The South African Homeless Peoples' Federation

The South African Homeless Peoples’ Federation – investing in the poor TED BAUMANN and DIANA MITLIN

Much emphasis has been placed in microfinance on organizational sustainability. An alternative measure of success is related to the benefits generated. This paper assesses and discusses the successes of the South African Homeless People’s Federation to achieve housing delivery for the poor. The Federation works with locally established savings groups, facilitating their access to housing (and the state housing subsidy) with both loan finance and skill sharing through community exchanges. The authors argue that the successes of the policy should be understood in terms of the assets that have been created for and by the poor. An estimated benefit of R540 million (net present value) has been secured mainly as a result of the improved housing constructed, and the emphasis on savings and loan finance is now being considered for replication by the state. The approach is not without its own limitations, however. The pro-poor stance has been weakened by the role of the state housing subsidy system and its approach to housing construction and management.

Housing for the poor built by contractors has often been of poor quality

SINCE THE DEMOCRATIC TRANSITION in 1994, housing for the poor in South Africa has been dominated by the state housing subsidy and contractordeveloped housing, often called ‘RDP housing’ after the now-defunct Reconstruction and Development Programme of the mid-1990s. However, this has been associated with a number of problems. Quality of both infrastructure and top-structure may be poor. Houses are often very small and families may immediately start to extend in any way possible, often replicating the shack construction of their previous homes. Sites are badly located, reinforcing the apartheid geography of South African cities and resulting in continuing high transport costs and social and economic isolation (Tomlinson, 1999, p290). Families may be moved to remote greenfield areas with little concern about social networks and contacts, adding to the difficulties of securing a livelihood (Baumann, 2001). In anticipation of such issues, one NGO and social movement of the urban poor, the South African Homeless People’s Federation, developed an alternative people-centred approach to housing improvements. This uses loans to bridge-finance (and top-up) state subsidies, thereby enabling low-income households to use ‘self-build’ options.

An alternative approach In the last five years, this experimental programme has demonstrated an alternative strategy to that of contractor-driven low-income housing in South Africa. The People’s Dialogue on Land and Shelter, a mediumsized NGO, has combined loan finance with social capital in savings schemes to enable local community groups to implement a housing proTed Baumann works for the Bay Research and Consultancy Services, Cape Town, South Africa; and Diana Mitlin works for the International Institute for Environment and Development, London. 32

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gramme of about 10 000 units. Examples such as this, the government now argues, demonstrate the value in moving to a savings- and loanbased model. People’s Dialogue and the South African Homeless People’s Federation are an NGO and a network of grassroots organizations working together to address the needs of the poor living in informal settlements. The programme has accessed grants and loan capital from national and international development assistance agencies to improve housing options for the poor through two strategies. First, small grants enable community groups to visit other communities and learn about their development struggles and achievements. Community exchanges have enabled community members to learn skills such as construction and financial management, and to gain the confidence essential for undertaking development activities. Second, loan finance has been used to augment and bridge subsidy funds. Together with the Federation, People’s Dialogue established Utshani Fund, a revolving loan fund to provide community groups with construction finance. Loans have been used to bridge-finance the state’s capital housing subsidies and to provide small top-up loans. Table 1 gives information about the houses constructed in this way, the total loans advanced and subsequent subsidy releases to individual households to retire these loans. As is evident from this table, subsidy releases are more rapid in some provinces than others. People’s Dialogue and the Federation have been active since 1994. Whilst their work has been predominantly in towns and cities, the emphasis on community learning has encouraged an organic spread outwards from the first four centres of Cape Town, Johannesburg, Durban and Port Elizabeth. Wherever located, Federation community groups start locally managed savings schemes to draw their membership together; daily saving is used to strengthen regular bonds between local residents. Members establish small revolving funds to help each other with loans in emergencies and for income generation. Once groups are established, the Federation helps to negotiate access to land and services (if families have no legal tenure), along with the universal priorities of housing and improved income-generation opportunities.

Small grants enable community groups to visit each other and learn construction and financial management skills

Table 1. South African Homeless People’s Federation construction and subsidies (December 2000) (The South African Rand has varied between R7 and R11 to US$1. For quick and reasonably accurate conversions, use R10 to US$1.) Province

Houses built (loans and loan/ subsidies only)

Loans (bridge and top-up) (R)

Average loan size (R)

Subsidies (R)

Eastern Cape

848

4 987 514

5 882

1 741 979

Free State

306

2 073 147

6 775

695 800

Gauteng

1025

9 579 187

9 346

Nil

KwaZulu-Natal

2085

18 575 408

8 909

1 049 750

60

582 084

9 701

Nil

290

1 555 433

5 364

602 700

Western Cape

2674

18 628 139

6 966

8 217 861

TOTAL

7261

55 980 912

7 710

12 308 090

Mpumalanga North West


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The NGO People’s Dialogue helps the groups deal with the formal world of government and developers

The emphasis on housing reflects the priorities of the post-apartheid era. More recently, the agencies have explored larger-scale formal commercial enterprises, with a conference and training centre, flower growing for domestic and export markets, and settlement-level commercial centres. Inevitably, and intentionally, these strategies have encouraged a high proportion of women members; 90 per cent of members and local leaders are women. Federation membership is drawn from the informal settlements and those renting in formal townships; average monthly incomes are R710. In areas where the housing subsidy has been secured, it is easy for the lowest-income members to take part. However, if households have to pay the cost of bridging finance, then Utshani loan repayments of R100 or more a month make it difficult for some of the poorest to participate. Savings scheme members apply for housing loans when they are ready. They need to have reasonably secure tenure (which many have), building plans and a costing of the required materials. The group itself needs to have opened a bank account and a more experienced group needs to have assessed their capacity to organize construction work and manage the associated financial processes. In practice, all these processes take some months to complete. Generally a savings scheme applies for loans for 10 members as an initial group; subsequent groups are processed much more rapidly (providing repayments are up to date). Interest charges are 1 per cent per month, set to cover inflation and with an allowance for administration; the deposit is 5 per cent. Maximum loan sizes are R10 000 (about US$700); and although families are encouraged to take smaller loans, most take the maximum. The relatively high loan amount is because most borrowers anticipate that they will quickly receive a state subsidy that will retire between 70 and 100 per cent of this loan. In practice, monthly repayments are generally R120. As the NGO supporter of the Federation, People’s Dialogue’s role has been three-fold. First, it has helped secure the resources for exchange programmes and other capacity-building activities. Second, it has provided support to help Federation groups interact with the formal world of government and developers. Finally, it has acted as custodian of the Utshani Fund, the revolving loan fund for housing.

Use and impact of development finance in the federation model In both its organizational and development activities, People’s Dialogue and the Federation have secured considerable resources. In total, People’s Dialogue has received some R79 million (US$5.5 million) on behalf of the Federation. Of this, R31 million (US$2.1 million) has been used for ongoing expenditure (community exchanges and capacity building, administration costs and documentation expenses). A further R48 million (US$3.4 million) has been provided to capitalize the Utshani Fund, with the majority of these monies being only for housing-related lending. Donors have included European NGOs, South African government agencies and bilateral development assistance programmes. All members who receive a subsidy through the Federation contribute 2 per cent of this money to the Utshani Fund. Conventional investment appraisal techniques can be used to assess the effectiveness of this use of development finance. The ‘costs’ are the funds invested in the process, including both contributions to the capital fund and recurrent expenditure. The benefits are the assets created or the recurrent benefits that those assets offer. Taking a somewhat conservative view of the benefits secured, making 34

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The net present value of this assistance may be as much as US$38 million

modest assumptions about the value that has been generated, and only considering those benefits that can be quantified financially, the development investment in People’s Dialogue and the Federation has created a net present value of R540 million (US$38 million in 2000 prices). This figure is made up of: The market value of the houses constructed over and above the value of the subsidy received. Additional value is attributed to the top-up loans (on average R2500) that are commonly taken out in addition to the subsidy, when constructing housing. The future value of the loan fund in terms of continuing access to housing loans and hence future assets. The value of community savings funds measured through the reduced interest rate borrowers have to pay because they can borrow from their savings scheme for emergencies and income generation, rather than from commercial moneylenders. The future value of community savings funds in terms of continuing access to low-interest loans.

A Federation house is worth considerably more than the resources put into it

The figures calculated on the basis of the above considerations take account of inflation, and assume a discount rate (pure time preference) of 5 per cent a year. The benefits have been received by some of South Africa’s poorest urban citizens. Families that have secured housing through Federation membership have received an asset that will benefit them for many years to come. Not included in this calculation is any value for the 15 000 plus families that have secured land through the Federation but who are waiting for subsidy releases before construction (Baumann et al., 2001). The value of R540 million also takes limited account of the negotiating and operational capacity and other social assets that have been generated in communities. Many Federation groups that have successfully constructed housing have developed good relationships with their local authorities and have secured additional poverty alleviation funds. The overwhelming bulk of the value added is attributable to housing. In contrast to much privately developed state housing in South Africa, a Federation house is worth considerably more than the resources put into it. Values of three to eight times the cost of the building materials and skilled labour have been suggested and sometimes offered by potential non-Federation purchasers, although few Federation member have been interested in selling. The value of Federation houses stands in sharp contrast to the experience of many RDP housing developments, where beneficiaries have resold their new houses at far less than the amount spent on them by the state (Thurman, 1999, p36; Gear, 1999, p17). This added value arises for the following reasons: Federation members provide unskilled labour free of charge (for construction and management). Skilled labour is provided at low cost as members negotiate with local artisans, or find skilled family members or friends to assist. Materials are bought collectively, securing discounts from wholesale building suppliers. Old materials from shacks are re-used. Federation self-builders pay more attention to quality than commercial


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Table 2. Assessment of Net Present Values (to March 2001) under different assumptions Assumption of benefits Housing value as a % of material costs

Assumption of costs Net Present Value

% of community savings funds used for loans

Period of continued housing construction

400%

30%

10 more years

2000/1 income constant for a further 10 yrs

R541 million

300%

10%

10 more years

2000/1 income constant for a further 10 yrs

R333 million

400%

30%

0 years

No more income

R72 million

contractors. This is increasingly important as the value of the subsidy erodes under South Africa’s moderate inflation rate (about 6 per cent annually) and rising material costs. And, more subtly, the emerging sense of ownership in the Federation model ensures that problems are dealt with as they arise and improvements are planned using the skills already learnt.

What would be the benefits had the funds been directed at straightforward housing delivery rather than community empowerment? 36

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In contrast to the financial benefits of construction, the financial benefits arising from access to group savings funds are relatively small. These benefits have been estimated using the differential interest rate between Federation and informal sector borrowing, and making estimates as to the proportion of funds that are borrowed. In the case of income generation loans, no additional value is attributed to potential profits. It is pessimistically assumed that such activities have low returns, only sufficient to repay the capital borrowed. This is unrealistic, but in the absence of clear estimates of profitability, a cautious estimate appears prudent. How reliable are the figures of value added? Any estimate involves predictions of prices and values. These benefits are valued using best estimates and current market prices. In general, the benefits were assessed conservatively (future loan repayments, for example, are assumed to be 50 per cent of monies owed for one year only, well below current repayment rates.) Table 2 summarizes the benefits under a number of different conditions. As shown by the third example, even if there are no further activities, the Net Present Value is still positive at R72 million. An alternative measure for assessing the benefits created by the People’s Dialogue and Federation process is the benefit that would have been achieved had the funds been directed at straightforward housing delivery rather than at community empowerment strategies. Funds of R79 million would have provided ‘top-up’ grants of R2500 to 30 000 families. This additional money may have enabled a further ten square metres on a subsidy-financed house that typically measures between 15 and 20 square metres at best. Whilst these houses might be worth more than the houses financed through the subsidy alone, little additional value would have been created. Construction quality would have remained low. The Alliance process has enabled 10 000 families to self-build their houses; these families now have an asset that is conservatively estimated at R30 000–50 000. Such figures demonstrate the power of saving and loan approaches rather than direct capital subsidies to address housing need. Small Enterprise Development Vol.14 No.1

With fewer than one in ten members benefiting from housing construction activities, is such a concentration on housing the optimal strategy?

Reflecting membership, a high proportion of housing loans are for women. Over 90 per cent of loan applicants are women in many savings schemes. There is a tendency for a lower percentage of women to apply for subsidies, primarily because they are ‘official’ government funds. Nevertheless the houses are seen as Federation houses and Federation membership is associated with women. Where necessary, Federation groups have supported the claim of the women. In a few cases, ownership has been in dispute following the death of the borrower, and Federation groups have supported the interests of the children. One further benefit, not easily monetized, is the stream of future use value accruing as a result of better-quality housing. The figures given here reflect current notional market prices for low-income housing. However, the benefits of better-quality housing will continue to accrue to future residents in Federation-built houses and the Alliance investment will generate positive ‘yields’ well into the future. These figures point to the success of the Alliance strategy but, at the same time, highlight an emerging problem. With fewer than one in ten members benefiting from housing construction activities, is such a concentration on housing the optimal strategy? This is a pressing question for the Federation leadership but is beyond the scope of this paper.

The importance of indirect investment through community savings One of the first lessons of this experience of integrating housing policy with microfinance relates to the role of savings. Savings assists in housing activity by: Strengthening links between members of the community, enabling them to work together both in construction and in negotiations with local authorities and other state bodies. Developing and spreading financial management skills. Enabling small and regular amounts of money to be put aside to add to the government subsidy investment. Building self-confidence and collective ambition. Creating a basis for federating and networking between communities. In the light of current state enthusiasm for self-help housing, it is important to recognize that these successes might not easily be generalized to groups established specifically for housing development. Such groups are likely to lack the skills and experience in a number of important areas.

The Federation Approach and South African housing need In 1994, housing was a priority for the poor in South Africa and the electoral commitments of the new ANC Government acknowledged this (Adebayo and Adebayo, 2001, p1). The ANC promised one million houses in five years and introduced a capital subsidy programme to achieve this goal. The policy was designed to finance commercial civil engineering and construction companies to construct large-scale residential developments. It assumed the commercial banks would extend additional housing finance to beneficiaries of the subsidy system. This effort has had mixed results. South Africa’s post-1994 housing drive has managed to reach many disadvantaged households. An estimated 1.5 million subsidies have been approved and subsidies for one Small Enterprise Development Vol.14 No.1

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Most households in townships and urban informal settlements are too poor to access commercial loans

million units have been disbursed. However the impact may be relatively small compared to overall need; the government acknowledges that construction is not keeping up with new household formation in urban areas. Serious questions are now being asked about whether the focus on the quantum of housing delivery under current South African policy is changing the lives of the country’s poor for the better. Part of the problem is that the scale of housing need is great and that this need is concentrated in households who are totally dependent on the subsidy system since they cannot access loan finance. Table 3 indicates that the average income of households in both township and urban informal settlements – the vast majority of whom are black – is very low, and near or below that needed for most commercially provided loan finance for housing. Despite the value added when people manage their own construction, there are few possibilities for these strategies within the subsidy programme. Eighty-four per cent of the subsidies allocated in the first four years of the national housing programme were project-linked, a good proxy of developments in which a new greenfield site was acquired and serviced, and houses formally built. By contrast, individual subsidies (i.e. to households who seek to acquire a plot and build a house on their own) and consolidation subsidies (i.e. to households living on serviced land acquired under previous government programmes) accounted for only about 15 per cent of delivery. Both of these options enable families to add additional finance of their own.

Delivery problems with the government housing programme

To reduce costs, local authorities tend to locate new developments on peripheral land far from economic opportunities

There are several major problems with the present system and its dependence on developers. First, the subsidy must cover land, services and housing delivery costs. Little remains for the house, and units of less than 12 square metres are common. Second, lack of end-user involvement and the fixed subsidy amount means that quality can be very low, resulting in maintenance problems, health problems and widespread dissatisfaction. There has been no real interest by developers in promoting more extensive community involvement. Third, to reduce costs, local authorities tend to locate new developments on peripheral land far from economic opportunities, reinforcing the spatial and racial distortions of apartheid and entrenching poverty (Adebayo and Adebayo, 2001, pp3–4; Baumann, 2001). Fourth, the system is driven by national budget allocations, not actual human settlement need. Delivery mechanisms are bureaucratic and slow and housing budgets are persistently under-spent. Fifth, the Department of Housing is anxious to ensure that housing provision is

Table 3. South African population by residence type (R10 = approx. US$1) Group

No. of households

% of households

Average monthly income

Suburban

2 891 000

32.7

R6139

‘Township’

2 135 000

24.2

R1810

Informal

1 012 000

11.5

R899

Rural

1 600 000

18.1

R1245

Traditional

1 200 000

13.6

R788

TOTAL

8 838 000

100

R2665

Source: Triple CCC Advertising (1999); Government of South Africa (1996)

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Delays to the state subsidies have meant that group members have fallen behind on repayments

more demand responsive, but many of those in need of housing cannot secure additional loans from the conventional financial sector. A household income of at least R3600 is required to obtain a mortgage for the cheapest houses currently available from the formal financial sector. This is above the upper cut-off income for a subsidy so, in effect, under current policy, a loan and a subsidy are mutually exclusive. As a result of problems with contractor-driven housing development, the department is intending to make the national housing programme more demand-led, drawing in additional resources to increase quality. New plans include the use of savings-linked loans to enable better-off families to access additional investment capital. For those with low incomes, self-help schemes are being proposed, with the only source of funding being state grants. The Federation experience suggests that savings and loans may go some way to addressing delivery problems. Many of those in need of housing are too poor to obtain formal loans, and improving access to financial services will help to address the need for investment capital. Self-help construction options can help to strengthen local organizations and provide loan finance. The Federation model itself has assisted even the poorest to be involved in grassroots organizations and community decision-making. However, the Federation itself now faces a major challenge. The people’s process moves considerably faster than the delivery of state funds. By 2001, it was the state, and not the Federation’s members, who was Utshani’s primary debtor, with over R32 million to be repaid through subsidies owed by the state to Federation members who had already built houses. In part due to the delays in the release of state subsidies for housing already constructed, members who maintained high repayment rates at the start of the programme began to fail to repay on a significant scale. Subsequent financial difficulties have resulted in a major review of the programme (Baumann and Bolnick, 2001, p107), including pressure to adopt more widely recognized microfinance procedures. However, the Federation approach has been effective in using development finance to increase the asset base of a very poor group, whom many microfinance programmes would struggle to reach.

Conclusion

Investment in community learning, confidence building and skill attainment appear to be important in securing the benefits

The approach used by the People’s Dialogue and the South African Homeless People’s Federation has been successful in generating considerable additional value. The net present value of R540 million indicates, for the most part, the scale of housing assets that have been created. Whilst there are limitations to the process described and few comparable studies of the effectiveness of development assistance, our figures suggest that People’s Dialogue and the Federation have developed a relatively successful strategy of using development resources to reach the poor, supporting empowerment and adding directly to their asset base. Much of the benefit created has occurred because of the way in which the process interfaces with the state housing subsidy programme. This success has attracted the attention of the South African Department of Housing as it seeks to overcome the substantial problems it has encountered in the realization of the government’s housing policy. While the state may learn some lessons from this approach, it should not be assumed that the necessary community capacity for self-help housing will be generated easily. Only if it invests community learning, confidence


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Positive net benefits have only been evident for the last 3 years of the 10-year programme

The financial sustainability of the revolving loan fund is just one, somewhat limited, measure of programme success

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building and skill attainment is the government likely to achieve similar outcomes. What are the more general lessons? First, development takes time. Positive net benefits have only been evident for the last three years of the 10-year programme. Second, assessing the success of investments in community capacity requires a holistic approach, which supports local skills in construction and financial management, strengthens community groups and helps them negotiate with state agencies. Third, savings and loan finance have added considerably to the benefits by developing the collective capacity of the urban poor to address their own needs, as well as providing financial liquidity. However, pressure for savings and loan processes to achieve financial sustainability may reduce the effectiveness of the intervention in development terms if it excludes the poor and undermines investment in social capital. At present, the Federation and People’s Dialogue’s approach differs considerably from conventional microfinance. Rather than emphasizing the strict management of finance, the Federation emphasizes the importance of strengthening the organizational capacity of the poor. Thus, the input costs of the institution-building process are seen as an investment in social assets rather than as a recoverable cost chargeable to borrowers. The Federation system provides multiple subsidies: directly through a low interest rate on bridge finance, income generation and crisis loans, and small grant finance for capacity and institution building exchanges; and indirectly through a willingness to continue to lend to groups despite less than perfect repayment (providing that the groups are actively engaging with the problem). Whilst the benefits secured may be dependent on the effective use of subsidy funds, the strategy itself has a greater replicability. In southern Africa, similar community-managed savings and loan schemes have been used in both Namibia and Zimbabwe for the last five years. In both countries, communities have achieved some success, although in each country the process has developed differently. This has been in response to emerging opportunities that are generally dictated by the state but which also reflect community capacity and priorities. Hence in Namibia, organized communities have persuaded Windhoek municipality (followed by other municipalities) to substantially revise its regulations resulting in the acceptability of incremental development. Windhoek municipality provides loans for communities to purchase land with bulk services and savings groups use their own loan fund to install infrastructure. In Zimbabwe, local authorities have made land with bulk services available to Federation groups with community-managed loan finance. A community-managed urban development strategy is currently evolving albeit in a situation of considerable political and economic uncertainty. The financial sustainability of the revolving loan fund is just one, somewhat limited, measure of programme success. Whilst financial rigour may be beneficial in order to strengthen community processes, microfinance measures introduced solely to achieve financial sustainability may undermine higher-level development objectives to empower the poor with related improvements to material living conditions. Strengthening the capacity of grassroots organizations is particularly relevant when the intervention is for large-scale shelter improvements rather than enterprise development because of the need to deal with multiple layers of state regulation. It is the capacity of local groups affiliated to the Federation to work together to use resources more efficiently and to support each other that accounts for the value created by programme activities. Small Enterprise Development Vol.14 No.1

REFERENCES

Adebayo, Ambrose and Pauline Adebayo (2001) ‘Sustainable housing policy and practice: Reducing constraints and expanding horizons within housing delivery’, Journal of South African and American Comparative Studies III(III). Baumann, Ted, Joel Bolnick and Diana Mitlin (2001) ‘The age of cities and organizations of the urban poor’, IIED Urban Poverty Studies: International Institute for Environment and Development. Baumann, Ted and Joel Bolnick (2001) ‘Out of the frying pan into the fire; the limits of loan finance in a capital-subsidy context’, Environment and Urbanization 13(2): 103–116. Baumann, Ted (2001) ‘Housing policy and poverty in South Africa’, Isandla Institute/University of the Witwatersrand School of Public and Development Management, forthcoming. Gear, S. (1999) ‘Numbers or neighbourhoods? Are the beneficiaries of government-subsidised housing provision economically empowered through the provision of housing services?’ Johannesburg: Friedrich Ebert Stiftung. Government of South Africa (1996) SA Census 1996, www.stats.gov.za. Thurman, S. (1999) ‘An evaluation of the National Housing Policy in the Western Cape’, Cape Town: Development Action Group. Tomlinson, Mary (1999) ‘South Africa’s housing policy: lessons from four years of the new housing subsidy scheme’ Third World Planning Review 21(3): 283–96. Triple CCC Advertising (1999) SA Focus: Consumers in SA, ESKOM Millennium Edition, Johannesburg.


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