Philippines - Housing Sector Project

Document of The World Bank FOR OFFICIAL USE ONLY I.Al Zq -7 Lt_ Report No. 6997-PH STAFF APPRAISAL REPORT PHILIPPINES HOUSING SECTOR PROJECT June 1, 1988 Infrastructure Division Country Department II Asia Regional Office Ths document has a resicted ditibuton and may be used by redpiens only in the performance of their offici dutes. Its contents may not otewise be dicosed wikhot Wodd Bank authorrUtiDon.  CURRENCY EOUIVALENTS Currency Unit Peso 1 Peso US$ 0.049 US$l - P 20.4 WEIGHTS AnD NEASUR 1 meter (m) - 39.37 inches (in) 1 square meter (sq m) - 10.8 square feet (sq ft) 1 kilometer (km) - 0.62 mile (mi) 1 square kilometer (sq km) - 0.386 square mile (sq mi) 1 hectare (ha) - 10,000 square meters (sq m) or 2.47 acres (ac) ABBREVIATIONS AND ACRONYMS ADB . .. ... Asian Development Bank ARNM.............adjustable rate mortgage BB........... ..Builder's Bricks Development Corporation BDC.... ,, ...... Bliss Development Corporation CIAP ............ Construction Industry Association of the Philippines COA ......, ..... Comzilm*ion on Audit DBM .... .......Department of Budget and Management BP ........... ..Development Bank of the Philippines DOF. ...,.... Department of Finance DPWH .... Department of Public Works and Highways EO . .... Executive Order GNP .... .... Gross National Product GDP . ...Gross Domestic Product GSIS ... Government Social Insurance System HDMF . .. Home Development Mutual Fund HFC ... Housing Finance Corporation HIGC........... Home Insurance Guaranty Corporation HLURB ...... Housing and Land Use Regulatory Board HSDC ........... Human Settlements Development Corporation HSRC ........... Human Settlements Regulatory Commission HUDCC ......... Housing and Urban Development Coordinating Council IBRD .. .... ...... International Bank for Reconstruction and Development MCR .... .... mortgage contract receivable MHS ... Ministry of Human Settlements MMC ............. Metro Manila Commission NEDA .......,.National Economic and Development Authority NHA. ....National Housing Authority NHC ...National Housing Corporation NHMFC .National Home Mortgage Finance Corporation Pag-IBIG .Forced Savings Provident Fund administered by HDMP SIR ....Slum Improvement and Resettlement Program of NHA SSS . Social Security System W ...Woodwaste Development Corporation JISCAL er January 1 to December 31  FOR OMCL4L USE ONLY ROUSING SECTOR LOAN STAFF APRAIML EPORT Table of Contents Page N!o-, LOAN AND PROJECT SUWARY I. SECTOR CNE A. Background .......................... ......... .1 B. Housing Stock and Conditions ............................. 2 C. Past Policy and Issues ................................... 2 D. Rationalization Plan and Future Policy ................... 7 S. Bank Strategy and Project Rationale ...................... 9 P. Project Origin and Preparaion........................... 11 II. S CTOL. ZNIIXUIZINS A. National Home Mortgage Finance Corporation (NHC)....... 12 D. National Housing Authority (HA) ......................... 21 C. The Social Insurance System ................................ . . 29 - Rome Development Mutual Fund (HDMF) ............ ..... 29 - Social Security System (S8) ...................... . 31 - Government Service Insurance System (GSIs) .......... 32 D. Coordination (HUDCC) ................................. 32 III. THE PROJECT A. Objectives and Desoription............................... 34 B. Cost, Financing Plan and Onlending....................... 36 C. Implementation .................................. 39 D. Procurement ......................................... 40 z. Disbursement .............. *,.# ...,...*... .. 41 F. Accounts, Audit and Reporting ....... .. ............ 41 IV. JUSTIFICATION AND RISKS..................X............ ........ 43 IV. AGREEMENTS REACHED AND RECOM ATIgMS........................ 46 This report is bamed on the findings of an appraisal mission consisting of Nesdms/Nessrs. D. Haldane (Head of Nission), A. Van Vugt (financial analyst), L. Xejia (computer specialist), and X. Bueno (banking consultant) which visited manila in August/September, 1987. Mr. J. Kearns /consultant) assis- ted in project development. This document has a restricted distribution and may be used by recipients only in the performa of their official duties. Its contents may not othefwie be disclosed without Wotid 3at-k autheizationt.  Page -so, ANNES 1. Seetoral Policy ................................................... 49 2. Executive Order Number 90 ................................... . 55 3. Housing Demand and Affordability ............................. 63 4. Sectoral Investment Plan (1980--1992) .... 67 5. Sectoral Action Plan . .................................. . 71 6. Disbursement Schedule ................................................. . 75 7. Technical Assistance, Trainlng, Equipment and Studies ........ 79 8. Inflation and Interest Rates ................................. 85 9. NHMFC . . ................ 89 10. NHDFC Policy/Operating Guidelines and Action Plan ............ 101 11. NHMFC Financial Statements (1980 - 2006) A. Income Statement and Ratios ............................ 113 B. Balance Sheet and Ratios ............................... 116 C. Cash Flow Statement .................... . 121 D. Key Assumptions .................... ................ 122 12. NHH.............................. 123 13. NA Policy Statement and Action Plan ......................... 135 14. NHA Financial Statements (1980 - 2006) A. Income Statement and Ratios ............................ 151 B. Balance Sheet and Ratios ............................... 154 C. Cash Flow Statement . .......... .................... 159 D. Key Assumptions ............................................ . 160 15. Economic Rate of Return ..... 161 16. Selected Documents Available on the Project File ... 163 CHARTS Sectoral Organization Chart A. Former (41000). . .. . . . . .... . . . . . ... 165 B. Proposed (40494) ............... ......... ..... 167 1UDCC Organization Chart (40054) ............................. 169 NMFC Organization Chart (31135) ............................. 171 NHA Organization Chart (40053) ................... 173  PHILIPPINES1 HOUSING SECTOR PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of the Philippines. Beneficiary National Home Mortgage Finance Corporation (NHMFC), and the Agencies: National Housing Authority (NHA). Loan Amount: US$l1(O million equivalent. Loan Terms: Standard variable interest rate and 23 year term including 5 years of grace. On-lending The Government of the Philippines would on-lend the peso Terms: equivalent of US$80 million to NHMFC for mortgage financing at terms of 20 years and a fixed rate to be agreed annually with the Bank, linked to a proxy for long term funds. GOP will bear the foreign exchange risk. Funding will be blended with fixed rate loans from the Social Insurance System. Onlending from NHMFC to sub-borrowers for mortgage loans would range from a fixed rate of 9% to 15% for up to 25 years depending on loan amount. The US$5 million for technical assistance, training, equipment and studies would be mads available by Government to the participating agencies on terms agreed with the Bank. Project Key objectives include (a) improvement in the institutional Description: framework, (b) greater efficiency in the use of public resources, (c) housing stock expansion for lower income groups, and (d) elimination of key bottlenecks to recovery in the construction industry. The project would comprise: (a) support for immediate imports of construction materials to initiate subdivision development, (b) a time-slice of NHMFC's mortgage investment program, and (c) associated technical assistance, training, equipment and studies. Benefits: (a) about 54,000 units added to housing stock, of which nearly three quarters would serve those below the poverty line; (b) 9,000 existing dwellings upgraded with utilitias, secure tenure and essential community facilities; (c) approximately 120,000 person years of employment generated through direct constrvuction associated with mortgage purchases, plus an unquantified additional impact through secondary linkages. Rate of Serviced sites: Metro Manila ..... 27% Return: Regional Cities .... 28% Upgrading: Metro Mail............ 31% Regional Cities .... 37%  Project The primary risk Is that such a broad and complex set of Rasks: reforms will prove difficult to acutally lmplement and could be derailed by political concerns, delayed or stagnate altogether. However, prdSress to date has been promising. Other risks Include: (a) low collection levels which would necessitate an Increase in Interest rates, (b) convincing private developers of the profitability of low-cost mass housing whilch in turn depends on high turnover rates on capital and thus NMFSC's processing efficiency and (c) NHA's ability to reduce costs and standards, and telescope land acquisition, site development and sales, all of which are now required before units can be purchased by NUfFC. An ambitious institutional strengthening program as part of the project will help address these concerns. The NRA now owns a third of the required land, sufficient for the first 18 months. These risks have been taken Into account In designing the project and measures Introduced to mbwiimze potential adverse impacts whereever possible. The project's benefits are considered to outweigh Its inherent risks. Estimated local Foreign Total Costs: ---- --- US$ millon -------- Building Materials Imports 0 75.0 75.0 NUMFO Mortgage Purchases: 171.S Z3LS 245.0 - NUA: Upgrading 14.4 6.1 20.5 Serviced Sites 17.1 7.4 24.5 - Private Developers 140.0 60.0 200.0 TA/Training/Eqpmt/Studies 2.5 2.5 5.0 ZOTAL a/ 174.0 11.0 i=L2 a/ Costs include, taxes esatimated at US$12.5 million or 3.,% Financing Local Foreign Total Plan: ---------- US$ million --------- Social Insurance System 155.0 10.0 165.0 World Bank 19.0 141.0 160.0 ZQZ&L 174.0 151.0 32S.0 Estimated FY89 FY90 FY91 FY92 FY93 FY94 FY95 Disbursements: -------------------------__-_-_-_ Annual (US$ a) 38.5 42.4 7.5 22.3 30.8 13.5 5.0 Cumulative (US$ m) 38.5 80.9 88.4 110.7 141.5 155.0 160.0  PHILIPPINES HOUSING SECTOR PROJECT I. 8XCTORAL CQN= A. Backround 1.1 Urbanization and Ecgnomic Growth. The Philippines is relatively urbanized with about 40% of the total population or 23 million people residing in cities. The urban population expanded by about 4% annually from 1960-1980, almost 50% faster than the 2.7% national average. A third of all urban residents is concentrated in Manila, with an estimated 7 million people. This pace of expansion is expected to decline only modestly, requiring the country to house, feed and employ another 10 million urban residents -- tantamount to creating another metropolis the sire of Man'la -- over the next decade. Even with successful regional development efforts, much of this Increase will occur in the capital, which generates over 40% of the country's GDP. 1.2 Growth of this magnitude will place tremendous strains on the country's ability to provide the requisite employment, housing, and urban services. Rapid economic recovery will be needed to meet these demands. The economic and financial crisis which gripped the country from 1983-1986 largely paralyzed industrial expansion and severely eroded GNP gains made during the 1970's. Real GNP declined by 6.8% and 3.8% respectively In 1984 and 1985, with industrial growth declining by more than twice this rate. Growth in 1986 was negligible (0.1%). Underemployment doubled to an estimated 60% in 1985, and real wages have shrunk. However, the beginnings of recovery were evident In 1987 when GNP growth registered 5.7%. About half (51%) of the 1987 urban population fell below the poverty threshold of about P6,120 (US$3')0) per capita per annum, and about 20% below the subsistence threshold of F3,0o0 (US$150). 1.3 Economic Role of Housing. The housing and construction industries were heavily hit by the extended crisis. Housing constitutes a small but growing rroportion of GNP (about 3.7%), and a somewhat more significant share of fixed domestic capital formation, estimated at about 15%. Nearly 60% of Philippine formal private sector construction activity is in housing, which was the fastest growing industrial subsector (gross value up by 14.4% and value added by 6.1%) in 1982. Housing starts are closely monitored in the Philippines as elsewhere, as a lead indicator of improving or decelerating economic activity, since the industry's forward and backward linkages are extensive. The P12.1 billion invested in formally built housing and service improvements from 1980 through mid-1984 contribute4 approximately 75,000 direct jobs over this period, net of any secondary linkages. Informal construction activities which still accommodate the majority of the population contributed many more. Mousing thus plays a dual role as both a major industrial subsector, as well as a key social and political concern.  - 2- B. Housing Stock and Conditiog 1.4 Growth of new housing stock has not kept pace with the rapid urban increase. New stock needed to accommodate urban growth alone averaged about 114,000 units per annum from 1976-1981 and effective demand about 97,000 annually. Supply through public assistance averaged 13,000 units or about ll%-13%. Clearly private and informal efforts were still housing most people in uncontrolled squatter settlements lacking effective planning, tenure and services. Publicly assisted production rose in the early 1980's to a peak of 29,000 units in 1984 or about 20% of growth needs, and a quarter of effective demand, demonstrating progress toward achieving a better match between supply and demand. Most of these units were built by private developers and financed through public institutlons. Thereafter, the economic downturn brought a sharp decline in housing production leaving the industry largely stagnant in 1986. 1.5 Private production under the expanding financial system, however, was heavily skewed toward higher-income groups. Though direct production by NHA was targeted on the poor, the Authority focused on upgrading and associated resettlement schemes which made almost no net contribution to new housing stock. Of the 167,000 new units added to housing stock through public assistance from 1976-1986, over 90% were completed, contractor-built dwellings affordable only to the most affluent 10%-20%. The balance 10% served growth among the remaining 80% of the population. Thus demand in the upper income strata was overserved and nearing market saturation, with the bulk of demand for new housing below the 80th percentile largely ignored. 1.6 As a result, dosspite vastly improved conditions in many squatter areas through upgrading, uncontrolled growth has not been curtailed. Encroachment on prime commercia.l properties, illegal seizures of public land, overcrowding and the resultant deterioration in living standards remain serious and growing public concerns. Barong-barongs (shanties) tripled from 1970-1980 from 14,000 to nearly 50,000 units. Overcrowding was particularly severe in Metro Manila where by 1980 nearly half of all families occupied a single room. The backlog of dwellings requiring upgrading (including unserviced homes) was estimated in the mid-1980's at about 440,000 units in Metro Manila alone representing about a third of the city, and 700,000 nationally. Of these, only about 22,000 have been upgraded and 54,000 resettled over the last 5 years, addressing about 10% of need. At this pace four more decades would be required to deal with the existing backlog. 1.7 To this must be added the approximately 140,000 new units needed annually over the next five years to prevent further deterioration in present conditions. The urgent dual needs to speed upgrading and expand new mass housing stock to slow or halt further uncontrolled growth forced the nev Aquino Government in 1986 to reassess its housing strategy. C. Past Policy and Issues 1.8 Policy and Institutions. Government's past strategy for meeting shelter needs initially emphasized direct public production of low cost shelter combined with extensive squatter resettlement. In 1975, the six  - 3 - organizations producing housing in a rather ad-hoc and disjointed manner were consolidated into the National Housing Authority (NHA) and its attached agency, the National Housing Corporation (NHC) which produced building materials. The NRA was assigned policy-making and regulatory functions, as well as responsibility for housing production and finance, and, together with NBC, represented the Government's sole housing instrument. 1.9 Three years later, the Ministry of Human Settlements (NHS) was established to oversee policy and regult';ory functions, and seven new agencies were chartered to perform five functions: financial Sourcing, mortgage lending, insurance, production and regulation. The new policy emphasis behind these changes was to stimulate private sector production through provision of low cost housing finance. The MKS network included the following institutions: A. Financial Sourcing Functions #1: Home Development Mutual Fund (HDMF). The HDMF or Pag-IBIG ProvLdent Fund (essentially a mandatory payroll tax refundable to employees) covered all formally employed persons. Proceeds were earmarked for housing. About 98% of stipulated contributions were initially lent to the NHNFC which in turn purchased mortgages granted to HDMF members; B. Mortgage Lending Functions 02: National Home Mortgage Finance Corporation (NHMFC). Designed to provide liquidity to local banks holding mortgages through establishment of a secondary mortgage market, the NHNFC over time came to dominate mortgage financing on privately built units (excluding those built by the Social Security System (SSS), the Government Social Insurance System (GSIS), and the National Housing Auithority (NHA)). NHMFC initially placed HDMF borrowings in high yielding s'nort term investments, and utilized the proceeds of bond issuances for mortgages purchased from originating Institutions; C. Insurance Functions #3: Home Finance gorgoration (HFC) recently renamed the Housing Investment Guaranty CorDoration (HIGC). The HIGC insured both construction loans made by private banks to private builders, and mortgages purchased by NHMFC or held by private banks. The Corporation also expanded into land dealings and direct production, provided advisory services to the builders it insured, and operated a bank (Maunlad S & L) through which it arranged some of the construction loans it underwrote; D. Production Functions (i) Land Development and Housing #4: National Housing Authority (NWA). The NRA produced low income housing through serviced sites for self-help house construction, upgrading of existing slums, and resettlement programs. It also engaged in industrial estates, workshop development, small business lending and some higher cost housing for cross-subsidy purposes. The Authority was financed through Government budgetary appropriations,  -4- foreign loans (prlncipally World Bauk and the Republic of G"rmany), and local borrowings. NBA also extended long tierm financing on the units it built, serviced these loans, and operated rental estates; #5: Bliss Development Corporation (Bc). Subsidized completed housing and apartments were the primary output of BDC, financed by Government appropriations for construction. Mortgages were sold to NWUNC, enablitg BDC to roll over its construction funds; (ii) Buildlna Materials #6. Vqodwaste Comuanv (W). This company produced wood products for home construction; #7: Builder's Bricks (BB). Bricks and masonry products comprised BB's outputs; *8: National Housing Corporation tNHC). The NBC produced and warehoused building materials which were sold to Government or the private sector, specializing In prefabricated units for "flexi-homes"; #9: Human Settlements Develovment Corporation (HSDC). A holding company for over 40 subtidiaries, iucluding BDC, W, BB, and NEC within the housing sector. The RSDC's overall jurisdiction extended well beyond the sector; and E. Regulatory Functions #10: Human Settlements Regulatorv Commission (BBRC). The NSRC was responsible for regulatory oversight of private builders coverLag subdivision and building standards, land use and zoning; 1.10 Thus, in the decade following the amalgamation of the previous six housing agencies in 1975, the sector once again grew from two corporations to ten, plus a governing Xinistry. A Shelter Secretariat was eventually created to coordinate this increasingly complex Institutional network, but without budgetary or other authority, it remained a :lrgely coremonial function. Chart 41000 presents the former sectoral organizatlon. Throughout this period the Social Insurance System (SSS and GSIS) made substantial investments in mortgages, financing half of new stock, but remained independent of the NES system. 1.11 Private Sector Resoonse. The private sector's initial response to Government's new policy and the expanded availability of mortgage finance was predictably enthusiastic, resulting in spectacular growth between 1980 and 1983. Housing starts reportedly tripled from an annual level of 28,000 in the late 1970's to a peak of 86,000 in 1983. By mid-1984, utilizing HDMF funds and other borrowings, the NHDEC had pumped nearly P5 billion (US$ 245 million) into mortgage financing. 1.12 Housing investments, like most others, sharply decelerated in 1984 and 1985 as the economic crisis deepened and borrowing costs soared to over 40% with shortened maturi*ies. The sudden contraction left the industry  - 5 - with a major inventory overhang and an extensive pipeline of both completed units ready for mortgage takeouts and subdivisions under construction for which funds were not available. The HI