the credit risk analysis by the financing institution. Obviously, the equation is much more involved. There may be part of the funding coming from other sources. And there may be guarantees from other sources. These must all be described very clearly for the financiers to best understand the proposal.

A Response to the Challenge of Slums

PART FIVE

Introduction to the SUF Action Planning Methodology (SUF-APM)

The SUF Action Planning Methodology Diagram

2. Actions

1. Actors

UN-HABITAT Slum Upgrading Facility

Our vision for our, PROJECT DESIGN & DEVELOPMENT PLAN • Project Location • Capacity • Assumptions • Layout & Unit Plans

COMMUNITIES

(Also shown on the back cover so you can refer to it easily) In outline the following SUF Development Guidelines will show how project development information is portrayed for Financial Assessment purposes.

A Response to the Challenge of Slums

SUF is designed to promote the inter-relationship between people, finance, and politics for upgrading low income residents for developments

This is the SUF Action Planning Methodology Diagram

Clients

P E O P L E

F I N A N C E

Community Groups CBOs (+NGO support) Enumeration Savings Schemes Cooperatives Project Land Coordination with Local Government / Municipality

CAPITAL MARKETS Enablers Micro-credit Institutions Banks • Loans • Housing Credit Products • Mortgages Investment Finance Pension Funds/ Unit Trusts Infrastructure Finance Bonds

E Environmental Impact Assessment

P O L I T I C S

JUDICIARY SUPPORT NATIONAL GOVERNMENT POLICIES, GUIDELINES AND FRAMEWORKS

International Assistance

Mun icip Proj al ect Sup por P t lan Proj e deve ct site a nd lop perm ment its

Urban Governance Land Use Controls Planning Regulations / Legal Secure Tenure Environment Infrastructure

Financial flows and Repayments

LOCAL GOVERNMENT Enablers

G Mun Infra icipal st Deve ructure lopm Plan ent

d use • lan vices • Ser ucture astr • Infr

55 55

3. Results TECHNICAL ASSISTANCE

SUF

B PROJECT BUSINESS PLAN

Construction may be by Home Owners, Construction Contractors or by Community Contracts • for access, and infrastructure upgrading • for total Site/House development • or for ‘Sites and Services’ only

D PROJECT CONSTRUCTION PROGRAMME

PROJECT IMPLEMENTATION PLAN

To be agreed by all parties

Project Manager

Housing / Upgrading Delivery Programme PROJECT FUNDING AGREEMENT Including all Grants, Subsidies, and other Credit Enhancements

RESULTING HOUSES AND INFRASTRUCTURE PRODUCTS FOR SALE AND

Repayments by Homeholders 1 1

1 D

The Project Construction Programme will provide the contractual timetable, coordinating all activities up to the hand-over of completed buildings and infrastructure

The overall concept of the proposed project will be produced by the Community as the Project Design and Development Plan under the overall auspices of the Local Government who control the use of land and its regulation.

The Environmental Impact Assessment provides the community with their main argument and agreement for development of their project

Key to the SUF Project is the Project Business Plan which embodies all the known costs of a project, the way in which it will be financed, and the method of repayment with timetables for each of these processes.

The Financing Institutions will prepare a Project Funding Agreement outlining when finance will be made available, its cost, and the timetable for repayment agreed, taking account of the risks involved and the ‘due diligence’ the FIs need to undertake.

The Project Implementation Plan will outline all the agreements and timetable for development, including the sequencing of land access, infrastructure provision, permits, licences, and the construction programme

Municipal

of the plans

OCCUPATION / OR IMPROVEMENT

Housing is the product of a range of Slum Upgrading Project types from Community/Cooperative-led projects to Financial Institutions-led projects, Municipal Infrastructure-led projects.

SUF SUF GUIDELINES are produced for each

The following Guidelines show how you can prepare a submission for a commercial loan based on the details that follow:

Guidelines for the preparation of a SUF Project Design and Development Plan

Guidelines for the preparation of a SUF Project Business Plan

Guidelines for the preparation of a SUF Project Implementation Plan

Infrastructure is the necessary key component to the development of land for housing. It is the responsibility of Municipalities with Government support to ensure its availability for upgrading Projects and for new low income housing areas.

A Response to the Challenge of Slums

56 This is the starting point for you to describe your project. Each project will have a project dossier. -a file on all the background information -and numbers that describe your project. There is so much you can explain about what you know about the prevailing initiatives in your country. The straight forward numbers about your scheme. This will illustrate the ‘cost equation’ - the money you need to borrow and how you will repay. Some technical data on finance here. This will be your time table for action!

A Response to the Challenge of Slums

A Project Design and Development Plan (PDDP) Guidelines Contents

1 Introduction 2 Project Design and Development Plan Framework i. Context – SUF Kenya country implementation strategy ii. Pilot Project Description – the location, physical area, size and boundary definitions, intended capacity and people to be served iii. People involved in the Pilot Project iv. Pilot Project Development Assumptions Strategy v. The Cost Equation vi. Pilot Project Credit Enhancement Term Sheet vii. Pilot Project Plan of Action – Project Management Flow Chart and Timetable for Implementation

57 57

Project Design and Development Plan (PDDP) Guideline The overall concept of the proposed project will be produced by the Project Client – community group, householders, cooperative society, housing association, developer or municipality, or any combination of these. The Plan will identify where the project land is located and its context within the city, and the city’s own development or structure plan. The Plan will identify how many people will be accommodated, together with their living status. The associated Municipal Infrastructure Development Plan will need to be shown in support of the PDDP. A Project Layout or Master Plan will be developed that shows the tenure of the land and its surveyed boundaries, together with how the infrastructure is brought to and around the site – roads, footpaths, drainage, water supply, sanitation, electricity, and refuse collection arrangements. The Plan will need to indicate what restriction to development there may on the site, and how these have been taken into account. Where factors are uncertain the Plan will need to outline the Project Assumptions that have been used in its creation. See the SUF Operations Manual for a Framework for a Project Design and Development Plan. An essential element in relation to the PDDP will be the E. Environmental Impact Assessment (EIA) - however rudimentary the local regulatory framework may demand an EIA to be. What is important is the EIA provides the Client / Community with their main argument for the development of their project – why its is necessary in this particular place, and how there will be an environmental benefit from its realization.

You are the project client, representing all the people who will live in your project houses or improvements. You will need to take responsibility for all the activities.

See the SUF Resource CD-ROM for all this detail.

A Response to the Challenge of Slums

58 Use these pages to introduce your project. - What is its name? -Where is it located. -What context policy would relate to your project.

Introduction: A SUF Framework for Project Design and Development Plans For each SUF Project a Design and Development Plan will be produced. This Guideline gives an illustration of the kind of Framework that will be used for the SUF Project Design and Development Plan. It is designed to bridge the content of both the SUF Clientâ&#x20AC;&#x2122;s Development Project (be it for Area Slum Upgrading, Municipal Investment, new affordable housing, or for improved access to housing finance, etc.) and the Plan for SUF assistance in preparation for banking and finance institutions. This Guideline utilizes an example SUF Project Design and Development Plan being prepared for a project in Nairobi, Kenya, by way of illustration of the kind of process that is envisaged for the preparation of a generic SUF Project Design and Development Plan. It is not definitive and should be used as a guide.

A Response to the Challenge of Slums

59 59

Project Design and Development Plan Framework

Framework Example For each SUF Project a Design and Development Plan will be produced that identifies the Project together with all stakeholders, their roles and their responsibilities

Kibera-Langata (Decant) New Housing Project Ref: UN-HABITAT SUF-Ken-PP01: KiberaLangata Decant Project - KLDP, Nairobi, Kenya A project centred on the Langata Decant Site (LDS) and the people of Kibera, Nairobi

Context

SUF Kenya country implementation strategy

1. Summery of SUF Kenya Scoping Paper Ref. SUF Kenya Scoping Paper Ref. SUF Country Profile sheet for Kenya (as Annex)

A Response to the Challenge of Slums

Pilot Project Description Generic

The location, ownership, physical area, size and boundary definitions, development permissions, intended capacity, and people to be served

The location needs to be described in relation to the town as a whole and to major roads giving access to land.

Who owns the land and, if being purchased, when this will take place.

How many square meters?

Has a survey been done and are ‘beacons’ in place.

ISSUE 1. Location 2. Ownership Physical Area 3. Size and Boundary Definitions 4. Current Land-use/Re-zoning (if required) 5. Permissions for Development/Urban Plan Approval 6. Environmental Impact Assessment 7. Intended Capacity (number of dwellings) 8.

People to be served - Socio-economic assessment

Current Status 10. A Response to the Challenge of Slums

61 6

WHO TO DO

WHEN/STATUS

The Environmental Impact Assessment (EIA) is your document to justify the development environmentally. Its is often a statutory requirement. -Who will be responsible for this. -Who will pay?

A Response to the Challenge of Slums

62 This is an exampleit shows all these how all these people are aware of your project. It is useful to identify someone in each of these kinds of organizations you can contact and you feel comfortable in discussions about your project.

People involved in the Pilot Project Example

iii

Title of Organization or Group 1. Ministry of Lands and Housing 2. KENSUP Unit Nairobi City Council

Professional Bodies 4. (e.g. Kenya Institute of Architects, QSs, Planners, etc.)

5. NGOs 6.

Financial Institutions

7. UN-Habitat KENSUP Team and

SUF Design Team / SUF Pilot Team

A Response to the Challenge of Slums

63 63 More and more e-mail is the method of communication. However, it does not replace face-to-face discussions and resulting agreement.

Address

E-mail

Make sure you record all meetings and record all meetings keep a file (with more then one reply, in case the original is lost). All of this information will help you complete the project. ‘Assumption Strategy” overleaf, where you attempt to get these people to signoff ‘their agreement to your project”.

A Response to the Challenge of Slums

SUF: Project Development Assumptions Strategy

Example

This project is used here for illustrative purposes only. It is an early example of thinking for this project and is subject to change.

Start by defining your project- its title. Try to list all your ideas for what you want to achieve as your ‘assumption’.

These examples are to give you an idea of the kind of assumptions to include.

Then list the kind of agreements and other documents you will need.

The order in which these points are listed is not so important to begin with.

A Response to the Challenge of Slums

SUF-Ken-PP01: Kibera-Langata Decant Project KLDP, Nairobi, Kenya A project centred on the Langata Decant Site LDS, Nairobi 3. Detailed Assumptions

Detailed assumption

Date this version_______________

(continued overleaf)*

What is required?

That the Housing Cooperatives (HCS) can/will be formed to respond to the prospect and certainty that they will be able to develop at LDS through the formation of a Special Purpose Vehicle (SPV), a jointly owned company specifically formed for this development

i. Binding Agreement by government that availability of LDS for HCs and their SPV is the intention ii. SPV Plan of Action

That the HC members can afford to repay loans and/or mortgages at a level that enables SPV to develop

i. Survey of HC members as shown in SPV Plan of Action

That the HC housing at LDS can/will be built to a cost and within a budget that is in line with Assumption 2

i. SPV Plan of Action development proposal, plans and costing

That Housing Cooperatives can/will be formed with recognizable and transparent governance and legal status (such that they can take on financial responsibilities safeguarded for guaranteed repayments to SPV)

i. SPV Plan of Action with people identified to form HCs ii. Legal agreement for HC Constitution

65 65 1. Overall Assumption That by developing new housing to be built and owned by Housing Cooperatives (HCs) on a greenfield site adjacent and accessible to the overcrowded Kibera slum, sufficient people would want to move to, and be able to afford such housing, that densities in the existing slum would be lowered to the extent that in-situ upgrading of the existing slum for the existing slum dwellers would become feasible and would be implemented for this purpose. SUF support has been requested for this project.

Who will By when do this? will this be done?

2. Outcome Assumption As a consequence of the entire assumption 1 being implemented, everyone in Kibera would then have the prospect of decent housing and services, and would be able to remain close to the kind of employment opportunities that has stimulated the slum in the first place.

Who will sign off on completion?

Who agrees with this assumption?

This sets out the big ideas -for your development.

This specifies exactly what you want to achieve.

Finally you will need broad support for your plan. The more people you persuade, the more comfortable everyone will feel. You will need to get the appropriate people to actually â&#x20AC;&#x2DC;sign offâ&#x20AC;&#x2122; on this - the people who will take responsibility for getting things done - and done on time.

i. Existing Kibera residents identified for HC formation ii. Ministry of Lands and Housing iii. NCC

Set target dates for these. Getting things done on time is important, even if it gives you a timetable of how late everything is.

A Response to the Challenge of Slums

66 Detailed assumption

(Continued

What is required?

Keep Going! There will be more and more ideas to jot down. Keep adding them on.

That the HCs can/will act collectively as interested parties with the SPV to be financed by private sector bodies and institutions

i. Constitution of the HCs includes these objectives and provisions ii. SPV is formed as the development company

That the Decant Site (LDS) can be safeguarded for SPV development and progressive HC ownership with sufficient security of tenure to satisfy financing institutions

i. Site survey and demarcation ii. Title ownership by government and subdivision to HCs iii. All required development permissions

That finance can/will be secured for the construction phase

i. SPV Plan of Action outlining how cost of construction finance will be borne

That a finance scheme can/will be developed for the HC individual membersÂ to be able to buy-out the constructed housing

i. SPV Plan of Action

That sufficient support can/will be mobilized (by Government, Local Government, Community Groups, NGOs, the Private Sector Finance bodies and the International Community) that a realistic financing plan can/will be put together and implemented

i. SUF Pilot Project Development Plan for KLDP ii. SPV Project Manager appointed for construction phase iii. SPV Board assumes liability for all loans and financing schemes

ETC. ETC. ETC.

A Response to the Challenge of Slums

67 67 Who will By when do this? will this be done?

Who will sign off on completion?

Who agrees with this assumption?

Ultimately, you want to be able to convince other people- especially the local authorities, but also most importantly, this is what you take to the bank. You should also think about what may go wrong with the development. For example, will it become too expensive to build it within the resources and borrowing power of the group members? Will legal permission be granted to build on the site? Will it all take too long?

A Response to the Challenge of Slums

68 This part outlines how cost estimates are built up. This is an outline, Plan B- The Business Plan Profile overleaf provides the details you will need to get.

Pilot Project Financing Plan Generic

(see also SUF Guide for Project Business Plan)

1. Proposed Pilot Project Cost Appraisal i. Site acquisition costs

2. Projected Financing Requirement and repayment strategy i. Site acquisition ii. Site infrastructure develop -ment

iii. Housing (superstructure) construction phase

iv. Individual housing unit buyout finance

ii. Site

infrastructure development costs (land clearance and profiling, sealed roads and footpaths, storm water drains, sewers and connections, water supply and connections, electricity supply and connections, public open space – e.g. playgrounds, landscaping, tree planting, solid waste management facilities, maintenance service requirements, etc.)

iii. Housing development (superstructure) costs

iv. Maintenance plan costs v. Costs

of professionals –i.e. architect, engineers (civil, mechanical, electrical), QS, legal)

vi. Regulatory-related costs—i.e.

planning approval, development/building permits, EIA, etc.)

A Response to the Challenge of Slums

3. Range of Finance Provider Options 4. Recommended Project Financing Plan and Timetable i. Roles and responsibilities

– who takes control and ultimate responsibility?

ii. Risk management iii. Security structure for lenders/financiers

iv. v.

Guarantee arrangements

vi.

Limitations, Firewalls and disclaimers

Credit Enhancement arrangements (see Terms Sheet provisions)

5. Legal Agreements

69 69

Pilot Project Credit Enhancement Term Sheet

See page 50- for an example of a Credit Enhancement Terms Sheet.

vii

Pilot Project Plan of Action Generic

(See also SUF Guide to Project Implementation Plan)

Project Management Flow Chart, Timetable for Implementation

1. Programme for Project Management operations 2. Project Management Flow Chart 3. Timetable for Implementation Decisions

Managing the project sequences is essential for cost and finance control mechanisms that then offer the client- the low income group developers a chance to borrow the money they require for their upgrading projects , at affordable rates of interest and fees.

A Response to the Challenge of Slums

70 Now we start getting serious! This is complex , and to be understood by a finance organization you may need help to set out the responses. This is where SUF comes in.

B SUF Business Plan Profile Client Cover Sheet Business Plan Profile Project Business Plan Â

A Response to the Challenge of Slums

A B C

71 7

Project Business Plan Guideline With the known information from A: the PDDP, and with information that will come from the C: the Project Implementation Plan, the Project Business Plan will embody all the known costs of the project, the way in which it is proposed to be financed, and the method of repayment with timetables for each of these processes. Â The Project Business Plan will also describe the proposed F: Project Funding Plan which will include all the associated grants (financial and possibly the granting of land to the project), subsidies (from government or other sources) and other guarantees and credit enhancements that may be available to the project.

When You have completed this Business Plan Profile you will want to approach the commercial banks - perhaps with some professional help. Ultimately you will want to get the bank and other associated financing institutions to propose the project Financing Plan -their commitment to your project.

A Response to the Challenge of Slums

SUF – Business Plan Profile A. Client Cover Sheet

Think about who is the ultimate owner of the development and will be responsible for all these processes.

A sample description is sufficient e.g.: the built 32 homes for our cooperative inemlbers.

Who owns the land. Is there clear ‘title’ (ownership document) or what process still needs to be gone through to define and service the land e.g.: does a land surveyor need to position ‘beacons’ and give a signed document as to its accuracy.

A Response to the Challenge of Slums

Key Elements

1 Client

Project Description

3 Land

4 Available Financial Resources

Cost Estimates

Questions to be answered by Client

i) What is the name of entity to assume responsibility for the project/development and legal status—e.g. the entity that will become the sponsor and driver of the project) ii) What is the relationship to local government—if any? i) What is the proposed development/redevelopment?

i) Is there an identified piece of land on which the development/re-development will take place? Provide description. ii) Who owns it and how is this ownership manifested (i.e. freehold, long term leasehold, tribal/customary, or other? iii) If not owned by the Client, what arrangements have been/are being made to have ownership transferred? i) What is the availability of existing financial resources for the project—e.g. group savings scheme or some other? If so, how much, where banked, and the frequency of the savings/rate of increase in amount saved? i) What are the total estimated costs of the development/re-development? (Please list the cost of the land separately)

73 73

This cover sheet should be completed by the client before proceeding to detailed business plan profile. Attachment to this Cover Sheet is a detailed explanation of a format for providing updated project status reports. Attachment 2 is a blank reporting format to be used in completing such project status reports utilizing the detailed explanation as a guide for the type of information that is required.

Client Responses

Problems/Issues

Use this section to respond to the questions that must be answered by the Client

Use this section, for each “Key Element”, to identify problems and/or issues that must be addressed regarding the questions answered.

List all your savings schemes and group members bank details. Attach more pages and documents.

The cost estimates are important. Try an early ‘back of -an- envelope’ sketch of the numbers. The cost estimates will improve in detail as more is known about the development. Ultimately you may have ‘Bill of Quantities’ for your construction proposal. But there are also fees to pay - both the statutory fees -and professional fees for you design drawings. Continued next page A Response to the Challenge of Slums

74 Key Elements This is where it gets interesting! If the financing gap too big? It often is. Ask yourself what can be done about it. Best way is to reduce cost- smaller development , more modest construction approach. Perhaps do more of the building work yourself, or in stages.

Your professional team is important. Buildings can be dangerous . You will want homes that are safe and affordable . A good team will ensure you get both.

Financing Gap/Potential Sources

i) What are the financing requirements (i.e. difference between 3 and 4)? ii) Are there other resources that may be readily accessed by the Client group? If so, please describe amounts, source and cost. iii) Is there other collateral that may be offered to a prospective financier? iv) Are there any subsidies anticipated and, if so, source, conditions and likely costs? v) Are there any forms of guarantees available and, if so, source, conditions and likely costs?

Professional Team

Who is advising you? i) Urban planner/architect ii) Quantity Surveyor iii) Civil Engineer(s) iv) Mechanical/Electrical engineers v) Financial Advisor (has any advanced due diligence yet been completed; if so describe) vi) Proposed Project Manager

8 The timetable is also key to mounting costs. Time is money. Keeping the timetable realist is also where experienced professionals can help.

A Response to the Challenge of Slums

Questions to be answered by Client

Proposed Timetable

What is the proposed timetable for initiating and completing the project? (Note: This should be a summary plan only; a much more detailed plan will have to be developed as part of the business plan and implementation plan.) Action Item Target Date for: i) Urban plan/designs completed ii) Detailed engineering designs completed iii) BOQ completed and ready for pricing iv) Tender document prepared v) Short list of contractors completed/tender document submitted to them vi) Proposals submitted by contractor(s) vii) Contract adjudicated/negotiated/awarded/signed viii) Contractor mobilization on site ix) Construction commences x) Key milestones xi) Construction completed

Client Responses

Problems/Issues

75 75

A Response to the Challenge of Slums

SUF – B. Business Plan Profile This is the detailed part of the summary you have made in Part A.

Make your answers on the forms at Part C, which are blank. The layout of questions is same.

Nevertheless, jot down the dates in this part as well - it gives you an idea of how long all these processes will take.

Attachment 1

Content of Plan

Actions Required

This section identifies the main elements of the Business Plan

In this section, the Client must identify the actions required in order for the plan’s content to be completed; below we have provided some guidelines to assist in the process

This section is meant to identify the party(ies) responsible for completing the actions required

Pilot Project Plan

1.1 Ownership/Institutional Arrangements: i) Government ii) CBOs

iii) Financiers

A Response to the Challenge of Slums

Responsible

- Identify government entity to work on project (if government involvement is applicable) - Projects must be driven by some form of CBO institution/a “sponsor” must be identified

- A financial institution/financial services provider/some other financial intermediary must be prepared to assist in accessing local private capital

- Pilot Team

77 77 Required Actions/Current Status Report Guideline for Preparing Project Status Reports Date of Update:

Outstanding Issues/ Current Status

This section should provide details on the issues that must be addressed and resolved in order for the actions required to be completed; in each update, the current status of resolving all such issues should be provided. Below we have provided some illustrative issues (but certainly not an exhaustive list) the Client should be considering

Completion

Dates

Original

Revised

Original date targeted for completion when Plan was drafted

Revised date targeted for completion at the time of each update

Never be afraid to ask questions from people who have been in this kind of project development before.

Use professionals who would like to help you - often with their free time.

However, ultimately -You will need to take responsibility - you will need to make final judgement about what you want to achieve.

- What government-related issues must be addressed and how; and current status—e.g. policy and/or regulatory changes, tax issues, etc.? (Note: there may be projects in which there will be no government involvement (e.g. a new financial product); no need to involved government if it has no role to play) - While some projects may be more “top down” in terms of structuring (e.g. new financial product targeting urban poor) most will likely be from “bottom up”; are there any issues related to the project’s sponsor, such as technical capacity, financial strength, or some other that must be addressed? If so, how? - Without access to private domestic capital a potential project would not qualify for SUF support; issues in accessing such capital must be outlined. Are the terms of available financing inconsistent with the target group’s ability to pay? If so, how and how to address?

Continued next page A Response to the Challenge of Slums

78 Content of Plan 1.2 Market Assessment: i) Legal/policy/regulatory Constraints/changes required

Responsible

- Changes in any regulations or laws should be detailed and why - Legal status of land/potential titling problems in particular

- Legal advisor as identified by Pilot Team

ii) Financial market capacity

- Capital market institutions that will be targeted and what must be done to get commitments

iii) Institutional capacity

- Actions required to address any institutional deficiencies or inadequacies among participants

iv) Technical capacity

A Response to the Challenge of Slums

Actions Required

- Actions required to address any technical deficiencies among any of the participating entities that would hinder project implementation and success

- Group/individual identified in 1.1(iii) above

- Pilot Team - Pilot Team

1.3 Environmental/Social/ Gender Impact Assessment/ Management Plan

- Action plan to address each of the noted assessments and identification of who will assume responsibility for completion (to the extent the assessment is required)

- Pilot Team

1.4 Risk Assessment/ Mitigation Measures

- Must identify any risks to the project and/or to the financing (see the attachment to the “SUF – Project Business Plan”

- Pilot Team with those parties above in 1.1(i), (ii) and (iii

79 79 Outstanding Issues/ Current Status

Completion Dates Original

Revised

- Are there any legal/regulatory changes required and, if so, what are the key impediments? Status and timeframe to resolution? - Are there Issues that must be addressed/overcome in order to get targeted institutions involved and how, for example, liquidity, interest rate issues, security issues, etc.? Status and timeframe to resolution? - Are there issues that must be addressed/overcome for institutional deficiencies to be corrected and how/who to undertake? Status and timeframe to resolution? - Are there issues related to technical capacity that must be addressed? Status and timeframe to resolution? - Are there Issues that must be addressed first to complete each required assessment and, once assessments have been completed, to correct any problems and/or issues?

- Are there any issues to address with regard to putting in place risk mitigation measures? If so, what are they and the timeframe and costs for getting them in place?

Continued next page A Response to the Challenge of Slums

Content of Plan

Actions Required

Responsible

1.5 Assessment of Technical Requirements and Costs

Identify any specific technical issues to be addressed for project to succeed

- Pilot team with technical experts as may be required

1.6 Procurement Strategy

- Must develop a detailed procurement strategy indicating suppliers, timefames, responsible parties

- Likely to be 3rd party contracted by CBO identified in 1.1(ii) above

2.1 Financial Analysis

- Detailed financial analysis and projections to demonstrate viability of project

- Person and/or organization in 1.1 (iii) with Pilot Team

2.2 Resource Mobilization/ Sources/ Financial Plan

- Identify sources of financing and nature of the same (i.e. debt, equity, or some other)

- Person and/or organization in 1.1(iii) with Pilot Team

2.3 Financial Structuring

- Financial engineering/structuring of the project’s financing

- Person and/or organization in 1.1(iii) with Pilot Team

2 Financial

Projections/Plan

A Response to the Challenge of Slums

81 8

Outstanding Issues/ Current Status

Completion Dates Original

Revised

- Are there any specific technical issues (and associated) costs that must be fully understood with a plan for resolving them prior to project implementation?Â Outline them and provide a plan for their resolution.

- Provide the details of any procurement-related issues that must be addressed, by whom, timeframe and impact on project completion.

- Are there any information gaps in costs, timing, etc and, if so, how will they be addressed? - Are there problems related to resource mobilization and, if so, how will they be addressed, whether they be of a market, capacity, or some other reason?Â How will they be resolved and over what timeframe? - Are there any issues, particularly of a pricing, tenor, risk, or return nature that must be addressed and, if so, how the team intends to address them, and over what time period?

Continued next page A Response to the Challenge of Slums

Content of Plan

Actions Required

Responsible

2.4 Enhancements Required

- Nature, structure, and potential sources of such credit enhancements

- Person and/or organization in 1.1(iii) with Pilot Team

2.5 Financial Closure

- Identify all legal/security and other documentation required for project financing to close

- Person and/or organization in 1.1 (iii) with Pilot Team

3.1 Implementation Arrange -ments

- Structure execution plan for undertaking and completing the project

- Pilot team to guide organizations in 1.1(i), (ii) and (iii) above

3.2 Procurement Schedule

- Develop procurement strategy with detailed schedule tied to project implementation plan

- Organizations in 1.1(i), (ii), and (iii) as appropriate with technical experts as required

3.3 Construction Timetable

- Develop detail construction schedule

- Organizations in 1.1(i), (ii), and (iii) as appropriate with technical experts as required

3 Implementation Plan

A Response to the Challenge of Slums

83 83

Outstanding Issues/ Current Status

Completion Dates Original

Revised

- Is there a need for any credit enhancements to make the project viable? If so, they must be specified/justified and the impact on the project if not provided. What are the requirements for securing such enhancements and the likely timeframe?

- Must identify and detail any and all pre-financing requirements to be imposed on borrowers, as well as conditions precedent to draw downs under the financing being made available, and who responsible for completing over what time period?

- Detailed implementation plan for the project identifying key milestone events, major issues that must be addressed, critical path, community involvement to maximum extent possible, etc. must be developed to include a timeframe. - Detailed procurement plan to include bill of quantities prepared by QS or other qualified individual, short lists of qualifying suppliers, tendering process as may be required, review of tenders, contract adjudication, negotiations, award and signing - Construction schedule must take into consideration lead times on delivery of required materials, contractor(s) mobilization, and any likely events that could result in delays and how to address.

Continued next page A Response to the Challenge of Slums

Content of Plan

Actions Required

Responsible

3.4 Process Management Support

- Detailed plan for managing the project implementation process from tendering through to project completion; and assistance that may be required to ensure successful project completion

- Organizations in 1.1(i), (ii), and (iii) as appropriate with technical experts as required; need Project Manager

3.5 Documentation/Knowledge Sharing Â

- Detailed plan for documenting process of project identification, planning, and implementation

- Pilot Team

Develop project reporting plan and format

- Pilot Team

4 Project Reporting 4.1 Project Reporting

A Response to the Challenge of Slums

85 85 Outstanding Issues/ Current Status

Completion Dates Original

Revised

Now fill in the following pages with you answers to all questions.

- Project management requirements must take into consideration the detailed implementation arrangements, procurement schedule, construction timetable and any and all constraints or likely events that may delay timely project completion and how to address.

- Must determine most appropriate methodology for documenting any SUF-supported project from start to finish; to be recorded and filed in such a fashion that lessons learned and knowledge gained may be utilized in similar future projects.

- Project reporting must include periodic reports on progress against plan, any delays and reasons, technical, financial or other problems encountered and how addressed.

A Response to the Challenge of Slums

SUF – C. Project Business Plan

Part C is the same layout as Part B, it allows you space to fill the answers. It saves space on what you want to submit to the following institutions.

Attachment 2

Content of Plan

Actions Required

Responsible

Action identifies the main elements of the Business Plan

In this section, the Client must identify the actions required in order for the plan’s content to be completed; below we have provided some guidelines to assist in the process

This section is meant to identify the party(ies) responsible for completing the actions required

Pilot Project Plan

1.1 Ownership/Institutional Arrangements: i) Government

ii) CBOs

iii) Financiers

A Response to the Challenge of Slums

87 87 Required Actions/Current Status Report Guideline for Preparing Project Status Reports Date of Update:

Outstanding Issues/ Current Status

Completion Dates Original

Original date targeted for completion when Plan was drafted

Revised Revised date targeted for completion at the time of each update

Continued next page A Response to the Challenge of Slums

88 Content of Plan 1.2 Market Assessment: i) Legal/policy/regulatory constraints/changes required

ii) Financial market capacity

iii) Institutional capacity

iv) Technical capacity 1.3 Environmental/Social/ Gender Impact Assessment/ Management Plan

1.4 Risk Assessment/ Mitigation Measures

A Response to the Challenge of Slums

Actions Required

Responsible

89 89 Outstanding Issues/ Current Status

Completion Dates Original

Revised

Continued next page A Response to the Challenge of Slums

Content of Plan 1.5 Assessment of Technical Requirements and Costs Â

1.6 Procurement Strategy

2 Financial Projections/ Plan

2.1 Financial Analysis

2.2 Resource Mobilization/ Sources/ Financial Plan Â 2.3 Financial Structuring

A Response to the Challenge of Slums

Actions Required

Responsible

91 9

Outstanding Issues/ Current Status

Completion Dates Original

Revised

Continued next page A Response to the Challenge of Slums

Content of Plan 2.4 Enhancements Required

2.5 Financial Closure

3 Implementation Plan 3.1 Implementation Arrangements 3.2 Procurement Schedule

3.3 Construction Timetable

A Response to the Challenge of Slums

Actions Required

Responsible

93 93

Outstanding Issues/ Current Status

Completion Dates Original

Revised

Continued next page A Response to the Challenge of Slums

Content of Plan 3.4 Process Management Support

3.5 Documentation/ Knowledge Sharing Â

Project Reporting

A Response to the Challenge of Slums

Actions Required

Responsible

95 95

Outstanding Issues/ Current Status

Completion Dates Original

Revised

You have now reached the point where your project is described in terms that a bank or other financial institution will understand.

Keep your professional friends with you as you decide how you want to approach the banks. Now you will need to think how the project will be implemented on site.

A Response to the Challenge of Slums

96 Now you need to think about how the project will be implemented on site.

C Project Implementation Plan Contents

1 Introduction 2 Project Definitions 3 Scope of work 4 Project Manager and Project Management 5 Project Construction programme for Implementation 6 Product Delivery Programme 7 Arrangements for Occupation, Management and Maintenance

Being able to demonstrate that the client is aware of as many as possible the implications that project implementation will bring, will be useful in assuring the financing institutions that these matters have been thought about and resolved as far as possible.

A Response to the Challenge of Slums

97 97

The Project Implementation Plan (PIP) Guideline The Project Implementation Plan will outline all the project agreements and timetable for development. This will be used to coordinate all activities and responsibilities required up to the handover of completed or improved houses, and their associated infrastructure. The PIP will primarily be a Project Management tool, a Project Programme for the entire project. It will embody the proposed contractorsâ&#x20AC;&#x2122; D: Project Construction Programme that will result in the Housing / Upgrading Delivery Programme. This is important in that it signals when repayments on the project funding will start, in line with the Project Business Plan. The PIP will relate to the PDDP in time tabling when responsibility for the completed construction is taken over by the residents individually or the residentsâ&#x20AC;&#x2122; management company where appropriate, together with responsibilities of maintenance.

This initial draft of the contents of a Project Implementation Plan is design to introduce the reader to the general concept of managing the process of successful implementation after the finance deal is in place. Pre-planning for the implementation stage is essential. It is where so much of the unforeseen costs in development can be lurking- ready to pounce on the unwary developer, even if it is a community development project.

A Response to the Challenge of Slums

Guidelines for the preparation of a (SUF Project Implementation Plan

A Response to the Challenge of Slums

99 99

Introduction 1. Introduction

Project Design and Development Plan Framework 1.1 A SUF Project Implementation Plan defines the scope of a Slum Upgrading Project – broadly, the extent of the land involved, its title and survey information, the roads and infrastructure that will develop the land, the number of dwellings that will be built or upgraded (as shown in the accompanying SUF Project Design and Development Plan), the timing and expected completion of the development, and the financing arrangements agreed in the accompanying SUF Business Plan.

1.2 The owner of the Project Implementation Plan is the Client. The Client is ultimately the person who is occupying and paying for the upgrading or new development. Typically for SUF Projects this will be the organization of the slum dwellers – a cooperative or other legally constituted body within the community. In all cases the Local Government will act in support of the Client (see SUF Project Support Plan) and in some cases may become the client themselves.

1.3 The Project Implementation Plan defines ‘who does what, and when’ in relationship to the SUF Project. All these processes will be controlled by a Project Manager, agreed by the Client and the funding parties. Where there is not a specific professional employed for the purposes of project management by the client, the client will need to agree amongst themselves who

will undertake this responsibility and this project must meet with the satisfaction of the project lenders/financiers.

1.4 The Project Manager will ensure that each part of the Project Implementation Plan will be undertaken according to the Project Construction Programme overall timetable. Although this timetable can be adjusted, each adjustment will need to be agreed by the relevant partners in the project – the Client, the Local Government, and the Project Funding Plan partners.

2. Project Definitions 2.1 The Client or Client Group (Slum Dwellers’ organization with Local Government support, NGO support, and professional advisory support, as appropriate) will define the SUF Project in the Project Design and Development Plan (SUF-PDDP).

2.2 The PDDP will define the people involved, together with their roles and responsibilities.

A Response to the Challenge of Slums

100 2.3 The PDDP provides the overall concept of the proposed project as produced by the Client under the auspices of the Local Government who control the use of land and its regulation.

2.4 The PDDP will define the Location of the project, its area and delineation as surveyed and gazetted (where appropriate, or as agreed otherwise), and the legal title and title holder of the land.

2.5 The PDDP will incorporate the Environmental Impact Assessment of the Project – this provides the community with their main argument and agreement for the development of their project in its location.

2.6 The PDDP will incorporate the Local Government SUF Project Support Plan – how the project fits within the overall Town Planning master plans for the location, the land use and building permits regulations for the location, together with reference to the Local Government/Municipal Infrastructure Development Plan that will describe how and when road access and infrastructure (internal roads, footpaths, street lighting, storm drainage.

3. Scope of Work and Timetable 3.1 Each part of the implementation plan is important . It is the chain that will be tested by the weakest link.

3.2 Write down all the things that you think will need to be done. Then test this with others in your group. Then ask some professionals for their opinion about your list.

3.3 Finally, sketch out how long you think this will take.

4. Project Management and the Project manager 4.1 Managing the Project will saves you money, Identifying someone to take this responsibility is very important. It may be someone from your group. If not ask for advice.

5. Project Construction Programme 5.1 This will be prepared either by the contractor, or by Project Manager if you are using community contracts.

A Response to the Challenge of Slums

101 10 6. Product Delivery Programme 6.1 You will want to know when your houses will be completed, and when you can move in.

7. Arrangements for Occupation, management and Maintenance 7.1 Finally, you will need to think about how the project houses will be managed and maintained.

Write down all your ideas. This is just the starting point.

You will need more details as you decide on how the project will be constructed.

More detailed Project Management Plans will be worked out with your Project Manager.

7.2 Any bank or financial institution will want to know its money is invested in property that is well covered for, so that if there is a default on payment, they would be able to move in and sell the property to recover their money.

7.3 Although this sounds horrific, it is still sensible to know that there is a ultimate resolution if everything goes wrong. Things change; no condition is permanent!

Â Â

A Response to the Challenge of Slums

Volume 1 Vancouver, CANADA 2006

DESIGN PHASE

Slum Upgrading Facility

In addition, SUF Guidelines will demonstrate How Finance works for Slum Upgrading and Very Low Income Housing Projects (VLIHPs)

PART FIVE

The Range of Financing Products and Options for SUF-type Projects

102

The range of financial products and instruments, their purpose and performance will be described so that the Client has a starting point in discussions about a project proposal with Financial Institutions.

Special Purpose Vehicles - SPVs for Developing Slum Upgrading and VLIHPs

Clearly identifying the Slum Upgrading / VLIHP development process in a single body that can have the confidence of the Financial Institutions, yet respond to the social and political demands of a project is the objective of forming a Special Purpose Vehicle. These are normal and usual bodies in any building development process. They can be limited companies, cooperatives, or not-for-profit ‘Housing Associations’.

The SUF Project Typology Guideline

Types of Slum Upgrading, Types of Housing Projects, and Types of Financing methodologies will be described, indicating the ways in which appropriate finance can be envisaged for improved conditions for Slum Dwellers. The roles, responsibilities, and inter-relationships of each of the People, Financial and Political parts of a Slum Upgrading Programme will be described together with the ways in which a workable approach to each of the Action Planning Methodology components can be achieved.

A Response to the Challenge of Slums

The Human Settlements Financing Division is the fourth sub-programme of the United Nations Human Settlements Programme , UN-HABITAT based at the UN Global Headquarters in Nairobi, Kenya

Acknowledgments This SUF Design Book, and the accompanying CD-ROM resource book has been produced by the UN-HABITAT SUF Design Team Leader Michael Mutter together with Satyanarayana Vejella, Bruce Bouchard, Chris Williams, Koki Kyalo, Valerie Patrick, Barry Kulick , Peter Lever, Tony Lloyd-Jones and Judith Allen

Disclaimer The designations employed and the presentation of the material in this publication do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area, or of its authorities, or concerning delimitation of its frontiers or boundaries, or regarding its economic system or degree of development. The analysis, conclusions and recommendations of this publication do not necessarily reflect the views of the United Nations Human Settlements Programme, the Governing Council of the United Nations Human Settlements Programme, or its Member States.

www.unhabitat.org