Argentina - Housing Sector Project

Document of The World Bank FOR OFFMCIAL USE ONLY Report No. P-4815-AR MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$3OO.O MILLION TO THE GOVERNMENT OF THE ARGENTINE REPUBLIC FOR A FIRST HOUSING SECTOR PROJECT August 24, 1988 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - Australes (A) July 1988 Commercial Rate (official) US$1 - A 9.25 A 1 = US$0.11 Free Market Rate US$1 = A 12.00 A 1 = US$0.08 WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS AC - Advisory Committee (Comite Asesor) BHN - Nationil Mortgage Bank (Banco Hipotecario Nacional) DNRP - National Directorate of Social Security (Direcci6n Nacional de Recaudaci6n Provisional) FONAVI - National Housing Fund (Fondo Nacional de la Vivienda) INDEC - National Census and Statistics Institute (Instituto Nacional de Estadistica y Censos) IPV - Provincial Housing Institute (Instituto Provincial de la Vivienda) SVOA - Secretariat of Housing and Environmental Management (Secretaria de Vivienda y Ordenamiento Ambiental)  FOR OMCI1L USE ONLY ARGENTINA FIRST HOUSING SECTOR PROJECT LOAN AND PROJECT SUMMARY Borrower: The Argentine Republic Beneficiary: Secretariat of Housing/National Housing Fund (FONAVI), and Provincial Housing Institutes (IPVs) Amount: US$300.0 million equivalent Terms: Repayable over 15 years, including 5 years of grace, with interest at the Bank's standard variable rate. Financing Plan: FONAVI US$280.4 million Beneficiaries US$ 27.6 million IBRD US$300.0 million Total US$608.0 million Economic Rate of Return: 17S Staff Appraisal Revort No.: 7190-AR May No.: IBRD 12432R2 This document has a restricted distribution and may be used by recipients only in the performance of their offlicial duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERN3ATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE ARGENTINE REPUBLIC FOR A FIRST HOUSING SECTOR PROJECT 1. The following memorandum and recommendation on a proposed loan to the Government of the Argentine Republic for the equivalent of US$300.0 million is submitted for approval. The proposed loan would have a term of 15 years, including five years of grace, with interest at the Bank's standard variable rate. 2. Background. The unmet housing demand in Argentina is estimated to be as high 2.5 million units and is growing. Demand for new housing is increasing at 220,000 units per annum, but only about 80,000 were built in 1986. The need is especially acute among the lower-income population. Low-income housing is currently financed by the Secretariat of Housing and Environmental Management (SVOA) and the National Mortgage Bank (BHN). SVOA allocates the funds from FONAVI (National Housing Fund) to the Provincial Housing Institutes (IPVs) for the execution of housing programs. The construction of houses is undertaken by private construction firms selected by the concerned IPV under competitive bidding. FONAVI is funded by a 52 earmarked tax on salaries and an income levy on the self-employed. In recent years, some 28,000 FONAVI houses have been completed annually. FONAVI has been inefficiently managed and has targetted beneficiaries poorly. On average, the FONAVI houses have been costly (about US$20,000 each) and have taken too long to complete (around three years). Furthermore, only about 10? of the costs are recovered. Some corrective measures were adopted with limited success in 1986/87 to address these problems. Because of deficient programming and lower than expected tax receipts, FONAVI funds for 1988 were overcommitted, leaving little room for new investment. During the fifties and sixties, BHN was the main credit institution for housing. Its importance declined in the seventies. A fall in internal cash generation, only partial loan indexation and a high level of inflation, decapitalized BUN almost totally, making it highly dependent on Central Bank transfers. In connection with recent understandings on the Banking Sector Loan, the Government has dscided to limit the rediscounts of the Central Bank to BHN. A UNDP-funded housing sector study (July 1987) identified a number of deficiencies in the sector and the Government is keen to introduce far-reaching sector policy reforms. Knowledge of the sector and of the need for new policies has been heightened by Bank work during preparation of the Technical Assistance Project for Social Sector Management. The Government agreed in November 1987 on the need for reforms of socioeconomic, financial, technical and institutional policies of the sector and requested urgent Bank assistance to fund a housing program directed at lower-income segments of the housing market. 3. The main sector problems are three: (i) Inefficient use of FONAVI's earmarked resources with relatively few and expensive houses produced in an untimely fashion. There is little incentive for construction companies to control costs and increase productivity through innovative design and construction methods. (ii) PONAVI's policies and  precedures have resulted in low recovery of investments. Both FONAVI's salary tax and mortgage payments erode rapidly with the country's high inflation rates and there is no incentive for families to save for houses. (iii) The large built-in subsidies are poorly targeted and not transparent. 4. Rationale for Bank Involvement. Bank involvement in the sector is the logical culmination of several years of sector policy dialogue with the Government, at a time when the sector is experiencing an acute shortage of investment funds. The unmet demand for affordable low-income housing has been rising, as a result of the disappearance of the long-term capital market of housing funds and the insufficient supply of FONAVI housing. By supporting far-reaching reforms of the sector's policies, the Bank would endorse the Government's objective of redirecting public housing investment to the low-income segments of the housing market. The proposed sector investment project would raise the productivity of scarce public funds, improve capital recovery, strengthen SVOA's institutional capability and rrovide the basis for the maintenance of a comprehensive housing policy dialogue with the Government. The project would also introduce private savings for down payments as the fJrst step in the re-creation of a voluntary savings system for housing. It is expected that the renaissance of a voluntary housing finance system would be further supported by the Bank under a possible restructuring project for the Banco Hipotecario Nacional (BHN). 5. Project Objectives. The overall objective of the proposed loan would be to support the Government in its efforts to reform its sectoral policies. The main purposes of policy reforms are to increase productivity of the housing programs financed by FONAVI, improve the financial performance of FONAVI and reduce subsidies and improve their targeting. The project would achieve this through: (i) reducing unit cost and size of FONAVI houses and the time required to build them; (ii) establishing standard bidding procedures; (iii) improving the selection of beneficiaries by establishing national and provincial registries; (iv) improving the recovery of FONAVI loans through the introduction of a new mortgage repayment system; (v) promoting and mobilizing family savings, with special emphasis on the participation of non-governmental organizations; (vi) redirecting, making more transparent and reducing housing sector subsidies which will permit an increase in cost recovery from the current level of 1O to an average recovery of 672, taking into account the home improvement loans; and (vii) improving the administrative and financial procedures of SVOA/FONAVI. As stated in its Policy Letter provided to the Bank, over the longer term the Government intends to replace gradually public sector resources by private funds. In this connection, a study would be undertaken to consider the possibility of replacing the FONAVI earmarked tax by general revenues. 6. Project Description. The proposed project would include a package of policy improvements, as evidenced in the Government Housing Policy Letter, covering, inter alia: (i) the establishment of national and provincial registries of potential beneficiaries in order to facilitate the targetting of subsidies and selection of beneficiaries; (ii) the introduction of new economical housing designs to lower unit costs; (iii) the relaxation of such standards that unduly restrict innovative and more economical housing designs; (iv) the introduction of improved and standard bidding procedures; (v) the introduction of a new mortgage repayment system  to improve cost ,ecovery; (vi) the promotion of savings to be applied as down payments; (vii) the establishment of transparent subsidies targetted to the lowest income groups; and (viii) the introduction of a new system of allocating FONAVI funds among provinces according to effective demand and other factors, such as their repayment record and IPV's efficiency. 7. The proposed loan will finance the construction of about 39,000 two-bedroom houses; 20,500 three-bedroom houses; and the improvement and rehabilitation of about 40,000 existing houses. On the basis of improved design and bidding procedures, housing construction perieds will be reduced from the present three years to less than a year. Housing unit costs will be lowered to less than half of historical levels. SVOA would introduce norms and criteria to promote, through competition, a variety of designs and constructioi1 techniques. Procurement methods, uniform throughout the country, would ensure transparency of the bidding process. A line of credit up to 15: of the base cost of the project, would be directed to improving and rehabilitating current substandard housing. 8. The proceeds of the proposed loan, together with FONAVI's own resources and beneficiaries' down payments, would finance the full costs of the housing units to be constructed or improved under the project. The Government, through FONA;_, would assume the cross-currency exchange risk and the US dollar exchange risk. The proceeds of the proposed loan would be made available to the IPVs in local currency in accordance with allocation criteria satisfactory to the Bank, under participating agreements which would define the IPVs' obligations, including the recovery of the loans made to the beneficiaries. The funds so recovered are to be returned to SVOA. Loans for home improvements would be provided by SVOA through BHN or other financial agents satisfactory to the Bank with SVOA assuming the risk of loan repayment. Under the proposed project, the monthly payments schedule would have the following characteristics: annual real interest rate of 8.7Z; maximum repayment period of 25 years and monthly payments, adjusted for actual inflation. The value of the repayments will be a portion of the cost of the house, the remaining being a subsidy that depends on the income level of the beneficiary. Subsidies would be reduced from over 95? in the past to an average of 37? under the program. Eligibility for houses to be financed by FONAVI would be limited to the lowest forty percent income earners. No subsidies would be granted to families with incomes above US$280 per month. Families earning less than US$100 per month would receive the highest subsidies. The home improvement loans would be for five years, adjusted monthly and with a real interest rate of 8.7? per year, plus a charge to cover the financial agent's administrative costs. 9. The proposed project would include technical assistance to carry out studies and implement recommendations in several areas required to make SVOA and the IPVs more efficient, including, inter alia, the creation of a sector information system, new procedures for the management and control of FONAVI's portfolio, new procedures to collect and administer FONAVI's resources, new ways to mobilize savings for the housing sector, and a more stable and modern legal framework. Local cost financing (25?) is included because of the current financial constraints of FONAVI and serious fiscal constraints of the Government. It is also recommended because of the project's high social and institutional impact, in line with decisions already adopted for the Public Sector Management Technical Assistance, Municipal Development and Social Sector Management Technical Assistance Projects in Argentina.  - 4 - 10. Main Agreed Actions: Assurances were obtained during negotiations that: (i) FONAVI programs would be restricted to housing with economic standards and lower unit costs; (ii) SVOA would introduce new flexible housing designs' specifications to assist the construction companies to build more efficiently; (iii) SVOA would introduce improved and standard bidding procedures that would ensure transparency of the bidding process; (iv) SVOA would establish new national and provincial registries of beneficiaries that would favor those families with a proven need taking into account their capacity to mobilize savings; (v) SVOA would facilitate the participation of intermediate groups, such as cooperatives, in the housing programs in order to improve beneficiary selection and mobilize savings; (vi) SVOA would put into effect a new mortgage repayment system that would cap and make explicit all subsidies as noted earlier; (vii) SVOA would adopt measures to improve FONAVI's financial performance, through increased collections and loan recovery to generate sufflcient incremental revenue to cover costs and service the Bank debt; and (viii) SVOA would allocate funds among IPVs according to their repayment record and financial and operational efficiency. The whole regulatory system (embodied in the required FONAVI Resolutions), must be in place and approved by all appropriate authorities, as a condition of effectiveness of the proposed loan. Retroactive financing of US$2 r.illion would be provided for technical assistance, equipment contracts and pilot civil works concluded after April 30, 1988. Finally, as a condition of disbursement for civil works, SVOA and the IPVs must execute participating agreements. Execution of an agreement satisfactory to the Bank, between SVOA and BHN or other financial institution acceptable to the Bank, would be a condition of disbursement for the home improvement loans program. The release of disbursements after the initial US$150 million would be subject to the following conditions: (a) substantial progress on implementation of the "FONAVI Tax Compliance Plan" (payments by provincial and municipal governments of amounts owed to FONAVI on account of employers' contributions); (b) incremental revenue improvements directly attributable to the project would be at least double the entire FONAVI debt service payable during the twelve months previous to the date in which the initial US$150 million was fully withdrawn; (c) satisfactory progress in carrying out the project, the program (as defined in the Government's Policy Letter) and the FONAVI Resolutions; and (d) satisfactory progress in the implementation of the recommendations of the studies carried out under the technical assistance program, including studies on the possibility of replacing earmarked taxes, mobilizing private savings for housing, and increasing the role of the private sector in housing finance. 11. Benefits. The project would provide about 60,000 additional houses at a much lower unit cost than before. Additionally, some 40,000 houses would be upgraded and expanded. The proposed project would reduce the housing sector's fiscal deficit through its lower overall subsidies and higher savings and recuperation of mortgages that would more than compensate for the debt service under the Bank loan. Moreover, the higher FONAVI housing output will substitute for BHN low cost housing which in the past have been financed with Central Bank overdrafts. Socioeconomic benefits comprise the sharper targeting of subsidies (to those earning up to the 40th percentile) and the creation of about 180,000 man-years of employment.  - 5 - 12. Risks. The main r_sks are financial, legal and institutional. FONAVI tax receipts and loan recoveries are sensitive to high inflation rates and have fluctuated in the past. In part, these financial risks are not specific to the project but are associated with the country's macro- economic difficulties. In order to ensure a more steady flow of revenue, a new mortgage repayment system will be introduced, and the technical assistance component would strengthen the management and control of FONAVI's portfolio. In order to minimize the project risks, disbursements after the initial US$150 million would be subject to FONAVI's compliance with clearly defined improvements in its operational and financial performance. All agreed FONAVI reforms would be introduced through FONAVI Resolutions, which legal authorities have confirmed would be permitted under the current FONAVI legislation, backed by the Loan Agreement. SVOA is understaffed and its personnel is underpaid and unmotivated. The result has been administrative weaknesses and low productivity and staff morale. Moreover, the quality and efficiency of the IPVs vary widely. The proposed institutional and financial arrangements would facilitate project implementation while increasing efficiency of SVOA and IPV's, and ensuring that only efficient IPVs will be able to participate fully and take advantage of the proposed project. The technical assistance component, through the introduction of new procedures, training and the provision of equipment, would also contribute to improve SVOA's performance. 13. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments Washington, D.C. August 24, 1988  -6- SCHEDULE A ARGENTINA FIRST HOUSING SECTOR PROJECT Estimated Project Costs (In US$ million) FEC 2 of X of COMPONENT '-cal Foreign Total Total Base Costs 1. Civil Work: A. Two-bedroom houses 149.9 88.0 237.9 37 46 B. Three-bedroom houses 98.3 55.3 153.6 36 30 2. Housing Improvement Loans 39.4 23.1 62.5 35 12 3. Supervisions 15.4 0.0 15.4 0 3 4. Technical Assistance: 5.3 2.8 8.1 35 2 Base Cost 308.3 169.3 477.6 35 92 Taxes snd Duties 38.6 - 38.6 - 8 Total Base Cost 346.9 169.3 516.2 33 100 Physical Contingencies (102) 34.7 16.9 51.6 33 10 Price Contingencies (8%) 27.0 13.2 40.2 33 8 Sub-total Contingencies 61.7 30.1 91.8 33 18 Total Project Cost 408.6 199.4 608.0 33 118 Note: Totals may not add up due to rounding. Financing Plan: Local Foreign Total FONAVI 280.4 - 280.4 World Bank 100.6 199.4 300.0 Beneficiaries 27.6 - 27.6 Total 408.6 199.4 608.0  - 7 - SCHEDULE B ARGENTINA FIRST HOUSING SECTOR PROJECT I. Procurement Arrangements Procurement Method Total Local Value of Project Category/Element ICB LCB Shopping Other N.A. Procurement --- (US$ millions) ----------- 1. Civil Works 498.7 498.7 (249.3) (249.3) 2. Home Improvement Loans 79.6 79.6 (39.8) (39.8) 3. Supervision 19.7 19.7 (0.0) (0.0) 4. Office Equipment 0.80 0.09 0.06 1.0 (0.8n) (0.06) (0.04) (0.9) 5. Technical Assistance, 6.0 6.0 Consulting Services la (6.0) (6.0) 6. Auditing la 3.0 3.0 (3.0) (3.0) Total 0.80 498.8 0.06 88.6 19.7 608.0 (0.80) (249.4) (0.04) (48.8) (0.00) (300.0) / Technical assistance and auditing to be procured in accordance with Bank guidelines. Notes: 1. The N.A. refers to legitimate project costs for supervision of civil works (4S of total work's costs) but the Bank would not disburse against this category. 2. IBRD a ire in parenthesis. 3. Totals may not add up due to rounding. II. Disbursements Amount Category (USS million) Percent Civil Works 250 50 Home Improvements 40 50 Supervision -- -- Office Equipment 1 100 Consultants /Auditors 9 100 III. Estimated IBRD Disbursements ------------------ Bank FY ------------- --- 1989 1990 1991 1992 1993 Annual 35.0 70.0 80.0 70.0 45.0 Cumulative 35.0 105.0 185.0 255.0 300.0  -8- SCHEDULE C ARCrNTINA FIRST HOUSING SECTOR PROJECT Timetable of Key Project Processina Events (a) Time taken to prepares Four months (b) Prepared by: Staff of the Housing Secretariat (SVOA) (c) First Bank Mission: November 1987 (d) Appraisal Departure Date: April 1988 (e) Negotiations: August 1988 (f) Planned Date of Effectivenesss November 1988 (g) List of PCRs N.A.  - 9 : SCHEDULE D THE STATUS OF BANK GROUP OPERATIONS P of 2 A. STATEMENT OF BANK LOANS AND IDA CREDITS (As of March 31, 1988) ARGENTINA Amount less Loan No. Year Borrower Purpose Cancellations Undisbursed (US$ million) Fully disbursed loans (18) 901.6 1521 1978 Argentina Grain Storage 87.0 22.5 1761 1979 Argentina Yacyreta Power 210.0 1.0 2031 1981 Banco Nacional Oil and Gas 87.6 34.7 de Desarrollo Credit 2032 1981 Yacimientos Refinery 200.0 3.0 Petroliferos Conversion Fiscales 2063 1981 Banco Nacional Industrial 100.0 31.7 de Desarrollo Credit II 2296 1983 Argentina Highway 100.0 22.6 2592 1985 Yacimientos Gas Utilization 180.0 165.2 Petroliferos and Technical Fiscales Assistance 2032-1 1986 Yacimientos Refinery 116.0 8.8 Petroliferos Conversion Fiscales 2641 1986 Argentina Water Supply 60.0 59.5 2675 1986 Argentina Agricultural 350.0 172.8 Sector Loan 2712 1986 Argentina Public Sector Mgt. 18.5 13.6 2751 1986 Argentina Power 14.0 14.0 Engineering 2793 /a 1987 Argentina Small and Medium 125.0 125.0 Scale Industry Credit 2805 /a 1987 Argentina Port 50.0 50.0 2815 1987 Argentina Trade Policy 500.0 4.0 2854 /b 1987 Servicios Power 276.0 276.0 Electricos Distribution Gran B.A. 2920 /b 1988 Argentina Municipal Dev. 120.0 120.0 2923 7b 1988 Argentina Banking Sector 400.0 400.0 TOTAL 3,895.7 of which has been repaid 713.9 3,181.8 Amount Sold 12.8 Of which has been repaid 12.8 Total now held by Bank 3,169.0 Total undisbursed 1,524.4 /a Not yet effective. /b Not yet signed. 5/05/88  - 10 - Schedule D Page 2 of 2 B. STATEMENT OF IFC INVESTMENTS (As of March 31, 1988) ARGENTINA Amount in USSm. Year Obligor Type of Business Total Eauitv Loans 1960 Acindar Industria Arg.S.A.* Steel Products 3.7 - 3.7 1960 Papelera Rio Parana, S.A.* Pulp and Paper 3.0 - 3.0 1961 Fadesa S.A.* Automotive 1.5 - 1.5 1962 Pasa* 3.0 _ 3.0 1965172 Celulosa Argentina, S.A. Pulp and Paper 12.5 - 12.5 1969175 Dalmine Siderca, S.A.* Steel Products 17.0 17.0 1969 Editorial Codex, S.A.* Printing 7.0 2.0 5.0 1971/73 Calera Avellaneda, S.A* Cement 5.5 - 5.5 1977/84 Alpargatas S.A.I.C. Textiles & Fibers 30.4 2.0 28.4 1977 Soyex S.A. Soybean Processing 25.0 - 25.0 1978 Massuh, S.A. Pulp and Paper 29.9 2.4 27.5 1978/ Juan Minetti, S.A. Cement 103.0 - 103.0 1978/79 Ipako-Industrias Chemicals and 20.3 2.0 18.3 82/87 Petroquimicas Arg. Petrochemicals 1979/83 Alpesca S.A. Fisheries 6.8 1.6 5.2 84 1984/86 Petroquimica Cuyo S.A.I.C. Petrochemicals 46.6 4.0 42.6 1986 Inversiones Industriales Capital Market 1.3 1.3 - S.A. and Roberts S.A. 1986 Atanor S.A.M. Chemicals 8.0 1.0 7.0 1986 Banco Roberts S.A. Capital Market 10.0 - 10.0 Hidra Oil Chemicals and 80.0 - 80.0 1987 Garovaglio/Zorraquin Food & Food Proc. 13.0 - 13.0 1987 Terminal 6 Port, Storage 5.5 - 5.5 1988 Bunge y Born Food & Food Proc. 40.0 - 40.0 1988 Arcor Food & Food Proc. 12.0 - 12.0 1988 BRLP Dev. Finance 30.0 - 30.0 1988 Astra Chemicals 12.4 - 12.4 1988 Chirete Chemicals 5.2 5.2 - 1988 Bridas Chemicals 20.6 - 20.6 1988 Banco General de Negocios Finance 10.0 - 10.0 Total Gross Commitments 563.2 21.5 541.7 Less Cancellations, Terminations Repayments and Sales 225.5 2.0 223.5 Total Commitments Now Held by IFC 337.7 19.5 318.2 Total Undisbursed (IFC only) 164.2 8.8 155.4  ___________ ~~~~~~~~~~IBRD 12432R2 ., 't B O l I V I A \ 6/- < . ! OCTOBER41984 SOUTH AMERICA * S a* "N I1L,L.<, -N . PARAGUAY . g~~>, . )M'JU 4 i-\>_ , 1Argentina A 7I ' - ' ? 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