One of the three main work streams of the BLC2 is an investigation into innovative finance for upscaling the upgrading of informal settlements and dwellings. The purpose of this research is to support affordable material access, non-cash finance and improving the functionality of informal finance products, and linking products to knowledge and capacity building around incremental housing. Support to builders, small scale landlords and developers, as well as accessing enterprise and supply development funds were also identified as key focus areas.
During the initial research phase of the BLC2, the consultancy Kaiser Economic Development Partners was appointed to undertake primary and secondary market research in order to better understand:
Some of the obstacles identified in this research was affordability of owners to upgrade their informal dwellings, and that individuals do not possess equity efficiently since mortgage finance is unobtainable. Moreover, large financiers see the informal sector as being too risky, and financial technology companies (fintech companies) deem the loans too large. There are currently no private sector or NGO initiatives that are delivering these services to informal settlement residents at scale across the metropolitan area of Cape Town.
In an attempt to model financial options, the BLC team appointed the expertise of Aunnie Patton Power, founder of Intelligent Impact, an advisor to the Bertha Centre for Social Innovation and Entrepreneurship at the University of Cape Town, and an Associate Fellow at the Saïd School of Business at the University of Oxford. Patton Power is consulting to the BLC2 team on developing innovative finance prototypes to essentially achieve two goals: 1) the aggregation of the demand side, and 2) driving down the cost of finance and materials.
Aggregating demand means that the different types of borrowers are pooled together (e.g. by technological platforms, mass marketing) and provide a track record of repayment, which mitigates against risks investors seek to minimise or avoid. This aggregation of demand also provides a solution to the issues of scale, considering that the sizes of incremental upgrades (40 – 50 loans) are too small to be interesting to the type of bigger capital needed to scale.
The cost of finance and materials can be minimised by pulling together diverse funding sources such as BBBEE funding, guarantees, private investors and development funders. In this approach, the proof of concept is essential, and pilot projects will be key for testing prototypes before taking any product to market. The cost of materials and labour could be addressed by taking advantage of economies of scale, innovation in building methods, agreements with large material providers, and through the coordination of skilled tradesmen and contractors.
The government has an essential role to play in consistently delivering land tenure and services to residents. Without the provision of land tenure and services, it is highly unlikely that the financing of top-structures will be viable. Technology companies, especially fintech companies, have an important role to play in aggregating demand.
The first workshop took place on 11 September, and included twenty five stakeholders from government, micro-lenders, fintech companies, and NGOs, who interrogated the prototype. Two groups discussed the application of the prototype to Forest Village, a new mixed-residential area including new sites and service plots, currently being prepared by the Western Cape Government’s Department of Human Settlements. The assumptions associated with this site were:
This workshop was organised to gather useful information to sense-check previous work and research, and in order to develop a prototype for managing the distribution and loan financing of materials to improve informal dwellings. Tenure and asset security is diverse and for this reason one of the groups considered site and service plots (tenure granted) while the other groups focused on the more precarious situations of back-yarders.
The second workshop took place on 20 October with more than fifty participants, spread into six groups to interrogate the finance prototype further. Ms Patton Power presented the work to date, outlining the key steps and approaches of the innovative finance prototype and asked the six groups to undertake two tasks: 1) Stakeholder mapping, and 2) Ideation on the application of the model onto six real sites.
In the first task, groups were asked to identify five primary stakeholders needed for the prototype to function and ask two key questions: 1) what does the ‘opportunity’ bring to the stakeholder?, and 2) what does the stakeholder bring to the ‘opportunity’?
The majority of the groups shared the common notion that the stakeholders includes: financiers, builders and developers, material providers, households, government, service providers (professional teams including town planners, architects, surveyors, structural engineers, etc.). A diverse set of inputs were shared regarding these stakeholders.
In the second session, groups ideated around the application of the model to six real sites. Each group had to apply the model to four steps in the process: Contracting, funding, construction and payment. Due to the diversity of the sites ranging from Kosovo, one of the densest settlements in Cape Town, to Penhill, a new greenfield site including 1500 site-and-service plots, a wide range of perspectives were contextualised. Some of the participants commented,
The contractors must have a track record of/experience with working with the specific community and providing durable, quality housing. The leadership needs to coordinate builders to work on site, and hence experienced leadership is crucial. Home owners and the community at large must have oversight to the extent that they are available. Individuals contribute as much as they are possibly able to – Group 2 contribution.
The BLC2 team will continue to work with experts in the sector such as Kaiser and Aunnie Patton Power to design and develop scalable options for incremental and in-situ upgrading of informal settlement dwellings. The work on the innovative finance prototype will be concluded towards the end of 2017 and we will keep you updated on the progress.