Ecuador - Second National Low-Income Housing Project

Document of The World Bank F3R OFFICIAL USE ONLY Report No. P-4648-EC MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$60.0 MILLION TO THE GOVERNMENT OF ECUADOR FOR A SECOND NATIONAL LOW-INCOME HOUSING PROJECT December 15, 1987 b This document has a restficted distribution and may be used by recipients only. in the perfonrmnce of their offical duties. Its contents may not otherwise be dclosed wthout Wodd Bank authorization.  ECUADOR SECOND NATIONAL LOW-INCOME HOUSING PROJECT Currency Equivalents Currency Unit Sucre (S/i.) Annual Average 1986 US$1 - S/151 Since August 14, 1986, the Ecuadorian currency has been floating. As of August 1987, the rate was as shown below. US$1 = S/. 195 S/.i - US$ .005 S/.1000 = US$ 5.12 WEIGHTS AND MEASURES 1 meter (m) = 39.37 inches 1 square meter (m2) = 10.76 square feet 1 kilometer (km) 0.62 mile 1 hectare (ha) = 2.47 acres 1 liter (1) 0.26 US gallon FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS BCE - Banco C'ntral del Ecuador (Central Bank of Ecuador) BEDE - Banco Ecuatoriano de Desarrollo (Ecuadorian Development Bank) BEV - Banco Ecuatoriano de la Vivienda (Ecuadorian Housing Bank) GTZ - Gesellschaft fur Technische Zussamenarbeit (Society for Technical Cooperation - Germany) IDB - Inter-American Development Bank (Banco Interamericano de Desarrollo) IESS - Instituto Ecuatoriano de Seguro Social (Social Security Institute) JNV - Junta Nacional de Vivienda (National Housing Board) USAID - U.S. Agency for International Development  FOR OmCIAL USE ONLY ECUADOR SECOND NATIONAL LOW-INCOME HOUSING PROJECT Loan and Project Suwmary Borrower: Republic of Ecuador Beneficiary: Banco Ecuatoriano de la Vivienda/Junta Nacional de la Vivienda (BEV/JNV) Amount: US$60.0 million equivalent Terms: Repayable over 17 years, including 4 years of grace, with interest at the Bank's standard variable rate. On-Lending Terms: The Borrover would onlend the entire proceeds of the Bank loan in Sucres to BEV at a variable rate established from time to time, equivalent to the rate paid by BEV on savings deposits (currently 20%). The Governwent would bear the foreign exchange risk. Financing Plan: BEV/JNV US$17.1 million Beneficiaries US $8.6 million IBRD US$60.0 million Total US$85.7 million Economic Rate of Return: 13% Staff Appraisal Report No: 6948-EC Map: IBRD 18179 Ts document has a restted distfibution and may be used by rcipients only rt hte p-r-nmme of their official duties. Its contents may not otherwise be disosed without Work Oaa athorization.  ~~~~~~~~~~~~~~~~~~~S.  NURmDiI UIAND R enA OF TE RESIDT OF THE INTERNATIENAL RANK FOR RECONSTRUCTION AND DEELOPIKENT TO TaH EaECUTIVE DIRECTORS OK A PROPOSED LOAN TO ECUADOR FOR A SECOND NAIORAL LOW-INCOME HOUSIC PROJECT 1. The following memorandum and recommendation on a proposed loan to the Government of Ecuador for the equivalent of US$60.0 million is submilted for approval. The proposed loan would have a term of 17 years, including four years of grace, with interest at the Bank's standard variable rate. Proceeds of the loan denominated in Sucres would be on-lent to Banco Ecuatoriano de la Vivienda (BEV) at a variable Interest rate established from time to time, equivalent to the rate paid by BEV on savings deposits. 2. Background. About half of Ecuador's 9 million residents live in urban areas, where population growth has averaged a rapid 4.5 percent p.a. over the past decade. About 45,000 new households are formed annually. The overall housing deficit is estimated at about 430,000 units. In comparison, housing production of the formal sector recently averaged about 15,000 units per year. 3. Lower income housing is developed and financed mainly by the Banco Ecuatoriano de la Vivienda (BEV) and its related development arm, the Junta Nacional de la Vivienda (JNV). The Instituto Ecuatoriano de Seguro Social (IESS) is a major financing source for middle-income housing; a number of savings and loans, cooperatives and commercial banks also finance housing for middle and upper-income groups. Main sector problems identified during implementation of two previous Bank projects in the urban sector (the Guayaquil Urban Development Project partially financed by Loan 1776-EC of 1980 and the National Low Income Housing Project partially financed by Loan 2135-EC of 1982) and through a Bank review of the public investment program in 1985 are: (i) inadequate mobilization and allocation of domestic savings for shelter development; (ii) insufficient production of housing employing norms and standards affordable by lower income groups; and (iii) lack of financial instruments adequate to promote housing affordability under prevailing conditions of inflation and interest rates in the 20-30 percent range. While progress has been made in recent years with improving housing affordability and levels of cost recovery by lowering the norms and standards within a share of BEV/JNV's investment program and developing a program of home improvement lending through BEV/JNV, much remains to be done to reduce construction norms and standards more widely and to improve financial policies and instruments in the sector to step up resource mobilization and improve affordability and cost recovery. 4. The Government has made development of low income housing a top priority, and has given BEV/JNV--with the help of private contractors primary responsibilities for implementing a housing program estimated to cost US$312 million between 1988-93. This program would be financed by USAID (US$23 million); IDB (US$57 million); GTZ (US$3 million); BEV/JNV (US$138 million); beneficiaries (US$31 million), and the proposed Bank loan (US$60 million).  -2 - 5. Rationale for Bank Involvement. The Bank's strategy in the sector is to help the Government develop policies and institutions to increase the supply of affordable housing for lower income groups while minimizing public subsidies. The project's objectives would be fully consistent with this strategy and would complement the objectives of the proposed Financial Sector Loan, which include development of improved long-term lending instruments and the use of market-deterrined interest rates thrcughout the economy. Moreover, during project execution the Bank would continue to coordinate closely with the other international agencies active in the sector to ensure that mutually consistent and reinforcing policies and activities were pursued in the housing sector. The focus within the project on applying reduced norms and standards to BEVYJNV's entire investment program and developing such program on the basis of demand surveys would ensure that all of BEV/JNV's investmients would meet the needs of lower income groups. The institutional separation and strengthening of BEV and JNV, respectively as a financial institution and as a public sector developer, and the inclusion of private contractors as suppliers of lower-income housing should improve the capacity of formal sector institutions to supply shelter for the poor. Finally, the adoption of a mortgage instrument hearing variable, market-related interest rates would improve the levels of cost recovery under BEV's programs, and enable BEV to mobilize an increasing share of its resources from the market. In summary, the project would provide an important vehicle to enable the Bank to continue its dialogue concerning affordability, cost recovery and institutional reform in BEV/JNV begun under previous loans, while extending its wider dialogue on financial issues to the housing sector. 6. Project Objectives. Specific project objectives include: (i) increasing the production of low-income housing; (ii) adoption by BEV of interest rate policies and a new mortgage instrument designed to improve resource mobilization and allocation and affordability in the housing sector; (iII) further streamlining and strengthening of the financial, administrative and productive efficiency of BEV/JNV; (iv) better targetting of BEVIJNV's production to make it more responsive to low-income beneficiaries; and (v) fostering greater participation by private contractors and developers in the production of low-income housing. 7. Project Description. The project would finance a share of BEV's 1988-93 investment program. It would be executed throughout the country and would comprise: (i) development of about 12,500 serviced lots with and without different types of dwelling units; (ii) provision of about 15,000 home improvement loans; (iii) technical assistance to BEV/JNV to help improve norms and standards, contracting and supervision practices, portfolio management and operational efficiency; and (iv) vehicles and equipment to facilitate project implementation. Concurrent with implementation of the project, BEV would put itnto practice a new lending instrument bearing market-related, variable interest rates and providing for capitalization of interest. Under such instrument, monthly payments would be capped at 25X of beneficiaries' household income. Any payment due in excess of this amount would automatically be capitalized for later payment, with the life of the loan adjusted to accommodate such deferred payments. 8. The project would be carried out over five and one-half years. Its execution would be coordinated by BEV, which would act as the financial intermediary and which is adequately staffed. Development of urbanized  lots and housing units would be carried out by JNV (subcontracting to private contractors) and private developers. Home improvement loans would be extended through BEV's specialized home improvement lending unit. Technical assistance activities would be carried out by consultants acceptable to the Bank. In order to facilitate procurement and supervision, during project execution there would be strict advance identification and separation of works to be financed by the international agencles cooperating in the funding of BEV's investment program. Moreover, to assure that the investment program remains responsive to market demands, BEV/JNV's yearly decisions on the composition of its entire investment program would be based upon annual demand surveys which would be acceptable to the Bank. BEV will pay the Central Bank for the use of loan proceeds, an.d will charge on all loans it makes in the coming years, an annually-adjusted variable rate linked to the rate BEV pays on demand savings deposits. Currently, this would mean that BEV would pay 20% per annum to the Central Bank and lend to homeowners at 21.5Z, including spread. The latter exceeds by 8.5 percentage points the average interest on BEV's portfolio. It is expected that the spread charged by BEV will increase over the next two years based on the results of an upcoming study of its administrative costs. The adequacy of the new rate formula will be reviewed yearly with the Bank and, at all times, BEV will ensure that it does not lag behind the average rate paid by commercial banks on demand deposits by more than two percenitage points. As a result of BEV's adopting a more realistic loan pricing policy, in place of the fixed-rate lending it nas been doing uneer inflationary conditions, its financial outlook should improve. During the twelve months needed to get the new system in place, BEV could lend to homeowners a maximum of US$6 million of the proposed loan at the fixed rate prevailing under Loan 2135-EC (19%). The total cost of the project is estimated at US$85.7 million equivalent, with a foreign exchange component of US$21.7 million (26 percent). A breakdown of costs and the financing plan is shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Croup Operations in Ecuador are given in Schedules C and D. A map is also attached. Staff Appraisal Report No. 6948-EC dated December 15, 1987 is being distributed separately. 9. Main Actions Agreed To. During negotiations, the main actions agreed to were that (i) the new lending instrument would be fully implemented by November 1988; (ii) investment decisions on quantities and types of shelter units to be built would be based on annual demand analyses in order to maintain the marketability of BEV/JNV's products among the project target group; (iii) BEV would adopt an Action Plan, to be reviewed with the Bank annually, establishing its performance targets; (iv) BEV and GTZ would enter into a contract acceptable to the Bank whereby GTZ would continue its role as coordinating agency for technical assistance; (v) the Bank and BEV/JNV would agree to terms of reference and an implementation schedule for a program to rectify deficiencies in BEV/JNV's accounting systems; (vi) Government and BEV would enter into a subsidiary Agreement acceptable to the Bank; (vii) BEV and JNV would enter into a Subsidiary Agreement acceptable to the Bank; and (viii) JNV would appoint five senior level staff to facilitate project implementation. Points (iv) to (viii) would be conditions of loan effectiveness.  - 4 - 10. Benefits. Apart from the construction of shelter, major benefits would be the adoption by BEV of market-related interest rates and the new lending instrument. This would promote mobilization of resources for shelter from the domestic capital market while improving resource allocation and shelter affordability and providing for cost recovery of investments under the project, As a result of the restructuring of BEV and JNV, by the end of the project JNV and BEV would function more effectively, respectively, as a developer and as a financial institution. The project would also encourage private developers to build low-income housing. The internal economic rate of return of the project is estimated at 13S. Project works are targetted at beneficiaries in the 15-60 percentile range of household incomes with the majority being below the 50 percent level. 11. Riskse There is little risk regarding physical works; JNV has an adequate land acquisition program underway and ample experience with developing necessary services. Moreover, home Improvement lending faces no particular physical risk. The main risks would be that the new Government entering office in August 1982 would not maintain the new lending system, interest rate policies, and institutional reforms which are integral to the project. These risks are tempered by the fact that reversal of these policies by any new Government would involve policy reversals at various levels (e.g., in monetary policy and economic philosophy), and more importantly, it would require the new Government to provide greater public subsidies (to the extent that beneficiaries do not bear project costs and current projected output levels are maintained). This is a step which would be difficult, given the likely climate of economic austerity in Ecuador over the next few years. It is therefore not expected that policies would be adopted which would negatively affect the proposed project. 12. rcoumudation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attac.aments Washington, D. C. December 15, 1987  Schedule A ECUADOR SECON3) NATIONAL LOW-INCOME HOUSING PROJECT ESTIMATED PROJECT COSTS (US$ Million) US$Million % Total 2 of - - - Bose Estimated Costs Local Foreign Total F.E.C. Costs Land AcqXlisition 2.6 0.0 2.6 0.0% 3.2% Design and Supervision (7%) 3.5 2.3 5.8 40.0% 7.3% Materials Loans 18.4 5.6 24.0 23.32 30.5Z Sites 6 Services 3.2 1.1 4.3 25.0% 5.4% Serviced Lot + 21 sq.m. Core Unit 6.2 2.1 8.3 25.0% 10.5% Serviced Lot + 37 sq.m. Unit 17.8 5.9 23.7 25.0% 30.2% Serviced Lot + 54 sq.m. Unit 4.4 1.5 5.9 25.0% 7.4% Technical Assistance 0.3 1.1 1.4 80.0% 1.8% Project Adminis- tration (3%) 2.5 0.0 2.5 0.0% 3.12 Vehicles & Equipment 0.0 0.5 0.5 100.0% 0.6% Project Base Costs 58.9 20.1 79.0 25.4% 100.0% Physical Contingencies 2.8 0.8 3.6 25.4% 5.0% Price Contingencies 2.3 0.8 3.1 25.4% 4.0% Total Project Costs 64.0 21.7 85.7 25.4% 108.9% Financing Plan Amount So,.rce US$ million % IBRD 60.0 70 BEV 17.1 20 Beneficiaries 8.6 10 85.7 100  Schedule B ECUADOR SECOND NATIONAL LOW-INCOME ROUSING PROJECT PROCUREMENT METHOD AND DISBURSEMENTS Component Procurement Method ICB LCB Other N/A Total -(US$mllions) 1. Land -- - 2.7 2.7 (0.0) (0.0) 2. Dsgn. & Spvn. - 3.4 3.4 (0.0) (0.0) 3. Home Impvt. Lns. - 26.2 26.2 (21.3) (21.3) 4. Shelter Units & 27.0 18.2 - 45.2 Civil Works (22.0) (14.7) (36.7) 5. Tech. Asst. - 1.5 - 1.5 (1.5) (1.5) 6. Project Admn. - 6.2 6.2 (0.0) (0.0) 7. Vehicles and Equipment - 0.5 - - 0.5 (0.5) (0.5) Totals 27.0 18.7 1.5 38.5 85.7 (22.0) (15.2) (1.5) (21.3) (60.0) Note: Figures in parentheses are the respective amount to be financed by the Bank for indicated items. Disbursements (I) of Category Amount Expenditures (TS$ million) Land Acquisition O Design and Supervision 0 - Home Improvement Loans 21.3 81 Sites, Services & Shelter Units 36.7 81 Technical Assistance 1.5 100 Project Administration 0 - Vehicles sad equipment 0.5 100 Total. Disbursement-Eligible Amount 60.0 Estimated Bank Disbursements IBRD Fiscal Year 88 89 90 91 92 93 -- - - (US$ million) - Annual 10.6 10.7 10.8 11.0 8.9 8.0 Cumulative 10.6 21.3 32.1 43.1 52.0 60.0  Schedule C ECUADOR SECOND NATIONAL LOW-INCOME HOUSING PROJECT TIMETABLE FOR KEY PROCESSING EVENTS (a) Time taken to prepare: 10 months. (b) Prepared by: BEV/JNV with technical assistance from GTZ. (c) First Bank Mission: March 1986. (d) Departure of appraisal Mission: January 1987. (e) Negotiations: November 16 - 20, 1987. (f) Planned Date of effectiveness: March 31, 1988. (g) List of relevant PCRs and PPARs: None.  l~~~~~~~~~~ I~~~~~~~~~ I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~  Schedule D Page 1 of 2 ECUADOR SECOND NATIONAL LOW-INCOME HOUSING PROJECT THE STATUS OF BANK GROUP OPERATIONS IN ECUADOR A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of September 30, 1987) Amount (less cancellations) * - (in US$ million)=- Loan or Credit Number Year Borrower Purpose Bank IDA Undisbursed Twenty-three loans and six credits fully disbursed 291.3 37.5 - 1644 1978 Ecuador Rural Development 18.0 - 9.0 1776 1979 Ecuador Guayaquil Urban Development 31.0 - 6.9 1882 1980 Ecuador Highways 55.0 - 18.4 1991 1981 Ecuador Rural Development 16.9 - 13.0 2044 1981 Ecuador Rural Development 16.1 - 12.1 2096 1982 Ecuador DFC 60.0 - 0.9 2135 1982 Ecuador Housing 35.7 - 13.2 2171 1982 Ecuador Education 16.0 - 10.8 2221 1982 Ecuador Small Scale Enterpise Credit 40.6 - 0.2 2516 1985 Ecuador Public Sector Management 6.0 - 4.0 2626 1985 Ecuador Agriculture Sector 100.0 - 15.2 2672 1986 Ecuador Industrial Finance 115.0 - 49.9 2673 1986 Ecuador Third Small-Scale Enterprise Credit 30.0 - 12.5 2713 1986 Ecuador Power Sector Inprovement 8.5 - 8.5 2752 1986 Ecuador Agriculture Credit 48.0 - 48.0 2774 1/ 1986 EMAP-G Guayaquil Water Supply II 31.0 - 31.0 2803 1987 Ecuador Petroleum Reconstruction 80.0 - 29.6 Total 999.1 37.5 - of which has been repaid 222.3 3.7 - Total now outstanding 776.8 33.8 - Amount sold 3.2 - - of which has been repaid 3.2 - - Total now held by Bank and IDA 773.6 33.8 - Total undisbursed 283.2 11 Not yet effective.  Schedule D Page 2 of 2 ECUADOR SECOND NATIONAL LOW-INCOME HOUSING PROJECT THE STATUS OF BANK GROUP OPERATIONS B. STATEMENT OF IFC INVESTMENTS (as of September 30, 1987) Type of Amount (US $ million) Years Compan/Organization Business Loan Equity Total 1966 & 1972 La Internacional, S.A. Textiles 3.7 0.2 3.9 1969, 1973 Compania Financiera Ecuatoriana DCF - 0.5 0.5 1975, 1977, de Desarrollo, S.A. (COFIEC) 1981 & 1982 1976 Sociedad Agricola e Industrial Sugar Hill 5.0 - 5.0 San Carlos, S.A. 1978, 1980, Cemento Nacional (CEM) Cement 12.0 1.0 13.0 1982, 1983, & 1984 1980 Adamas Andina, S.A. I/ Pulp and Paper 3.3 1.0 4.3 1981 Compania Minera Toachi, S.A. Mining 1.0 0.3 1.3 1987 Minera Kolla Mining 9.0 4.4 13.4 Total gross commitments 34.0 7.4 41.4 Less cancellations, terminations, repayments and sales 24.6 1.6 26.2 Total commitments now held by IFC 9.4 5.8 15.2 Total undisbursed 9.0 4.4 13.4 Ido , 11 Cancelled by letter of April 26, 1982.  79- 8., 5- onLcenzo 'Frnct \->C 0 L 0 B I A -Sho ESMERALDAS . A Comotbne Ai[To. - 80o100 va rni m'onaco $ ESMERALDAS ULCAN Mtltste