China - Enterprise Housing And Social Security Reform Project

 ICRR 12527 Report Number : ICRR12527 IEG ICR Review Independent Evaluation Group 1. Project Data: Date Posted : 09/11/2006 PROJ ID :P003603 Appraisal Actual Project Name :Enterprise Housing And Project Costs 950.0 505.8 Social Security Reform US$M ) (US$M) Project Country :China Loan/ Loan US$M ) /Credit (US$M) 350.0 266.0 Sector (s):Board: ): US$M ) UD - Housing finance Cofinancing (US$M) and real estate markets (93%), Sub-national government administration (6%), Central government administration (1%) L/C Number :C2642; L3773 FY ) Board Approval (FY) 95 Partners involved : Closing Date 06/30/2001 12/31/2004 Evaluator : Panel Reviewer : Division Manager : Division : Roy Gilbert Kris Hallberg Alain A. Barbu IEGSG 2. Project Objectives and Components a. Objectives As per the Development Credit Agreement (DCA), they were: a) To assist in the development, on a pilot basis in the Participating Municipalities, of an efficient and effective market-based housing system and social safety net designed to divest enterprises of responsibility for direct provision and management of housing and social security benefits to their employees and thereby achieve enterprise restructuring. b) To assist the strengthening of institutional capabilities in respect of housing management and finance and social security administration. [The ICR had a slightly different formulation . It instead reported a set of four objectives in a different order from the DCA's, but covering the same ground .] b. Components (or Key Conditions in the case of Adjustment Loans ): i) Housing Mortgage Loans through Participating Financial Intermediaries (PFI) by Housing Management Companies (HMC) -- more commonly called "Construction Loans", these were mostly for financing the building of new housing. Conventional mortgage lending for individuals to buy houses was also eligible for project funding, but very little used, as had been expected at appraisal (appraisal cost US$925.0m.; actual cost US$491.7m.). ii) Technical assistance and training for PFIs, HMCs, municipal housing reform offices (HROs), municipal labor and health bureaus and central government ministries (appraisal costs US$19.7m. ; actual US$14.1m.). c. Comments on Project Cost, Financing, Borrower Contribution, and Dates Project start-up was slow, with the first disbursement made only two and a half years after effectiveness . The ICR blames this on the delay in recognizing local counterpart funding in annual credit plans by the State Planning Council's (SPC). By the original completion date, only about half the loan had been disbursed --hence the need to extend closing. The Bank made repeated requests for final cost and financing data, but the Borrower failed to provide these. ICR estimates, cited here, are based upon disbursement figures and other information available . On this basis, the ICR reports that borrower counterpart funding, originally estimated at US$ 600 million at appraisal, was only US$240 million at completion. 3. Relevance of Objectives & Design : The objectives remain highly relevant to current CAS priorities for the Bank Group to assist China in deepening the financial sector through support to housing finance . They are also highly relevant to promoting "sound progress in urbanization" a key priority for China's current 11th Five Year Plan. Project design was an original and creative response to the particular opportunities of quasi -market evolution of part of China's housing sector at that time . The design's use of the transfer of the fully paid -off enterprise housing stock to newly created and quasi commercial Housing Management Companies (HMCs) was an appropriate and insightful tool to kick start significant revenue streams (from moderate rents) for HMCs and to serve as collateral for new lending to them . However, the ICR correctly questions whether the design was flexible enough to adapt to China's rapidly changing housing sector . For instance, the rigid setting of interest rates on project mortgage loans prevented easy adjustments, leaving the project's loans uncompetitive with lower interest domestic sources, significantly curtailing the demand for project disbursements. 4. Achievement of Objectives (Efficacy) : Objective a): Substantially achieved : The project help create 17 HMCs (somewhat below the SAR target of 24) that managed or sold 10.3 million m2 of housing in the four cities on a quasi commercial basis in an incipient housing market in the four project cities . Of this, 2.9 million m2 was new housing construction (half the appraisal target of 6.0 million m2). Actual project funding for this was less than expected due to the competition from increasingly competitive domestic financing. More would have been disbursed if project start -up had been prompt, but SPC's slow processing of counterpart funding and initial lack of support for HMCs by local governments, delayed this until 1998, according to the ICR. Loan funds were on-lent to HMCs to finance the building and purchase of new rental housing . Actual shares of all funding that went to each are not reported in the ICR . Altogether by 2000, 2.2 million enterprise housing units were privatized in the four cities, and 99 percent of retirees received their benefits from municipal social security administrations rather than enterprises . The ICR reports that housing and social security provision in these cities is no longer associated with the enterprises . These achievements were in spite of a number of exogenous constraints, including continuing large subsidies and delays in housing and wage adjustments (of State Owned Enterprises - SOEs) that had to be accommodated. Also, Government of China (GOC) responses in curbing credit in overheated real estate markets, first in 1994-1995 and currently in 2006, curtailed the impact of the project . Lower domestic interest rates in the late 1990s enacted by the People's Bank of China and its 1998 decision to allow mortgage lending by all state and commercial banks across the country made PFIs reluctant to on -lend the Bank loan in local currency as the exchange risk premium made the final rates to borrowers significantly higher than comparable domestic rates. The SAR predicted that other cities in China would adopt the successful project model, but the ICR does not provide evidence of this result . On the other hand, the ICR reports that social security systems, presumably of the type encouraged by the project, are "well under way and expanding throughout the country ". Objective b): Modestly achieved : The HMCs in particular built up their capabilities for managing housing and housing finance through the daily on -the-job contact with this work by their staffs . But according to the ICR, project TA played a relatively minor role in strengthening the key agencies involved . The failure of a bilateral agency to support a large part of the housing TA resulted in the fragmented and only partial implementation of the TA component . Also, the lack of effective functioning of the project's Central Coordinating Group (CCG) led to delays in TA (as well as procurement). 5. Efficiency : No ERR was estimated for this project either at appraisal or completion . Without fully functioning housing markets, true market prices for housing opaque in China, making it difficult to measure economic benefits of a project like this one. Using measures of cost effectiveness, efficiency appears to have been within the bounds expected at appraisal . In US$ terms--during a period of stable exchange rates --the actual cost per m2 of housing construction was only slightly higher than appraisal estimates, according to ICR data . 6. M&E Design, Implementation, & Utilization: The M&E design at appraisal listed 38 monitoring indicators, but none included baseline data or targets to be achieved. Most indicators were about HMC development, housing consumption, housing finance and social security reforms. Institutional capacity development, key to the achievement of both objectives, lacked good indicators . The ICR informs, in any case, that neither municipal project management entities nor the Bank paid much heed to any indicators at all, and Annex 1 scantily reports two outcome indicators only . Contrary to accepting that the rapid pace of reforms prevented the implementation of M&E, as the ICR argues, rapid change makes it even more important for M&E to be strengthened, implemented and utilized to help us understand which reforms can be attributed to the project. Instead of the effective abandonment of M&E, IEG would have preferred to see a simpler but useful M&E (with fewer indicators, for example), with baseline values and, if necessary, reformulated targets whose achievement can be monitored at low cost throughout project implementation . 7. Other (Safeguards, Fiduciary, Unintended Impacts--Positive & Negative): According to the ICR, resettlement plans were prepared with each project city that complied with Bank policy on involuntary resettlement. All new housing schemes funded through the project had to include environmental impact assessments that were approved by the Bank, in accordance with Bank environmental policy safeguards . 8. Ratings : ICR ICR Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory Institutional Dev .: Substantial High For helping China substantially change the "rules of the game" in housing finance. Sustainability : Likely Likely Although the case for sustainability would  have been best made by data showing the good financial performance of the HMCs--not available in the ICR--particular repayments of outstanding Bank Performance : Satisfactory Satisfactory The Bank's ambition and innovative approach to China's housing finance and willingness to take on board the recognized risks of this strategy was highly satisfactory. Less so was the choice of project cities dispersed across the country that made supervision difficult and the problems encountered in ensuring Borrower ownership of the operation . [The ICR rates Bank performance inconsistently, namely "satisfactory" on page 1, while "moderately unsatisfactory" on page 16. IEG based its review upon the ICR's satisfactory rating.] Borrower Perf .: Satisfactory Satisfactory But ownership of the project was weak at several key moments, and support for project at the national level was unsatisfactory. Municipal authorities and project agencies did not take the necessary steps to restructure the Loan/Credit to ensure that its funding would be more competitive with funding from other sources. At completion, the Borrower did not provide final project cost data (nor a Borrower ICR). Quality of ICR : Satisfactory NOTES: NOTES - When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006. - ICR rating values flagged with ' * ' don't comply with OP/BP 13.55, but are listed for completeness . 9. Lessons: 1)Project Design: Projects aiming at significant reforms have to balance a number of conflicting values - innovation versus broad acceptance of the status quo, persistence versus reluctant adaptation to changing circumstances and information, and strategic reform versus technical reasoning . Trade-offs have to be made between them, if necessary, through additional follow -on projects. 2) Project Ownership and Institutional Arrangements . The absence of the key central player in the housing reform, Housing Systems Reform Office, and the described weakness of CCG in project implementation proved to be crucial obstacles to an otherwise superior project performance . Experimental projects must be prepared to embrace dissension and adapt to the resulting difficulties . 3) Supervision. For a far-reaching and innovative Bank project such as this, running in parallel with other experiments in China (most notably Shanghai), intense and timely monitoring and evaluation of the Project against national reforms during implementation should have been more rigorously pursued . Moreover, a project of this type needs to receive extraordinary management support from both the Borrower and the Bank . 4) Central Oversight. The demonstration effect of particular project component can be less than expected when there is poor central oversight--by CCG in this case. Future projects should assist in setting up organizational structures which remain viable throughout project implementation in order to maximize their demonstration effect throughout the country and to encourage policy evaluation and legislative changes at the highest national level . 10. Assessment Recommended? Yes No Why? To encourage borrower self-evaluation and data collection, update the findings, and learn more about replication of project approach and subsequent adjustments made to it. 11. Comments on Quality of ICR: Overall, the ICR is of satisfactory quality . It candidly reports the challenges and shortcomings faced by the project . It enables a reader to understand the context of this complex operation . The ICR self-evaluation would have been a lot stronger, however, had the report enjoyed more input from the borrower, particularly final cost data, financial reporting of HMCs and, of course, a Borrower ICR . Other data/analysis on the relative importance of funding for new housing construction and for the purchase of existing housing would have provided some important lessons for designing operations of this kind . There was one important inconsistency : as noted in section 8 above, the ICR does not report the Bank performance rating consistently, being "satisfactory" on page 1, while "moderately unsatisfactory" on page 16.