Algeria - Housing Structural Adjustment Loan

Report No. PIC4381 Project Name Algeria-Housing Structural Adjustment Loan Region Middle East and North Africa Sector Housing Project ID DZPA36081 Borrower Democratic and Popular Republic of Algeria Implementing Agencies Conseil National de la Planification (CNP), Ministere de l'Habitat, Ministere des Finances Contact: Mr. M. Elias (CNP) Tel. 011.213.2.92.59.82 Fax. 011.213.2.79.94.72 Date Initial PID September 1996 Project Appraisal Date October 1996 Project Board Date February 1997 INTRODUCTION 1. The proposed Housing Sector Ajustment Loan (H-SAL) in support of Algeria's structural reforms aims at moving Algeria closer to its goal of an open, market based economy in the context of growth and increased employment. The proposed H-SAL would build on the ongoing Extended Fund Facility (EFF) and the recently approved Structural Adjustment Loan (SAL) (April 1996). It would help accelerate the structural shift of the housing sector from a supply driven, public dominated role, to a demand driven, market oriented sector, sustained by household savings, private construction enterprises and developers, and a developing mortgage market. BACKGROUND 2. The current economic structure of Algeria emerges from a centrally planned model of growth based on heavy industrialization financed by hydrocarbon revenues and from a series of structural reforms mainly undertaken after the sharp fall of oil prices in 1986 which triggered a gradual transition to a market economy. Algeria remains an oil-dependent economy where the share of the public sector, including about 400 national state enterprises and about 1000 local public enterprises, is estimated at more than 60 percent of GDP. The country's budgetary equilibrium and balance of payments viability are largely dependent on the performance of the hydrocarbon sector which accounts for 20 percent of GDP, 60 percent of fiscal revenues and 95 percent of exports. 3. Following the collapse of oil prices in 1986, the major reform measures implemented in the real sector until 1994 included the abolishing of state import monopolies, the transformation of most public enterprises into autonomous enterprises with no access to Treasury financing for new capital investments, decentralization of collective  bargaining, the dismantling of state farms and significant reductions in the subsidies of food and energy prices. In the financial sector, the Government introduced a new banking law in 1990 which incorporated modern bank prudential regulations and granted the Central Bank much greater autonomy with regard to monetary policy. In 1993, a major clean- up of the state banks' balance sheets was undertaken through a Treasury buy-back of non-performing bank loans amounting to more than 275 billion DA or 40 percent of total bank assets. 4. Owing to major inefficiencies in the state-controlled industrial sector and inadequate government policies for the development of the private sector, economic growth remained anemic over the course of reforms undertaken since 1987. Average annual GDP growth was negative over the 1986-94 period and, combined with the population growth, led to a cumulative decline of 21 percent in GDP per capita. Unemployment and inflation jumped from 17 percent and 12.4 percent in 1986 to percent and 29 percent respectively in 1994. In parallel, the shock caused by the 50 percent decline in Algerian terms of trade in 1986 led to a significant increase of its external debt from an outstanding amount of US$17.1 billion at the end of 1985 to US$ 28 billion (68 percent of GDP) by the end of 1994. 5. A renewed and deeper adjustment program was introduced by the new Government in 1994; it was supported by an IMF Stand-by and in May 1995 by a three-year EFF program of US$1.8 billion, and by World Bank loans, including a Structural Adjustment Loan of US$300 million in April 1996. Growth resumed in 1995 to reach 3.9 percent in the non-hydrocarbon sector, a modest, but important turnaround from the decade-long recession. To contain and then reduce the high unemployment rate in Algeria (28 percent unemployment in 1996 with a labor supply growth close to 4 percent), the non-hydrocarbon sector has to grow at faster than its current rate. As agreed in the Bank's assistance strategy for Algeria, this requires a medium-term framework based on a considerable acceleration in the pace of structural reforms that would facilitate a shift towards a private sector-driven growth path that is labor- intensive. THE HOUSING CRISIS 6. From 1979 onward, the Algerian Government has attempted to address the rapidly growing demand for housing by increasing the share of housing investment up to 15 percent of total public investment in 1986. This was mostly done through the public supply of 'social' housing units, either for rent in urban areas, or for home ownership in rural areas. Such social housing programs were temporarily halted after the oil shock, but resumed in 1992 and reached a peak in 1995, when a housing program of 115,000 units for rent in urban areas was launched despite the collapse of the housing finance system. 7. Due to the extreme reliance of the budget on oil receipts, public housing production fluctuated on a yearly basis, lagging behind demand and creating a pervasive housing shortage and construction delays. The gap in housing demand has been partly filled by the self-help construction sector, either officially based on administrative issuance of building permits, -2-  (see 1/) or 'illegally' through informal settlements. As a result, the average housing occupancy ratio peaked at 7.65 in 1990, with large variations among social groups. (see 2/) In Algiers, people are reportedly living in shifts, while slums and shanty towns are now spreading throughout the country and cover more than 17,000 hectares. According to Bank estimates, reducing the Algerian housing occupancy ratio to international standards will call for an increase of percent of the current housing stock, equivalent to 1.1 million units or seven times the 1994 production. 8. Despite the current adjustment program, and some progress made in reforming part of the housing legal and regulatory framework, structural imbalances are still prevailing in the housing sector, particularly in the following sub-sectors: the housing finance system; the housing subsidy system; the land market and the public construction sector. GOVERNMENT HOUSING SECTOR STRATEGY 9. While Algeria is facing a difficult transition period to overcome its long-lasting housing crisis, the Government is convinced that integrating the housing sector into the process of transition towards a market economy is now essential, and is committed to achieving this objective over the next five year period. The State's basic strategy is to shift from its current role of housing landlord, producer, and financier to a role of enabling agent or 'regulator' of the housing market. (see 3/) Four goals support this strategy: (a) phasing out the current regressive housing subsidy system and redirecting part of total subsidies towards targeted households, with special consideration to a one-time up-front grant associated with household savings; (b) reforming the housing finance system through the transforming of the Caisse nationale d'Epargne et de Prevoyance (CNEP) into an autonomous bank and the development of primary mortgage market lenders; setting-up a refinancing facility for mortgage loans to primary lenders; (c) improving the performance of the construction sector through restructuring, liquidating or privatizing public enterprises, and enabling greater participation of small and medium scale enterprises; and (d) developing property rights through regularizing the land market, expanding land registration, privatizing the public housing stock and increasing the supply of serviced land. 10. Recent progress has been made both in designing reforms for reaching the above goals (preparing the regulatory framework and implementing pilot operations to test the validity and the feasibility of proposed reforms), and in starting to implement them. First, the new housing policy formulation has been supported by extensive studies, in particular through the technical assistance component of the Housing Completion Loan (Loan 3561-AL). Among the main achievements are: a strategic study on housing finance, including the restructuring of CNEP and its future split between a housing bank and a small housing fund; identifying current subsidies and formulating a new housing subsidy policy, with special attention to low income households; and technical studies for splitting up large public construction enterprises. Second, the following significant progress has been made in the legal and regulatory framework: legislation governing the contractual relationship between owners and tenants; regulations governing housing developers; - 3 -  acceleration of the land titling process (with support of the Cadastre Project); and adoption of regulation for the creation of mutual funds, which are potential and traditional investors in the housing sector. Thirdly, progress in implementing the housing reform on the ground has started in three main areas: (a) restructuring public construction enterprises, with elimination of some 40,300 redundant positions, liquidation of some 172 local enterprises; and an increase in the private share of the construction of the public housing program, through outsourcing finishing activities to small firms; (b) launching pilot operations aiming at upgrading slum areas through provision of 'core units' of a minimum size (35 to 50 m2), rapidly built (less than one year) by small private enterprises, with significant cost savings; and (c) financial restructuring of the Offices de Promotion et de Gestion Immobilieres (OPGIs), along with upward revisions of public housing rents to progressively ensure better coverage of maintenance costs and facilitate the sale of the public stock. 11. Despite this recent progress, the State still exercises a predominant role in the housing sector, and the challenge for shifting from a public supply driven system to a demand driven and most privately supplied system is still ahead. A successful shift implies a carefully planned agenda of reforms (where both the phasing out of past and current practices and the actual introduction of proposed reforms are inter-twined), that will not jeopardize the fragile contribution to growth recently brought by the sector in the real economy and will not exert an adverse impact on the social front. Implementation of this agenda during the first two years of the transition period would constitute the sector adjustment program to be supported by the proposed H-SAL loan. THE PROPOSED LOAN COORDINATION BETWEEN THE H-SAL AND THE ADJUSTMENT PROGRAM 12. The proposed H-SAL will be in continuation of the support provided by the Bretton Woods institutions to the housing sector in Algeria, under the EFF and the SAL. Both institutions commend the Algerian authorities for their far-reaching stabilization and adjustment program over the last two years, despite the adverse social environment, and insist on the priority attention that the housing sector requires to confront the social crisis and achieve at a minimum a 5 percent annual growth rate in non-hydrocarbon output over the next three years. Several key actions supported by the IMF and the Bank have already triggered the adjustment process of the housing sector, namely: (a) the trade and exchange system liberalization in 1994/95 has generated a quick supply response by increasing the availability of imports of critical building materials; (b) the liberalization of construction prices in September 1994 has been an important factor for a better adjustment of demand and supply of building materials, either by discouraging the excessive use of these materials, or by encouraging new and less costly types of housing; (c) reforms of the financial sector have induced an upward revision of CNEP loan rates (22 percent) and term deposit rates (14 percent); (d) under the public enterprise reform agenda, the authorities have or are in the process of reducing the excess work force of public construction enterprises and are reconcentrating them in core activities; and (e) under the public finance reform agenda, housing - 4 -  public expenditures have been scrutinized through a Public Expenditure Review (PER). LOAN DESCRIPTION 13. The loan, which is currently expected to be US$200 million, would be made on a two-tranche basis. Cofinancing is being sought, in particular from the EU and the African Development Bank. The entire program of actions to be supported by the Loan has been split into the following areas of loan coverage: on the demand side: (a) reform of the housing subsidy scheme; (b) reform of the land market and development of property rights; and (c) reform of the housing finance system and development of the mortgage market; and on the supply side: Restructuring and privatization of the construction enterprises and the development of private contractors. A detailed matrix of reforms for each component is under discussion between the Borrower and the Bank. POVERTY IMPACT 14. The overall impact on poverty of the Algerian program to be supported under the HSAL will be positive. The Algerian authorities have already put in place a functioning social safety net designed to limit the impact of adjustment on the poor. In addition, the Algerian authorities have started to phase out the poorly targeted rental housing program and are experimenting with a program that provides low-cost core housing units to the poor. Under the HSAL, the Algerian authorities will further focus on targeting the poor through implementation of the new housing policies discussed above. ENVIRONMENTAL ASSESMENT 15. The project is consistent with the Bank's environmental policies and will follow bank's procedures concerning the environment. The project is proposed in Category C rating. In the proposed loan, housing policies will have a positive effect on environment: they will improve sanitary conditions for residents with systematic planning of infrastructure for land development and slum upgrading. In addition, during the privatization process under the SAL, the Bank has insisted on the importance of establishing a clear division of responsibility between the state and the potential new owners for remedying damage caused by pollution. During the privatization process of the coonstruction enterprises under the HSAL, the Bank will monitor Algeria's performance in this regard. 1/ The "self-help" construction activity was restricted to private individuals who were able to build their own dwelling on private land. 2/ According to 1993 MOH estimates, occupancy ratios reached 9.2 in 38t of housing units, and was above 13 among 17t, while 24; of the population, occupying 45t of the housing stock, enjoyed a 3.9 ratio. 3/ Ministry of Housing (MOH): "La reforme: pour une politique des moyens", December 1994. -5-  Contact Point: Francois Amiot, Task Manager The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202)473-2372 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by The Public Information Center week ending October 18, 1996. - 6 -