How to Pay for Slum Upgrading: The Power of Leveraging Private Funds

For the next step in the Nairobi studio Spring 2013, we are looking into different models of participation and governance (getting the ball rolling and including the community), monitoring and evaluation (assuring outcomes and accountability) and financing (paying for it) of slum upgrading. Assigned to the financing team, I have been learning more about donor- and government grants and loans with or without intermediaries, temporary and long-term tax breaks and debt relief, community savings groups and participatory finance—I could go on.

As I was reading about slum upgrading finances in Tanzania, India, Thailand, Brazil and Kenya, I kept wondering about the elephant in the room: the United States. While the United States might not harbor so-called “slums,” as they are often understood or imagined in the conventional sense (make-shift tin-roof shacks, open sewer and steep narrow roads), the United States certainly has (and continuously does) have its own massive share of sub-standard housing and programs to solve the problem.

Several examples come to mind:

–> Hoovervilles in Central Park, New York City, early 1930s during the Great Depression:

Source: http://ephemeralnewyork.files.wordpress.com.

–> Pruitt-Igoe as part of a Public Housing Initiative during Urban Renewal in the 1960s:

Source: http://openbuildings.com/buildings/pruitt-igoe-profile-42002

–> And finally modern-day colonias, mostly found close to the Mexico-USA border:

Source: http://geography.wr.usgs.gov/science/images/coloniasVan.jpg

So how did these work out and what could be learned for Kenya’s national slum upgrading policy, especially in terms of financing?

From these examples, not much. Hoovervilles and colonias are basically informal settlements: both were bottom-up self-financed and -built temporary solutions that became permanent. They do work–as slums often do–but they do not work well. Public housing under Urban Renewal, the only example here built at a large scale and by the government, is not a good inspiration either. It failed miserably:

Demolition of Pruitt-Igoe in April 1972, St. Louis, Missouri [Photo by U.S. Department of Housing and Urban Development, Office of Policy Development and Research].
Source: http://places.designobserver.com/media/images/ForeclosedRoundtable-2_525.jpg

Disappointed, I poke around some more, and finally stumbled upon one interesting financing example: the Cleveland Action to Support Housing or CASH, a funding organization in operation since 1977 as a result of a collaboration between the Cleveland City Planning Commission and neighborhood organizations.

With the goal to increase funding availability from private banks for people of color (during a time of “redlining,” the practice among lending institutions to deem certain neighborhoods as less desirable for loans, based on racial representation), the idea was to maximize private investment by leveraging public monies with private dollars. This way, the lenders’ exposure to risk would be reduced (whether such a risk actually existed or not, as was most often the case). The Cleveland Planning Commisson proposed to use public money provided by the Community Development Block Grant to underwrite any part of the loans and to implement a rotation system for all participating institutions. This means that the little risk there might have been for lenders would be spread over a big pool of participating lending partners. The risk would effectively be eliminated. In addition, lenders would be allowed to occupy four of the five seats in the nonprofit corporation that established a loan-review committee to evaluate all loan applications. The only thing former director of the Cleveland Planning Commission Norman Krumholz and his team were asking was for the lenders to modify their underwriting criteria slightly, so that more borrowers would be “bankable” which in turn would allow borrowers to take out rehabilitation loans to fix up their housing at slightly below the market value.

But lenders refused to modify their criteria to lend below market interest rates.

It was a good plan: effective, safe. But it was the wrong place and the wrong time. The “risk of default,” lenders said, was too strong. What they really meant was that they would not get over their racism. Cleveland’s poor were all black.

In the face of such difficulties, how was CASH finally endorsed? Interestingly, it succeeded partially by proving another program wrong. The primary programmatic vehicle for housing rehabilitation at this time was a government-funded Three Percent Loan Program. Under this program, any qualified applicant could receive a rehabilitation loan of up to $20,000 at an (incredibly low) interest rate of 2% with a term of up to 20 years. This loan, however, had little impact on the rehab needs of the city: It turned out that most low-interest loans were going out to middle-income who used the money to remodel kitchens and bathrooms.

Although the three percept program remained, as it was politically feasible and attractive, CASH advocated had a lobbying ground and after two long years of negotiations, in 1977, it was finally implemented.

Today, CASH loans are made by one of 20 participating lenders at a 2.3% interest rate. The private public leveraging ratio is two for one. CASH no longer targets redlining—yes, it still exists—but it does offer three types of loans, mostly to low-income populations.

So goes my stint into United States house upgrading finance. And while I realize that CASH is not an ideal program and it does not live up to our search for a slum upgrading financing model, I believe that it does offer several crucial lessons:

Lesson 1: Financing requires a (at least) three-way partnership among the government (be it city-, state- or the federal level), community-based development organizations and the private banking sector.

Lesson 2: When we speak about housing provision, credit and rehabilitation can only flow when private funds are leveraged.

More Similar Than Different? What We Could Learn From Studying Kenya’s Neighbor Tanzania

There are many reasons to study Tanzania in order to inform a Kenyan policy, especially one that targets poverty alleviation such as Kenya’s National Slum Upgrading and Prevention Policy to be. The differences between Tanzania and Kenya are striking—but so are its similarities. Both were crucial centers for the Arab slave trade in the 19^th century. Both were under German protectorate during the Sultan of Zanzibar’s rule. Both became British colonies. Both were organized under similar urban spatial segregation during colonial rule: minuscule areas allocated to Africans, while most desirable land went to white colonialists. Finally, both gained Independence in the 1960s.

British East Africa included Kenya and Tanzania (then Tanganyika). Source: http://www.wikimedia.org.

This is where the similarities end—at first glance at least. Because for being neighboring countries, Tanzania and Kenya are surprisingly different.

While Kenya took the capitalist route following independence, Tanzania’s then president Julius Nyerere turned left, taking the country with him. The 1964 Arusha Declaration, written by Nyerere and approved by the Tanganyika African National Union (TANU), outlined policies that together constituted Ujamaa, Tanzania’s unique version of Pan-African Socialism.

Ujamaa comes from the Swahili word for extended family or pulling together, the making of a person through community. Ujamaa gave the possibility—some even say the promise—of a type of socialism that could free the country and the continent from neo-colonialism, the new doctrine that took hold of the continent following the African decolonization process, as argued by Frantz Fanon and other post-colonial theorists.

In Africa’s largest and most debated example of social engineering, industries, banks and services were nationalized, economic activity collectivized towards agriculture and the accumulation of private wealth discouraged. Almost 70% of all Tanzanians were moved from traditional lands into planned villages in a process of villagization. This economic and political transformation was to foster economic and cultural self-reliance. Nyerere thought that Tanzania—as an independent nation—needed to make it on its own, without the help or intervention of anybody.

Ujamaa Poster. Source: http://www.greaterhalifax.com.

A charismatic, affable leader and admirer of Rousseau who—ironically—is said to have loved translating Shakespeare into Swahili, Nyerere was convincing. But the reason his Arusha Declaration received world-wide attention and earned him the respectful nick name Mwalimu—Swahili for the teacher—is not his likability or his intellect. The world listened up because Ujamaa seemed to work.

In the late 1960s and 1970s, Tanzania enjoyed one of the highest rates of literacy and primary-school enrollment on the continent. Life expectancy, access to water and a sense of national identity increased. Tanzania’s 9 million people, affiliated with over 120 tribes, were not plagued by civil wars or tribal conflict. Western aid donors, particularly in Scandinavia, were enthralled and poured an estimated $10 billion into Tanzania over a span of 20 years, making Tanzania one of the top 10 countries of foreign aid per capita, according to the New York Times.

Nyerere ruled for 21 years.

But what happened to Tanzania at the end is a familiar story, in many respects very similar to the tale of the Soviet Union, the county where I was born: the economy struggled, corruption reigned and goods, opposition and freedom of speech were scarce. Most importantly, the people suffered. Surviving on an incredibly meager per-capita income of $200 a year, Tanzanians were named among the poorest on the planet the year Nyerere left the office.

Tanzania has changed a lot since then. Throughout the 1990s and 2000s, the government decentralized and launched a number of progressive policies and initiatives, including the 1995 National Land Act that gives every slum dweller a legal right to land. Focusing on stakeholder participation, small-scale building material industries and labor-intensive projects, Tanzania’s 2000 National Human Settlements Development Policy is among the most progressive. This is why it is a good place to draw inspiration for Kenya’s policy, because—despite their radically different economic strategies and political alliances in their post-independence period—both, Tanzania and Kenya, are taking bold leaps—towards a comprehensive approach to economic growth and reduction of poverty informal settlements.