Utilisation du paiement au résultat pour catalyser le développement de logements abordables : Une étude de cas du programme Haïti HOME

Haiti Home Ownership and Mortgage Expansion (HOME) Program USING PAY-FOR-RESULTS TO CATALYZE AFFORDABLE HOUSING DEVELOPMENT: A CASE STUDY OF THE HAITI HOME PROGRAM January 2021 This document was produced for review by the United States Agency for International Development (USAID), and specifically for the Economic Growth and Agricultural Development Office of USAID/Haiti. It was prepared by the World Council of Credit Unions (WOCCU) USAID/Haiti Homeownership and Mortgage Expansion program (HOME) program (Award No: AID-521-A-15-00011). The principal leader and writer of this case study is Denise Mainville. The views expressed in this document are the sole responsibility of World Council of Credit Unions and do not necessarily reflect the views of the United States Agency for International Development or the United States Government. 1 Haiti HOME Program (AID-521-A-15-00011) Using Pay-for-Results to Catalyze Affordable Housing Development: Case Study TABLE OF CONTENTS PREFACE............................................................................................................................. ii List of Acronyms................................................................................................................ iii EXECUTIVE SUMMARY ...................................................................................................... 1 INTRODUCTION .................................................................................................................. 2 Haiti’s housing crisis: A problem with no easy solution ...................................................... 2 Pay-for-Results: A new way of “doing development”.......................................................... 3 Proof of Concept: The remarkable achievements of Haiti HOME....................................... 4 THE HOME PROGRAM’S PFR APPROACH....................................................................... 6 Overview: Moving from concept to creation ....................................................................... 6 HOME’s approach: Give me a lever, and I can move the private sector ............................ 7 Supply-side: Catalyzing a supply of affordable housing ..................................................... 9 Identification and recruitment of property development partners .................................... 9 Incentive development ................................................................................................. 11 Property development.................................................................................................. 16 Demand-side: Creating effective demand for housing ..................................................... 20 Motivating commercial banks to lend down market ...................................................... 20 Motivating credit unions to develop a housing portfolio ................................................ 22 KEY TAKEAWAYS ON PfR ............................................................................................... 24 HOME’s transformational achievements.......................................................................... 24 PfR success factors......................................................................................................... 26 Lessons for donors and program implementers............................................................... 26 CONCLUSION.................................................................................................................... 27 REFERENCES ..........................................................................Error! Bookmark not defined. i Haiti HOME Program (AID-521-A-15-00011) Using Pay-for-Results to Catalyze Affordable Housing Development: Case Study PREFACE The Haiti Homeownership and Mortgage Expansion program (HOME) program was a five year, USD 10-million USAID-funded initiative, implemented by World Council of Credit Unions (WOCCU), that sought to use a Pay-for-Performance, or Pay-for-Results, model, developed in collaboration with the Affordable Housing Institute (AHI), to catalyze the development of an affordable housing market. This case study is intended to leverage the experience of Haiti HOME to showcase both the potential of Pay-for-Results to achieve meaningful development outcomes and the challenges inherent in designing and implementing a Pay-for-Results initiative. This case study analyzes the program’s methodology for designing its Pay-for Results incentive structure, its results, and lessons learned. The case study draws upon internal project documents, information obtained through interviews with project stakeholders, and additional resources that are detailed in the References section. ii Haiti HOME Program (AID-521-A-15-00011) Using Pay-for-Results to Catalyze Affordable Housing Development: Case Study LIST OF ACRONYMS AHI Affordable Housing Institute APHI Association des Promoteurs Immobiliers d'Haiti EDGE Excellence in Design for Greater Efficiencies HFHI Habitat for Humanity International HOME Home Ownership and Mortgage Expansion P4P Pay for Performance PfR Pay for Results USAID United States Agency for International Development WOCCU World Council on Credit Unions iii Haiti HOME Program (AID-521-A-15-00011) Using Pay-for-Results to Catalyze Affordable Housing Development: Case Study EXECUTIVE SUMMARY World Council of Credit Unions’ (WOCCU) Haiti Homeownership and Mortgage Expansion (HOME) program created a new market for affordable housing by deploying an innovative Pay-for-Results Results (PfR)1 scheme catalyzing the supply and demand sides of the housing value chain. Implemented from 2015-2020, HOME was a USD 10-million USAID-funded initiative. This case study showcases how Haiti HOME successfully deployed PfR to achieve meaningful development outcomes and illustrates the challenges in designing and implementing a PfR initiative. Beyond providing proof of concept that PfR works, HOME transformed Haiti’s affordable housing sector. On the demand side, the program developed Haiti’s first credit union-issued mortgage product, offering a new solution to lower-income households typically not served by commercial banks when it comes to long-term financing. On the supply side, it stimulated the development of an affordable housing industry by incentivizing private sector investment in affordable housing supply and supporting affordable housing property developers to develop capacity to implement international building best practices. Overall, the program leveraged more than USD 25.9 million in private sector funds utilizing less than USD 3 million in publicly funded incentives—a ratio of 9:1. HOME was initiated with the objective of catalyzing the supply and demand sides of the housing value chain to create a sustainable market for affordable housing. It was an effort to jumpstart a developmental process that would, over time, contribute to reduce Haiti’s housing deficit of nearly 500,000 houses, as over 180,000 were lost in the 2010 earthquake. In addition to those losses, WOCCU, in collaboration with Affordable Housing Institute (AHI) and Habitat for Humanity International (HFHI),2identified many fundamental constraints in Haiti’s home delivery system that cannot be resolved in the short or medium timeframe. Primary among these constraints are unclear property rights and the general population’s limited income level that distort Haiti’s housing market. These constraints paired with the lingering effects of the earthquake resulted in a significant number of people, especially the urban poor, living in unsafe, unhealthy conditions. The HOME program was not designed to finance construction; instead, it sought to leverage a new concept—PfR—that had shown promising results in sectors such as health and agriculture but had not yet been utilized in the housing sector. PfR is a development approach that rewards private sector partners for achieving pre specified outcomes, rather than funding their efforts to achieve outcomes. When successfully deployed, PfR incentives offset investment risk, mobilizing private sector investment into potentially profitable but under-developed markets while leveraging the private sector’s entrepreneurial initiative, know-how, creativity, and financial resources to achieve mutually agreed-upon objectives. Following a comprehensive market analysis, the HOME program designed a two-pronged approach to incentivize commercial firms to invest in the development of a market for affordable housing. On the supply side, the program provided incentives to bring property developers into the affordable housing space, with the intent of increasing the stock of affordable housing available to low- and middle-income buyers. On the demand side, HOME 1 Pay for Results (PfR) is also referred to as Pay for Performance (P4P) in HOME program reports and materials. “Pay for Results (or performance/success/outcomes) is an umbrella term for initiatives that pay upon accomplishment of results rather than efforts to accomplish those results.” (Camp, Lawrence, et. Al, Pay for Results in Development – A Primer for Practitioners. Palladium and USAID. January 2018) 2 HFHI was a HOME partner through May 2018 1 Haiti HOME Program (AID-521-A-15-00011) Using Pay-for-Results to Catalyze Affordable Housing Development: Case Study worked to increase the availability of mortgage financing from financial institutions for low- and middle-income buyers. While the PfR initiative was primarily intended to “pull” the private sector into the affordable housing market through the provision of attractive incentives, the HOME program also used “push” activities such as grants and technical assistance to help the private sector partners build capacity where needed. The approach, results, and lessons learned from these supply- and demand-side activities are detailed in this case study. The case study concludes with observations on these transformational achievements, identification of factors underpinning the success of the initiative, and lessons for donors and implementers interested in using a PfR approach. INTRODUCTION Haiti’s housing crisis: A problem with no easy solution “There was no way the government could spend its way out of this crisis.” -Claude Clodomir, Haiti HOME Chief of Party October 2015, Port-au-Prince, Haiti. Claude Clodomir was in a difficult situation. As Chief of Party for the HOME program, he was responsible for an innovative U.S. government supported activity that aimed to reduce Haiti’s massive housing crisis by piloting a private sector-led model to jumpstart a housing market for low to mid-income households. This crisis had grown to extreme proportions since the 2010 earthquake that destroyed approximately 180,000 houses in the country’s capital and largest city, Port-au-Prince, adding to a pre existing backlog of approximately 300,000 houses (WOCCU 2016). Yet, Clodomir had limited options by which to achieve the program’s objectives of catalyzing development of a sustainable market for affordable housing by engaging investment on both the supply and demand sides of the housing value chain. The Haiti HOME program agreement stipulated that construction expenditures would not be reimbursed, eliminating traditional means of supporting the creation of new housing capacity, such as directly hiring U.S.- or Haiti-based construction firms or providing “bridge loans,” loan guarantees, or grants to companies or non profits to build the needed homes.3Indeed, this provision was included in large part because initiatives such as these had not led to scalable models that would impact the provision of housing to the average Haitian. Furthermore, while less intrusive, even indirect supports for housing development have potential to distort the construction and housing market and crowd out private sector builders. The highly subsidized nature of public housing initiatives was also problematic, as neither the pace of building nor long-term maintenance of the facilities could be sustained without continual government support (WOCCU 2016). The overriding problem with such initiatives, however, was that they lack potential to make a meaningful dent in Haiti’s vast housing deficit (WOCCU 2018). As Clodomir himself was aware, “[t]here was no way the government could spend itself out of this crisis,” he said. The nearly USD 7 million4that USAID had committed to WOCCU indicated USAID’s confidence that the program could come up with a workable solution to the problem and make a meaningful impact. Clodomir knew he had to find a better way to tackle this immense 3 This is a standard provision (M.22) in USAID contracting. 4Initial funding was nearly $7 million for three years. A 2018 extension extended the project to five years and increased its overall budget to more than $10 million. 2 Haiti HOME Program (AID-521-A-15-00011) Using Pay-for-Results to Catalyze Affordable Housing Development: Case Study challenge—one that could meet USAID’s high expectations while overcoming the shortcomings of traditional funding approaches. Pay-for-Results: A new way of “doing development” “If you can’t build, incentivize.” -Lawrence Camp, Senior USAID Advisor Searching for ideas, Clodomir reached out to Lawrence Camp, a senior USAID advisor who initially helped to conceptualize the HOME program. Camp made a seemingly simple recommendation, which opened a new world of possibilities to Clodomir. “If you can’t build,” Camp told him, “Incentivize.” Camp was referring to an approach—Pay for Results— that had been making inroads in the development community but had not yet been tried in the housing sector. The approach seemed risky—it was new and unrefined, and it relied entirely on the private sector for its success. That said, it was also intriguing; if successful, PfR could offer a replicable model for continued investment in the housing sector with the potential to sustain and grow well beyond the HOME program’s implementation period. Implementing such an approach in Haiti would truly be putting it to the test, as the country’s housing sector is challenged by numerous constraints that conspire against efforts to make progress towards many of the country’s housing goals. PfR is radically different from traditional development approaches in that it pays only for the achievement of pre-defined results rather than funding inputs or efforts made toward reaching results (Camp et al). Pay-for-Results5 Pay for Results (PfR) is a development approach that rewards private sector partners for their success in achieving pre specified outcomes, rather than funding their efforts to achieve outcomes (Camp et al). When successfully deployed, PfR incentives temporarily offset investment risk, catalyzing private sector investment into potentially profitable but un-developed or under-developed markets, while leveraging the private sector’s entrepreneurial initiative, know how, creativity, and financial resources to achieve mutually agreeable objectives. Traditional development approaches seek to address development problems by motivating government, non-governmental, and private entities to undertake activities on the donor’s behalf, providing financial assistance (such as grants and cost-reimbursement) and in-kind support such as training and technical assistance to support the activities. Under traditional development approaches, the entities receiving the support are responsible for carrying out the strategies and solutions that have been designed by the donor or its implementer, working under their guidance and support. PfR, in contrast, turns responsibility for designing and implementing solutions over to participating entities (partners) who are paid on the basis of their success at achieving pre defined outcomes. A “pure” PfR approach provides an incentive to its participants—often private sector firms—to achieve the pre-defined goals. However, it does not prescribe the pathway by which those goals must be achieved, nor does it make up-front payments to support the activities. The commitment to pay only for its participants’ results puts the risk taking and responsibility squarely in the participants’ hands, but also gives them control over 5 For background on the Pay for Results approach, see Camp, Lawrence, et. al. Pay for Results in Development – A Primer for Practitioners. Palladium and USAID, January 2018. (https://www.usaid.gov/sites/default/files/documents/1865/Pay_for_Performance_Primer_Final.pdf) 3 Haiti HOME Program (AID-521-A-15-00011) Using Pay-for-Results to Catalyze Affordable Housing Development: Case Study the strategies to achieve those results. In a hybrid approach, which the HOME program ultimately used, the “pull” of results-based incentives is balanced by “push” activities that provides support (such as technical assistance and limited grant funding) in combination with financial incentives. These “pull” and “push” elements work together to motivate private sector actors to leave their comfort zone while building their capacity to succeed in unfamiliar markets. The PfR approach seeks to harness private sector entrepreneurial dynamism to solve longstanding development challenges and has the potential to be more effective, sustainable, and cost-efficient than traditional development approaches. Broadly put, PfR initiatives de-risk investment into potentially profitable markets whose development is inhibited by supply, demand, or enabling environment constraints that make such investments risky enough to curtail them in the absence of the PfR initiative. Ideally, private sector investment that is motivated by PfR initiatives will strengthen the market and create conditions for sustained market activity by the time the PfR incentive is phased out. PfR initiatives have the best potential for success in circumstances where the private sector sees, or can be convinced of, an underlying business interest for long-term involvement in the market, and where they have the capacity and motivation, if properly incentivized, to realize and sustain profitable engagement in the market over time (Mainville and Narayan 2017). PfR: The Players The donor: The entity that funds a PfR initiative. In the case of Haiti HOME, the donor was USAID. The program implementer: The entity contracted by the donor to design and manage the PfR initiative. In the case of Haiti HOME, the primary implementer was WOCCU, with the Affordable Housing Initiative and Habitat for Humanity International serving as partners. Private sector partners (or partners): The entities that participate in a PfR initiative in pursuit of the PfR incentive. For Haiti HOME, partners included property developers, commercial banks, and credit unions. Following his conversations with Camp, Clodomir recognized the potential of the PfR approach. Yet, as a new strategy for “doing development,” there was little guidance available about how to develop a PfR initiative, and there was certainly nothing tailored to a context like Haiti’s affordable housing sector. Indeed, Clodomir was aware of no other examples in which a PfR approach had been undertaken either in Haiti or in the housing sector in another country. If he were to lead the HOME program team into this arena, they would be breaking new ground. Who knew what sorts of challenges they would come across? Proof of Concept: The remarkable achievements of Haiti HOME “I think our project has inspired many who now realize it is possible to…offer adequate solutions to the housing problem in Haiti.” -Patrick Brun, Owner of Chabuma Five years later, the HOME program was coming to an end. As Clodomir looked back on the experience of leading the program, he was struck not only by what the HOME program had 4 Haiti HOME Program (AID-521-A-15-00011) Using Pay-for-Results to Catalyze Affordable Housing Development: Case Study achieved, but also how it had been achieved, as well as the significance of what was being left behind as the project approached its conclusion. By the time HOME’s technical activities concluded in late 2020, the program had leveraged its innovative PfR approach to provide a “proof of concept” that incentives work effectively to achieve development goals, even in a challenging environment like Haiti. HOME’s initiative had catalyzed the construction and sale of Haiti’s first commercially driven affordable housing. HOME also led to the establishment of Haiti’s first mortgage instrument tailored to low- and middle-income buyers. More importantly, the HOME program mobilized the process of entrepreneurial innovation that led to these gains, with incentives supported by light-touch technical assistance that motivated HOME’s private sector partners to leverage their own resources in the pursuit of these results. Overall, the HOME program leveraged USD 25.9 million in private sector investment using less than USD 3 million in financial incentives, a ratio of USD 9 in private sector funds leveraged for every USD 1 in funding provided. Significantly, the investment process that HOME stimulated showed no signs of ending as the program wrapped up—private sector partners were taking concrete steps to maintain their affordable housing development activities, implying potential for sustainability that is largely unseen with traditional development initiatives. HOME’s major achievements are summarized in Exhibit 1. Exhibit 1: Haiti HOME achievements HOME program “firsts:” • First deployment of PfR approach to housing sector development in a low income country • First private sector-driven affordable housing developments • First non-bank mortgage product developed and issued • First “green” certification under the International Finance Corporation’s EDGE program • First private sector housing association established • First vertical housing development involving application of Haiti’s recent Condominium Law • One of the first housing developments with a fully integrated co-ownership structure, with formal bylaws, table of recurring charges, elected board, and professional management. Private capital leveraged by PfR incentives Type of Incentive PfR Incentives Disbursed Private Capital Leveraged Leverage Output Ratio (1:X) Pay for Results Incentives to Housing Developers USD 2,195,522 USD 10,480,291 5 Pay for Results Incentives to Credit Unions USD 240,304 USD 10,926,079 45 Client-centered Credit Enhancements provided for mortgages USD 117,166 USD 932,632 2 Risk Capital Incentives to Credit Union USD 300,000 USD 2,602,680 9 Leverage from non-incentivized financial institutions USD 0.00 USD 977,344 N/A Total USD 2,852,992 USD 25,919,026 9 5 Haiti HOME Program (AID-521-A-15-00011) Using Pay-for-Results to Catalyze Affordable Housing Development: Case Study Homes planned, built, sold, and mortgaged* Housing unitsBuilt Sold Pending Mortgaged 57 35 3 29 *Source: HOME project reporting, data current as of December 2020 THE HOME PROGRAM’S PFR APPROACH The HOME program’s staff had the overarching challenge of designing a program that would leverage the innovative potential of PfR, but remain grounded in the realities of Haiti’s challenging implementation context and the unique dynamics of the country’s housing market. Initiating this task required that they obtain a thorough understanding of Haiti’s housing market and its constraints, and identify the key leverage points by which they could hope to motivate productive and profitable private sector investment in the market. Overview: Moving from concept to creation We were not just building houses. We were catalyzing a process.” -Claude Clodomir, Haiti HOME Chief of Party HOME’s first major step toward designing the PfR incentive was to commission a comprehensive analysis of Haiti’s housing market,6 which documented the state of demand, supply, and the enabling environment for the market (WOCCU 2016). The resulting document showed the immensity and interconnectedness of the challenges, and at first blush seemed to be defining an impossible task. As outlined in the market analysis report, virtually all aspects of Haiti’s housing market presented significant constraints to private sector investment in an affordable housing market aimed at low- and middle-income families. Indeed, when HOME kicked off, there existed no commercial property development activities or entities tailored to low or middle-income households in Haiti. The market was simply perceived as too costly and risky, with limited commercial potential. On the supply side, there was an extremely limited stock of housing available. Building of any type is expensive in Haiti—land and materials are costly, with most building materials being imported and little suitable land due to Port-au-Prince’s mountainous terrain and soil conditions. There is also little infrastructure—such as water lines and electric supply— available to housing sites, which meant that developers themselves had to bear the costs of its development. On the demand side, it is extremely difficult for potential buyers to qualify for mortgages. While Haiti has a significant base of residents with stable incomes who would like to buy their own homes, many have difficulty satisfying commercial banks’ underwriting requirements, which typically require three years of stable documented employment in the formal sector. Additionally, collateral requirements are extremely difficult to meet. For example, Haiti’s weak land titling system makes it difficult for potential buyers to use the land where homes will be built as collateral to guarantee their loans. Because of these constraints, most formal housing 6 Unless otherwise cited, details presented on Haiti’s housing sector and the project’s implementation context throughout the remainder of this document are drawn from the housing market analysis (WOCCU 2016), from internal project documents, or interviews with project stakeholders. 6 Haiti HOME Program (AID-521-A-15-00011) Using Pay-for-Results to Catalyze Affordable Housing Development: Case Study developers focus on the luxury market, consisting of a small but wealthy community of high income Haitians and expatriates who finance construction themselves. As the HOME program launched, there were fewer than 1,000 mortgages in the country issued by Haitian banks; these mortgages averaged USD 300,000 and carried interest rates between 18-30%. At the other end of the market, there was an active, but informal and unregulated housing sector dominated by small-scale masons and builders, who also largely built owner-financed homes on a contractual basis. The only formal financing available to lower-income Haitians were microfinance-funded consumers loans, with high interest rates and short repayment periods. Under such conditions, low-income buyers often built on a piecemeal basis, contracting successive construction activities as they saved or borrowed adequate funds. Finally, enabling environment constraints—such as the complex land titling system and a nascent credit bureau—underpin many of these supply and demand-side challenges. These constraints increase the costs of doing business, and the complexities of these challenges mean that they would likely not be resolved during the few years that the HOME program was slated to run. Indeed, numerous policy and governance-oriented projects had already taken place in Haiti without making significant inroads on the problem. Indeed, in 2015 when the HOME program began, Haiti was rated #180 out of 189 countries in the World Bank’s “Doing Business” ranking (World Bank 2014), demonstrating a significant lack of efficient procedures and effective policies that are necessary to private sector investment and growth. HOME’s approach: Give me a lever, and I can move the private sector PfR is not just a tool, it’s a mindset.” -Claude Clodomir While WOCCU’s 2016 Housing Market Analysis conveyed the immensity and complexity of the challenge that the HOME program faced, the HOME program team still saw some cause for optimism. Despite the many problems affecting the country’s economy and real estate market, the presence of both higher-end and lower-end builders and a large number of potential buyers indicated that a functioning housing market existed, albeit heavily constrained, and that there was potential for a commercially driven affordable-housing market to emerge with HOME’s support. There was certainly plenty of unmet demand—approximately 20% of the urban population earned between USD 250 and USD 500 a month, while another 30% of the market earned between USD 150 and USD 250 per month. Many of these residents had stable incomes— they were often government workers, teachers, or formally employed in the private sector— and could be eligible for a mortgage to help them buy a modest house or condominium. The problem was that no one was either building or financing such houses because of the perception that the sector was risky and costly to serve. The HOME team suspected that these perceptions over-generalized the entire sector, and based on their analysis, they posited that low- and middle-income markets offered a significant potential—and profitable—market. The HOME program designed a two-pronged approach to incentivize commercial firms to invest in the development of a market for affordable housing. On the supply side, the program would provide incentives to bring property developers into the affordable housing sector, with the intent of increasing the stock of affordable housing available to low- and middle-income buyers. On the demand side, HOME would work to increase the availability of mortgage financing to low- and middle-income buyers from financial institutions. In both cases, HOME would also provide, or use grants to facilitate access to, technical assistance that would help 7 Haiti HOME Program (AID-521-A-15-00011) Using Pay-for-Results to Catalyze Affordable Housing Development: Case Study ensure that the private sector firms had the capacity and resources needed to provide high quality housing and financial products. By design, the program did not include any activities to explicitly address the enabling environment. The rationale was that the enabling environment problems were too large and complex to be addressed in the course of a three-year project. Instead, HOME would encourage its private sector partners to tackle the many challenges they faced in the enabling environment as they would in the absence of a program like HOME, with HOME providing necessary technical support to upgrade their capacity to work through challenges related to the weak enabling environment. This approach helped the firms develop their capacity and gain experience addressing these issues, as they would need to in the future after HOME’s support was no longer available. HOME’s PfR approach could be understood as a series of progressive experiments, designed to test and refine hypotheses about the potential of the affordable housing market in Haiti and the best strategies to develop it. The PfR incentives served as “levers” by which HOME could catalyze behavior change on the part of the private sector partners, while offsetting the underlying risk of investment that was inhibiting their entry to the market. Simultaneous engagement with multiple firms allowed HOME to test hypotheses to determine the merits of different private sector-driven investment strategies simultaneously, while limiting program expenditures. Adaptive management was a central pillar to this approach, as it allowed HOME to continuously adjust its implementation to reflect learning and promote the most efficient and effective paths available to meet program goals. In short, as articulated in the Housing Market Analysis (WOCCU 2016) that informed many of the project’s activities, “Haiti HOME is intended to surface where these risks—real, perceived, or non-commercial—act to disrupt value chain links, and to create promising experiments to see how the risks can be reduced and the housing value chain strengthened.” Envisioning the HOME program approach as a series of experiments Objective: Catalyze private sector investment in a market for affordable housing. Hypotheses: • There is a plausible business case for investing in the low- and middle-income (affordable) housing market. • The main reason that this market has not been developed is because potential investors excessively generalize their perception that the market is unprofitable and risky. • PfR incentives will serve as “levers” that will incentivize behavior change— motivating private sector-investment in the affordable housing market. • Once the private sector is incentivized to invest in the market, they will see first hand evidence of its profitability, compelling them to sustain their investments once the PfR incentives are withdrawn. Behavior change objective: Motivate sustained private sector investment in the affordable housing market by creating incentives for the private sector to enter, and facilitating their success in, the market. Interventions: • Supply side: Increase affordable housing stock o “Pull:” Incentivize commercial investment by offering cash rewards for building affordable houses, for investing in green housing and best 8 Haiti HOME Program (AID-521-A-15-00011) Using Pay-for-Results to Catalyze Affordable Housing Development: Case Study practices in housing development, and for selling houses to low- and middle-income buyers. o “Push:” Support through grants and technical assistance development of capacity to implement best practices that are otherwise unknown or unused. • Demand side: Increase finance available for affordable housing construction and purchase o “Pull:” Incentivize financial institutions to increase lending for affordable housing by offering cash rewards to financial institutions for issuing housing loans to low- and middle-income buyers. o “Push:” Support capacity development for implementation of best practices in housing lending through grants and technical assistance. Supply-side: Catalyzing a supply of affordable housing With an overall approach broadly writ, Clodomir and his team turned to the details. Critical questions still needed to be answered, such as: which developers should we target? How should we structure the incentives? How will the private sector respond? The HOME team would quickly learn that, when it comes to PfR, the details matter a great deal. Identification and recruitment of property development partners “The biggest challenge was that USAID was seen as an entity that gives grants, and a lot of possible competitors walked away.” -Claude Clodomir, Haiti HOME Chief of Party Approach The first step was to identify and onboard property developers to become HOME program partners. To begin, HOME sought to recruit firms that demonstrated an interest in the affordable housing market. These developers needed to have sufficient investment resources—both land and financial—and needed to show evidence of their integrity and commitment to what was to become a shared cause of serving Haiti’s affordable housing market. HOME ran ads in the national newspapers, soliciting submissions from firms that had land and a summary of the affordable housing development concepts. Within a month, WOCCU received more than 50 expressions of interest—a promising start. Upon reviewing the applications, however, members of the HOME team were mildly dismayed. Despite the clear requirements for the expressions of interest, many of the applicants were non-profit organizations with no land holdings that proposed to develop houses on land that they would acquire with grant funding from HOME. The project held an information session to clarify the intent of the PfR approach and what it implied for prospective private sector partners. Looking back at the recruitment process, Clodomir mused, “[t]he biggest challenge was that USAID was seen as an entity that gives grants, and a lot of possible competitors walked away.” Indeed, the next stage of submitting detailed proposals saw just twelve applicants. Of these, only four firms’ proposals were immediately accepted. The firms were then subjected to an extensive vetting and due diligence process in which the HOME team verified the applicants’ qualifications and confirmed that they were established entities with demonstrated, proven experience in delivering high-quality building services. 9 Haiti HOME Program (AID-521-A-15-00011) Using Pay-for-Results to Catalyze Affordable Housing Development: Case Study Results Ultimately, three firms, all Haitian, partnered with HOME for Haiti’s first ever commercially driven affordable housing initiatives—Chabuma, Tecina, and Panamera. Chabuma was a hardware and building materials retailer prior to becoming a property developer through the course of its work with HOME. The company was embarking on its first building project when they learned about Haiti HOME, and it quickly became evident that the program could provide Chabuma with invaluable support. Patrick Brun, Chabuma’s President, said: “We have been in building materials for 40 years. We have seen engineers and customers coming in and out complaining about how hard it is to find affordable housing, so we knew of the opportunity. We transformed ourselves to become a consortium…but we could not do it without HOME.” Tecina and its consortium partners had been involved in housing development in Haiti since 1974 and had completed a number of publicly and internationally funded social housing projects, as well as private luxury housing projects prior to its involvement with HOME. Reflecting on the initiation of the process with HOME, Gerald Emile Brun7, Tecina’s Vice President, observed: “Once you start getting into affordable housing, it is a very delicate process, particularly given the cost of production…It was clear that any support we could obtain from HOME that would reduce the stress of the (affordable housing) project would be good.” Panamera, an experienced luxury housing developer, became interested in HOME after sensing, and confirming with its own research, the affordable housing market’s potential. Panamera’s owner, Stephane Lerouge, describes his affordable housing projects as “luxury and modern, but at a good price—something attractive to banking and government employees and expats; and ideal for people renting or living with relatives who one day want to be home owners.” Lessons The partner recruitment process led to several lessons for the team: • The PfR approach can deter some potential partners: As a new and different approach to “doing development business,” most entities found PfR difficult to grasp, and several lost interest once they understood the concept. “PfR is not just a tool, it’s a mindset,” Clodomir points out. For many businesses and organizations, the idea of investing their own money to develop a market—in other words fronting their own resources in a relatively risky investment—was contrary to the way they wanted to operate. • Fewer well-motivated partners bring better results than many reluctant partners: While it was initially disappointing to the HOME team to see interest dissipate so quickly for many applicants, this winnowing had the benefit of eliminating potential partners who were fundamentally ill-suited to the PfR approach. In fact, the HOME team came to appreciate that the program was better off starting with relatively few partners, with the most potential for success, rather than engaging a plethora of partners who were neither firmly committed nor prepared for the effort. • Partners should have adequate resources to bear risk and invest: The requirement for partners to have land available for building and adequate resources to front the investment was also limiting. In fact, the HOME program was criticized by some stakeholders for the fact that relatively few partnerships were established. In 7 Despite sharing a last name, Patrick Brun of Chabuma and Gerald Emile Brun of Tecina are unrelated. 10 Haiti HOME Program (AID-521-A-15-00011) Using Pay-for-Results to Catalyze Affordable Housing Development: Case Study retrospect, however, this resource-dependent narrowing of the field was fortuitous. At the end of the program’s five years, after weathering the economic crisis that began in 2018 and was exacerbated by the COVID-19 pandemic in 2020, these partners had experienced setbacks and delays that had real financial impacts. Their capacity to manage and absorb shocks and setbacks was one of the important factors that led them to consider their involvement in HOME a success, despite these challenges. • Entrepreneurialism is a critical trait: Beyond the need for property development partners with financial resources and expertise in housing development, another set of traits emerged as important over the course of the project. These traits were not actively sought; however, they proved to be just as important as the other criteria used to qualify partners. Specifically, those partners that pursued the opportunity to develop affordable housing with the HOME program were differentiated by a unique entrepreneurial bent. They were open to new approaches, creative, flexible, innovative, ambitious, and commercially oriented. These traits helped the private sector partners throughout the property development process. With the HOME program’s support, they adapted their approaches when faced with roadblocks, learned, and grew, ultimately strengthening themselves and the affordable housing industry for which they formed the backbone. Incentive development We needed to convince the companies to move outside of their comfort zone.” -Olivia Nielsen, HOME program advisor, Affordable Housing Institute Approach The HOME team turned to their next challenge—defining the incentives that would motivate their new partners to invest in developing affordable housing properties. The HOME team designed incentives to meet two main goals: first, from the private sector partners’ perspectives, the incentives had to offset the risk of being a first mover in the largely unexplored affordable housing market; second, from HOME’s standpoint, the incentives had to motivate behavior change by stimulating sustained investment in the affordable housing market. While a few examples of incentives for the PfR approach existed, they had been designed for other sectors, such as agriculture and health. It was incumbent on the HOME team to develop a PfR approach to apply in a new sector where it had not been previously introduced. Reflecting on this challenge, Olivia Nielsen, a HOME program advisor working with the Affordable Housing Institute summarized the challenge in fairly simple terms: “We needed to convince the companies to move outside of their comfort zone.” Exhibit 2 summarizes the incentive development process. The first step was to create an estimate of the production cost for the intended affordable housing product, as well as an estimate of the price the affordable housing market would bear for such a product. For the HOME program, the cost estimate needed to include not only the cost of building a house but also the cost of implementing a number of “best practices” that housing developers in Haiti did not commonly follow. These included, for example, “green” certification under the IFC’s Excellence in Design for Greater Efficiencies (EDGE) initiative for the housing units as well as obtaining titles for individual housing plots prior to building on them. The second step was to determine the “profitability gap” of building for the low- and middle income market, which was the differential between the production and market values. This estimate formed the basis on which the incentive was calculated, with subsequent adjustments to account for factors such as the risk the activity posed to each partner, and the innovative value of the developer’s activities. Gerald Emile Brun, Tecina’s Vice President, explained: 11 Haiti HOME Program (AID-521-A-15-00011) Using Pay-for-Results to Catalyze Affordable Housing Development: Case Study “HOME analyzed the gap between what we could supply and what the buyers could pay, while maintaining a minimum profit margin. Then, HOME proposed an incentive based on our performance of doing the project.” The third step was to structure the actual incentive payments. The HOME team used milestone-based payments rather than a single lump-sum payment upon project completion. This approach had several benefits. First, milestone-based payments would help the partners see returns on their investments throughout the process, keeping them motivated. Second, partners could reinvest their incentive earnings in their projects, further facilitating their progress. Finally, an important pragmatic consideration was that payment milestones could be disbursed as fixed amount subawards under USAID’s Simplified Acquisition Framework. The final step in developing the incentives was an ongoing process of adaptive management that would help account for two realities—first that the definition of incentives was an experimental process rather than a fixed one, requiring adaptations and adjustments as HOME and the private sector partners learned; and second, that the context in which the projects were being implemented would itself evolve, changing the risk/reward ratio on which the incentives were based. This adaptive management process, discussed further below, required that the HOME team closely monitor program implementation, partners’ efforts, and the overall operating environment; then adjust incentives as necessary to remain aligned with evolving conditions. Exhibit 2: Incentive development process with illustrative HOME program application Summary: Incentive Development Process 1. Estimate “pure market price” for target product based on production costs and industry standard profit margins; and market cost that could be borne by target beneficiary group. 2. Estimate total incentive amount based on the “profitability gap”, i.e., the differential between production and market values determined in the prior step. Adjust based on risk and other intangible factors that influence private sector partners’ incentive and capacity to realize the project. 3. Define milestone payments, tagged to meaningful behavior change objectives. 4. Adaptive management to keep incentives aligned with changes in the implementation environment and program and private sector partners’ learning. An important feature of the incentive development process was that it was conducted in collaboration with each development partner. Consequently, it was an iterative process with discussions to refine each entities’ understanding of the product, target market, and inherent risk of the activity, among other factors. An important intangible outcome of this collaborative process was that it helped to establish the foundation for a collegial, constructive, and transparent relationship between the project and the private sector partner and to demonstrate the HOME program’s role as a facilitator of the private sector partners’ success. While building trust, this process also helped to increase the development of partners’ commitment to the HOME program’s outcomes and goals. A second important aspect of the incentive development approach was that it made clear to all parties involved that incentive amounts were completely independent of costs incurred. Instead, incentive amounts were based on the “profitability gap.” This was a crucial distinction and a significant divergence from how traditional aid funding works, in that it eliminated motivation for the partner to “game the system” by increasing or falsifying costs. Instead, once the incentive amounts and product were agreed upon, it was incumbent on the partner to 12 Haiti HOME Program (AID-521-A-15-00011) Using Pay-for-Results to Catalyze Affordable Housing Development: Case Study produce the agreed-upon product as efficiently as possible, as they would directly benefit from any cost savings. Furthermore, the private sector’s largest payoff would come when the product sold on the market, undermining any incentive to increase their revenue by compromising on quality because this would reduce the marketability of their product. This also helped to keep the partners’ incentives aligned with the program objective of having them produce for the market, absent any support from the project. Results While the overall process of determining incentives was standardized, the specific incentive amounts and structure varied depending on the partner and the project being developed. Chabuma, for example, began with a piece of land in an area they called Santos on which they planned to build 31 houses. These houses would range from two-bedroom starter-units that could be sold for as little as USD 50,000, to fully developed 3 bedroom, 2-bath houses that would be sold fo