Private Sector Initiatives in Slums May 27, 2008 Background Upgrading (trends) Private Sector involvement (trends) Challenges and Opportunities Economy and state of the private sector Will affect resources, ability to invest 1
Challenges Traditional business models Low volume, high profit margin markets Corporate policies (e.g. collateral requirement) Investment Climate Financial sector, business laws and regulations, transaction costs, industry standards, can be too conservative and increase costs. Public Good Investments Private sector may not want to invest; little scope for cost recovery Property rights and land titling Affects household level and business decisions to invest Large scope between formal title and no title Culture Misconceptions from private sector and from poor Opportunities Informal economy of the poor is huge Base of the pyramid: over $5 trillion in purchasing power De Soto s s work: some $1.2 trillion dead capital in untitled land and unregistered businesses Private sector can offer finance, expertise Cost effective models Job creation Can help to integrate communities with City 2
Approaches to Private Participation in Slum Upgrading Levels of client interaction: Client relationship Local Government Beneficiary relationship Low income clients Private Sector Business Community organizations Rich consumers Low-income clients Low-income clients Low-income clients Local Government Resource and capacity constraints create demand for finance and delivery of infrastructure and services Gap funding, credit guarantees Municipal bonds (Ahmedabad) Project implementation and service delivery PPIs: service contracts, management contracts, lease, concession, BOT/BOO, Divesture Water; Manila, Output-based aid (OBA) Subsidies to the private sector to ensure performance targets, service provision to the poor 3
Communities as clients CBOs and NGOs: Community-Led Infrastructure Finance Facility (CLIFF), Slum Upgrading Facility (SUF) Provide grants for TA, capital, management costs Organizes public, private and community stakeholders Negotiating collectively through credit histories (micro-credit), credit), land titles (Terra Nova, Brazil) Leveraging the Drive for High-income income Markets Cross-subsidization subsidization (regulations, PPP contracts) Water provision and the lifeline block Land management regulations Mixed housing regulations (US) Transferable Development Rights (TDRs) Land-sharing Corporate social responsibility 4
Direct Marketing to the Poor Housing Housing microfinance Lending for building materials and technical assistance for self- construction (Patrimonio Hoy) Financial Services Use of cell phones, text-messaging, retail locations for banking services Health and Hygiene Small quantity sales Franchise pharmacies (CFWshops and Mi Farmacita) Public Goods Auto-payment for water with the Aquacard Sulabh Sanitation Movement Small-scale providers Promising Approaches Building trust Facilitating payment New products and marketing Small-unit high-volume sales Partnerships with government, NGOs, and international community 5
Building Trust Establishing evidence of demand and willingness to pay Documentation Structured savings accounts Project trust funds Building a business-client relationship Membership programs Negotiation with community groups and leaders Facilitating payment Client grouping Stability of aggregate income Incentives to repay from group pressure Small group to community-level Pre-payment and auto-pay technology Freedom to immediately adjust consumption No risk of debt, penalties No risk of free-riding riding or lost revenue collection 6
New products and marketing Financial services that fit demand Life insurance to cover loan repayment Non-mortgage housing lending Training in use of new products Patrimonio Hoy s s builders training Social marketing for health and hygiene products Sulabh toilets and hygiene promotion Small-unit high-volume sales Packaging and technology for small- unit sales Blister packs for medicines Innovative processes for high-volume Microfinance administrative software Local distribution networks Independent promoters, franchisees 7
The role of government, NGOs, and international community Government: Improving markets that impact the poor (appropriate regulations and oversight) Direct support to private sector (subsidies, mitigation of commercial risk) Land security and tenure Political support for private initiatives NGOs: Advocate for the poor as clients; technical assistance and support in negotiating with the private sector Assistance to businesses; sharing of knowledge about the poor; bridge into local communities Donors and Multilateral Institutions Support for policy reforms Financial and business development services for private sector Technical assistance, capacity-building Others? 8