Ukraine - Housing Project

Document of The World Bank Report No. 15033-UA STAFF APPRAISAL REPORT UKRAINE HOUSING PROJECT FEBRUARY 13, 1996 Municipal and Social Services Division Country Department IV Europe and Central Asia Region  CURRENCY EQUIVALENTS (as of September, 1995) Currency Unit = Karbovanets US$1 = 180,000 Kbn. AVERAGE EXCHANGE RATES Kbn per US$1 YEAR - RATE 1992 - 2,212 1993 - 7,623 1994 - 63,224 Sep.1995 - 180,000 ABBREVIATIONS AND ACRONYMS CEU - City Executing Unit EU - European Union FSU - Former Soviet Union GDP - Gross Domestic Product ICB - International Competitive Bidding NCB - National Competitive Bidding PSC - Project Steering Committee SA - Special Accounts SCHME - State Committee For Housing and Municipal Economy SCUDA - State Committee for Urban Development and Architecture SOE - Statement of Expenditure TG - Technical Group USAID - United States Agency for International Development UKRAINE - FISCAL YEAR January 1 - December 31  STAFF APPRAISAL REPORT UKRAINE HOUSING PROJECT CONTENTS Loan and Project Summary ............................................. i I. SECTORAL BACKGROUND .......................................... 1 A The Housing Sector in Ukraine .......... ......................... 3 B. Government Housing Policy . ..................................... 4 C. Project Cities .............................................. 4 D. Bank Housing Sector Strategy and Project Rationale ...................... 4 E. Bank Experience ............................................ 8 II. THE PROJECT ............................................... 9 A. Project Genesis ............................................. 9 B. Project Objectives ............................................ 9 C. Project Description . .......................................... 9 m. PROJECT COSTS AND FINANCIAL ASPECTS .......................... 13 A. Project Costs .............................................. 13 B. Financing Plan ............................................. 14 C. Onlending Arrangements . ..................................... 15 D. Pricing and Cost Recovery . ..................................... 15 IV. PROJECT IMPLEMENTATION . ..................................... 17 A. Project Implementation Plan ........... ......................... 17 B. Quality Control ............................................ 18 C. Procurement .............................................. 19 D. Disbursement ............................................. 22 E. Accounting and Auditing . ..................................... 23 F. Supervision, Monitoring and Evaluation ............................. 23 V. PROJECT BENEFITS AND RISKS ........... ......................... 25 A. Economic and Social Benefits .......... ......................... 25 B. Environmental Impact . ....................................... 26 C. Participatory Approach . ....................................... 26 D. Risks ................................................... 27 VI. AGREEMENTS AND RECOMMENDATIONS ............................ 29 Tbis report is based on the findings of an appraisal mission in July 1995 consisting of Y. Uchimura (Task Manager), B. Inadze, EC4MS, 1. Harasymiak and K. Villani (consultants) and a post-appraisal mission in September 1995 consisting of Y. Uchimura, B. Imnadze, EC4MS, 1. Harasymiak and 0. Cherniahivsky (consultants). The peer reviewers are L. Hannah, TWURD, and A. Nassau, EC31V. The Division Chief is T. Blinkhorn, EC4MS. The Department Director is B. Kavalsky, EC4.  ANNEXES A. Housing Policy Concept Paper B. Summary of Housing Policy Measures C. Outline Terms of Reference for Technical Assistance D. Detailed Project Costs E. Project Cash Flows F. Detailed Procurement Arrangements G. Estimated Disbursement Schedule H. Supervision Plan 1. Economnic Analysis Summary J. Environmental Analysis MAP IBRD No. 27170 TABLES Table 3.1 - Project Costs Table 3.2 - Financing Plan Table 4.1 - Procurement Arrangements Table 4.2 - Disbursement Categories  UKRAINE Housing Project Loan and Project Summary Borrower: Ukraine Implementing Agency: The City Administrations of Kharkiv, Lviv and Odesa. The State Committee on Housing and Municipal Economy and the State Committee on Urban Development and Architecture Beneficiaries: Households and private developers in Kharkiv, Lviv and Odesa. Poverty Category: Not Applicable Amount: US$17.0 million equivalent Terms: Payable in seventeen years, including five years of grace at the Bank's standard variable interest rate. Conmitment Fee: 0.75 % on undisbursed credit balances, beginning 60 days after signing, less any waiver. Onlending Terms: The Bank loan funds will be onlent by the National Government to the Project City Administrations in US dollars at the standard Bank terms and conditions with a surcharge of I %. Project Objectives: The overall objective of the proposed Housing Project is to support the development of a housing market to meet the housing needs of the people of Ukraine. Specifically, the proposed project will aim to: (a) further private ownership of housing and fully privatized apartment buildings by selling all apartments financed by the loan to city residents; (b) promote resident take over of the management and maintenance of their buildings through formation of homeowners' (condominium) associations; (c) encourage the growth of private housing developers by providing access to land with infrastructure for housing construction and simplifying building regulations; (d) pilot competitive bidding in selection of contractors; and (e) further housing reform through policy studies. Project Description: The project will consist of completion of selected unfinished municipal housing for sale to city residents in Lviv and Odesa, development of land sites for sale to private developers for further residential construction in Kharkiv and Lviv, housing policy studies and technical assistance for project implementation and capacity building. The total project cost is estimated to be US$27.9 million equivalent.  - ii - Financing Plan: A Bank loan of US$17.0 million will finance 61 % of total project cost net of taxes (55% of costs including taxes) or 93% of the foreign costs and 42% of local costs. The loan will finance: (a) 80% of the housing completion component incremental costs; (b) 80% of the land development component incremental costs; and (c) 27% of the technical assistance component. US$16.7 million, will be onlent to the project cities; US$0.3 million, will be made available to the national government for policy studies and technical assistance. Counterpart funds will be provided by the national government and the project city administrations. ERR: 25% Map: IBRD 27170 Project ID Number: UA-PA-34581  UKRAINE HOUSING PROJECT STAFF APPRAISAL REPORT 1. SECTORAL BACKGROUND A.The Housing Sector in Ukraine 1.1 The housing sector in Ukraine is going through a gradual process of transformation as government control of the sector decreases and a market based housing system begins to slowly emerge. These changes are the result of initial housing policy reforms aimed at development of private markets and the gradual collapse of government control due to lack of funds. 1.2 Prior to 1993, the government dominated the housing sector. In 1992, local governments owned 36% and other government agencies (primarily state enterprises) owned 25% of housing in urban areas; the remaining urban housing was owned by housing cooperatives (6%) and private individuals (33%)'. While the people have been provided with small plots for gardens and second homes2, local governments exercised strict controls on the allocation of land and its use. Maintenance of local government, enterprise and cooperative housing was carried out by municipal housing maintenance organizations. Rents (along with water, heat and other municipal services) were highly subsidized: rents and utilities were estimated to account for less than I % of household monthly incomes in 1992. State construction enterprises built new housing or reconstructed old housing using standard designs and norms. 1.3 The state allocation system has not been able to provide adequate housing for its citizens. Space is limited: a Ukrainian citizen living in an urban area has an average of about 18 sq. m. of housing space or about one-third that found in Western European countries (e.g. 32 sq. m. per capita in London and Paris). High standardization leads to limited choice of housing types. Energy efficiency was not a consideration given low Soviet energy prices, and buildings were constructed with poor insulation of exterior walls and roofs, exposed metal joints and poor quality windows. Construction quality was poor so that residents had to spend their time and resources reworking doors, window frames, finishing and other interior work to compensate for the poor workmanship. 1.4 Under the Communist system, families with less than 5 sq. m. of housing space per person or who were considered priority (e.g. the handicapped, war veterans) became eligible for new housing free of charge from the government and were registered on the wait list. In 1992, there were 2.1 million families (or approximately 18% of total urban households) on the government housing wait list in urban areas. Families with less than 9 sq. m. per person became eligible for cooperative housing and were put on a separate cooperative housing wait list. Instead of obtaining free housing, families on the cooperative wait list were grouped together and required to make a down payment of 25 % of construction cost with the govermment providing a loan through state banks for the remaining 75% at 1.5% to 2.0% interest per annum to be repaid over 50 years. The completed building was owned by the cooperative who contracted with the municipal housing maintenance organization for management and maintenance at subsidized govermnent rates. In 1992, there were over 500,000 families on the cooperative wait list for urban areas. 1/. The level of private ownership is higher in the rural areas where 91 % of the housing is reported to be owred by individual families. 2/. 0.10 hectare per person in urban areas and 0.25 hectares per person in rural areas.  1.5 The system of government controlled housing is breaking down. The economic recession reduced the amount of government funds allocated to housing construction. As a result, construction of most municipal, state enterprise and cooperative housing has come to a stand still. Unfinished housing sites, with partially erected buildings and cranes standing idle, can be seen in the major urban areas of Ukraine. 1.6 A market for real estate in the urban areas, although limited, is slowly emerging. Following the start of housing privatization in 19933, people began to privatize their apartments and exchange or sell them to adjust housing to their current needs. Initially, direct exchanges were predominant but increasingly more apartments are being sold. Real estate brokers are emerging to link potential sellers with buyers. In Kharkiv, transactions of privatized apartments increased from 4,970 (approximately 1 % of the estimated number of residential units in the city) in 1993 to 15,727 (approximately 3 %) in 1994. In Kiev, 24,931 real estate transactions (approximately 1 % of the estimated number of residential units) were recorded during the first nine months of 1994. Apartments in better locations, such as the city center or with good access to transportation, are commanding higher prices: e.g. apartments in downtown Kiev sell for around US$400 per sq. m. compared to US$270 per sq. m. in less attractive locations. Most real estate transactions are carried out in US dollars with the entire payment made in cash at the time of sale. 1.7 Housing developers are beginning to emerge in the construction industry. Some construction enterprises are now building housing for sale to individual households in response to major cutbacks in government sponsored construction. Many groups are beginning to operate as developers, displaying an entrepreneurial spirit. These include builders from the former state building "complex", construction "brigades" from both state and enterprise construction groups and individuals from other professions seeking to enter the building (housing) industry. As a result, there is increasing competition among housing construction enterprises and a market for new housing is developing, primarily for larger, more luxurious apartments targeted at the higher incomes. However, financing is a constraint. Construction is carried out on a "pay as you go" basis. In most cases, financing is provided by the potential buyers who are asked to make a down payment and additional payments in line with progress on construction. 1.8 The housing market in Ukraine still remains limited and faces several constraints. First, lack of financing (for both households for home purchases and developers for housing construction) remains an obstacle to growth of the housing market. Given the high price to income ratios for housing, many families cannot afford to pay all cash, as is the current practice, and will need access to long term loans to purchase an apartment. Second, land in the urban areas remains under the control of local governments who allocate development rights to enterprises and other groups interested in utilizing specific sites. Third, excessive local government land and building regulations act as a disincentive to real estate development. Developers have to go through multiple reviews of their investment proposals before permits are issued allowing them to start construction. While regulation is required to protect the public interest (e.g. building safety, environmental impact and cultural preservation), some of these reviews are duplicative and not necessarily transparent; they create uncertainty and undue delays. 3/ Housing reform is discussed in Section B below.  -3 - B. Government Housing Policy 1.9 Housing privatization was one of the earlier reforms started by the Government. The Law on the Privatization of State Owned Housing in Ukraine was passed in June 1992 and became operational in early 1993. Under the law, a Ukrainian citizen is entitled to receive free of charge 21 sq. m. of floor space per person within the apartment they currently rent from the government. In addition, each family is entitled to another 10 sq. m. of floor space free4. Housing privatization has proceeded at a slow but relatively steady pace. As of September 1, 1995, approximately two million apartments had been privatized, or about 32% of all apartments targeted for privatization. Privatization of individual apartments has resulted in both state owned and private apartments mixed together in the same building. Municipal housing and maintenance companies continue to be responsible for the management and maintenance of the building and common areas. 1.10 In 1994, the Government of President Kuchma embarked upon a program of economic reform which includes elements which impact on the housing sector. A critical reform is the phasing out of subsidies for housing, heating, hot water, water and sewerage and gas5. The increase in cost recovery for state housing will reduce one of the disincentives to housing privatization. The Government is also preparing a draft Law on Land and Property Registration setting out procedures for registering rural and urban land and property which would address some of the shortcomings of the Land Code of 1992 which permitted private ownership of land. The Bank is supporting these and other structural reforms through the Rehabilitation Loan (Loan 3831, approved by the Board on December 22, 1994). 1.11 In April 1995, the Government issued a Housing Policy Paper ("the Concept of the State Housing Policy for Ukraine") which advocates a market based approach to housing development. The paper acknowledges the limitations of the previous central planning approach to housing provision and states the need to move towards a market oriented housing system. One of the principal objectives of the new policy is to "create conditions for every citizen to build, purchase or rent housing according to his or her choice, needs and opportunities". The government's role will be transformed from that of the primary builder and owner of housing to an indirect role of developing housing finance systems, providing assistance to low income households and promoting energy conservation measures in buildings, encouraging private investment in the construction industry, promoting housing privatization and expanding homeowner management and maintenance of housing. The paper lays out the overall direction of housing policy, forms part of the Government's economic reform program and will be used as a reference to revise existing housing legislation and issue new legislation. The paper was approved by the Supreme Rada on June 30, 1995. An English translation of the Housing Policy Paper is attached as Annex A. 1.12 At the local level, reform oriented city administrations have been undertaking pilot demonstration activities to promote housing reform within their cities with assistance from USAID. Kharkiv and Odesa Cities have piloted privatization of whole buildings and are experimenting with the 4/ If their apartment is larger than the free allocation, the family can pay for the extra space or apply for a smaller apartmnent. If the apartment is smaller than the free allocation, the family is entitled to be compensated by the government for the difference. 5/ In October 1994, the Government issued Cabinet of Ministers Decree No. 733 which provided for increased cost recovery of housing, heating, hot water, water and sewerage and gas to 20% of production costs in October 1994 and to 60% by July 1995. Actual implementation has been delayed: cost recovery was increased to 40% of production costs at end June 1995 and is now scheduled to reach 60% in January 1996.  - 4 - organization of condominium associations to allow residents to take over management and maintenance of their building. In Kharkiv, a pilot project to contract out building management and maintenance was carried out in order to introduce competition in the provision of management services. The International Finance Corporation has also been working with the State Property Fund in developing condominiums as part of its small scale privatization efforts because many shops are located in mixed residential-commercial buildings. The Government is following up on these activities and is mainstreaming condominium formation by issuing Cabinet of Ministers Decree No. 5886 in July 1995 mandating the formation of condominium associations. Efforts to organize condominium associations will continue in these cities. Land auctions were carried out in Kharkiv, Odesa, Lviv and Chernihiv in 1994 which provided buyers with 50 year leases (with the priority to renew for another 50 years) to commercial and residential lots and gasoline stations. The Government is expanding the land auction program to other cities in Ukraine and issued Presidential Decree No. 608/95 "On Privatization and Lease of Non-Agricultural Land Sites for the Purpose of Economic Activity" in July 1995. 1.13 Project preparation was carried out in the cities of Kharkiv, Lviv and Odesa which were targeted for inclusion in the Bank project because of their commitment to housing sector reformn and the willingness of the city administrations to carry out alternatives to central planning and state allocation of housing. C. The Project Cities 1.14 The project will be implemented in the cities of Kharkiv, Odesa and Lviv. Kharkiv, with a population of 1.6 million in 1994, is the second largest city in Ukraine. It is located in the eastern part of the country, close to the border with Russia. It was one of the major military industrial centers in the former Soviet Union and is home to heavy industrial enterprises as well as several research institutes. Odesa, with a population of 1.1 million in 1994, is the fifth largest city in Ukraine. Located on the Black Sea, it is a mnajor port as well as a regional industrial center; during the sunmmer months, it is a popular resort for local tourists and vacationers. Lviv, with a population of 0.8 million in 1994, is the seventh largest city in Ukraine. It is located in the western part of Ukraine, close to Poland. Both Odesa and Lviv have international airports; Lviv with a direct comection to Poland and Odesa with a direct connection to Austria, Germany and Russia. All three cities have been hit by economic decline, but, as major regional economic centers, are expected to recover once economic growth resumes in Ukraine. The location of the cities are shown in Map No. IBRD 27170, attached to this report. D. Bank Housing Sector Strategv and Proiect Rationale 1.15 The housing sector is a critical element in the transition to a market economy and will play an important role in the development of the Ukrainian economy. Reducing government housing construction and maintenance subsidies will have a positive impact on the government budgetary deficit and overall macro economic stabilization. One study estimated that government assistance for 6/ Cabinet of Ministers Decree No. 588 "On the Approval of Regulations on the Organization and Operation of Associations Set Up by the Owners for Management and Maintenance and Use of Common Property in Residential Buildings", July 31, 1995.  housing, water, heat and other utilities accounted for around 20% of GDP in 1993'. Policy reform will require, among other things, increased household involvement in selection, management and maintenance of housing. Housing reform will support growth of industrial and commercial enterprises. Improved access to housing facilitates labor mobility and encourages industrial adjustment as people move in search of better economic opportunities during the transition period. Household takeover of management responsibility will support the privatization of state enterprises by relieving them of the obligation to construct and maintain enterprise housing. Growth of a real estate market will allow for greater flexibility in constructing offices and other commercial buildings in urban areas and will, in turn, allow them to function as dynamic service and information centers. Housing can provide an attractive investment for households and provide motivation for savings. Finally, cramped quarters and poor quality of housing are seen by the people as one of the more visible shortcomings of the central planning system. Better housing will provide tangible results of the alternatives to central planning and will help to sustain momentum for economic reform. 1.16 The basic objective of the Bank's housing sector strategy in Ukraine is to support and accelerate the development of the newly emerging housing market. A housing market will require: (a) development of a housing finance system to provide long term loans for the purchase, construction and rehabilitation of apartments and homes; (b) growth of builders, housing management and maintenance companies, real estate firms and agents to service the needs of the households; and (c) establishment of a policy and legal framework which will establish and protect property rights, safeguard contracts, provide for the timely provision of infrastructure and municipal services, and assist the poor in meeting their basic shelter needs. The role of the government will shift from being an owner and direct supplier of housing to creating a regulatory environment that will allow households, builders, real estate firms and other actors to interact, and protecting the poor and other socially vulnerable groups and assisting them in meeting their basic shelter needs. The sectoral objectives, actions taken to date and further actions required are presented in tabular form in Annex B. 1.17 Development of a housing market is an integral part of the transformation of the economy as a whole and the sequencing of housing reform measures will depend on progress on the overall reform program and stabilization of the economy. While provision of housing finance is essential to enhance the affordability and generate demand for housing, local financial institutions are reluctant to make long term housing loans to households when inflation and nominal interest rates are high and there is legal uncertainty over their ability to use housing as collateral for their loans. Measures to promote housing lending to households are contingent upon economic stabilization and development of banking laws, collateral laws and the pace of financial sector development so, despite its importance, housing finance development will emerge only after these essential preconditions are established and this will occur at a later stage in Ukraine's economic transformation. Similarly, the growth of construction and buildings materials companies will be addressed as part of the Government's enterprise privatization and development program. Efforts to promote the housing market will be coordinated with other Government economic reforms supported by the Bank, 7/ Ira Lowry, 'Housing Reform in Ukraine: Moving From a Socialist System to a Market System", USAID/Padco, February 1994.  - 6 - specifically those in economic stabilization, enterprise privatization, financial sector development, land reform and social safety net through a series of ongoing and proposed projects'. 1.18 Initially, emphasis will be on smaller Bank projects (limited in scope, amount and geographical coverage) to demonstrate market based alternatives, promote key reform measures and provide technical assistance to initiate further policy development. These projects would be followed by projects, the scope, timing and scale of which will depend upon the progress made on overall economic stabilization and structural reforms, reforms within the housing sector and experience under the earlier projects. Change is expected to be slow in the beginning given lack of depth of the emerging private enterprises, peoples' attitudes towards change and time required for new market oriented systems and institutions to be fully established and functional. 1.19 The proposed Housing Project is envisioned as the first in a series of housing projects. The project will work with reform minded city administrations to foster housing reform and housing development at the local level by: (i) promoting private ownership of housing and homeowner management of multi-family buildings; (ii) improving construction enterprises' access to land for housing development; and (iii) introducing competition in the selection of contractors for local government contracts. In order to participate in the project, the city administrations have agreed to: (a) Sell unfinished housing completed through the project, breaking with the past policy of allocating housing to families on the wait list. Buildings financed through the Bank project will be fully privatized (i.e. all the apartments will be privately owned) and the residents, through their condominium associations, will be responsible for managing and maintaining their building. (b) Increase housing developers' access to land by continuing with the land auction programs initiated under assistance from USAID (para. 1.12) and selling land developed under the project in Kharkiv and Lviv. Preparation of a land auction program for 1996 and 1997 were a condition of negotiations, (para. 6.1) and adoption of the program will be a condition in the subsidiary loan agreements with the project cities. (c) Review and simplify, where appropriate, land and building regulations at the city level with support from consultants funded under the technical assistance component of the project. Simplification of the existing review and approval procedures should facilitate greater private sector investment in urban real estate. (d) Select contractors for completion of the unfinished buildings and construction of infrastructure through competitive bidding, rather than through assignment by the city administration. This is a standard Bank requirement but it will be the first time that the city administrations (and the local construction companies) will experience open competition in the selection of contractors for local government construction works. 8/ Specific operations include: (a) the ongoing Rehabilitation Loan (Loan No. 3831) and the proposed Enterprise Development Adjustment Loan which support the Government's enterprise privatization program; (b) the proposed Financial Sector Adjustment Loan and the proposed Financial Institution Development Loan which would strengthen the policy and legal framework for bank operations and provide private developers with access to investment financing; (c) the proposed Agricultural Sector Adjustment Loan and Land Registration Loan which would address property rights, private ownership of land and land administration; and (d) the proposed Social Protection Adjustment Loan which would strengthen the social safety net for the poor.  -7- The above agreements were confirmed during negotiations and reflected in the legal documents (para. 6.2). 1.20 The project will also lay the basis for further housing policy reform and future projects at the national level. The Housing Policy Concept Paper expresses the Government's intent to move towards a housing market, but there are two key areas where additional analytical work needs to be carried out and specific policies developed. The Policy Concept Paper makes reference to low interest loans to promote homeownership, continued government housing support for low income families and other policy measures. However, these measures are not developed in detail and no consideration is given whether they are sustainable given the fiscal constraints faced by the Government. Families will need to be provided with long term financing if they are to purchase housing which is typically several times annual household incomes. The institutional arrangements and measures needed to developed a housing finance system would need to be considered as part of the overall financial sector development. While the Policy Concept Paper points out the need for a housing finance system, it does not include specific recommendations on the action the Government will need to take. Studies on the review of government support for housing and development of housing finance will be included in the technical assistance component of the project (para. 2. 11). 1.21 The Bank's strategy in Ukraine supports the Government's structural reform agenda with special emphasis on private sector development, public sector restructuring, social protection and poverty alleviation, and environmental protection. The proposed housing project will promote the growth of private real estate developers by improving access to land for housing construction and simplifying and making transparent building regulations and procedures to facilitate start up of real estate investments. Local construction enterprises will also gain experience in tendering by participating in the procurement training to be carried out as part of project implementation. The project will promote private ownership of housing and reduction local government's role by completing and selling unfinished municipal housing. The technical assistance studies will lay the foundations for future development of the housing market and a less direct role for the government in the housing sector. This project is consistent with the Bank's Country Assistance Strategy for Ukraine. 1.22 The project is also part of the Bank's strategy to improve public sector management at the local level and increase local autonomy. City administrations are in a better position to gauge local priorities and are expected to play a larger role in the delivery of basic infrastructure and municipal services. The cities have taken the lead in project development and will be given control over project implementation. Lviv and Odesa are also considered for participation in the Bank's proposed Urban Transport Project and Municipal Water Supply Project. These projects will allow the Bank to establish working relationships with officials at the local level and be more aware of the needs of residents in the regional cities.  - 8 - E. Bank Experience 1.23 The Bank has limited experience lending to Ukraine9 and for housing in Eastern Europe. There are only three housing projects under implementation in Eastern Europe: (i) the Poland Housing Project (Loan 3499-PL), approved in June 1992, which provides financing through local banks for mortgages and housing construction; (ii) the Albania Housing Project (Credit 2534- AL), approved in July 1993, focusing on completion of unfinished housing through a national agency (the National Housing Authority) created through the project; and (iii) the Russia Housing Project (Loan 3850-RU), approved in March 1995, which provides financing for land development, housing construction and building materials industry development. The different approaches taken in these projects reinforce the need to design projects according to the needs and level of transition in the respective countries. The Albanian project, which is similar to this project, points to the risk that the cities may go back on their commitment to market housing and allocate them to households on the municipal housing wait list and/or continue their role as housing developers. The project addresses these concerns by focusing on those city administrations which have undertaken and agreed to housing reforms and promoting private developers through increased access to land and changes in housing regulations. 2/ Tle Bank is still in the process of building its portfolio in Ukraine. The Institution Building Loan (a technical assistance project) and the Rehabilitation Loan (a policy loan) are under active implemnentation. Two additional loans, the Agricultural Seeds Development Loan and the Hydropower Rehabilitation Loan became effective in September 1995.  -9 - II. THE PROJECT A. Project Genesis 2.1 Project preparation was carried out jointly with the State Committee on Housing and Municipal Economy (SCHME), the State Committee on Urban Development and Architecture (SCUDA) and the project cities. Initial discussions on developing a housing project were held with the Government in 1993. The cities of Kharkiv, Lviv and Odesa were selected as possible project cities because of their support for housing reform and interest in attempting alternative, market based approaches to housing provision. B. Proiect Objectives 2.2 The overall objective of the proposed Housing Project is to support the development of a housing market to meet the housing needs of the people of Ukraine. Specifically, the proposed project will aim to: (a) further private ownership of housing and fully privatized apartment buildings by selling all apartments financed by the loan to city residents; (b) promote resident take over of the management and maintenance of their buildings through formation of homeowners' (condominium) associations; (c) encourage the growth of private housing developers by providing access to land with infrastructure for housing construction and simplifying building regulations; (d) pilot competitive bidding in selection of contractors; and (e) further housing reform through national policy studies. C. Project Description 2.3 The project will consist of completion of unfinished housing, development of land sites for further residential construction, housing policy studies and technical assistance for project implementation and capacity building. It will include the following components: (i) Housing Completion (US$16.7 million of which US$14.3 million is incremental): Completion of the unfinished city housing stock for sales to private households in Lviv and Odesa; (ii) Land Development (US$10.0 million of which US$6.6 million is incremental): Provision of off-site infrastructure to develop serviced land for sale to private developers for housing construction in Kharkiv and Lviv; and (iii) Technical Assistance (US$1.2 million): Financing for housing policy and land and building regulations studies and consultancies and training to assist with the project implementation both at the national and local levels. The project will finance completion of a large portion of the existing stock of unfinished municipal housing in the project cities. During negotiations, the Government's commnitment to encourage the growth of private developers and the project cities' commitment to promote competition in the housing sector in their respective cities were confirmed and incorporated into the Project Agreements (para. 6.2). Provision of infrastructure and promotion of private housing developers are new undertakings for the cities in Ukraine and are more in line with the role of local governments in a market economy. The possibility of auctioning the uncompleted buildings directly to the private developers was considered but dropped because developers would still face difficulties in mobilizing  - 10- the necessary funds to complete buildings and did not show strong interest to take over partially completed buildings. Construction financing is expected to be made available to developers subsequently through financial institutions with support from other Bank loans'