Edition 01: 20 November 2000
The Model has been placed in the public domain.
The Model is strongly demand response oriented. Project applications are worked out together with the users who execute, run, maintain, own and pay for the project structures. The Model provides practical working solutions for sustainable integrated development and covers all major development priorities. It constitutes a practical way of applying modern development concepts such as those outlined in the DFID "Guidance manual on water supply and sanitations programmes" (WEDC for DFID, 1998). It integrates in a practical and feasible manner policy, finance, technology and human capacity building to offer sustainable solutions to development.
Project applications are self-financing, subject to an interest-free seed loan repayable in 10 years. The Model is structured for communities of 10000 households (50000 users) but can be adapted to smaller and larger project areas as required. The minimum amount of the interest-free seed loans is US$ 3.000.000 or US$ 60 per user, which covers the entire basic package of structures and services, and calls for a monthly payment of US$3 per family of 5 into a Cooperative Development Fund. The Model is structured so that some, if not all, of these monthly payments can be recovered by savings on the current expenditure of the families for the (inadequate) structures and services available to them.
Project applications require 75% financing in the form of a 10 year interest-free loan by an External Support Agency. Regional or state authorities in the beneficiary countries are expected to supply the remaining 25%.
Project applications are self-financing because they allow the recipient communities to fully exploit a network of sustainable development activities using:
(i) The interest-free loan itself
(ii) Local Exchange Trading Systems (LETS)
(iii) Multiple re-cycled interest-free micro-credits to be administered by a local micro-credit institution. They are generated by recycling seed loan repayments and project
reserves during the loan term, and by recycling repayments of the micro-credit loans themselves.
Some important factors causing financial leakage are energy imports, import of industrial goods and services, and interest. The cumulative interest content of a typical western industrial product is thought to be anything up to 40% of the cost to the end user. This interest normally exits from project areas never to return.
Technologies using local energy such as human energy, local biomass, PV and wind energy, and locally recycled wastes together with appropriate financial instruments help create and encourage open competition and free enterprise within the framework of a cooperative and non profit-making global financial structure. As the Model shows, self-financing integrated development is then able to flourish.
The formal currency capital available for recycling in the form of micro-credits is made up of :
a)Part of the initial seed loan money until it is needed for the project application
b)Seed loan repayments
c)Micro-credit repayments
d)The long term maintenance fund
e)System capital replacement fund which will be built up after the ten years' seed loan has been fully repaid
For instance, a woman may need a sewing machine to be able to make clothes. She will need "formal" currency to buy the sewing machine (and perhaps some cloth), which is presumably not made in the project area itself. That money will be made available to her in the form of an interest-free micro credit. She will sell outside the local LETS system some of the clothes she makes to earn the "formal" money she needs to repay her loan. The rest of the clothes can be sold within the local currency LETS system. As she repays her loan, the repaid capital can be promptly recycled for another interest free micro-credit project, so the available seed money repeatedly re-circulates within the local economy.
(Fig 1)
The proposed micro-credit systems will be different from most of those formed up till now. Formal currency loan capital repayments and longer term reserves within the projects themselves will be used to finance the micro-credit systems. These funds are already available for multiple re-cycling, interest-free. When, at the close of the ten years' seed loan repayment period, the original project capital is repaid, the users will continue to pay their monthly contributions into the Cooperative Development Funds to build up capital for system extensions and/or to replace system hardware after 20-30 years. These fresh Cooperative Development Funds will become quite large. They in turn become available for interest-free micro-credits within the project area until they are needed, so that permanent on-going sustainable development in ten-yearly cycles is ensured .
Final repayments of blocks of micro-credits will be co-ordinated so that money for long term capital investment purposes (system replacement and extensions) will be available when it is needed. An example of this is shown in columns 37, 38, 39 and 40 of the chart in fig 2, where the higher columns indicate shorter payback times for the last lots of micro-loans so that the entire interest-free seed loan capital of Euro 3.000.000 is available for payment in the 41st quarter.
Money for the interest-free formal currency micro-credits granted is therefore generated by the users themselves within the framework of the project applications. The money and the micro-credits belong to the users. They are interest-free and continue to re-circulate within the local economy. Based very conservatively on an average payback time of two years, the theoretical average interest-free micro-credit finance made available during the first ten years to every family of five persons in a given project area is US$ 1500. If the average payback time were to be shorter, the interest-free funds available would be greater still.
The following chart (which has been drafted in Euros) shows a typical build-up of micro-loan investment over the first period of ten years of a project application. It shows the amount of new micro-loans actually (re)invested each quarter during the first period of ten years. The amounts are net of current outgo for project administration and maintenance of structures, which have already been deducted.
In the chart, the original interest-free seed loan is paid back in the 41st quarter. The capital available for micro-loans temporarily falls back to the amount actually being paid into the Cooperative Development Fund each month by the users. It will then gradually build up again over the next period of ten years, so that a further amount of at least US$ 1500 can be made available (on an average) to each family in the form of interest-free micro-loans. This time the funds accumulated belong to the users themselves, and are available for renewal and/or extension of project structures when needed.
(Fig. 2)
CHART SHOWING THE DEVELOPMENT OF MICRO-LOANS
Associated activities such as collection of payments and distribution of information will all be paid for in the local LETS currencies.
Local micro-credit institutions are, therefore, regular members of the local LETS systems.
The pay-back time for the interest free loans will vary from case to case. Some micro-credit investments will generate more goods and services that can be sold outside the local LETS currency area than others. Some users will therefore be able to earn formal currency to repay their micro-loans more quickly than others. The users themselves will decide from case to case during their monthly meetings on what is acceptable to them.
The possibility of sale of some of the production to consumers from outside a project area for formal currency will usually be a condition precedent for the granting of a micro-credit loan. This condition of partial "export" sale lapses as soon as the micro-loans have been repaid. In project applications where an export-import cooperative has been set up, the cooperative may often be able to help the beneficiary of a micro-loan export part of his or her production in exchange for formal currency.
The rate at which micro-loans in formal currency can reasonably be recovered will determine the payback period, which could therefore be anything between a few months and a few years. The rate of the loan repayments must be realistically possible for the borrowers. The system is co-operative and interest free and designed to enhance the general welfare within the beneficiary communities. As with the Grameen bank systems, any person or co-operative group wanting a Micro-Loan will be expected to produce four friends who agree to be jointly and severally liable for the periodic loan repayments, and to make sure they are made on time.
(Fig 3)
HOW THE ORIGINAL SEED LOAN MONEY IS USED
1) All loans are to enable the beneficiary to extend his/her LETS and formal currency income by producing more goods and services
2) The goods and services must benefit the general interests of the community and encourage exchanges under the local LETS systems.
3) Some of the goods and services must be saleable outside the LETS systems to earn formal currency to repay the micro-loans.
4) The Micro-Credit loans must promote the rapid circulation of formal money within the beneficiary communities. For example, using formal currency to build a clinic or hospital would not qualify for micro-credits because the capital invested cannot be re-circulated. On the other hand, buying equipment for testing water quality (foreseen in the Model) would qualify, as the formal currency cost can be recovered by charging in formal currency for water analyses conducted for users outside the project area until the micro loan has been repaid.
5) Special priority will be given in the first instance to micro-loans to start the collection and transport of compost, urine, and grey water, and establish the recycling centres that will collect, store, and export non-organic waste products from the project area. The formal currency micro-loans will be recovered by sale of the waste outside the project areas.
SELF-FINANCING INTEGRATED DEVELOPMENT PROJECT - FULL TEXT
DRAWING OF INSTITUTIONAL STRUCTURES.
CASH FLOW DIAGRAM.
HOW THE ORIGINAL SEED LOAN MONEY IS USED.
GRAPH SHOWING DEVELOPMENT OF MICRO-LOANS .
THE INTEREST-FREE LOAN CYCLE.
TANK COMMISSION - THE BASIC PROJECT STRUCTURE