Co-authors: Mary, Mutinda, Consultant, SDI-Kenya (wanza.mutinda@gmail.com); Baraka, Mwau, consultant, SDI-Kenya (barakamwau@gmail.com); Jack, Makau, Director, SDI-Kenya (jackmakau@sdinet.org); Alice, Sverdlik, researcher, IIED (alice.sverdlik@iied.org)

 

What is the ‘poverty penalty’?

Urban residents living in informal settlements in Nairobi pay a much higher price for house rent, water, electricity and other basic goods and services compared to middle and higher income residents of the City. This extra cost to the poor in accessing basic goods and services is termed the “poverty penalty”.

Official statistics on poverty do not take into account the poverty penalty, and this essentially underestimates poverty levels for the urban poor. The poverty penalty increases the risk that adverse cycles of poverty will create the poverty traps and intergenerational transmission of poverty that are increasingly evident in Nairobi’s informal settlements. Policy actions to address urban poverty that ignore the poverty are often inefficient and ineffective.

Looked at differently, the fact that slum residents pay a higher price indicates that they are willing and able to pay the “normal” price for their basic services. This presents a unique opportunity in slum upgrading – there exists an economically sustainable path for basic service providers to extend provision to the urban poor.

 

4 policy pointers

1. Policymakers should take into account the poverty penalty in designing strategies to address the accessibility of basic goods and services for the urban poor.

2. In slum upgrading, governments should consider holistic integrated approaches that address the multiple dimensions of urban deprivation.

3. Licensed providers of basic services should consider formalizing engagements with informal [small scale] service providers, as a strategy for expanding basic services provision in underserved areas, while retaining these service providers’ means of making a livelihood.

4. In the reality of a housing market that is private, dominant and highly lucrative — yet poor quality and low income — the Nairobi City County and national governments can flex their policy and legislative muscles towards improving housing quality. This can rebalance the affordability and minimum acceptable standards of low income rental housing.

 

The Poverty Penalty in Nairobi’s informal settlements

Nairobi’s poorer residents pay nearly 4 times more for water, 2 times more for electricity and nearly 20% more for rent per square meter when compared with formally housed middle and upper income-class residents. The situation is desperate in the case of provision of sanitation, garbage and sewer services; these are virtually inexistent in the city’s poorer neighbourhoods. 

This extra cost to the poor in society is called the “poverty penalty”—or sometimes the “poverty premium”. It can take on different forms. A “quality penalty” is where the poor pay the same price for an inferior good or service. A “price penalty” is where the poor pay more to access the same good or service, sometimes being priced out of the market.

Nairobi’s case is a tangled web of quality and price penalties. Though water is often illegally redirected from the Nairobi City Water and Sewerage Company (NCWSC), the safety of the poorly fitted hose pipes is often compromised. The spaghetti of illegal overhead electricity wiring has frequent outages and poses dangers. The one-roomed housing units often lack proper ventilation and are of poor building material. 

The fact that the poor pay more for accessing basic goods and services had been long documented, from Caplovitz in 1960s USA[1], to extensive research in developing countries[2]. Since the turn of the century there have been several World Bank publications documenting findings in Zambia, Uganda, Pakistan, Kenya, Cambodia and Vietnam, among other developing countries.[3]

Table 1: Estimated price penalty on basic service provision in Mukuru informal settlement in Nairobi, per unit of supply[4]

Implications of the poverty penalty 

The poverty penalty affects people’s well-being and their ability to meet individual and community needs. In the most vulnerable low income groups it can create a poverty trap.

The poverty premium is a mirror term to the poverty penalty. Essentially, by paying a higher price the urban poor demonstrate their ability to pay for cheaper, formally-provided basic services. This is an important lens when framing solutions that realize the socio-economic rights enshrined in Article 43 of the 2010 Constitution of Kenya[5], the universal declarations on human rights, and the Sustainable Development Goals. The gap that really exists is not in rationalizing the business case (ie the ability to provide a service and make a return for it). Rather, it is in resolving operational and social bottlenecks that create barriers of access for the urban poor.

Unravelling the operational and social deficiencies in provision of basic services in Nairobi 

Basic service provision covers the spectrum of water, electricity, sewerage and garbage-disposal. In the case of Nairobi, in both formal and informal neighborhoods garbage services are usually privately contracted, and public utilities play a significant role in providing the other three basic services.

For water, electricity and sewerage services, provision differs significantly across different neighborhoods. In formally-approved neighborhoods, provision is usually by licensed public utility institution. In quasi-formal tenements, there exists some level of property owner organization to source for basic services in bulk and distribute to residents, who are predominantly tenants. In informal settlements, basic services provision is dominated by informal small scale service providers (SSSPs). The emergence of SSSPs was accidental and driven by need—responding to a persistent vacuum in formal service provision. Over time, however, Nairobi’s SSSPs consolidated and they now operate like cartels, with price fixing and domain fencing. 

The SSSPs are unregulated and often illegal. Their very fluid organization makes it difficult for informal settlement residents to identify them or demand better quality services for the prices they are quoted. Quality, availability and accessibility of the basic services the SSSPs provide often falls far below the minimum expectations of basic socioeconomic and human rights. This in turn leads to significant negative public health dimensions and environmental degradation, presenting a real and realized cost to society.

Table 2: Nairobi’s settlement profile and related basic service provision pattern (% [6]; Basic services provider[7])

 

Understanding the barriers to accessing affordable clean water: the case of Mukuru’s small scale water providers

Figure 2:  Water tapping in Riara, Mukuru Kwa Njenga. Source- (AMT 2017)

Safe water provision is becoming increasingly contentious within the Nairobi and indeed globally. Water in the city is often rationed, and with inadequate and old infrastructure water losses are increasing. Nairobi City Water and Sewerage Company (NCWSC) reports 40% nonrevenue water. In informal settlements this goes up to 95%. Water provision offers the highest divergence in price. Provision by small, independent, unregulated service providers was initially driven by need but is now informally institutionalized into cartels, with reports of vandalism of public infrastructure, price setting and domain fencing. In Mukuru, water supply is a balance of the community and power brokers’ relationship. Water is often illegally redirected from NCWSC water chambers. The water business is highly profitable. For the few legally approved suppliers, costs constitute: a KES 7,500 (US $74) registration fee paid to NCWSC, the cost of buying infrastructure (taps, tanks and pipes), and routine water treatment cost. Depending on the type of pipes and tank capacity, this cost could be up to KES 100,000. The initial capital outlay can be recovered within 4 months as the minimum that the vendors collect is KES 30,000 per month. Margins are even higher for informal suppliers, who may not incur some of the charges. These SSSPs employ various strategies to safeguard water supply to the chambers, including alleged bribery of officials, forceful access and control of chambers, as well as threatening destruction of public infrastructure like NCWSC operated water Automated Water Dispensers (ATMs) in order to coerce the NCWSC to give into their demands to let the water flow.

Unlocking the poverty penalty 

Unlocking the poverty penalty means unlocking the barriers to access for the urban poor, by addressing challenges of proximity to and availability of formally-provided basic services.

There have been various efforts to unlock these barriers in Nairobi’s low income neighbourhoods to accessing formally-provided basic services. The main gap, however, has been in the interconnectedness and scale of implementation. Oftentimes, efforts are experimental, disjointed and a drop in the ocean—failing to see the holistic multiplicative and summative impact of the barriers to access to all basic needs.

By flexing its influence on land tenure, land use, property rights and regulations, the Kenyan government can play a catalytic role in enabling the scale and synergies between service providers that are necessary to unlock the poverty penalty. A crucial regulatory enabler would be to stabilize and insulate the market environment from economic and political peaks and troughs, thus incentivizing private investors to provide housing and other basic services in the longer term. This power of influence — on land tenure and use, property rights, and regulations — can also be monetized by structuring innovative financing of public interest projects through claiming a share of the additional economic benefit realized by private developers on the action of public policy. For instance, where land use changes allow additional storeys, the national government could claim a portion of the additional profit to the private developer, and channel this towards public interest housing projects.

Another important government regulatory action is to carefully consider the laws and policies that instrumentalize housing as a basic need, articulated as a socio-economic right enshrined in article 43(1) of the Constitution of Kenya 2010. Currently, weak regulation over Nairobi’s pervasive private rental market has meant that the commoditization of housing has heightened undignified living conditions. Poor households live with open sewers, no sanitation and lack safe drinking water, all while paying profitable, market-level rents to private landlords.

 

Brief overview of some government-led efforts:

Electricity penalty: In 2007, the Kenya Power and Lighting Company (KPLC) piloted safe, affordable, available informal settlement electricity in the Kibera slums, targeting 11,000 customers with a proposed flat rate of KES 300 (US$ 3) and controlling consumption using load limiters. The pilot faced significant challenges, with powerful cartels intimidating consumers, vandalizing load limiters and stealing power connections. Currently, KPLC is conducting a second pilot under the Global Partnership Output Based Aid (GPOBA), leveraging technology that cannot be vandalized.

Housing penalty: There is a half-century of history of Kenyan government efforts to provide decent housing, but with limited success. The much famed 2003 Kenya Slum Upgrading Program (KENSUP) aimed to improve the lives of 1.6 million slum households by 2020, at a cost of approximately KES 884bn (US$ 8.8bn)[8]. It has only delivered 822 housing units and 245 market stalls[9], in Soweto, Kibera. The 2011 Kenya Informal Settlements Improvement Program (KISIP) recorded modest achievements, rehabilitating 17.4km of road, enhancing tenure in 13 settlements, facilitating the issuing of 540 land titles, and conducting housing surveys of Mombasa, Nairobi, Nakuru and Kisumu[10]. The 2018 Kenyan president-led “Big Four” affordable housing initiative[11] seeks to accelerate realization of KENSUP’s goals in identified slums. The home ownership paradigm that has dominated policy dialogue—“one household, one housing opportunity”— [KL1] has completely ignored the reality that 78.7% of urban residents in Kenya are tenants (and in the case of informal settlements tenancy is over 92%). 

The working assumption, for instance in the case of Nairobi, has been that an informal settlement resident currently paying rent of KES 3,000–4,000 (US$ 30–40) will be willing to pay a 15 year mortgage at KES 4,000 per month for improved housing. This, however, fails to take into account the reality: most informal settlement residents share their rental accommodation to lower overall costs, and across the country 43% of them own land with title — and often a housing structure — in another part of Kenya (eg their rural ancestral home region). Locking themselves into a 15 year mortgage plan to own a single roomed unit is only rational to the extent that the unit can be commoditized for additional income. In addition, for more vulnerable low income groups who lack access to alternative housing and are locked in a poverty trap, the KES 4,000 assumption is beyond their means, especially given the poverty penalties they suffer daily.

Water Penalty: In June 2015, Nairobi City County launched the Automated Water Dispensers (ATM) technology in the Mashimoni area of Mathare informal settlement. The innovation, an AQtap water dispenser, was funded by the Danish government and a water services firm, Grundfos Lifelink. When technology was launched, the price of a 20 litre jerrycan of water was set at KES 0.5 (US$ 0.005), compared to the informal water provider’s usual price of KES 5 (US$ 0.5), clearly addressing the price penalty. By using a prepaid card system, the ATM solution also sought to improve the situation that 95% of water in informal settlements was non-revenue. Quality was also addressed, with water sourced from a trusted formal supplier –NCWSC. 

In subsequent years, researchers have documented setbacks of the ATM innovation in Mathare, for example evidence that registered vendors now bill at KES 5, offsetting the gains made in addressing the water poverty penalty.[12] Scale remains the biggest challenge, because demand for water far outstrips the installed dispensers. Following the intervention, illegal water vendors still dominate the water supply. The NCWSC’s strategy of curtailing Mathare’s water cartels by cutting off water supply to chambers backfired. The action was politicized and residents protested, threatening to vandalize the water dispensers.[13] And at the user level, there have been cases where water has been stolen from the automated system’s tanks, or by simply climbing up and taking water directly from the tank.[14]

 

Conclusions and Way Forward

Left unaddressed, the poverty penalty—the extra cost that the poor pay for basic goods and services—exacerbates the risk of the adverse cycles of poverty that lead to poverty traps and transmission of poverty across generations. This makes it harder for governments to make tangible improvements in the lives of most low income households.

Though several efforts have been put in place to address the affordability and availability of housing and basic services in Kenyan informal settlements, the piecemeal, experimental and isolated approach of these efforts has only served to exacerbate the situation by embedding and strengthening informal and often illegal players in the housing and basic services markets.

In the case of water, under-provision of the water ATMs solution in Mathare has only reinforced the power of informal water vendors, who now hold these installations to ransom and threaten vandalism if the water is not supplied to their illegal taps.

In the case of electricity, ignoring cartels in implementing upgrading strategies has led to vandalism and threats to potential customers, and has increased the power of cartels who now have additional infrastructure to tap into. 

The case of housing is poignant. Housing represents the epicentre, from where other basic services are accessed by a household. Treating housing as a market good rather than a basic need invites the commoditization of dignified living. Private players making active, rational, best-return decisions will only meet basic quality requirements when it is economically advantageous to do so. By failing to recognise housing as a basic need that should not be left solely to market forces and by ignoring the rental reality, the Kenyan government’s promotion of home ownership and the minimal impact on the overall housing deficit of the affordable units it has delivered, will only lead to further gentrification of the urban poor.

 The mirror to the poverty penalty is the poverty premium. By paying more than middle and upper income households for access to basic services, the urban poor demonstrate their ability to pay for basic services. There is less need for “free” and “subsidized” services. The fact that the basic services can be provided in an economically rational way offers an opportunity for regulated private-market players to support government efforts in addressing urban poverty and realizing the socioeconomic rights of Kenya’s informal settlement residents. Focus can then shift to resolving the operational and social bottlenecks that hinder access to basic services.

Unlocking barriers to access demands unequivocal long term commitment by national and county governments that insulates basic needs from economic and political peak-and-trough cycles.

Scaling up access to basic services 

• Rethinking the poverty penalty allows us to consider economically sustainable ways of providing high quality basic services to the urban poor. By flexing their influence on policy and regulations, the County and national governments can rebalance basic services away from commodization and towards a human rights paradigm that supports achieving the aspirations in the Constitution of Kenya while keeping the market economically viable for private players.

• National and county governments can develop appropriate regulations that promote a systems approach to developing “sustainable neighborhoods” in low income neighborhoods, with the aim of effacing the interconnected, multiplicative and summative impact of the poverty penalty. Synergetic consortiums of water, sanitation and electricity providers can work together to realize economies of scale and to minimize bottlenecks in operations and maintenance. 

Ensuring sustainable access to basic services for the urban poor

• Through regulation, national governments can stabilize and insulate the market environment for basic needs from economic and political peaks and troughs, thus incentivizing private investors to provide housing and other basic services in the long term. 

• By setting up policies and laws that instrumentalize housing as a basic need, the national and county governments can further strengthen rental housing market regulation, to realize the socio-economic right enshrined in article 43(1) of the Constitution of Kenya 2010.

Footnotes

[1] Caplovitz, David. 1968. The poor pay more: Consumer practices of low-income families. Free Press

[2] Mendoza, R. U. 2011. "Why do the poor pay more? Exploring the poverty penalty concept." Journal of International Development 23(1), 1-28.

[3] Satterthwaite, David, and Diana Mitlin. 2012. Urban poverty in the global south: scale and nature. London and NewYork: Routledge

[4] Service provision small independent and unregulated service providers were initially driven by need but are now institutionalizing informally into cartels

2. Constitution of Kenya 2010 article 43.

(1) Every person has the right -

(a) to the highest attainable standard of health, which includes the right to health care services, including reproductive health care; (b) to accessible and adequate housing, and to reasonable standards of sanitation; (c) to be free from hunger, and to have adequate food of acceptable quality; (d) to clean and safe water in adequate quantities; (e) to social security; and (f) to education.

(2) A person shall not be denied emergency medical treatment.

(3) The State shall provide appropriate social security to persons who are unable to support themselves and their dependants.

[6] Percentages derived from Kenya Integrated household budget survey 2015/6 conducted by the Kenya National Bureau of Statistics (KNBS 2018)

[7] For water, electricity and sewerage

[8] Muraguri, L. 2012. "Kenyan Government Initiatives in Slum Upgrading." Les cahiers d’Afrique de l’est, 119-128

[9] Based on report from Government of Kenya state department of housing and urban development available onhttp://housingandurban.go.ke/kenya-slum-upgrading-programme-kensup/

[10] Ministry of Transport, Infrastructure, Housing and Urban Development. 2019. http://www.housingandurban.go.ke. February 15. http://www.housingandurban.go.ke/project/jet-hotels/.

[11] Affordable Housing Program (AHP). 2019. "Ministry of Transport, Infrastructure, Housing and Urban Development. State Department for Housing and Urban development." http://www.housingandurban.go.ke. February 15. http://www.housingandurban.go.ke/wp-content/uploads/2018/11/Pipeline-Release-Version.pdf.

[12] AMT. 2017. "Muungano Wa Wanavijiji." https://www.muungano.net. October 1. https://www.muungano.net/publicationslibrary/2018/1/22/mukuru-spa-situational-analysis-phase-2-report-mukuru-kwa-njenga-kwa-reuben-viwandani.

[13] Christiane, Tristl. 2017. Co-constituting cost recovery, Assembling benevolence - the Techno-Political patterning of Automatic Water Dispensers. Ethnographic research, Paris: HAL. https://halshs.archives-ouvertes.fr/halshs-01686982.

[14] ibid