Meta-finance: Part 1, the challenge of group-benefit lending
How do you finance a public toilet?
If you’re French, you invent the pissoir
That’s a fairly simple problem in municipalities where every home has its own indoor plumbing, because the need for public toilets is minimal. Then too, if you have lots of public accommodations – offices, restaurants, stores – you can require these businesses to have some level of toilet facilities.
Lavatory, Indian restaurant,
Such approaches work fine in affluent, developed municipalities, but how do you tackle public sanitation in informal settlements, spontaneous communities (or slums) where people’s habitation has far outrun municipal infrastructure?
There ought to be a viable business proposition, because you have a community of many people, all of whom will benefit if there’s a working toilet block or complex that residents can access.
The counter at a Dharavi communal toilet
Such a toilet block can also become a paying proposition, with walk-in customers charged a higher rate than subscribers, who pay a lower monthly fee.
What one rupee buys you: a clean squat, a clean flush, and clean toilet paper
So we can imagine a viable neighborhood-level utility, in the form of a community-subscriber public toilet. Yet the community toilet will not exist unless somebody pays for its construction and operation. How do we finance it? We can finance loans to individuals, even if they have only informal income, because we can establish a payment history and can rely on the individual’s motivation. So if we add together the paying power of a whole neighborhood of residents, each of whom could pay his or her share of the cost, shouldn’t we be able to finance the group improvement?
Moving from the individual to the group introduces new risks. As I put it in a paper, Meta-finance, prepared for DIG as part of DIG’s Housing Finance for the Poor Initiative with the Gates Foundation, and now posted on AHI’s Web site (link in .pdf):
In microfinance and housing microfinance, where the loan goes to individual benefit, so the basic equation is one where the marginal benefit to the consumer roughly equals the annual capital cost of the improvement. In meta-finance, with group benefit, annual capital cost usually exceeds marginal benefit to the consumer (at least as measured by effective demand).
Anyone who’s ever shared a taxi and tried to split the costs realizes these dynamics of the marginal consumer.
Who’s paying the marginal cost of all this luggage?
The person who first flags down the cab is willing to pay 100% of the journey’s cost. Adding another person going to the same destination doesn’t cost the cab-hailer a cent. In economic-speak:
Once non-recoverable capital costs are introduced and funded, then each additional user (beyond the additional underwriting) can be added to the system to a decreasing marginal cost.
Anyone who’s ever shared a taxi and tried to split the costs realizes these dynamics of the marginal consumer. The person who first flags down the cab is willing to pay 100% of the journey’s cost. Adding another person going to the same destination doesn’t cost the cab-hailer a cent. In economic-speak:
That economic reality creates the basic paradox of infrastructure: an improvement that benefits many is paid for by a few – a subset. Those who do not join the initial subscription can benefit nevertheless once the improvement is built.
In the cab situation, there are only two of us, and usually we split the cab’s cost. But when the cab is a bus, and there are already 67 of us on it, a 68th person may jump in just before the doors are closing, and get a free ride. Further, a whole bunch of people may think the same way, lingering by the doors and jumping in when they’re about to close.
This leads to a set of risks absent from those in individual-benefit lending:
Free riders. Those who did nothing to create or support the infrastructure gain its benefits without paying (e.g. unmetered water from a communal standpipe).
When you’re a kid, you can bum a lot of free rides!
Resource capture and rent-seeking. Someone in the community seizes operating control over the infrastructure and charges neighborhood residents a premium (relative to the original underwriting projections) that extracts all the affordability for personal (private) benefit.
Toddler in the swimming pool. The community benefit is not maintained because no one regards it as his or her or their personal responsibility to maintain it (e.g. failure to maintain cleanliness in a communal latrine).
Anybody watching me?
Tragedy of the commons. The communal good is overused and laid to waste (e.g. latrine whose capacity is exceeded).
Though they’re given economists’ names, these risks are not esoteric; they come up over and over again in any group-use situation.
For meta-finance to be said to exist, these risks must be handled in the transaction structure without reducing it to a series of individual microfinance loans.
Last July, at the Bellagio Urban Summit convened by the Rockefeller Foundation, our Week 1 group (Housing, Water, and Sanitation) tackled this problem – or at least, banged our heads against it. Led by Franck Daphnis of Development Innovations Group and Melanie Walker of Gates Foundation, we agreed on a group definition of meta-finance:
Metafinance pools individual cash flows to secure previously inaccessible high value loans that provide community rather than individual benefit. Metafinance loans are larger and of longer tenor than traditional microfinance group loans. Items of communal benefit such as potable water pipes, wells, latrines, street paving, drainage ditches, and electrical connections would be ideal candidates for metafinance.
(The definition is from a forthcoming paper on the topic, to be authored by Daphnis and Walker.)
The idea was interesting enough that DIG commissioned AHI to spend a week in
A backpack, a laptop, a universal plug, and a mug of tea: I’m ready!
As described in my DIG report:
How then does meta-finance work – when it works?
The ‘pure form’ of meta-finance is lending not to an entity (even a group-controlled one) but rather lending to a disparate group for group benefit.
Nearly all real lending is between two parties, a borrower and a lender, where each of them is a single entity. The lender may be a bank, a credit union, a specialist originator, or an investor, but it’s an entity, with basically one goal: to get repaid and earn yield from the repayments. The borrower is likewise an entity: a person, a family, a company. When people want to do something together, they form a new entity – a corporation, a partnership, a co-op, a trust – and that entity becomes the borrower. The significance is in the binding. Creating an entity means I and my assets are at risk from your performance. As a certain group of gentlemen put it, on a momentous occasion:
And for the support of this declaration,
with a firm reliance on the protection of Divine Providence,
we mutually pledge to each other
our lives, our fortunes and our sacred honor.
With this in mind, last October I went off to
Like Eophippus, we all evolve upward from something
Here’s what I found:
In
The Indians I met were finding that, to finance group-benefit improvements, they had first to form the group into a recognizable entity, and establish its membership history and savings record.
The chair of the Jadibanagar savings cooperative, and her husband
So the idea of meta-finance was forcing a self-organization: the money imperatives were changing the interpersonal relationships, and driving them toward formalization.
That’s not all it takes to finance group-benefit infrastructure, for there are other economic and financial challenges ahead:
The course of true finance ne’er runs smooth
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