High Sierra Level
Analysis of Governance Issues in the Housing Market in Sierra Leone
MACRO-ECONOMIC AND POLITICAL ENVIRONMENT
The sluggish financial and economic progress of 2008, under the Koroma administration, nevertheless holds the possibility of strong and broad-based economic growth as the economy struggles to rebuild from the war years, together with moderate inflation levels. Over the medium term, any improvement in key sectors will offer hope that the economy will bottom out of aid dependency, given credible internal reform, strong policy-making and institutional investment. The country's macroeconomic and financial policies devised and put to work within the context of the Poverty Reduction Growth Facility (PRGF) arrangement show the potential to accelerate trends that are promoting broad-based economic recovery.
The current democratic dispensation has created an enabling opportunity for the administration of Koroma to make a significant step in advancing economic and social development. Even better is the concept of "public value" and the "strategic triangle" approach adopted by the British international agency, Public Administration International, to have each Ministry and Department of the new administration in Sierra Leone to address and align questions of strategic goals and priorities in terms of public value outcomes to be achieved (Public Administration International). But the pervading deficiencies in the public administration are not a positive indication of good governance.
An aggressive effort, however, to involve the Diaspora resource in national development is gaining significance with the administration—a strategy likely to be more helpful. The current Diaspora engagement has opportunities to it for the economy and businesses. In addition, the PRGF recovery tool used by the Government of Sierra Leone—monetary and fiscal stimuli—will be relatively effective under the circumstances. This strategy of engaging the Diaspora has put the Koroma administration model of a free-market economy in the public interest.
With this new development in Sierra Leone's political environment, the financial system is seen to be promising; and the regulatory framework, as having the potential to be fixed to curb widespread corruption. Now, searching for growth, the Koroma administration is opening up to ideas from the Diaspora to a degree that differentiates it from previous administrations. The government is turning a historic corner and heading into a period in which the role of the Diaspora will be formidable. The Office of Diaspora Affairs which has literally been recognized as an official agency of the government and is working "towards linking Sierra Leoneans from the Diaspora to different business opportunities, agencies, ministries, and departments in Sierra Leone" (Office of Diaspora Affairs) can be made to work better. The Office of Diaspora Affairs' Diaspora Trust Fund, for instance, as a development vehicle for Diasporans to make an impact can be sufficiently used with specific terms of reference to mobilize Sierra Leoneans in the Diaspora to pool their remittances to buy into state-owned enterprises (SOEs) in Sierra Leone that are slated for privatization.
As it is the case, President Koroma has been quite open-minded, as well as the appeal of his style of democracy, appears to be restorative. Although Sierra Leone is fortunate that her governance problems have now being assumed with the promise inherent in the election of this insurance broker as president, historical forces—and the endemic nature of corruption in society—will pose a serious threat to his presidency regardless.
Indeed, the macroeconomic outlook is promising. The country shows the promise to benefit economically from the PRGF arrangement but only with unwavering commitment by the APC administration. The real estate sector is a growth market in Sierra Leone if given the attention it deserves. The export markets have the potential to grow as well and the overall growth rate of the tourism market and the service industry can also do very well with good governance. But the country is still rather stressed by unwilling cabinet ministers and public servants.
The balance of payments with higher merchandize imports is seemingly showing an increase accounted for mainly by an increase in imports of machinery and transport equipment, chemicals and manufactured goods; and mineral fuel and lubricants constituting the largest share of total imports look encouraging. Exports growth shows potential with diamond and gold exports forming by far the largest share of total exports. This relatively promising balance of payments position gives the country the opportunity to solidify its strategic advantages as the government struggles to rebuild. At the same time, this PRGF arrangement and the growing balance of payments may lead to a stable economy. Corruption minefields may be diminished, which may quicken the growth of the economy. And it is likely that, with Koroma less distracted by a corrupt cabinet, his administration will see more clearly than its predecessor that strengthening the economy by addressing corruption head on should become his government's most important good governance strategy. The administration should now truly show commitment to lead efforts to improve Sierra Leone's Human Development Index rating and expand the benefits of sound economic management to be felt at the household level in the form of improved income and job prospects as well as improved basic services that support the growth and productivity of the informal sector on which 80% of the active working population survive.
UNDERUTILIZED HOUSING MARKET SECTOR
Sierra Leoneans are squeezed by a confluence of pressures, especially those with low incomes and uncertain formal access to secure land. There are images of famished existence seen in many places. Kroo Bay, for instance,is one of Sierra Leone's largest informal settlements, with an estimated population of about 10,000 inhabitants. It is also the most impoverished and neglected area, with no supply of drinkable water, no electricity and lacking all public services. Kroo Bay is part of the urban core, located on the coastline in central Freetown. Informal settlements are also present in the Bormeh, Government Wharf and Susan's Bay easements and on both private and public lands. The characteristics of these settlements share common features that are more evident in some areas than others. They are located on marginal land (including under bridges and flyovers) with poor drainage and extremely poor housing conditions with few foundations, makeshift roofs and impermanent building materials.
The government has a lot of work to do to make the housing sector in Sierra Leone viable. The country's housing market crisis portends a combination of a much disorganized land tenure system and poorly developed mortgage market. The disorganized land tenure system reflects the Ministry of Land's overly corrupt handling of land estates. The poorly developed mortgage market reflects, among other factors, a weakness in housing and nonresidential construction in Sierra Leone. Policy makers apparently lack appreciation for a stable mortgage market and has not created the enabling environment to encourage banks to reform bank business models and practices to accommodate the intricacies of commercial and mortgage banking. But it is obvious that access to land and housing for most Sierra Leoneans is still tantamount to the ultimate form of social security. It is for this reason that most urban and rural Sierra Leoneans would sell their houses only under the direst of circumstances, and they are generally comfortable with customary ownership of land. In reality, widely shared social values affect attitudes towards the marketability of land and housing.
Escalating prices on land with legitimate titles on the one hand, and multiple disputed sales of land with phony titles on the other, are especially inconvenient risks, especially in urban areas. A general lack of security, whether social, legal, or economic, is inimical to financing housing, and land problems in Sierra Leone represent the highest risk to the development of a vibrant housing system. Land banking by developing an integrated management information system with detailed property information for property development is essentially one critical response to the current inefficient land management system. Fundamentally, this requires also a sophisticated construction management and loan product development program in place.
Sierra Leone does not have a source of home loan money. Even though the Sierra Leone Housing Corporation (SALHOC) as a parastatal (semi official) body that "follows government housing policies is designed to create partnerships with the private sector, NGOs and the public sector to make housing services accessible to all sectors of society, particularly the poor" (Report on Country of Return Information), it does not have a matured mortgage operation that provides borrowers with major mortgage loans.
Facing the underutilized housing market in Sierra Leone, the government can act responsibly by promoting the growth of home ownership and facilitating the provision of a secondary mortgage market. This is how Fannie Mae succeeded to help millions of Americans achieve the dream of home ownership. A secondary mortgage market exists in the buying and selling of a mortgage from one lender to another. A bank or mortgage company that provides a loan turns around and sells that mortgage to the government parastatal that has to be properly set up to handle such purchases. This frees up their cash to make another mortgage loan. And the cycle of growth is expanded and sustained in this manner. The idea and concept worked for Fannie Mae, SALHOC can therefore adapt some features of the Fannie Mae concept to set up its mortgage operation in Sierra Leone as a privately held, stock ownership company that will promote the growth of the housing industry by making it possible for many low-to-middle income Sierra Leoneans to own homes. Investors, especially Sierra Leoneans at home and in the Diaspora can purchase stock in the Sierra Leone Housing Corporation, and this will not only increase their own wealth, but will also help to fund the home ownership possibilities for a new generation of Sierra Leoneans. Through the issuance of mortgage backed securities, for instance, the reformed Sierra Leone Housing Corporation can guarantee investors a return on their investment, and at the same time, providing a source of funding for issuing further mortgages. This provides the nation's lenders with a steady stream of cash to continue to make mortgages available to the consumer thus supporting a steady and continual cycle of growth.
With a sustained flood of mortgage money, there will be a growth in residential and commercial real estate. Most Sierra Leoneans are squeezed by a variety of pressures, especially low income individuals and those with uncertain access to secure land. Urbanization has been a contributing factor to poor housing with more than 60% of communities in metropolitan Freetown, for instance, living in informal housing. There is sufficient evidence, however, to suggest that communities are able to become sufficiently organized to drive settlement upgrading in partnership with government and the private sector.
ROUGH-AND-TUMBLE OF SIERRA LEONE'S ECONOMIC POLITICS
It is increasingly evident that the government has to work to stave off a sustained slump in Sierra Leone's economy. The healing wounds of war are still being used by politicians to justify Sierra Leone's rating in the Index of Economic Freedom which remains significantly below the world average in seven areas. The judicial system is riddled with corruption (as is virtually all of the civil service). The labor market is highly inflexible and Sierra Leone is one of the world's least free. Liberalization of the trade regime is progressing, but import taxes and fees, non-transparent regulations, inefficient customs implementation, inadequate infrastructure, and corruption add to the cost of trade. Sierra Leone has relatively high tax rates. The budget deficit has been somewhat reduced, but better spending management is needed as reiterated by the president himself that "it is no secret that due to … poor management of national resources, Sierra Leone has lagged behind in the areas of social and economic development" (Sierra Leone Web).
Inflation is high, averaging 10.6 percent between 2004 and 2006. Unstable prices explain most of the monetary freedom score. Corruption is perceived as pervasive. Sierra Leone ranks 142nd out of 163 countries in Transparency International's Corruption Perceptions Index for 2006. International companies cite corruption in all branches of government as an obstacle to investment. Official corruption is exacerbated by low civil service salaries and a lack of accountability. Inflexible employment regulations hinder overall productivity growth and employment opportunities. Sierra Leone's labor freedom is among the world's 20 lowest. (Source: 2008 Index of Economic Freedom).
The Koroma administration has a responsibility to clear up the clouds of economic gloom and despair which have gathered over Sierra Leone's economy for decades. The administration has to propel the engines that could pull the nation out of her chronic gloom. Even though some fear the worst: that "the real GDP growth for Sierra Leone is forecast to slow from an estimated 6% in 2008 to 4.8% in 2009, as post-war recovery tails off and the global financial crisis reduces demand for Sierra Leone's exports" (Economist Intelligence Unit) as reported by the Economist Intelligence Unit, a division of London's Economist Group; all is not lost.
The pessimism may be overdone. Sierra Leone is still one of the most resourceful parts of the world in terms of natural abundance. Even though the country faces such daunting economic difficulties that do not seem to go away, Koroma only has to prove the pessimists who see the regime change as all mouth and no trousers—that much of it made up by old budget commitments, double-counting and empty promises—wrong. He has to prove that it was not mainly propaganda; and to convince Sierra Leone's own people and the outside world that his government is serious about stimulating development and is ready to take radical steps to spend infrastructure money and providing a decent social safety net for Sierra Leoneans, especially in housing, education and health care.
FINANCIAL SECTOR AND THE HOUSING MARKET
Sierra Leone's financial sector holds promise for reaching broader and deeper into the housing market. The vast majority of Sierra Leoneans evidently do not have access to asset-backed finance or mortgage finance, but low and moderate income households are beginning to participate broadly in the maturation of the microfinance industry. The (PRSF), initiated in 2002, is one indication of the commitment of the government, the Bank of Sierra Leone, and the donor community to support financial sector development. The PRGF project was undertaken primarily to support concessional lending practices and debt relief under the joint Heavily Indebted Poor Countries (HIPC) Initiative. The targets and policy conditions in a PRGF-supported program are drawn from the country's PRSP. "Key policy measures and structural reforms aimed at poverty reduction and growth are identified and prioritized during the PRSP process" (IMF).
There is apparent need for improved housing conditions in Sierra Leone, especially for lower income Sierra Leoneans. There are potentials for the sector if the government could commission the Sierra Leone Housing Corporation and interested investors with substantial microfinance experience to assess trends in public and private sector delivery of affordable housing in the country and to make strategic recommendations for tangible, replicable and sustainable interventions that would enhance the amelioration of housing conditions for the majority of Sierra Leoneans. A technical assessment to broadly examine the trends, risks and opportunities to meet the critical challenge of affordable housing in Sierra Leone is critical at this point in time. The specific objectives for such an assessment is to:
* analyze the strategies, experience and roles (public and private) for the delivery of affordable housing in Sierra Leone;
* determine the main reasons for any constraints in the delivery of affordable housing solutions (including costs, appropriate construction approaches and materials, finance and land);
* understand the extent and the characteristics of the potential market for affordable housing in Sierra Leone; and
* recommend tangible strategies to the Government of Sierra Leone and other potential key players to meet current demand for affordable housing, focusing on the appropriate housing typologies, financing, and the legal and regulatory framework.
The government should be open-minded in terms of understanding of the optimal factors that comprise an "enabling environment" in which a vibrant and equitable housing sector may develop. A stable macro-economic and political environment in which low and moderate income people are able to create effective demand for housing finance and other inputs into the housing improvement process is a necessary condition for such an enabling environment. The right policies to ensure efficient and equitable land markets will promote a sense of security for all sectors of society and therefore spur household investment. Such supportive legal and regulatory frameworks will also promote broad community and private sector participation in housing development and upgrading processes.
The way out of the current economic woes of Sierra Leone is to have a macroeconomic policy designed to accelerate the process of growth and transformation of the economy under competitive conditions. A stable political environment has already been created with the successful democratic dispensation of 2007. In spite of some economic risks due to increases in oil prices, Sierra Leone possesses the potential for a stable macro-economic and socio-political environment under which an affordable housing sector could take off. The government only has to embark on a comprehensive macroeconomic stability strategy. The main thrust is to create wealth and reduce poverty as defined in the government's PRSP, which was introduced to ensure the country benefited from debt cancellation. The PRSP supposed to be a demonstration of the government's long-term commitment to reduce poverty and enhance economic and social growth in both rural and urban communities. Therefore, a developer-driven and household-led incremental housing or community-led settlement upgrading should be aligned with this strategy which seeks to protect the vulnerable segments of society. Improving public expenditure managementandfiscal resources mobilization; and pursuing price and exchange rate stability are measures needing to be put in place by the government. The administration has to keep trends in the key economic parameters stable in order to grow the economy and to keep fiscal position in line with budget projections and revenue generation by the responsible agencies.
The bottom line is that the economy has to create jobs in order for people to afford a range of housing opportunities. Positively, Sierra Leone's major exports of bauxite, diamond and gold enjoyed favorable prices in 2007 and 2008 which, together with inflows from both foreign donors and private remittances, have helped to improve the country's import cover and reduced exchange rate volatility. The impact of remittances is equally phenomenal. Official private remittances are growing according to an International Monetary Fund (IMF) report on remittances (IMF). Even though, therefore, Sierra Leone's financial system has been a shadow of itself for many decades and the depreciation of the Leone has been dramatic, the potentials for growth exist. There are possibilities of investment opportunities with predictable inflation, exchange and interest rates to impact the housing market in Sierra Leone.
Reducing inflation to single digits thus has to be one of the corner stones of the present government. For this to happen, Koroma and his government must seriously commit to creating a dynamic private sector to fuel economic growth and improve people's living standards. This commitment should be expressed in terms of closer collaboration and partnership with the private sector and the privatization of many state-owned enterprises (including the Sierra Leone Housing Corporation (SALHOC), the Sierra Leone Airport Authority, the Sierra Leone Telecommunications Company (SLTC), the Sierra Leone State Lottery Company, the Guma Valley Water Company Limited, the National Power Authority, the Sierra Leone Ports Authority, Sierra Leone Postal Services, the Sierra Leone Commercial Bank (SLCB), the National Insurance Company (NIC), the Rokel Commercial Bank (RCB), and the Sierra Leone Road Transport Corporation (SLRTC). In line with this vision, the mandate of the Sierra Leone Investment and Export Promotion Agency (SLIEPA), which now replaces SLEDIC, in addition to providing a range of services that aim at assisting exporters to source market and penetrate overseas markets, should be expanded to facilitate the development and growth of a competitive and vibrant private sector and also to help reduce the cost of doing business in Sierra Leone.
The land ownership system in Sierra Leone which is governed by a complex operation of customary, statutory, and common law also needs to be given considerable attention. Corruption and landdisputes, especially involving public lands in urbanizing areas, have been experiencedby significant majorities. The lack of uniformity, complex codes,administrative requirements, and the dualism in land tenure is a risk to an effective housing finance market due to the uncertainties and litigation potential. What could be an interesting response to the current inefficient land management system is to manage a comprehensive land banking system for an efficiently coordinated property development program. It is not clear at this time what the relationship is or will be between the government's inventory-taking exercise and the current land banking efforts. Asignificant development within such a program is the National Social Security and Insurance Trust (NASSIT) and its underlying interests in the country's housing sector.
The National Social Security and Insurance Trust (NASSIT) is a quasi-public entity involved in the government's inventory-taking exercise and the current land banking efforts. "It is a Statutory Public Trust set up by the National Social Security and Insurance Trust Act No. 5 of 2001 to administer Sierra Leone's National Pension Scheme. The trust was established to provide retirement and other benefits to meet the contingency needs of workers and their dependants" (NASSIT). It is the sole legally authorized institution that manages a pension scheme for workers in Sierra Leone, in accordance with Act No. 5 of 2001, which requires Sierra Leonean employees of companies operating in Sierra Leone to be members of the scheme. In addition, to collection of contributions (30% of the insured's average earnings for the first 15 years of coverage, plus 2% of the insured's average earnings for each additional 12-month period) and administration of benefits. It also manages the assets of the scheme. These assets include real property of various forms, including the development of a housing stock of formal rental units in the country in a joint venture with the American firm ‘Regimanuel Gray Constructors' which has a plan of investing over 50 Million US Dollars in the country's housing market in five years.
POLICY RECOMMENDATIONS
One is tempted to deliver a whole host of recommendations for improving affordable housing policy and processes in Sierra Leone. A policy that stimulates more innovative and more intensive use of land in or nearby urban centers or in built-up environments can help the housing market in Sierra Leone. The national housing market should be understood and analyzed according to various market segments to enable more people to benefit from housing investment, whether personal or institutional. A developer-driven housing conventional strategy for the supply of separate and semi-detached housing can be geared toward the formally employed professionals—a segment that could be served rather efficiently by the real estate development industry and the commercial banks, with mortgage finance. The majority of Sierra Leoneans are building, extending and improving their houses as circumstances and household resources warrant. Financing incremental housing may therefore be facilitated through forging a link with commercial banks.
The government should also facilitate informal settlement upgrading for areas like Kroo Bay, Bormeh, Susan's Bay, and Government Wharf by the different groups that reside there with technical support from specialists in this field. Such a decision will release an enormous amount of good will. The ensuing results will be striking. The country needs a well managed settlement upgrading and "de-densification" or resettlement of families program.
Wholesale financing arrangement between mainstream commercial banks and other qualifying private institutions that will ensure sustained funding for the market segment of incremental housing is also strategic. Such an arrangement takes advantage of the proportional benefits of each level in the finance system as well as the strengths of government. Market-related interest rates that will be charged at both the wholesale and retail levels, and accompanied by sound financial and risk management, will permit the possibility of an enabling financial sector integration. The use of market-related interest rates will enable the wholesale operation to gear additional private savings from other private institutions and develop a sound secondary market. Likewise, more low-income households will have the opportunity to establish sound, transferable credit histories and become repeat borrowers.
Also, a privatized Sierra Leone Housing Corporation can be very instrumental in institutionalizing the modern mortgage system in Sierra Leone. The Sierra Leone Housing Corporation can be transformed to a leading home loan supplier in lending to underserved populations in Sierra Leone. If done well, the reengineered Corporation can be a darling of socially responsible investing with lending policies that should not be a barrier to home ownership in Sierra Leone.
The problem, however, of urban households lacking sustainable access to finance and appropriate financial arrangements to improve their housing and shelter-related environments cannot be ignored. Because many households are generally financially challenged, lending institutions must understand that this incipient market is high risk. Taking on greater risk may therefore require wholesale financial institutions to undertake sophisticated risk management practices and investment strategies to protect stock holders and end-user clients.
About the Author
Kenday S. Kamara is a freelance development consultant in administration, policy development and capacity building. He can be reached at kenday.kamara@waldenu.edu.
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