A few years ago, while managing an investment in a microfinance company, I had the opportunity to go to villages in Tamil Nadu and Andhra Pradesh to attend the break of dawn meetings with microfinance groups. Interacting with the borrowers during these â€œjoint liability groupâ€ meetings was enlightening. Through these interactions it was possible to segment borrowers into clusters based on their underlying and often unstated need for loans. A large number of the borrowers were clearly availing the loans to smoothen their cash flows; adroitly managing the elaborate questioning of the MFI officers by justifying their end use of the loans for buying more livestock! There was another category of borrowers who were using the loans to supplement working capital for their small businesses. Then there were the borrowers who I describe as the aspiring poor. These borrowers saw the loans as a means to realize their dream of securing dignity. And for these poor women, respectability typically came from two forms of investments. The first was easy to understand â€“ borrowing money to send their children for better education. It was an easy correlation to make even in a village. The children who studied in better schools had a better chance of getting employed. It was the second form of investment that intrigued me â€“ those who borrowed money to build a permanent (â€œpuccaâ€) home, not because it gave better shelter but because in a village community, this was a palpable rite of passage on the journey to dignity in a village for the poor. During one of these village visits, I got into a conversation with one borrower and asked her why it was important for her to take a loan to build a â€œpuccaâ€ house. She asked me to come and see her home. It was a mud home with a thatched roof that was lined with strips of blue plastic sheet to keep the rain out. I stood at the â€œdoorâ€ â€“ two jute sacks stitched together and hung from a bamboo staff at the entrance. She went in and stood at the entrance to her home. With a weak smile and downcast eyes she said, â€œSir, if this was a â€œpuccaâ€ house you would not have hesitated to come inside my home. That is why I want to have a â€œpuccaâ€ house. No one respects you when you live in a hut.â€ I asked her what a â€œpuccaâ€ house meant. And she was clear about what it meant. It meant a proper brick and cement house with cement floors and a reinforced concrete roof. There were tiled roof houses in the village but that was less â€œrespectableâ€ than one which has a RCC roof. She wanted a covered area for bathing. She wanted a kitchen. But she did not want a toilet for it would be unclean to have a toilet within the home. And she wanted a good strong door at the entrance. She had not thought of plumbing but she wanted lights with proper switches. Going beyond the physical aspects she so painstakingly described, it was clear that this was her way of describing being equal to others in the village. This was about not being seen to be inferior to anyone else in that community. At CapAleph we have spent the last year delving into the problem of affordable housing. All our research confirms a multi-billion dollar market for affordable housing, growing larger with accelerated urbanization and the sharp reduction in poverty in both rural and urban India. The housing industry has been trying to find solutions to address this large unmet need by either developing large aggregations out of town (thereby reducing the cost of land) or by developing lower cost construction materials. Usually these dwelling units imposed high relocation and transport costs on occupants, or fell short of the â€œpuccaâ€ definitions of the aspiring customers. During our research, we came across a low cost home built with steel in Andhra Pradesh. This was a really low cost home â€“ the cheapest we had heard about. However, no one wanted to own one of these homes because the temperature inside the house on a hot day would be around 60 to 70 degrees. So in the day time, one could not live in this house. But what was more damaging was what happened at night. During the night, village urchins would pelt the home with stones. The noise of stones on the steel works would set off the dogs in the village and very soon, the occupants became the laughing stock of the village! We spoke to NGOâ€™s working on affordable housing to understand what affordable housing meant and to arrive at a definition of a small dwelling unit. Through these interactions we concluded that affordable housing meant different things to different people. The $50 Billion unmet opportunity was actually a set of smaller opportunities, each a more tightly defined consumer segment, each with a specific need. After much deliberation we arrived at a segment of the market that we would try and address with a specific product. We began by studying the conventional developer-builder model and soon concluded that this model would never deliver the â€œaffordable housingâ€ that we were targeting. The conventional builder-developerâ€™s approach is not geared for low cost, as it is premised on acquisition of land and the development of the acquired land, both of which involve the costly interface with the politics and bureaucracy of land acquisition. This model involves speculating on inventory of finished dwelling units, and the large working capital required for gestation periods of between 2 to 4 years for completing a project. All of these factors combine to create very high capital outlays. This in turn prices the end product beyond affordability. When we looked at conventional solutions we saw that the lowest construction cost using conventional building techniques and processes would be in the vicinity of Rs. 1400 to Rs. 1600 per sft. Our first insight was that the largest component of profits in the developer-builder model is driven by speculating on land value. And since this was the core aspiration driving the developer-builder model, targeting lower construction costs was not the top priority. We found that instead of dealing with low cost housing, we should focus on low cost construction because there were a large number of customers in rural, peri-urban and urban markets who were in possession of land but were constrained by the inability to access truly affordable construction solution which were sub Rs. 1000 per sft. So we confined our solution to the mass of people at the base of the pyramid who had title to land but did not have access to low cost building and construction solutions. This stratification of the market and defining our customer within the space of â€œaffordable housingâ€ was an important first step for us. We then used our interactions with NGOâ€™s working in this space and field research to define our product. We defined our low cost home as a stand-alone single floor house with a discrete living area, a sleeping area, a kitchen and a covered bath and (much against the wishes of almost every potential user we spoke to) a toilet under the same solid RCC roof! An overhead tank. Plumbing for piped water. A septic tank based Indian style toilet with discharge facility. Electric connections for lighting and a fan in the sleeping area. A good quality wooden main door for the entrance, sliding aluminum and glass windows with grills, and plastic doors for the bathroom and toilet. At the drawing board stage, we could put all of this together on a 328 square feet plinth area. The question was whether we could execute this house on a truly low cost basis? Our second insight was that if conventional building solutions were used to deliver our defined product, the cost of materials could not be significantly compressed as neither quantities or costs would vary significantly in any innovative building solution. However, we soon realized that the single largest cost after the cost of cement and steel in a house is the cost of labour. If the period of construction was significantly compressed, especially since semi and unskilled labour costs have escalated exponentially over the last decade in India, then there was scope for substantial reduction in overall construction costs. Our third insight was that the customer, however poor had a clear idea of what a pucca house meant and while it would be possible to innovate on materials and reduce costs, anything which overtly detracted from the external features of a â€œpuccaâ€ house would not be acceptable. Moreover, local custom was an important element in designing the final home and the design solution needed to be flexible to incorporate individual needs. With a theoretical framework for delivering a low cost construction model on paper, we zeroed in to Chittoor town in Andhra Pradesh to develop our first prototype low cost house. Mr. Dasaratha Reddy, the founder of Future Financial Services, which is headquartered in this town, was kind enough to introduce us to Ramachandra who had a small parcel of land and was willing to let us build our first prototype on his parcel of land. We ran straight into the Seemandhra agitation. We persevered through all the disruptions this agitation caused and were able to complete the first prototype in 23 working days. Itâ€™s a â€œpuccaâ€ house, built to BvQI specifications. The prototype has been delivered at a cost which is lower than Rs. 1000 per sft. During the time we spent constructing this prototype, we have learnt how to reduce costs by up to Rs. 200 per sft and to compress the time to completion of the house to 18 days through a set of cost improvement plans. We have proof of concept that it is possible to actually deliver a good quality home at our target low cost price and within a record construction time! This is the first chapter in the story of JanAshray, the first business that we are incubating at CapAleph. This is our own story of perseverance and a reinforcement of our belief that private capital can produce outstanding impact beyond financial returns. And often the innovation is not in novel and path breaking technology but in good robust management of processes. We will update this story as we keep building on this opportunity.
A Home for Ramachandra (2)