Mexico - Second Low-Income Housing Project

Document of The World Bank FOR OFCIAL USE ONLY L 3 L/Co- Report No. 8019-ME STAFF APPRAISAL REPORT MEXICO SECOND LOW-INCOME HOUSING PROJECT NOVEMBER 8, 1989 Country Department II Infrastructure and Energy Operations Division Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit Peso (Mex$) US$1.00 2616 Pesos (as of 10/30189)* Daily Minimum Wage 8306 Pesos (as of 10/30/89) (National Average) FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES Metric System ABBREVIATIONS ACF Average Cost of Funds to the Banking System BANOBRAS National Development Bank for Public Works CETES Mexican Government Treasury bill rate DMW Daily Minimum Wage FONHAPO = Low Income Housing Fund FOVI - Housing Fund For Commercial Banks FOVISSTE = Housing Fund for State Service Workers GOM Government of Mexico INFONAVIT Housing Fund for Workers ISSFAMfFOVIMI Social Security Institute at Armed Services NGOs = Non-government organizations PRONASOL = National Program of Solidarity SEDUE Secretariat of Urban Development and Ecology SHCP = Secretariat of Finance and Public Credit SPP = Secretariat of Planning and Budgetary * The exchange rate against the US dollar is currently sliding at a rate of MEX$1 per day.  FOR OFFICIAL USE ONLY MEXICO SECOND LOW-INCOME HOUSING PROJECT STAFF APPRAISAL REPORT Table of Contents LOAN AND PROJECT SUMMARY., .............................,., i-ill I. THE HOUSING SECTOR .......................................... 1 A. Housing Demand and Supply ............................... 1 B. Non-Government Organizations. 4 C. The Construction Industry. 4 D. The Housing Finance System. 5 E. Institutional Sources of Housing Finance. 5 F. FONHPO. 7 G. Sector Issues .11 H. Experience with Past Bank Lending .13 I. Government Strategy .14 J. Bank Strategy and Rationale for Involvement .16 II. THE PROJECT .17 A. Background .............................................. 17 B. Objectives ............ +.................................. . . 17 B. Objectives.17 C. Project Description ...................... . ..... 17 D. Project Costs .19 E. Financing Plan .20 F. Onlending and Legal Arrangements .21 III. IMPLEMENTATION ASPECTS .21 A. Implementation of Subprojects .21 B. Criteria for Subproject Selection .23 C. Implementation of Institutional Development. Program and Special Studies .24 D. Targeting of Project Investments and Monitoring of FONHAPO Programs .25 E. Project Reporting. 25 F. Annual Assesment of FONHAPO's Program. 25 G. Accounting and Auditing .26 H. Procurement .................... 26 I. Disbursements .28 This report is based on an appraisal mission which visited Mexico in March 1989. The mission was comprised of Messrs. Thomas Zearley, Sr. Financial Analyst (Task Hanager), Gian Carlo Guarda, Urban Advisor, and Ms. Tova Maria Solo, Consultant. Mr. S. Ramachandran (LATTF) contributed to the writing of the report, and Ms. Frances Tate assisted in its preparation. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  IV. FINANCIA ASPECTS . ...................................... 29 A. FONHAPO Onlending Policies and Capital Recovery . . 29 B. Subborrower Loan Collections .. 32 C. FONHAPO Financial Prospects .......................... - 32 V. PROJECT JUSTIFICATION . . . 33 A. Project Benefits ........................................ 33 B. Environmental Impact .................................... 34 C. Urban Poverty Impact .................................... 34 D. Risks and Safeguards .................................... 35 VI. AGREEMENTS REACHED AND RECOMMENDATIONS . . 35 A. During Negotiations .. 35 B. Effectiveness ........................................... 37 TABLES Table 1 Major Housing Finance Institutions ........................ 6 Table 2 Estimated Project Costs ................................... 20 Table 3 Financing Plan ............................................ 20 Table 4 Procurement Arrangements .................................. 27 Figures Figure 1 FONHAPO's Loan Terms .31 ANNEXES Annex 1 Distribution of Household Incomes in Mexico ............... 38 Annex 2 Estimated Yearly Housing Demand in Mexico ................. 39 Annex 3 Number of Huusing Units Completed and Tot-al Investments By Type of Housing Finance Institution ........ 40 Annex 4 FONHAPO Organizational Chart .............................. 41 Annex 5 FONHAPO Procedures and Operations ......................... 42 Arnex 6 FONHAPO Financial Statements 1985-88 ...................... 45 Annex 7 Estimated Number and Costs of Housing Units to be Financed by FONHAPO Under the Proposed Project ...... 47 Annex 8 Description of Special Investment Programs ................ 48 Annex 9 Plan of Action for Institutional Stengthening of FONHAPO ................................................ 51 Annex 10 Preparation of Special Studies .53 Annex 11 Breakdown of Estimated Project Costs-By Tyle .59 Annex ? Project Monitoring Indicators .60 Annex 13 Estimated Schedule of Disbursements .61 Annex 14 FONHAPO's Proposed Onlending Terms .62 Annex 15 Description of Annual Survey of Collection Performance of FONHAPO Subborrowers .63 Annex 16 FONHAPO Financial Projections .64 Annex 17 Economic Analysis of Project .68  MEXICO SECOND LOW-INCOME HOUSING PROJECT Loan and Project Surmary Borrower: Banco Nacional de Obras y Servicios Publicos, S.N.C. (BANOBRAS) Guarantor: United Mexican States Executing Agency: Fondo Nacional de Habitaciones Populares (FONHAPO) Amount: US$350 million equivalent Termst Repayable over 17 years, including 5 years of grace, with interest at the Bank's standard variable rate. Relending BANOBRAS would onlend the Bank loan proceeds in pesos to Terms: FONHAPO at the Mexican Government Treasury bill rate (CETES). FONHAPO would relend the proceeds to e'igible subborrowers (i.e., states, municipalities, social and cooperative organizations and authorized banking institutions, etc.) on terms and conditions which vary with the housing loan amount provided to final beneficiaries (heads of households earning less than 2.5 times the legal minimum wage). Under FONHAPO relending terms, monthly payments and the loan amount are indexed to the minimum wage, and upfront lump-sum subsidies are provided to beneficiaries, the amount of which varies depending on the loan amount and family income. In addition, beneficiaries would be charged an interest rate of 3Z p.a. on the loan balance net of the lump-sum subsidy. To cover administrative costs, subborrowers charge a one percentage point fee on the FONHAPO loan amount. The Government will bear the foreign exchange and interest rate risks. Project The main objectives are to: (i) increase the availability Objectives: of housing credit for low-income families; (ii) improve FONHAPO's level of cost recovery and redirect its subsidies to the poorest groups; (iii) improve the cost efficiency of housing solutions; (iv) further streamline the administrative procedures of FONHAPO and its subborrowers; and (v) contribute to the improved planning and development of urban areas.  - il - Proiect The loan would finance a slice of FONHAPO's 1989-94 Description: conventional lending program in starter dwellings, serviced lots and home improvement credits (822 of total project costs). It would also finance two special investment programs for land tenure and urban upgrading in rapidly- expanding nortLarn border cities and in unregulated settlements in Mexico City and other urban centers (132 of total costs). Altogether, the project would provide new or improved housing for about 250,000 families. In addition, the project would support institutional strengthening for FONHAPO and its subborrowers and studies on building codes and administrative procedures, informal settlements, and savings mobilization among low-income families (5Z of total costs). Project The project would expand the credit available for the Benefits: largest and poorest segment of the housing market and would improve FONHAPO's cost recovery, thereby gradually increasing its own contribution toward new investment financing. It would also enable FONHAPO to initiate significant land tenure programs and expand credit for home improvements and basic services. Finally, the project would provide employment in construction and improve sanitary and environmental conditions of low income families. Project The major risk, which '.nvolved possible political Riskss resistance to highe. levels of cost recovery and the retargetting of FONHAPO subsidies, has already been successfully ad.ressed as the new Administration has agreed to implement revised onlending terms for FONHAPO. There would also be the risk that ex post subsidies provided by FONHAPO would be higher than anticipated if future adjustments in the minimum wage do no keep pace with inflation. But, as real wages in Mexico are expected to increase, following nearly six years of continuous decline, this risk is small.  - iii - Estimated Project Costs: Local Foreign Total - _____________US$ millions------- I. FONHAPO Credits (a) Conventional Programs 416.1 69.6 485.7 (b) Special Programs 65.4 13.7 79.1 II. Other Costs (a) Technical Assistance 6.4 0.0 6.4 and Studies (b) Project Administration 23.8 0.0 23.8 PROJECT BASE COSTS 511.7 83.3 595.0 Price Contingencies 93.0 12.0 105.0 TOTAL PROJECT COST 604.7 95.3 700.0 Financing Plan- Local Foreign Total -------------US$ millions------------ Bank 254.7 95.3 350.0 Government 140.0 0.0 140.0 FONHAPO 175.0 0.0 175.0 Subborrowers/Beneficiaries 35.0 0.0 35.0 TOTAL 604.7 95.3 700.0 Estimated Disbursements: Bank Fiscal Year 1990a/ 1991 1992 1993 1994 1995 (US$ millions) Annual 39.4 48.1 70.0 105.0 70.0 17.5 Cumulative 39.4 87.5 157.5 262.5 332.5 350.0 Rate of Return: About 14Z _/ Retroactive financing of US$35 million to be provided for all project expenditures incurred after February 15, 1989.  MEXICO SECOND LOW-INCOME HOUSING PROJECT I. THE HOUSING SECTOR A. Housing Demand and Supply 1.01 Demographic, Urban Trends and Income Distribution. Mexico is experiencing a population boom. While the country's birth rate has gradually declined from a peak of 3.4% in 1960 to 2.7% in 1980, and has remained virtually unchanged s'ace then, the rate of infant mortality has declined substantially and the~ average life expectancy has been extended. As a result, total population hts jumped from 50.6 million in 1970 to 82 million in 1988, and is expected to top 100 million by the year 2000. Mexico's population is very young. Today, 59Z of the population is less than 24 years of age. And, although a large portion of the population still lives in dispersed rural areas, the urban population has grown rapidly and is increasingly concenttated in a few large metropolitan areas. The proportion of the population living in urban centers of more than 2,500 people, has increased from 51% in 1960 to 71% in 1988. About 27% of the population lives in Mexico's three main metropolitan areas (Mexico City, Guadalajara and Monterrey), which continue to draw migrants from other areas of the country. Moreover, the past decade has seen local population booms accompanying rapid economic growth in certain cities, in particular the cities along the United States border, the international tourist areas, and urban centers in the petroleum belt. These trends combine to increase the pressure on the existing housing stock. 1.02 Current information on income distribution in Mexico is not readily available. Results of the latest survey of household income, for 1984, are presented in Annex 1. It shows that over 30% of households earned less than one minimum wage (about US$100 per month, in March 1989 prices) and about 75Z of famllies earned less than three minimum sa'aries (US$300/month). Undoubtedly, at present a larger proportion of the population falls into these lower-income brackets, as real wages in Mexico have declined measurably since 1984. 1.03 Demand. Mexico's housing deficit is substantial. The Government of Mexico (GOM) estimates that 6 million units, or a 37% increase to the existing housing stock, would be required to alleviate the present over- crowding. 1 Between 1989-94, nearly 590,000 units per year would be required to prevent Mexico's housing conditions from deteriorating (Annex 2). New household formations account for about 48% of this need. The remaining 52% reflects the need to replace substandard housing. Demand for housing is accentuated at the low-income end of the market, and will continue to be in the foreseeable future. Government projections indicate 1/ Overcrowded units are defined as those with more than 2.5 perbons per room. The housing deficit is determined by the number of such units.  -2- that during the 1989-94 period, about three-fourths of the newly-formed families will earn less than two minimum wages, or the equivalent of US$200 per month. Historically, families in this income group have not had access to formal sector financing for housing, except through programs offered by the public housing agencies (para. 1.18). 1.04 While the scarcity of credit underlies the housing problem in Mexico, the netuie of the lhousing deficit varies throughout the country. In general, 'ew families are without some form of shelter, instead the need for housing appears ilt the following forms: - Inner cities of the older metropolitan areas are characterized by over-crowded and deteriorated tenements, sorely in need of rehabilitation. The absence of financing for home improvement or for resale has led to the owners' virtual abandonment of many properties. GOM efforts, begun in the early 1980s, to expand credit for the rehabilitation and sale of apartments to residents and to promote investment in rental properties represent promising starts toward solving inner city housing problems and will be continued by the current Administration. - At the same time, the fast-growing metropolitan fringe areas are experiencing difficulties increasing their limits to accommodate new families. Some larger cities have dealt successfully with the demand by acquiring and selling lots, planned in an orderly fashion but with no initial services to families who build on their own. Programs such as these, which emphasize land tenure regularization, self-help construction, and the gradual provision of services, deserve furtlher support of, and promotion by, both local and federal authorities. - Several urban areas, such as the northern frontier cities and Mexico City, have experienced sudden, explosive growth and now must contend with the problem of large irregular settlements. (For the purposes of this report, irregular settlements refer to spontaneous neighborhoods, located near or within metropolitan areas, built on land which has not been registered or titled, with neither the benefit of formal sector financing, nor the blessing of local permits, nor the guidelines of the legal codes and regulations, nor, in the majority of cases, full access to basic services.) In time, most such settlements become legalized and endowed with public services, but neighborhoods of some degree of 'irregularity" or other, are very common. Furthermore the majority of 'irregular' settlements are not registered on the property tax rolls. Some 500,000 households in Mexico City alone live in settlements currently classified as irregular', and 602 of the housing in the capital is estimated to have been 'irregular' originally. Service installation can cost up to twice as much in these communities as it does in 'planned" or orderly neighborhoods. Therefore, it is important to stem the further proliferation of irregular conmunities and, among the more promising ways to do this, are several programs now being developed by federal and local government authorities which focus on land tenure rights and the provision of basic services for poor neighborhoods (para. 1.35). - Outside of the major cities, housing presents a totally different problem. In small towns and rural areas, peasants often have land and electrical energy, but have virtually no access to financing to  -3- build homes or to upgrade their existing ones with basic services like water supply and sanitation. Recently, the GOM created a small, specialized fund to support housing in rural areas. This could be a step in the right direction, but time will be needed to evaluate the program's effectiveness, principally in terms of cost recovery, credit collections and administrative efficiency. 1.05 The main form of tenure is ownership), accounting for about 672 of all housing units in 1980, up from 54? in 1960. This trend reflects both the strong desires of Mexicans to own their own home and the Government's efforts to satisfy that desire. It also reflects the reluctance by the private sector to invest in rental properties as a result mainly of unfavorable fiscal policies which have tended to reduce investment yields and to dimlnish Investors' confidence. Recently, the Government lhas begun to recognize that rental housing may represent a solution, particularly for low income families. In an effort to increase the supply of rental housing, the GOM took steps, beginning in 1987, to promote investor-owned rental housing by creating new lines of credit, and offering fiscal incentives to investors such as accelerated depreciation atnd tax credits. Furthermore, as part of a recently-approved Bank loan (para. 1.43), the Government will prepare a study of the rental market including a review of incentives required to stimulate more private investment in rental housing. Rent control legislation is not a major problem in Mexico's housing sector. The last re.it control decree dates back to the late 1940s, before the expansior. of major cities, and is limited to legislation governing "pockets" of downtown areas. 1.06