Sunday, July 30, 2006

Problems with Supply-driven Low-income Flats

The organization for which I’m currently consulting believes that low-income housing development should be in the private domain. It’s how things are done normally. The government can provide public housings, but to what extent? And what have been the outcomes of such housing built and managed by the government?

Karet Tengsin flats in Central Jakarta. You can see the pointy BNI Tower faintly in the background.

Penjaringan flats in North Jakarta, by the industrial/warehouses. Some have dubbed this a 'vertical slum.'

Let’s look at a couple of low-income flats built and managed by the Jakarta municipality: one in Karet Tengsin, Central Jakarta, and the other in Penjaringan, North Jakarta. In both cases there’s a significant subsidy from the municipality: only one-third of flat costs are to be paid by residents (12 out of 36 million Rupiahs in 10 years – which is dirt cheap). However, a swooping 60% of them have stopped repayment. The rent price still refers to the 1988 Governor’s decree (1,200 to 7,200 Rupiahs – 13 cents to 80 cents – a day!), but residents have constantly protested (demonstrated) every time there’s a plan to increase rents. They also don’t pay utility bills. And worse, the intended target group does not live there anymore; they’ve sublet the flats to those better off, for money of course. And now the flats have somewhat turned into ‘vertical slums.’

Out of frustration, the municipality owned company P.D. Pembangunan Sarana Jaya will return management rights of some of the flats to the municipality (Dinas Perumahan).

Does the main problem lie in management, or in the concept of social housing in the first place? The Jakarta municipality is planning to extend the flats in Karet Tengsin (actually this has recently started) and redevelop those in Penjaringan. For the latter case, costs are estimated between 48 and 64 million USD (depending on the alternative designs). However, the municipality only has 20 million. So how can they effectively serve the increasing housing needs of low-income households inside the city?

Using the approach I mentioned at the beginning, one way to deal with the problem is mobilizing domestic capital (funds from the residents, community groups, and domestic commercial banks) to finance low-income housing development. As has been well documented, the poor actually has money to pay (for example, those living in slums pay more for water than their richer counterparts living in formal areas of the city). Not only that, in many cases the poor are more prudent in repaying loans (for example, see the performance of micro credits).

So why can’t we mobilize these funds (especially banks) to provide financing for such activities? Answer in following post.

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