Volume 3                    Issue 1                    November  2007

Print Version     

Strategizing Slum Improvement in India: A Method to Monitor and Refocus Slum Development Programs

Robert M. Buckley, Mahavir Singh, and Jerry Kalarickal

Introduction

India’s 10^th Five Year Plan noted that the urban slum population is growing despite sharp reductions in poverty and rising incomes.  The central and several state governments recognized the need for intervention by initiating, or enlarging existing urban housing and other slum subsidy programs.  With this in mind, the Government of India (GOI) has requested a loan from the World Bank to implement a more effective strategy and delivery mechanism for the financing of urban slum improvement and sanitation provision in underserved areas. 

In order to support the GOI to achieve the goals delineated in 10th Five-year Development Plan concerning slum improvement and poverty alleviation in urban areas, the Bank has agreed to consider a program that will focus on (a) refining the national policy framework for the upgrading of urban slums and sanitation in underserved areas in India; (b) working with the states and various beneficiaries to establish a methodology which measures program performance of both the GOI and the states, and identifies concrete monitorable steps that can be taken to improve this performance; (c) developing appropriate monitoring mechanisms to enable the evaluation and modification or redesign of the programs which would improve the transparency, efficiency, administrative simplicity, and targeting of the assistance; and (d) developing funding schemes for slum improvement and sanitation that could provide incentives so that resources are used more effectively and the program reach expanded.  In doing so, the program will: (i) contribute to poverty alleviation in the poorest urban areas in India; (ii) strengthen human capital in poor neighborhoods by increasing community participation in planning, delivery and maintenance of public works and services; (iii) improve the efficacy of the use of more than $400 million of annual government expenditures on these programs. 

This paper is the first joint GOI-World Bank attempt to examine the existing housing and sanitation programs with a view to developing a framework for evaluating them.  Data was collected for four Housing Subsidy programs and two Sanitation programs from a series of conversations with government officials in concerned ministries at both the federal and the state government levels and from Government of India documents. 

The structure of the paper is as follows.  First, the caveats to the analysis are spelled out.  The next section presents the necessary background.  Then section III briefly describes the five programs evaluated.  Section IV examines how each of these programs measures up against the evaluative criteria.  Section V presents the conclusions while section VI outlines the way forward. 

I Caveats to the Analysis

Among the existing housing programs, three federal programs and two state level programs were examined.  Two of the national programs – the Valmiki Ambedkar Awaaz Yojana (VAMBAY) and the National Slum Dwellers Program (NSDP) – are run in conjunction with the states and are primarily urban programs.[1]  The third national program, the Indira Awaas Yojana, is a rural housing program.  The state level programs are Karnataka’s Urban Ashraya Housing Program and Kerala’s Mythri Housing Scheme.  Finally, a new program that the Kerala government is considering- the Bhavanashree program- is also appraised.  This last program was included because its’ program design addresses some of the concerns that the paper shares about existing programs.  However, since this program is still in its design phase, the analysis of this program in this paper should only be considered as an appraisal and should not be read as an evaluation.

Apart from the housing programs, a couple of slum sanitation initiatives – the Pune Sanitation Project and the national level Nirmal Bharat Abhiyan – are also examined.  These sanitation programs were included because they are integral to any slum upgrading program.  Furthermore, there are design elements in this program that are worthy of emulation in all slum upgrading programs.

Since this is an informal study of a few selected programs, a necessary caveat that there might be inaccuracies in the specific details of the programs also has to be added.  The paper has tried to minimize these errors but a major part of it has focused on ensuring that the general characteristics of these programs are as accurate as can be.  The inaccuracies that might have crept in also point to the need for better data about the urban poor in India as well as the housing subsidy programs, a case that the paper makes during the course of this paper.

II Background

GOI’s policies on slums have undergone a paradigm shift in recent years.  In the 1970s and early 1980s, the government emphasized the notion of ‘slum free cities’.  What this often meant was forced or voluntary resettlement of slums in central cities.  However, over time, the weaknesses of such a program became evident. Firstly, the slum dwellers who were being resettled were fully integrated in the economies of the cities.  They were economic agents adding to crucial economic output.  Resettling them would have adverse economic consequences.  Secondly, removing slums from central cities and transportation nodes often meant that the new settlements on the outskirts of the city were far from jobs, thus further worsening the welfare of slum dwellers.  With this realization, the government started focusing on slum upgrading and slum rehabilitation programs.  In the initial years of slum upgrading, the focus was on providing infrastructure to the slums through the NSDP.  Now there is increased stress on provision of shelter to urban slum dwellers through VAMBAY.

India’s new focus on economic liberalization and on decentralization has posed significant additional challenges to urban development in the country over the last decade.  In particular, the country’s thrust on decentralization under the 74th Constitutional Amendment Act has led to a new emphasis on improved urban governance and management with a view to increasing cities’ efficiency and reducing urban poverty.  This is a major challenge for a country with some 433 million people living on less than US$1 a day, 36% of the total number of poor in the world. India also has some 20% of the world's out-of-school children.  Out of the 290 million (28% of the population) that live in urban areas, 62 million live in slums.  This represents over 21% of the urban population in India.  These urban poor suffer disproportionately from adverse health impacts linked to lack of proper shelter and basic services, in particular sanitation.  Conditions are particularly adverse in India's largest cities, as the top mega-cities in India (Mumbai, Delhi, Kolkata, Chennai, Bangalore, and Hyderabad) house 18% of the total slum population in the country. 

This emphasis on improved urban governance takes a new dimension, as the urban sector increasingly becomes an important driver of economic growth. Urban centers contribute more than 60% of the country’s Gross Domestic Product (GDP), which highlights their role in achieving national economic growth targets.  In this context, urban infrastructure has a prominent role in the GOI’s Tenth Five-Year Development Plan (2002-07).  It aims to improve urban infrastructure as critical to growth and poverty alleviation through decentralized urban local governments with strengthened capacity to deliver services.  The GOI has estimated that the country needs to reach an economic growth rate of at least 8% in order to significantly reduce the incidence of poverty. For the first time, the Ministry of Urban Development and Poverty Alleviation (MUDPA) has designed a comprehensive Urban Development Strategy focusing on fiscal, financial, and institutional changes.  As a cornerstone of the urban strategy, the MUDPA has introduced the Urban Reform Incentive Fund (URIF) in 2002. Through financial incentives from this centrally funded scheme, GOI encourages systemic reforms at the State level.  Simultaneously, GOI has set up the City Challenge Fund (CCF) to promote reforms in citywide governance and service delivery.

Despite this progress, the sheer volume of resources required to address the needs of the urban poor threatens the sustainability of current efforts.  Unless a sustainable framework for financing urban slum improvement is implemented, successful scaling up of these initiatives would be difficult to undertake; and without successful large-scale poverty reduction in India, it would be impossible to achieve the Millennium Development Goals. This program is well suited to support the GOI in the pursuit of large-scale poverty reduction in a sustainable manner. 

III Current Subsidy Programs

There is a general perception that the government should help to improve the housing conditions of the poor, but the programs actually sponsored appear poorly positioned to deliver on that result.  Table 1 shows that the selected urban programs allocate approximately $130 million of GOI assistance per year.[2]  Ideally, the Government of India would target the 40 million poor urban slum dwellers (of an estimated total slum population of 60 million) with these funds.  However, even if those resources went only to the intended beneficiaries, every slum dweller would receive no more than $3 of assistance per year.[3]  Given the unit costs of even very modest housing, this amount is obviously not enough to have a substantial effect.  On the other hand, providing more assistance to a fewer beneficiaries leaves out others who are equally deserving.  The relative paucity of resources allocated to housing the urban poor underlines the importance of using those resources more effectively and leveraging them better. 

In this context, for example, a program that provides $75 per year of assistance (and which could correspondingly serve less than 4 percent of poor urban slum dwellers) would have no discernible impact on the overall number of slum dwellers.  For this result to occur all that would be necessary is that the slum population increases by 4 percent or more, as it often has in the past 20 years.  With this increase in the number of households in need, there would be no reduction in the slum population.  Although such a program helps a non-trivial number of slum-dwellers, there would be no effective difference in number of slum dwellers.  Thus, given the large and growing numbers of slum dwellers, and the limited availability of public resources to assist them, designing programs that most effectively use the resources and that make them go the farthest is of particular importance.

Table 1:  Selected Government of India Programs for the Urban and Rural Poor Plan allocations for 2001-02 in Rupees millions

Sources: Annual Report MUDPA, 2001-02, Annual Plan, Planning Commission, 2001-02 and Annual Report MRD 2001-02.  Adapted from World Bank Urban Strategy for India, 2002.

Table 1 shows that rural housing-related subsidy programs receive more than six times the public resources devoted to similar urban programs even though the rural poor outnumber their urban counterparts by less than three to one, 197 versus 67 million respectively.  Consequently, on a per capita basis, the rural poor receive almost twice as much housing assistance as the urban poor.[4]  This difference in allocation does raise questions about how public expenditures are determined. 

Table 2 lays out the essential characteristics of the five housing programs considered here.  For a detailed description of each program, please refer to Appendix 1. 

Table 2:  Comparison of Housing and Slum Dweller Programs

Sources: KSCB and RGRHCL, Bangalore, March 2003 and KSHB and Kudumbhashree, Trivandrum, January 2004.  Ministry of Rural Development website.

IV Evaluation of Subsidy Programs

Five criteria were used in the analysis of these programs: Targeting, Efficiency, Transparency, Administrative Simplicity and Sustainability.[5]  In the absence of highly specific data, the paper undertakes a discursive analysis of the components of these programs.  Rather than viewing this discursive analysis as a weakness, it is in many respects a strength.  It is fully in the spirit of the way the World Bank undertakes ex-post evaluations of its projects – assigning a level of performance based as much as possible on quantitative measures.[6]  It is also consistent with the approach taken by, for instance, the European Bank for Reconstruction and Development in its evaluation of the many dimensions of reform in the former socialist economies.[7]  Moreover, this approach not only sheds light on the strengths and weaknesses of these programs, but it also requires policy-makers to consider explicitly how and why they believe a program performs against a specific standard. 

Each of the programs are rated on the five criteria on a scale of 1 to 4 in increasing order of excellence.  A program that rates poorly gets a score of 1 while a program that satisfies all the concerns under a specific criteria gets a score of four.  While some of these programs can be vastly improved by some small changes in the program structure, other programs need wholesale reform in the way they are designed.  A detailed discussion on each of these measures is presented in Appendix 2.

Table 3 shows that the four housing programs have an average rating between poor and fair (an aggregate score of less than 10).  In contrast, both the sanitation programs examined are rated higher with scores of 12.5 and 13.5.  For a full analysis of each rating given, please refer to Appendix 3.

Table 3  Rating of Housing and Sanitation Programs

*The targeting rating is the average of the ratings each program got for each of the three targeting components.  See Table 2.

 (Key: 4 – Excellent, 3 – Good, 2 – Fair, 1 – Poor)

The twin sanitation programs rate better than the low-income housing programs.  The most notable improvement of these sanitation programs are better targeting through greater community participation and better efficiency through the institution of user fees.  However, there is much room for improvement in the sanitation programs.  The capital costs in both programs are either fully or very heavily subsidized.  Given the demand for sanitation facilities in India, it might be more sustainable and more efficient to include a beneficiary contribution element to the funding of capital costs.  This will necessitate that the local government work with CBOs in designing and building these programs.  Such collaboration will not only ensure that these programs are more sustainable but also improve consumption efficiency. 

V Conclusion

On the positive side, most of the programs studied appear to favor cash grants and loans to in-kind subsidies.  This is a big improvement from the days when most developing countries (and even some developed countries) had large and expensive public housing programs.   Cash grants increase consumption efficiency because they are more likely than in-kind grants to be valued at the cost of the subsidy. 

However, the overall picture that emerges when these program are examined is not an optimistic one.  Figure 1 provides a visual perspective on how these programs rate and how far they will have to travel if they are to become ‘excellent’ programs.  The five housing programs that are underway have an average rating between poor and fair.  Each of the five Indian housing programs that were evaluated got an aggregate score of 10 or less than 10.  In contrast, both the sanitation programs examined here are rated higher with scores of 12.5 and 13.5 because they had better targeting mechanisms and greater community participation.

Figure 1: Rating of Various Subsidy Programs

(Key: 4 – Excellent, 3 – Good, 2 – Fair, 1 – Poor)

Each of the programs show room for better design and implementation in each of the criteria that is used.  In order to continue developing a housing policy framework it is important that existing programs are reassessed to understand the scope for better targeting and more efficient, transparent, and “user friendly” programs that the government can then scale up.  Several points have emerged for consideration and further validation:

Insufficient Resources:  Current government allocations for urban slum programs cannot achieve a significant reduction in the numbers living in sub-standard housing unless further contributions from beneficiaries, local governments or the private sector can be mobilized.  According to the Government of India, current programs result in less than 100,000 new units a year.  Since there are approximately 12 million households dwelling in slums, this funding covers less than 1 percent of the need for better shelter.  Leverage is essential if conditions in slums are to be measurably improved.  Given the relatively high cost of housing even for the poor, there is ample evidence that contributions from beneficiaries can be a part of this leverage.  For example, in the Sanitation Program in Pune and in the Nirmal Bharat Abhiyan, by moving the responsibility of maintenance to the beneficiaries and by levying user charges, the fiscal burden on the state is reduced drastically.  In the long run, the capital costs are only a small percentage of the total cost building and maintaining better sanitation facilities.  Beneficiary participation makes such programs feasible and allows increasing the coverage of the programs.  Such a move will also have beneficiary effects on targeting by reducing the probability of manipulation by interested parties as well as increase efficiency by reducing the per-unit subsidies.

High per-unit subsidy rates: Subsidy rates ranging between 80 to 90 percent of total cost of housing (see Annex 4) are very high.  It is very probable that the government can achieve the same housing objectives with far less direct outlay.  By eliminating the unbudgeted subsidies embodied in free land and loan defaults, the scope of slum programs might be increased three to four-fold. 

Increase Administrative Simplicity: Reducing the subsidy element in central schemes offers scope for administrative simplification, thus improving effective targeting to poorer states with weak capacity to make use of these programs.

Reducing reliance on supply-driven design:  Such a move increases beneficiary satisfaction and increases efficiency.   This means that using the kind of self-help groups used by the Kudumbhashree program in Kerala might be useful not only in furthering the shelter solutions but also in other aspects of poverty eradication.

Mobilize alternative mechanisms for beneficiary contributions: Many of the current programs try to increase beneficiary contributions by having a loan component as part of a housing subsidy program.  Even when these loans are not heavily subsidized through lower than market interest rates, the very poor repayment performance functions as a hidden subsidy.  This has undesirable side effects on the viability of state finances and central funding agencies.  Therefore, alternatives for mobilizing beneficiary contributions are urgently needed.

Prioritised and Demand-driven Programs:  In all slum related schemes, specific projects will have to be identified by municipalities in consultation with slum dwellers and given priority.  This will ensure that only viable projects are taken up and that community participation is forthcoming.  As argued earlier, community participation often optimizes resource use.  Furthermore, it might be important to prioritize various projects on set criteria due to the constraint on resources.

Land Monitoring and Control: Very often, slums develop on public land. The governmental regulatory/enforcement mechanism that governs these lands has to be strengthened. For instance, as a policy, the concerned department (on whose land the slum has come up) should have to take stock of the land afresh and take care of rehabilitation of the slum dwellers on their own because it was the poor enforcement mechanisms of the department that resulted in the slum. This would trigger a debate on the issues such as land management, land-holdings as per requirements, inventory costs and more importantly, exploring the possibilities for allocating some land for rehabilitation of slum dwellers.  Moreover, it might force the department to retrieve parts of the unused land which could then be commercially exploited to finance the slum rehabilitation programs.

The paper recommends further exploration of these issues, re-examination of state and central programs in light of these tentative findings, and consideration of alternative approaches being used in India and in other developing countries.  Governments can increase the number of urban poor substantially helped by these programs at the current level of expenditure—if reforms of these programs are undertaken. 

IV The Way Forward

This paper provides a basis for discussions between the World Bank and the Government of India regarding future World Bank assistance and policy work in this sector, and demonstrates the losses likely to be sustained by the sector in the absence of reforms.  The Bank stands ready to support the GOI’s efforts to improve the lives of the poor and proposes to immediately start the studies above in preparation of the World Bank funded Urban Upgrading and National Sanitation Program. 

In particular, in order to design a more effective strategy and delivery mechanism for the financing of urban slum improvement and sanitation provision in underserved areas, the proposed steps below should be followed:

1.   Undertake a series of studies and preparatory activities for slum improvement strategies.  To do this, a methodology similar to the one described in this paper should be agreed upon in consultation with the MoUDPA and the state government to evaluate the various slum upgrading programs.  Furthermore, concrete monitorable steps should also be agreed upon to improve the performance of these projects. 

2.   Develop appropriate monitoring mechanisms that allow concerned parties to evaluate, modify and/or redesign these programs to improve efficiency, transparency, targeting and administrative simplicity. 

3.   Develop funding schemes for slum improvement and sanitation that provide incentives to use resources more effectively as well as to expand the reach and coverage of these programs. 

4.   Strengthen the national resource Cell at the MoUDPA so that it can assume its role as repository of information for policy making.  This cell should be supported by a research cells at the national and state levels.

5.   Implement GIS based urban planning systems for slum identification and management as well as develop a database of slum dwellers, squatting areas, land policy regulating the area, and ownership status in order to prioritize projects.  A mechanism for developing and updating this database will have to be worked out with state and local government bodies.

6.   Explore mechanisms for involving public or private sector financial institutions to enlarge the resource base for taking up various slum development programs. 

Appendix 1

The National Slum Development Program (NSDP) was launched in 1996.  Annually, the program provides about Rs. 400 crores (Rs $ 4 billion) in assistance.  The objective of the program is slum upgrading through the provision of physical amenities, community infrastructure, health care and social amenities.  Up to 10% of the funds can be used for housing construction/upgradation.  The Planning Commission allocates funds annually, in proportion to the share of the national slum population in each State or Union Territories (UT).  Then the Ministry of Finance releases the funds to the States or the UT.  MOUD&PA is the Nodal Ministry responsible for monitoring and for the implementation guidelines.  Neighborhood Committees and Community Development Societies should implement the NSDP at the local level.[8]  Slum Development Committees, including elected representatives from ULBs, NGOs and community-based organizations, should oversee them.  The program has both loan and subsidy components.  For the larger States, loans constitute 70% and subsidies 30% of total allocated funds.  For the smaller States, the loan component is only 10% and the subsidy 90%.  All construction is undertaken by contractors.

Valmiki Ambedkar Awas Yojana (VAMBAY), initiated in 2001, was designed to address housing deficits for the urban poor.  It provides about Rs. 300 crores (Rs 3 billion) of annual assistance to designated state agencies who then determine beneficiaries and monitor the implementation.  The state government must provide the beneficiaries with a title and/or land as a pre-condition for the loan or subsidy.  Its goal is to achieve ‘Cities without Slums’ by providing or upgrading shelter for people living below the poverty line in urban slums including members of Economically Weaker Sections (EWS) who do not possess adequate shelter.  The scheme also addresses the lack of rudimentary toilet facilities with a National City Sanitation Project, “Nirmal Bharat Abhiyan”.  GOI mandates State governments to use twenty percent of the total allocation under VAMBAY for the National Sanitation Project.  The rest of the scheme funding provides matching subsidies and HUDCO loans to title holding beneficiaries to build or upgrade a house.  Funds from VAMBAY can only be used in notified slums[9].  In addition, GOI does not release the funds to the state government until they receive the States’ 50% matching fund.  Very often, the state government provides land on which to build the house. All construction is undertaken by contractors.

Indira Awaas Yojana (IAY) was initiated in 1986 as a part of the Rural Landless Employment Guarantee Program after which it became part of the Jawahar Rozgar Yojana in 1989.  In 1996, it took effect as an independent scheme to provide grants for housing construction to rural residents who are below the poverty line.  A minimum of sixty percent of funds are reserved for Scheduled Caste/Tribe (SC/ST) households.  The beneficiaries are selected by the Village Panchayats based on the list of those households in the target area who are below the poverty line.  Rs. 20000 is provided to selected beneficiaries to build a new home or Rs. 10000 is provided for upgrading existing houses.  Selection of construction technology, design of houses, and purchase of construction material is left to the beneficiaries.   The dwelling units are required to be in the name of the female member of beneficiary household.  The beneficiaries are strongly encouraged to build sanitation facilities as part of the dwelling unit.  Cooking facilities (chimneys) that are fuel-efficient and smoke-free are also required in the dwelling facilities.  For the purpose of guidance and monitoring of construction, voluntary agencies with a good track record are encouraged to be active in the implementation of the IAY.   The Center allocates funds to the states on the basis of the proportion of rural poor in the state to the total rural poor in the country.   Within the states, the same formula is used to distribute funds between districts.  Eighty percent of the total funds come from the central government and twenty percent from the states. 

Urban Ashraya Housing Program is part of a Government of Karnataka scheme that provides housing to those who are homeless.  The scheme aims to provide 300,000 urban units and 800,000 rural units to households living below the poverty line.  The state grants 15-year loans of Rs. 40,000 to beneficiaries in larger cities and Rs. 25,000 for those in smaller cities.  In addition, beneficiaries must make a minimum contribution of Rs. 5,000.  Since the inception of this scheme, 80,879 houses have been built in urban areas under the supervision of the Rajiv Gandhi Rural Housing Corporation Limited (RGRHCL).  The program does not specify the design or construction of the house and beneficiaries are given the option of building the houses themselves. The Government of Karnataka selects beneficiaries based on a 1995 survey of “siteless/houseless persons” and “those who has their own site but were houseless” which is periodically updated by the municipality.[10]  Here again, the state government provides land on which to build the house.  

Mythri Housing Scheme was the primary Government of Kerala housing scheme from 1996 to 2002.  In this period, the Kerala State Housing Board implemented the scheme and financed over 270,000 homes under this scheme.  Beneficiaries who qualified for the program could get Rs 9000/- in capital subsidies (cash grants) and Rs 19000/- in loans at 5.5% interest rates.  The beneficiaries had to own 1.6 cents  (approximately 64 square meters) and had to make a minimum contribution of Rs 2500/- to use the program.  The program does not specify the design or construction of the house.  The Government of Kerala selected the beneficiaries based on whether they fit four of the nine criteria that identifies Below Poverty Line households.  Kudumbhashree[11], a poverty eradication program implemented by the Kerala government, undertook the targeting for this program.

Bhavanashree Housing Program, a new program that is designed to be subsidy free, comes under the highly successful Kudumbhashree program undertaken by the Kerala state government.  Under this program, ten to fifteen years loans ranging between Rs 30000/- and Rs 40000/- are allocated to needy households.  For this purpose, the Community Development Societies have negotiated bulk loans from financial institutions.  The program gives the beneficiaries a choice in the duration and the amount of the loan.  The interest rates range between 7% and 7.5%.  The Kerala Government calls the program a subsidy free program because of the absence of explicit subsidies and subsidy-free interest rates (the negotiated interest rates with Housing Financial Institutions are 7% or less).  The beneficiaries are those identified to be below the poverty line and who are members of the CDS.  Like the Mythri program, the beneficiaries have to own 1.6 cents  (approximately 64 square meters) of land to qualify for the program. 

Pune Municipality Sanitation Project:  Over the last fifty years, the Government of India has funded various sanitation initiatives around the country.  Most of these were haphazard efforts at constructing public use toilets that over time became dysfunctional due to poor mechanisms that oversaw maintenance and design.  Nevertheless, more recently, there have been some signs of success.  In Pune, a major sanitation initiative resulted in the construction of 475 sanitation units, with each unit ranging between 10 to 60 seats.  In total 10,000 toilet seats were provided.  For a city with a slum population of 600,000, this is a major initiative.  What makes this initiative worth closer study is the fact that while the capital costs of Rs 40 crores (Rs 400 million) were covered by the Pune Municipal Corporation, community based organizations (CBOs) have agreed to be responsible for the maintenance.  This addresses one of the main causes of the failures of earlier programs.  Furthermore, under this program, a slum family is required to contribute a nominal monthly amount for the use of the facilities.  This contributes to making this program more efficient and sustainable. 

Nirmal Bharat Abhiyan: A new National City Sanitation Project under the title of “Nirmal Bharat Abhiyan” is an integral sub component of VAMBAY.  Twenty percent of the total allocation under VAMBAY is dedicated to the construction of community sanitation facilities.  Of this 20%, fifty percent will be in the form of a subsidy and fifty percent as an HUDCO loan.  The State Governments/Local Bodies will be free to supplement this amount with their own grant or subsidy as the case may be.[12] Each toilet block will be maintained by a group from among the slum dwellers who will make a monthly contribution of about Rs.20 or so per family and obtain a monthly pass or family card.[13]

Appendix 2: Criteria for Evaluating Subsidy Programs 

Targeting: Targeting is traditionally measured in three ways:  

(1)  how much of a transfer actually goes to beneficiaries, in this case poor urban slum dwellers, as opposed to those for whom the subsidies were not intended?  In other words, how much of the expenditure can be viewed as “leakage” from its intended target.  The higher the leakage of resources to, for instance, higher income families, the lower is the effectiveness of targeting on this scale;

(2)   how much of the intended audience, in this case all poor urban slum dwellers, receives a transfer?  That is, how much “coverage” of the intended audience is allowable with the resources available; and

(3)   how much of the resources given to the intended beneficiaries actually goes to housing improvements?  When a subsidy is for a specific and expensive good, such as housing, the subsidy per beneficiary must be sufficient to achieve a reasonable improvement in their housing conditions or at least enough to leverage other resources, which together bring about a significant change in housing consumption.

Moreover, there are many levels at which targeting can be examined.  At the national level, how are the funds disbursed to the various states?  At the state level, what criteria are used for disbursing funds to the local governments?  And finally, at the local government level, how are the beneficiaries identified and how much of their needs are addressed by the programs?  Hence, the paper measures how each program fares on the three levels: national, state and local.  Then it gets an average score for targeting based on the scores for each level of targeting.  Though there is a degree of subjectivity in the scores given to the programs, the paper argues that such an ordinal rating of programs is possible based on program design and implementation and that such a rating sheds light on program strengths and deficiencies. 

Efficiency: All subsidy programs should be evaluated on how well they improve the welfare of the beneficiaries.  For instance, there are four possible outcomes from a housing subsidy program: they could increase or decrease the quantity of housing consumed by the beneficiary; and they could increase or decrease the cost of housing services as experienced by the beneficiary.[14] 

When economists talk about efficiency of subsidies, they have in mind two kinds of efficiencies.  Consumption efficiency measures whether the valuation the beneficiary places on the subsidy is equal to the cost of providing the subsidy.  Production efficiency measures how the market value of the subsidy compares to the cost of providing the efficiency.  Taking both these efficiencies in aggregate gives us the program efficiency.  Needless to say, to even get a summary measure of these inefficiencies one needs data on the real cost of the subsidy as well as the market price of the subsidy and the valuation that the beneficiary places on the subsidy.  It is therefore, very hard to pin down the program efficiency in developing country subsidy programs.  However, it is relatively straightforward to make some preliminary judgments about the efficiency of these programs.

The paper does this by looking at the per unit subsidy: the percentage of the total cost of housing that is provided by the subsidy.  This approach is a useful first approximation because what is known as the deadweight loss of a subsidy is directly linked to the size of the per unit subsidy.  The deadweight loss represents the loss in resources involved with the distribution of a subsidy or imposition of a tax.  In general, it is equal to half the subsidy rate times the responsiveness of the market participants.  The paper assumes that the price elasticity of demand for housing services is equal to one, as found in the literature.     Furthermore, it can be assumed that the greater the participation of the beneficiaries in the design and the implementation of the subsidy program, the higher the probability that the beneficiary values the subsidy closer to its real cost and lower the efficiency loss.  Hence, for this measure the paper has an imperfect but directly quantifiable measure by which these programs can be compared. 

Transparency:  Transparency in this case refers to the visibility of all costs of the subsidy in the budget.  Transparency is only possible if the actual costs of subsidies are known.  Therefore, in order to measure transparency, the real cost of a subsidy must be first determined and how these costs are listed in the government’s budget must be examined.  The higher the share of the subsidy budgeted, the more transparent it is.  Improving the transparency of these programs would have significant benefits, among them better understanding of the full economic cost of providing housing assistance, better targeting in practice and eventually less corruption.  Again, there is a direct quantitative measure of this standard: when all subsidy costs are on public budgets, transparency equals 100 percent and when none are, it equals zero.  Of course, the paper often has to estimate how large the unbudgeted costs are so that the measure remains imperfect.  Nevertheless, the use of such a measure allows us to ordinally rate programs and allows for the possibility of discussing the precise sources of these measures.

Administrative Simplicity:  All other things being equal, subsidy design should minimize the government’s administrative cost.  For instance, targeting subsidies carefully can reduce the need for a complicated administrative rationing system.  Similarly, incentives that align participants’ and private sector partners’ behavior with policy objectives can reduce the need for monitoring and enforcement costs.  For instance, when subsidies are not as deep, there are fewer payoffs for those wishing to make improper use of the program.  When programs reach a larger share of the intended beneficiaries, there is less competition for the subsidies; and since competition often excludes those most in need, this would be a positive outcome.  When beneficiaries are involved in the project design and execution, they can often take a role in supervision and management of resources, as well as proper maintenance once the project is completed.  Here this measure is based on project design.  If the programs minimizes the opportunity for interpretation and hence, manipulation by various interested parties then it gets a lower rating than if it is clear and succinct and provides little incentive for manipulation and encourages beneficiary participation.  Once again, the programs are scored based on an interpretation of the strengths and weaknesses of the program but when exact measures are impossible, such ordinal ratings are a good starting point in program comparison and evaluation.

Sustainability: Any definition of sustainability runs the risk of being taking out of context.  Thus in defining sustainability, it must be clear what the objective of the definition is, and conclude what it means in a particular context.  In this particular context, sustainability refers to whether the government can scale up the housing subsidy program (and continued) to effectively address all the intended beneficiaries.  In addition, more often than not, sustainability will mean financial sustainability.  There might be programs that make a real difference in the housing consumption patterns of the beneficiaries.  However, if these programs provide per unit subsidies far in excess of the financial wherewithal of the state, then such programs would rank low on this sustainability index. 

Appendix 3: Rating of Housing and Sanitation Programs 

Targeting

Targeting refers to the extent to which the programs reach the intended beneficiary as well as to scope and scale of such benefits.  Here the paper examines the success of each program at three levels: national, state and local targeting.

National Targeting: For national targeting, the paper rated national programs (VAMBAY, NSDP and IAY) on their ability to target the right state according to need.