How partnerships on housing can work

 President William Ruto (centre) during the inspection of an affordable housing project at Mukuru in Nairobi, October 3, 2022. [Denish Ochieng, standard]

Rising cost of materials and dipping of demand are some of the risks that should be considered in public private partnership (PPP) putting up affordable housing, a policy think tank has detailed.

The think tank, Affordable Housing Institute (AHI) also says an affordable housing PPP should be done the same way governments do infrastructure PPP.

It says that in an affordable housing partnership, citizens are a major stakeholder because they are the customers of the project. 

In a document titled A Guidebook to Successful Affordable Housing PPP, the institute notes that even though housing is a human infrastructure, a PPP for affordable housing has a different structure from an infrastructure PPP.

"In an infrastructure PPP, government stands between contractor and citizens. In a housing PPP, citizens stand between contractor and government," the guidelines read.

"Citizens not only consume the output but also live in it; they own it, legally and psychologically."

In such an arrangement, the private PPP contractor is expected to build the capital asset and finance construction before later selling it at offtake at a profit.

The government will be the one financing the offtake on behalf of citizens who will buy the capital asset for their consumption. 

The institute differentiates infrastructure PPP from housing PPP saying while in the later the facility is the actual output, for the former, the project itself is expected to produce output. 

The institute notes that affordable housing PPP is a journey into the unknown. 

"Things happen that no one can foresee," the guidebook states. 

Such things include rising cost of materials, promised commitments prove unenforceable and expected demand does not materialise.

It adds that people who sign up to buy the houses off plan may fail to close because they change their minds, want their money back or they can't pass credit underwriting. 

Another issue is that the wrong households may move which is a concern the government has addressed in it it's affordable housing project insisting that houses will be issued on a one man one ID basis. 

However, cases to do with individuals renting out their units (hence the wrong individuals ending in the project) are often difficult to police according to Principal Secretary State Department for Housing and Urban Development Charles Hinga.

The institute also points out that there could be latent defects appearing six or 12 months later. Latent defects are faults in a property that is considered hidden or concealed such that it could not be discovered during inspection before the sale. 

"The other question is who owns the risks? Someone always does whether they appear to know or not," the document states. 

The guidebook is borrowed from lessons in countries that have had implemented affordable housing PPP. These are Fiji, Peru, Rwanda,Solomon Islands, South Africa, Turkey and the United States. 

Kenya is implementing its own affordable housing programme in partnership with counties through a PPP arrangement spearheaded by President William Ruto who targets 200,000 units annually. 

In this arrangement, the government provides land and horizontal infrastructure for the developer. It is the same way the guidebook presents how a housing PPP should work detailing that the public sector should provide: land, infrastructure, demand aggregation, fiscal incentives, non-fiscal incentives such as approvals, public support and policy legitimacy.

The guidebook insists that the private PPP contractor should understand the country's financial ecosystem vis a vis the macroeconomics before embarking on it. 

This includes how the capital markets performs, the possibility of long term finance, inflation rate, performance of the local currency in the global market, how much material is imported versus locally produced, political stability, interest rates and if there is a law or framework on PPP.

Kenya has the Public Private Partnership Act (2021). 

President Ruto, also to give confidence to investors in the sector, engineered the housing levy, a new law passed as part of the Finance Act 2023, which will anchor the affordable housing.

The housing levy deducts 1.5 per cent of gross income from employees and is expected to provide financing during offtake of the affordable houses. 

The guidebook that a viable strategy for offtake is key. It defines offtake as payment in full, in cash, for the development phase.

"Rolling over the development debt is not offtake. It is buck pass," the institute notes in the guide book dated June 2023. 

An idea offtake, it says, involves selling all the homes or flats at one mass closing. 

"A partially sold property is a like a partially cleared fence," it notes. 

After offtake, the property must be asset managed. This should help in maintaining value of the property, common areas and capital reserves. 

The documents notes that a housing PPP should be built with the targeted consumer in mind. The home, it says, should be sized to match the family intended. 

It distinguishes three types of consumption level. These are: need (what a middle income plus household of this type have), effective demand(what the target population can regularly afford to pay), and financial demand(what they can borrow to pay).

This is also cascaded to house size typology where density of units or bungalows is determined. 

 "A home is a shield around a family and it should be sized to match the family it is protecting," the document states. 

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