Tunisia - Fifth Urban Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No.7621-TUN STAFF APFRAISAL REPORT REPUBLIC OF TUNISIA FIFTH URBAN PROJECT APRIL 30, 1989 Infrastructure Operations Division Country Department II Europe, Middle East and North Africa Regional Office ;hs doeumet has a res d d_sbon _ad may be used by recipient "ii the perfXim of  CURRENCY EQUVALENIS The exchange rate for the Tunisian Dinar is floating. The rates used is this report are the ones officially quoted as of April 13, 1989: 1 'Tuni-sian Dinar (TD) - US$ 1.07 1 US Dollar (US$) = TD 0.94 WEIGHIS A,D MEASURES Metric System ABBREVIATIONS AND ACRONYMS AFH - Agence Fonciere d'Habitation (Land Development Agency) BCT - Banque Centrale de Tunisie (Central Bank of Tunisia) BE - Banque de l'Habitat (Housing Bank) CENT - Caisse d'Epargne Nationale Tunisienne (National Savings Fund) CNEL - Caisse Nationale d'Epargne-Logement (Savings and Loan Fund) CNRPS - Caisse Nationale de Retraite et de Pr6voyance Sociale (Social Security and Retirement Fund) CNSS - Caisse Nationale de S6curit6 Sociale (Social Security Fund) CPF - Conservation de la Propriete Fonci&re (Land Registry) DGATU - Direction G6n6rale de l'Aminagement et de l'Urbanisme (Directorate of Regional and Urban Planning) DT - D.-strict de Tunis (District of Tunis) FNAH - Fonds National d'Am6lioration de l'Rabitat (National Housing Improvement Fund) FOPROLOS - Fonds Social pour la Promotion du Logement des Salari6s (Workers' Housing Fund) IFC - International Finance Corporation LIS - Land Information System NER - Ministare de l'Equipement et de l'Rabitat (Ministry of Public Works and Housing) MPF - Ministere du Plan et des Finances (Ministry of Planning and Finance) ONAS - Office National d'Assainissement (National Sewage Company) OTC - Office de la Topographie et Cartographie (Office of Topography and Cartography) SAL - Structural Adjustment Loan SNIT - Soci6t6 Nationale Immobiliere de runisie (National Real Estate Company) SONEDE - Societe Nationale d'Exploitation et de Distribution des Eaux (National Water Company) SPROLS - Societe de Promotion des Logswents Sociaux (Social Housing Developer) STEG - Societe Tunisienne d'Electricit6 et de Gaz (Gas and Electricity Company of Tunisia) TI - Tribunal Immobilier (Land Tribunal) UNDP - United Nations Development Program FISCAL YEAR January 1 - December 31  FOR OMCIAL USE ONLY REPUBlIC OF TUNISIA FIFE1 URBAN PROJECT Table of Contents Page No. Loan and Project Summary. ....................................... . (1) L INTRODUCTION 1 IL SECTOR CONTEXr A. Urban Growth and the Housing M ar bet 2 B. Sectoral Isuss.....ue......s. ....0. .... 4 C. Institutional Framework ............................. .. . ... 5 D. Housing Finance within the Evolving Financial Sector........ 8 E. Government's Housing Policy, Bank Sector Experience and Rationale for Involvement ....... ..... * ............. 10 DCL E: THE F CIALCDUlERMEDIARY ............................. 14 IV. THE PROJECT A. Objectives ............. .... ............................ ................. 19 B . Desc ript ion . . . . . . .0.* . . .. .. .. .. .. .. . .... .. . . . .. . . .&. 20 C. Line of Credit to CNEL/BNI ............ .a............ 21 D. Institutional Assistance to CNEL/BH. AFH, SNIT and MER...H.. 25 E. The Land Information Management Compo tonent .................. 26 F. Project Cost and Financing ................................ 27 G. Procurement, Disbursement and Special Accounto....*.....O... 30 H. Audits, Monitoring and Supervision.................-.0...... 32 V, PROJECT JUISFICATION A. Hosng........s.....n...... 32 B. Land Information Management ........................... 34 C. Environmental. Impact m p a ct... . .. ... . ...... . . ... 34 VI. AGREEMENTS AND RECO IENDATIONS .......................... 34 This report is based on the findings of an appraisal mission to Tunisia in October/November 1988 composed of Messrs. Veuthey (Sr. Urban Planner), Chr6tien (Housing Finance Specialist). Hovnanian (Urban Engineer), Lacour (Housing Specialist), Mrs. Engelhard (Lawyer), Messrs. Canel (Consultant: Land Information), Barbier (Consultant: Urban Regulations) and Mrs. Bodnar (Financial Analyst). Ms. Muller typed the report. Mr. Lucenet prepared the cost tables and graphics. Mrs. Snell-Tesh edited the report with Mr. Sterling who also prepared the financial projections for CNEL/BK. This document has a restricted distribution and may be used by ecipients only in the prformance |of their ollcial duties. Its contents may not othesis be disclm without Wofld Bankc authofiztion.|  - (it) - Table of Contents Page No. MSr OF ANNEXES 1. Estimated Disbursement Schedulu ....... 36 2. Project Cost Table ........ . 37 3. Caisse d'Epargne Logement (CNEL) ............. 38 4. CNEL Income Statement and Balance Sheet (1984-1986)............ 44 5. BI Projected Financial Tables (1988-1993)...................... 46 6. BE Definition of Performance In dicators 50 7. CNEL/BH Technical Assistance for Transformation................ 51 8. BR Subproject Appraisal Model Form....... 54 9. Schematic Description of Housing Sector in Tutisia *.*....... 55 FIGIUREStrAiBLES 1. Population and Urban Growth (1975, 1984, 1993).0.060,6e..00.... 2 2. Housing Production (1977-1986) ........ .. ..... ..6.*0.0 .... 3 3. Housing Demand and Affordability (1985-1991)8...... 3 4. Interpots and Inflation Rates (1981-1988) ................. 9 5. Location and Amount of Previous Urban Projects (1973-1988)..... 12 6. Investments in Real Terms (1980-1988) ...................... 13 7. Comparison of Characteristics of CNEL and BH ................... 16 8. Financial Performance Indicators (1988-1993) ................... 19 9. Project Elements Description*,** ............. 21 10. Income Distribution and Affordability ........................... 22 11. Project Cost and Financing ..................................... 28 12. Project Financing Plan ......................................... 29 13. Disbursement Arrangements .................. 31 MAP: IBRD 18707 (0388d - Text) (0397d - Annexes)  - (i) - REPUBLIC OF TUNISIA FITH URBAN PROJECT LOAN AIND PROJECT SUMMARY Borrower: Republic of Tunisia Beneficiaries: - Banque de l'Habitat (BB) - Ministry of Equipment and Habitat (HER) - Ladd Registry (CPF) - Office of Topography and Cartography (OTC) Amount: US$58.0 million Terms: Repayable in 17 years including five years of grace at the standard variable interest rate. Project ObJectives: The principal objectives of the project are to: (i) increase the supply of affordable low-income housing programs through mobilization of domestic savings and through rationalization of resource allocation by transforming the savings and loans fund (Caisse Nationale d'Epargne Logement 1CNEL]) into a housing bank (Banque de l'Habitat [BHU), and providing a line of credit to this restructured institution for low-income housing programs; (ii) increase the share of the formal private sector in land and housing development, and in surveying activities; and (iii) start modernizing the land usuagement system, by simplifying the procedures of land registration and exchange. Prolect Description: The project comprises the following three components: - housing finance: the core of the project, which includes the transformation of CNEL into a housing bank, with the necessary accompanying measures like training and technical assistance, as well as a line of credit to the new bank in the amount of US$51.0 million; - institutional strengthening of the Ministry of Housing to implement aad monitor the new housing policy adopted in June 1988 by the Government, including a new regulatory framework facilitating private land and housing development and restructuration of the parastatals SNIT (housing company) and AFJ (land developer). - land information management including the modernization of land registration and the production of base topographical maps.  - (ii) - Benefits and Risks: The project would improve housing finance by increasing the private share in housing development, further mobilizing local savings, and rationalizing the use of public resources allocated to the sector. Project benefits affecting land information management will come from (a) improved security of tenure (legal aspect of cadastre) and (b) improved knowledge of spatial development (maps and topographic plans). The main benefits include the following: (i) speeding up of land transactions to achieve more efficient land uses; (ii) expanding the use of credit to finance investments; and (iii) facilitating land consolidation and land redistribution, which are essential conditions for improving the productivity of land. The main risk is related to the ability of the institutions' management and staff to effect the organizational changes. Other risks are the possible delays in the expected increase o' private sector involvement, and reluctance of those persons with vested interests in the administration to streamline procedures. To minimize these risks, action plans are being prepared by BE and the agencies in charge of land registration (OTC and CPF) and a comprehensive technical assistance package has been included in the Project.  L IDNRODUCTION 1.01 C_rrent Situation. Tunisia is already highly urbanized and urbanization is expected to continue at a fast pace. Of the total population of 7 million, 4 million live in urban areas, 2.5 million being concentrated in Tunis and three other coastal cities, in which most non-agricultural economic activities are also located. By the year 2000 more than 7 million people will be living in cit,es. Current demand for housing is estimated at 45,000 units a year and is rapidly growing. Up to now Tunisia has been successful in avoiding many of the worst features of rapid urbanization; slums and homelessness are relatively uncommon, as indicated oy low average occupancy rates of 5.3 inhabitants (or 1.03 households) per dwelling. Moreover, basic utility services have improved considerably over recent years in most urbsn areas. 1.02 Sector Issues. The ability to meet future needs, even to preserve the achievements, is jeopardized by shortcomings in the regulatory framework, standards and institutions as well as by a lack of appropriate financing. Substantial inefficiencies in housing and land management have resulted. Much of urban housing development has slipped o'it of control into the informal sector, where official standards are disregarded and utility services are often difficult to obtain. Where official stendards are applied, urban housing densities are low and the cost of services correspondingly high. A severe long-term problem of land registration has emerged; ownership is assured by the Torrens system of registering rights in a land book kept by the State, but only 501 of land in use has been registered and only about 32 of registerable plots have up-to-date titles. At the present rate, registration of all plots might take decades to complete. 1.03 The housing sector also lacks adequate financing. The housing finance agency (CNEL), which financed low-income housing through a contractual savings scheme, has experienced difficulties because of rigid regulations concerning saving and lending products and the inability of the State system to supply housing, which resulted in withdrawals by depositors. Since the desire for housing is a powerful incentive to financial saving in Tunisia and since lending for houwing by the deposit and investment banks is limited by the higher costs of loans and the difficulties of securing collateral, CNEL had to be restructured to operate with greater flexibility in the liberalized financial sector. 1.04 Recent Actions. In keeping wich the broad economic liberalization in progress in Tunisia, the Government adapted a new housing policy. Its principal features are: (a) an increase in the supply of land for housing by facilitating more private activity and by reorienting the public land development agency towards low income households; (b) an increase in the upply of financing by restructuring the housing savings institution; and c) a revision of outdated building and infrastructure startout and updating the urban planning regulations. In March 1989, the Parliament passed a law allowing the creation of the new housing bank (BB); El was formally created by its shareholders meeting on April 28, 1989. 1.05 The Project. The proposed project would help implement the Government policy. It aims at: (a) increasing the supply of affordable low income housing programs by transforming CNEL into a full-fledged housing bank and by providing it a line of credit of $51 million; (b) assisting the Ministry of Housing in implementing and monitoring its new housing policy, in particular a new regulatory framework facilitating, private land and housing development; and (c) initiating the modernization of the land registration system.  -2- H. SECTOR CONTEXT A. Urban Growth and the Housing Market 2.01 Tunisia is a highly urbanized country with 4 of its 7 million population, or 562, living in urban areas. Economic activity and urban populations are concentrated in Tunis (1.8 million) and three other cities along the east coast. Return of migrant workers from abroad has recently boosted the pace of urban growth, from 3.22 between 1975-84 to 3.71 in 1986, compared to a national population growth rate of 2.22. By the year 2000, Tunisia's cities are projected to house more than 7 million people. This rapid increase translates into continued heavy demand for new infrastructure, serviced land, housing, and the financing required to create it. Figure 1. Population and Urban Growth I0 ; 6 ............... ......... . n ......................... ~~~~~~~........................... .... ............... ................. 2 (census) (census) (estimates) 2.02 Despite the virtual standstill in the processing of land titles and a 501 shortfall in the availability of servicsd land, thie housing market has successfully responded to the increase in demand for housing, both quantitatively and qualitatively. The urban housing stock has increased at about 5% annually to about 850,000 dwelling units, 701 of which are owner-occupied and 301 rented. Annual production has averaged about 40,000 to 50,000 units annually over the last decade; in 1984, for each thousand inhabitants, eight houses were built, compared with five per thousand for Algeria and four for Morocco. The occupancy rate in Tunisia decreased from 5.6 to 5.3 inhabitants per unit between 1977-86, or 1.03 households per unit, so that the number of dwelling units is now close to the number of households. The number of rooms per unit has also increased and access to basic utility services has improved considerably in recent years in most urbatn areas. An ongoing successful upgrading program, partly financed by the Bank, is bringing up services to 25.000 households or 150.000 people.  -3- Figure 2. Hosig Production 1977-1986 (1,000 of Units) 300 * Infonnal Sector 23 % 200../i~ Private Sector too 0 . Public 4 / Sector 0 ii57=t 1977-1981 1982-1986 (Source: Retrospective du Verne Plan. Perspecives du Vieme Plan. DvasseLt 1986) 2.03 Privately produced housing accounts for about 70% of current housing stock. Pzivate individuals building l.egally (with a building permit) and illegally (informal sector) account for nearly all of the private market, developers for only 3X. Over the last decade, public housing construction, catering to middle and upper income groups, appeared to be taking on a larger role, with annual public housing construction approaching private construction volume in the late 1970s, at around 12,000 new urban units a year. Housing demand peaked along with the economy in the early 1980s; with public housing programs slacking off dramatically to fewer than 5,000 units annually at present, private efforts have filled the gap. In particular, a quarter to a half of recent growth in the housing market is attributable to the informal sector, which caters to the lowest income group, who can afford neither housing loans nor infrastructure and structures built to inappropriately high legal standards. 2.04 Current housing demand can be estimated at about 45,000 units per year, taking into account population growth and renewal of existing stock. Half of these units are required by the lowest income group under the tenth pe:centile, 30% by households between the 10th and 65th income percentiles, and 20S by households above the 65th income percentile. Table 3. Housing Demand and AffordabiitY Inmonmt - Uni Numbe Number Annual value Affordable to household We avrageos ot units of unfts of the nsw Incom (2) Tqp. of (O00 TD ('000 TD for the peiiod per yew dm - housina E11 In 19888) In_1888 1986-91 MTD 1988 ..E.month - minlmun 0-7 5.t 136.600 22.767 126 0-134 0-10 suburbaln 9-12 11 48,40 8,067 89 134-268 10-50 sub. amefior6 13-18 1 31,700 5.283 79 268-350 SO-66 doononiqu 19-28 21 19,300 3,217 68 360 *500 6e-80 lwndino 28 3 35.000 5.833 175 500+ 80+ OTAL 271.00 45.167 536 (source: SIDES 1988) (1): corresponds to local temInology; the *91i1ngs of 20,000 and 30.000 (1989) TO mendoned In the repo, correspond here to 19.000 wad 28,000 (1988) TD. (2): Househoid Income for Tunis. Assumes dounparynt - 20 to 30 % df unit cost.  -4- B. Sectoral kues 2.05 The main constraint to the proper functioning of the sector is of an institutional and regulatory nature. Indeed, the institutional framework (paras. 2.08 to 2.14), in place in the housing sector for the last 15 years, corresponds to previous policies rooted in State intervention, This rigid monopolistic framework needs a serious overhaul if the Government expects to carry out and monitor its recently adopted liberalization policies in the financial sector as a whole, and in the housing finance sector in particular. Inappropriate standards, procedures, and regulations affecting virtually every aspect of urban development constitute, a major constr.int to sector development making it practically impossible, until very recencly, for private developers to operate in the formal sector. Another important constraint is financial: housing lenders' supply of funds has dwindled recently due to public sector contraction and to lenders' inability to continue to attract private n-vings for lack of affordable bousizng products once saving contracts were completed. Finally, the dwindling supply of urbanisable land is the main physical constraint in growth in the housing se*ctor, making it more urgent than ever to begin the difficult process of intxoducing new and simpler administrative procedures for land titling and transfer and better land information systems. 2.06 The inappropriateness of urban planning and construction procedures, regulations and standards is not a new problem but the economic costs implicit in urban development which bypass them has been mountiirg rapidly as sucb bypassing has become more widespread. The pressure of demand and the limited supply of affordable formal housing have been such that, bit by bit, practices which, in a normally functioning housing market, should be the exception are, in fact, becoming the rule. Administrative and bureaucratic requirements for private developments have been so unrealistic that the public land development agency has become a monopoly, unable to supply enough serviced lots to me t the demand. On the one hand, in informal sector operations, public lands are illegally seized and subdivided into lots without servicing streets and utilities. The lots are appropriately sized and contain good quality houses which are illegally built. On the other hand, the formal sector has been subdividing public and private land legally into lots which were too large to be affordable to most buyers. These large lots contribute to the scarce supply of land appropriate for housing, and the actual density of 20 to 30 units per ha. requires twice as much land the average development built in similar areas in other countries. This situation has recently improved as explained in para. 2.10. 2.07 This limit in the supply of appropriate land is fast approaching, but the basic information necessary to identify what land is settled and what remains is not available to the authorities responsible for managing it. A major reason for this is that registration and title transfer procedures are lengthy and the transfer tax is so high that the land market functions basically outside the law: only half the land has ever been registered and a very small percentage of land sales are recorded. If the rigidities in the regulations, procedures, and norms are not brought into line with the realities of the market as it has developed, the apparent gains in quantity and quality of housing will be cancelled out as the physical limits of developmen- are reached. Urban development will evolve into an increasingly anarchic process beyond public control, and one that will cost dearly to  rationalize in the future. Moreover, if important adjustments are not made in the housing finance system, credit for housing (which is a major potential 0 source for the domestic ressource mobilization), will remain outside the realm of most households, an economic handicap which the housing sector can ill afford. C. Instit tional Framework Overall Jastitutional Structure 2.08 A full range of public institutions has for many years dominated all stages of land management, land development as well as housing construction and housing finance. (a) Housing and Land Development The Ministry of Public Works and Housing (Ministere de l'Equipement et de l'Habitat, or MEH) has overall responsibility for the housing sector and tutelage over the various a&encies invilved in the production and financing of housing. For housing construction, these are: the Real Estate Company (Soci6te Nationale Immobiliere de Tunisie, or SNIT) at the upper end of the scale; the Retirement and Social Security Fund (Caisse Nationale de Retraite et de Prevoyance Sociale, or CNRPS, and the Social Housing Developer (Societe de Promotion des Logements Sociaux, or SPROLS), the housing arm of the Social Security Fund (Caisse Nationale de S6curite Sociale, or CNSS), which have built rental housing for their contributors. Other agencies under the Ministry of Public Works and Housing include an Urban Redevelopment Agency (Agence de R6habilitation et de Renovation Urbaines, or ARRU), which executed two earlier Bank projects, and an agency that constructs housing for families relocated prior to adoption of an in-situ upgrading policy (Programie National de Resorption des Logements Rudimentaires, or PNRLR), and a Land Development Agency (Agence Fonciere d'Habitation, or AFH). (b) Housina Finance The Government savings and loan bank, Caisse Nationale d'Epargne Logement (CNEL), which has recently been transformed into BR, was the only financial institution providing housing finance on a large scale. CNEL/BH also manages a special fund financed by a payroll tax used for providing targeted subsidies for housing for lower-income wage earners earning less than twice the minimum wage, called Fonds Social pour la Promotion du Logement des Salari6s (FOPROLOS). The MEH administers another fund financed by a rental tax for the housing improvement loans to homeowners and local Governmeats, called Fonds National d'Am6lioration de l'Habitat (FNAH). (c) Land Information Management The land information management, which includes both land  - 6 - registration (security of tenure) and mapping activities, are fragmented among several agencies. The main ones are: the L2nd Tribunal and the Land Registry (Conservation de la Propriete Fonciere, or CPF) which issues titles, both under the Ministry of Justice. The Office of Topography and Cartography (OTC) under the Ministry of Public Works and Housing is In charge of defining plot boundaries, production of cadastral maps, topographical surveys, and all cartographic activities. A number of other parastatal agencies report, produce and manage information about specific types of land (for example, ARAPPI, an agency in charge of acquiring, restructuring, and consolidating irrigated public land), and there are three separate land development agencies for housing (AFH), industry, and tourism, ae well as for specific project areas and land used by each of the technical ministries. Petfonmiaue of HousiK Sector Iastitutions 2.09 Land Development. Broadly speaking, the public institutions involved in housing construction and finance, and the structure within which these institutions operate, do not function well and have been slow to adapt and change in response to experience. Further institutional adjustments, particularly in the areas of land subdivision and housing finance, are continuing and will be supported in the proposed project. During the current plan period (1987-91), AFH has acted as executing agency for the site and service component of the Fourth Urban Project and has been increasing the share of smaller (100-200 M2) lots it its own program. In October 1987 the APE board confirmed this new strategy by endorsing a 75% allocation to smaller lots. However, APE's volume is still too low, its turnaround time too long (seven years), its lots too low priced to assure adequate liquidity and working capital, and its staff has increased by 50% since 1981, of which less than 10X are technical staff, even though its activities have not increased. A broad restructuring of AFH and its operations is envisaged and a contrat-programme now in preparation was discussed at negotiations. 2.10 Housing bevelopment. A similar evolution'has occurred in SNIT. Created more than 20 years ago (1957), SNIT was until the early 1970s responsible for "managing" all aspects of Government funded housing production: land purchase and development, housing finance intermediation housing construction, and sales. Since the creation of AFH in 1973 and CNEL in 1974, SNIT's primary function has been to construct Government-subsidized housing in urban und rural areas, including middle-income housing prefinanced by CNEL and FOPROLOS, and to purchase and ievelop the land it needs for this housing. SNIT accounts for about three-quarters of publiciy funded housing and remains the largest real estate develocer in Tunisia. SNIT suffers from many of the same problems as AFE: neglect of lower-income demand, shortage of land, land turnaround time (five years), and financial weaknesses; its production has fallen down to 3,600 units in 1987. A restructuring proposal approved by its board in 1987 and subsequently by the Ministries of Public Works and Housing and of Finance, is now being carried out, and a contrat-programme is under preparation and was discussed at negotiations. Information obtained after appraisal in January 1989 indicate improvements, in particular SNIT's outstanding balance to CNEL has decreased to TD 30 million at the end of 1988 from TD 105 million at the end of 1986.  - 7 - 2.11 Housing Finance. CNEL was a financially autonomous savings and loan institution established in 1974 under the joint tutelage of the Ministries of Finance and of Public Works and Housing. CNEL's initial role was to mobilize domestic savings for housing by offering attractive terms to households subscribing to a four- or five-year "contractual savings" scheme. Savings mobilization was greater than expected and CNEL quickly expanded the number of loans granted to subscribers in advance of their savings contract completion. Charged in 1977 with managing FOPROLOS funds, CNEL moved into upstream prefinancing of housing construction by SNIT. In less than ten years, CNEL became a major player in housing finance, and was the logical choice for financial intermediary for the site servicing component of the Fourth Urban Project. 2.12 However, since 1985 CNEL encountered several financial difficulties (more details are given in Annex 3,. The Government was becoming increasingly aware of the need for a full-service housing finance institution; CNEL's range of activity was too narrow for it to qualify. Given CNEL's experience and the shortage of skilled managers, it was more efficient to change its statutes and convert it into a housing bank than to broaden its savings and loan procedures or to create a new institution. CNEL has recently been transformed as the Housing Bank (Banque de l'Habitat or Be), a process the proposed project is designed to assist. Performance of Land Information Maagement Insns 2.13 Overview and scale of Land Registration Issues. This process of institutional maturation and evolution as seen above in the housing finance and production sectors is only just beginning among the institutions involved with land information management. Tunisia uses the Torrens system of land registration, in which land tenure rights are guaranteed by the registration of titles in a land book kept and guaranteed by the State. This is not the case with the registration of deeds as in France or the USA, for example. Registration was made compulsory in rural areas in 1964 but remains optional in urban areas. To date only about 50 of registerable land has been registered, and only about 31 of registerable plots have up-to-date titles. Despite some improvements in their procedures and decentralization of offices, the pace of land registration is still very slow and one estimates that it would take another century to complete the cadastre of the whole country at the current pace. Indeed, currently only 3.5 million ha of a total of 16.2 (of which only about half would warrant registration) have been registered, or about 300,000 titles of a total of 1.5 million, and about 300,000 plots have been graphically registered of total of 2.1 million. The current average pace is about 35,000 ha or 10,000 titles per year. The difficulties confronting these organizations are compounded by institutional deficiencies which cause a significant reduction in potential productivity and also increase costs. 2.14 Impact of Deficiencies in Land Information. The importance and urgency of reformilg agencies, regulations, and procedures involved in land information management can better be understood by summarizing the associated activities which depend on smooth functioning of a systematic land information system. These include urban development, land taxation, rural and urban infrastructure projects, farmland restructuring, anJ the allocation of rural collective land. Incomplete land registration means a lack of basic data for land-use control and planning purposes, long delays in establishing site boundaries and in registering sites for Government land agencies, and uncontrolled informal sector encroachment on Government land:  - 8 - (a) Urban Development. Through its agencies, Government is unable tc develop land fast enough to meet requirements for urban development, and the system only starts now to encourage private developers to fill this gap. In the absence of a complete land registry (cadastre), Tunisia does not have a workable land tax system. With decreasing revenues from other sources, such as petroleum reserves, Government must examine other sources of revenue, such as an equitable land-tax based on professionally assessed land values. Such tax could be (and is in many countries) a particularly suitable source of revenues for municipalities. (b) Rural Development. The impact on rural areas is potentially even more of a handicap to national development. The potent benefits of land restructuring, the systematic *djustment of property boundaries to form viable farming units, mainly in areas irrigated througia Government schemes, are threatened by difficulties in getting these lands registered soon after the completion of restructuring and by multiple-ownership. These difficulties also result in problems in administering rural credit. Rural collective, or tribal, lands are allocated to individuals or family groups but the long wait between allocation and registration causes unnecessary duplication of effort and delays realization of the benefits of this massive program; a million hectares have been allocated to date, with 500,000 hectares currently unallocated. (c) Cartography. Infrastructure projects in urban and rural areas are also handicapped by cartographic deficiencies. There is an urgent need to update and create base maps, without which it is difficult for the water, drainage, and power utilities to prepare preliminary designs. These utility agencies end up spending substantial funds to commission urban scale maps for their projects while needlessly duplicating effort. It is estimated that about 370 sheets at 1:25,000 scale and about 90 sheets at 1:50,000 scale are needed for many development projects, in particular infrastructure projects involving roads, water supply, and power. For urban areas, only 121 of the 1.8 million ha. of municipal land has been mapped at the required scales of 1:2000 or 1:5000, covering about 60% of the current urban population. D. Housing Finance within the Evolving Finaneial Sector The Fiancial Sector 2.15 The financial sector has undergone substantial change through a series of reforms that began in January 1987. Interest rates were fixed by the Central Bank and are now largely free; credit allocations were closely regulated through a system of prior authorizations and are now left to the banks; and a money market has been established to replace rediscounting for achieving monetary goals. There remaina a system of preferential credits with somewhat lower interest rates for priority sectors (exports, small industries, and less favored regions), but these interest rates have already been raised close to the inflation rate and are being brought up gradually to the money  - 9 - market rate that reflects the supply and demand for funds in the interbank market. The sector is now in most respects free of controls and more diverse than three years ago. An inactive stock exchange exists, which the authorities are trying to revive with IFC/UNDP assistance. 2.16 Money Market. The primary determinant of interest rates now is the money market rate, which the Central Bank sets each week through its accommodation of the banking system's liquidity needs. It has tluctuated 2-3 points above the inflation rate, averaging around 9.5%, until the increasing liquidity of the banks recently caused it to fall to around 8.51 compared to an inflation rate of about 7 percent. The money market also comprises a CD market, which has been growing rapidly, and a framework for commercial paper, of which little has been yet issued. These instruments offer yields close to the basic money market rate and constrain the banks to offer competitive rates on large deposits. Even small deposits get rates close to or above inflation. Bank lending rates are also determined by the money market rate because the banks' spread ove- it has a cap set by the Central Bank. This cap was 3 points until it was rt ied in January 1989 to 2.5 points to encourage private investment and greater efficiency of financial intermediation. Apart from the preferential credits, it is the only significant control remaining over interest rates and is motivated by the authorities' concern that competition in the financial sector is still weak. But since it discourages banks from lending to higher cost and riskier borrowers, a study is being undertaken by the IMF under the SAL program to determine if the cap can be removed. Figure 4. Interests and Inlation Rates 14 12- j A- Inflation 10- | / \ o P_ o _ Commercial Banks _ t _ -_C ~ Lending Rates' % _ 8. O - -O - --;5<-CNEL Lending Rates CNEL Lending Rates _ to developers 4 - Commercial Banks 21 * Deposit Rate Urban IlIl Urban Transport II Urban IV _o CNEL Deposit Rates 1981 1982 1983I 198 198S 1986 1987 1968 * average of short and medium term loans (source: Intemational Financial Statistics, November 1988) Sources: C.N.E.L. 1987 Statistcs; and Intemational Financial Statistics. November 1988. 2.17 Regulatory Framework. The cotncern over the insufficiently competitive behavior of the banks reflects the authorities' awareness that the reforms have been imposed on the banks, which were comfortable with the old system. The habit of arranging business by common agreement, rather than through competition, is changing only gradually. The zest for competition is also held in check by the segmentation of the sector. Instead, the banks have be^ome more cautious in their lending, partly because their loan evaluation capabilities are often underdeveloped and partly they have inherited significant non-performing assets from the past, but now without the assurance of a back-up by the State. They rre highly liquid at present, but their profitabiiity as a percentage of assets is high and they should be able to  - 10 - provision adequately if they limit their dividends. They can also anticipate borrowing by the State to cover the budget deficit. 2.18 The segmentation of the sector is partly due to regulations and partly to specialization. Regulations distinguish between deposit banks, of which there are ten, and investment banks, of which there are nine. The latter are barred from taking deposits except in special cases and rely on long-term resources, though the money market gives them access to short-term money at slightly higher cost than deposits. They may not lend short-term, and the deposit banks may not lend for more than seven years. Apart from these there are eight off-shore banks, one of which is coming on-shore; a postal checking system; various social security and pension funds (caisses); insurances; portfolio management firms; and a leasing firm. The equity market is still minute, among other things because acco.inting and auditing are weak and because the tax treatment of other financial instruments is relatively favorable. The Housing Finance System 2.19 CNEL filled a niche within this system, though it did not provide a number of services that were in demand. Its contractual savings scheme met the needs of many middle- and lower-income earners wishing to buy a dwelling. The investment banks did not provide housing finance and thte deposit banks limited their financing to borrowers who could provide collateral other than mortgages, whose value was limited given the problems of land registration and the cumbersome judicial procedures. The caisses and the FOPROLOS together constitute a major source of financing for housing, but are restricted to target groups. But CNEL could not finance purchases of plots, upgrading or acquisition of existing houses, or rental apartment buildings. It also did not diversify its financial instruments because it felt it had a strong cash flow and lacked a mandate for a larger role. 2.20 The new BH is a transformation of the CNEL into a full-service housing bank. It will: (a) mobilize savings on a voluntary basis, where deposits are made without the promise that mortgage loans will automatically Fe granted in return; and (b) tap the financial market more aggressively by issuing a variety of financial products and borrowing locally or abroad to finance housing and land development. E. Government's Housing Policies, Bank Sector Experience and Rationale for Involvement Evolution of Housing Policies 2.21 At the time of the preparation of the Bank's Fourth Urban Project in Tunisia about six years ago, the priorities for Government policy were to initiate programs to upgrade informal settlements, where housing quality is good but services were lacking, and to take steps to reduce public subsidies to the housing sector and decrease Government involvement in housing construction in favor of its investment in infrastructure. These priorities have been successfully addressed in the establishment of an upgrading agency and of its program, and in a shift in public investment reflected in the Sixth Plan period (1982-86). The Government has progressively moved forward with reforms in 1987, borrowing rates on public housing loans were nearly doubled,  - 11 - better to reflect the market rate. In July 1988 the Government adopted a new housing policy whose main tenets are to: (a) increase the supply of land for housing by increasing densities, reserving sites, updating land registry procedures and mapping, reorienting the public land and housing development agencies towards low-income households, and facilitating subdivision and housing construction by private developers and local Government agencies; (b) increase the supply of appropriate financing for land development and housing by transforming the existing housing savings institution into a full-fledged housing bank (BR) and removing restrictions on active participation by the banking and insurance sector; and (c) reclaim leadership in the management of urban development by defining an active policy to oversee and direct growth, setting up a data base, revising outdated building and infrastructure standards, and updating the urban planning law. In March 1989, the Parliament passed a law allowing the creation of BE, which was formally created by its shareholders meeting on April 28, 1989. Previos Urban Prlets 2.22 Until now the Bank has granted four urban development loans to Tunisia: Loan 937/Credit 432-TUN, US$18 million, 1973; Loan 1705-TUN, US$19 million, 1979; Loan 2223-TUN, US$25 million, 1983; and Loan 2736-TUN, US$30.2 million, 1986, respectively). The first project was a quite successful urban planning and urban transport project including the rehabilitation of a suburban railway line in Tunis and the setting up of the Tunis District; the second project was directed to two municipalities, Tunis and Sfax; and the last two projects initiated the institutional upgrading ef ARRU and AFP. Urban IV became effective on April 11, 1987. At the request of the Tunitian authorities an amendment was made to the loan agreement in November 1988, allowing public and private developers to be eligible for construction/land development subloans through CNEL as financial intermediary. The implementation of these projects has permitted the Bank to better understand the housing sector in Tunisia, and therefore identify the sey issues that should be tackled at the national level as ongoing projects cannot but have a limited impact on the whole sector (in particular its financing aspects). 2.23 Project work has been supported by extensive sector work, namely the Housing Sector Review (1983), the Instituti.onal Housing Sector Review (1984) and a financial model for the housing sector (1987). Last year a Municipal Finance and Management Sector Study leadin& to the preparation of a First Municipal Development Project (Sixth Urban Project) was completed. Finally, a mini-housing sector review, prepared in May 1988, played an important role in the design of the housing policy endorsed by the Government in July 1988 (para. 2.21).  - 12 - Figure 5. Previous Urban Projects in Tunisia 0 h-enzel-B enurguuba |Zaghhuane ; < O ~~~~~~~~~ZriLal El Fahs 0 25 50 75kms 5- PREVIOUS d0rndt aPROJECTS glK )Sikta ioin TUNISIA: Ka WSlCairouan *Monastir Cost in Millions of constant 1988 $ US: 70 40 20 10 5 0 Urban 1 | Jd 0uDdrr / Urban 2 - - B_ u Zi Tfax Urban 3 Urbanr Gaofea O-9Transport T I ,<Gt,SIra Urban 4 Upgrading S Tozeuta / 9