Morocco - Second Housing Finance Project

Document of The NWorld Bank FOR OFFICL USE ONLY ~ 3/Zl -Mo4 Report No. P-4886-MOR MEMORANDUM AND RECOXMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON PROPOSED LOANS IN AN AMOUNT EQUIVALENT TO US$ 3 MILLION TO THE KINGDOM OF MOROCCO AND IN AN AMOUNT EQUIVALENT TO US$77.5 MILLION TO THE CREDIT IMMOBILIER ET HOTELIER WITH THE GUARANTEE OF THE KINGDOM OF MOROCCO FOR A SECOND HOUSING FINANCE PROJECT August 25, 1989 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 EQUIALENTS (as of June 1989) Currency Unit = Dirham (DH) US$1 DH 8.60 DH 1 US$0.116 FISCAL YEAR JaniOry 1 - December 31 WEIGHTS AND MEASURES Metric System British/US System 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 miles (mi) 1 sq. kilometer (km2) = 0.386 sq. miles (mi2) I metric ton (ton) = 2,205 pound (lb) PRINCIPAL ABBREVIATIONS MOI - Ministry of the Interior MOH - Ministry of Housing CIH - Credit Immobilier et H6telier  FOR OmCAL4 USE ONLY KINGDOM OF MOROCCO SECOND HOUSING FINANCE PROJECT Loans and Project Summary BORROWERS: Kingdom of Morocco, and Credit Immobilier et Hotelier (CIH) GUARANTOR: Kingdom of Morocco (for the loan to CIU) BENEFICIARIES: Ministry of Interior, Ministry of Housing, and CIH AMOUNTS: Loan to the Kingdom of Morocco: US$3 million Loan to CIH: US$77.5 million; TERMS: Both loans will be repayable in 20 years including five years of grace at the standard variable interest rate. ONLENDING ARRANGEMENTS: The line of credit component of CIH's loan will be used according to the following terms: Interest Rate Maturity Grace 2eriod - Construction loans 13.5% Up to 4 years Up to 4 years - Mortgages 12.0% Up to 25 years - FINANCING PLAN: Sub-borrowers: US$ 84.0 million CIH: US$ 190.0 million IBRD: US$ 80.5 million TOTAL: US$ 354.5 million STAFF APPRAISAL REPORT: No. 7431-MOR, dated July 31, 1989. This document has a restricted distribution and may be used by recipients only in the X -rformna.ice of their official duties. its contents may not otherwise be disclosed without World Bank .iutho.iz&ion.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN OF US$3 MILLION TO THE KINGDOM OF MOROCCO AND US$77.5 MILLION TO THE CREDIT IMMOBILIER ET HOTELIER WITH THE GUARANTEE OF THE KINGDOM OF MOROCCO FOR A SECOND HOUSING FINANCE PROJECT 1. Submitted for approval is the following memorandum on proposed loans to the Kingdom of Morocco, ia an amount equivalent to US$3 million, and to the Credit Immobilier et H6telier (CIH), in an amount equivalent to us$ 77.5 million, to assist in the implementation oE a housing finance project. Both loans will be repayable over 20 years with five years of grace at the Bank's standard variable interest rate. 2. Background. Morocco's urban population has increased rapidly over the past three decades, expanding from 292 of the total population in 1960 to 45X in 1986, at an annual growth rate of 4.5%, significantly above the ovterall populatioingrowth rate of 2.6% p.a. During the last ten years. this rapid urbanization has taken place in the context of a difficult economic situation. Severe budgetary and balance of payments deficits, compounded by the stagnation in real income, have limited significantly the capacity of the public and private sectors to respond to the housing, infrastructure, and service needs of an increasing number of urban dwellers. The housing shortage is particularly acute for low-income households. Overcrowding, shared dwellings, and shanty towns are visible consequences and adversely affect health and sanitary conditions, social stability, and economic development. During the last five years, housing production averaged 72,000 units p.a., considerably fewer than the 90,000 units required to meet new demand, notwithstanding the need to replace substandard housing. Mortgage lending financed only 152 of the related capital investment, less than in most developing countries. Moreover, such financing disproportionately benefits medium- and upper-income households. 3. CIH is the primary mortgage lender. Commercial banks primarily finance construction loans with maturities of two to three years. They participate, however, in funding mortgage lending, since the Government requires that they earmark at least 6% of their deposits for either making mortgage loans or purchasing medium-term securities issued by CIH. Commercial banks prefer the latter alternative because of credit ceilings on their overall lending. The sale of these securities became the main source of CIH's liabilities, when Central Bank rediscounts were discontinued in 1986. The situation will change as a result of the recent government decisions to allow CIH, as we'l as all other specialized credit institutions, to mobilize savings directly from the public and to relax the existing credit ceilings on commercial bank lending. The limited participation of the financial sector in the funding of housing investment is the result of Morocco's tight financial market, combined with excessive Treasury demand for credit. The disproportionate amount of lending to medium- and upper-income households is the result of the competitive edge these households have in gaining access to credit as well as the fact that many low- and moderate-cost housing units are built without authorization, which excludes them from mortgage financing.  - a- 4. The efficient development of housing and the progressive eliminatlon of housing shortages call for a greater financial Intermediation role in the sector together with an expansion of the credlt to be made available for low- and moderate-cost units. Further resource mobillzation for low- and moderate-coot housing, however, will be ineffective until the Government removes existing bottlenecks in its supply and promotes the absorption of unauthorized housing into the formal sector by adapting present construction standards to the financial capabilities of low-income houeholds and by easing land development. 5,* Proleot Ob,ectives. The project will broaden the scope and improve the functioning of housing finance, as well as rationalize land and housing supply, with particular emphasis on low- and moderate-cost housing. The first objective will be achieved by helping CIE mobilize resources and strengthen its ability to channel them to these two categories of housiang; the second by helping the key ministerial departuients involved in the housing sector foster the development of appropriately priced construction sites and housing units. The project will also lay the groundwork for a progressive transition from the present specialized banking system to a universal one. To this end, it focuses on improving CIH's competitiveness and ability to mobllize resources, so that it can fulfill its mandate effectively in a morket-determined onvironment. 6. Proleot DesoRLton. To achieve the above objectives, the project will: (a) support low- and moderate-cost housing constructLon through a line of credit of US$ 77 million equivalent; and (b) strengthen institutions Involved In the housing sector by providing funds in the amount of US$3.5 million for technical assistance. 7. CIH will be the beneficiary of both the line of credit and institutional development funds for a total amount of US$77.5 million. it will use the proceeds of the line of credit to refinance: (a) construction loans to private and public developers to build low- and moderate-cost housing units; (b) land development projects carried out by public or private developers; (c) individual housing construction loans; and (d) mortgage loans for the purchase of new housing units. To qualify for Bank refinancing, subprojects will have to meet specific criteria related to the price and size of housing units; they must also have PRRs of at least 13.5%, corresponding to the current statutory interest rate on construction loans. CIH will use the institutional development funds (US$0.5 million), first, to improve its knowledge of the housing supply system to better adapt its lending to housing supply needs; second, to assess the possible features, market potential, and impact on its operations of extending its lending to home improvement projects, the purchase of existing housing units, and the purchase of serviced plots; and third, to Adapt its management information and internal audit systems to its new depository and lending activities, including the acquisition of related computer equipment. 8. The Urban Directorate of the Ministry of Interior (MOI) and the Housing Directorate of the Ministry of Housing (MOR) will be the beneficiaries of the remaining funds for institutional development (US$3 million). These  - 3 - funds will be used for institution-building programs aimed at upgrading their capability to guide and facilitate land and housing development. The MOI program will promote improvements in existing approaches, procedures, and the regulatory system affecting the preparation of urban master plans and land subdivision plans, which in turn affect the supply of serviced land and housing. The MOH program will improve the knowledge and understanding of the housing production process and system in both the formal and informal sectors, as well as assess the impact of land-use, infrastructural, and building regulations on the development cost of housing and the modifications required to foster low- and moderate-cost housing development. 9. Project implementation, comprising commitment of the line of credit to CIH and execution of the institution-building programs, is expected to take three years from loan effectiveness; full disbursement of Bank loan proceeds, five years. A breakdown of the estimated project costs and financing sources is presented in Schedule A; procurement and disbursement information in Schedule B; timetable of key project processing events in Schedule C; and the status of Bank Group Operations in Morocco in Schedule D. The Staff Appraisal Report, No. 7431-MOR, dated July 31, 1989, is being distributed separately. 10. Rationale for Bank Involvement. The project continues the Bank's support to housing and urban development in Morocco. This has already resulted in three lending operations: the first two for urban renewal and the construction of sites and services, and the third for the financing of low- and moderate-cost housing by CIH. The project will further support CIH lending for low- and moderate-cost housing while addressing critical issues related to housing development and future CIB operations. It comes at a critical time, when the Government is discussing ways and means to promote a more dynamic role for local authorities and public agencies in the development of serviced land and low- and moderate-cost housing. In keeping with present Government liberalization policies, local entrepreneurs are ready to play a greater role in the construction of large housing development projects, including low- and moderate-cost housing. In the financial sector, the Government is seeking to simplify the regulatory framework, reduce distortions and foster competition. CIH has been authorized to engage in commercial banking activities and is developing new deposit products and saving schemes to finance land and kiome acquisition. The commercial banks mainly finance construction and rely on CIH mortgage lending to ease the commercialization of the projects they support. While helping CIH mobilize new resources and harmonize its lending activities with recent developments in the financial sector, the project constitutes a major vehicle with which to pursue a broader dialogue between the Bank and the Government on the issues of specialized banking, credit controls, selective credit policies, and variable rate instruments. Ultimately, the project is expected to lead to a future Bank housing finance operation involving both CIH and the commercial banking system. 11. Lending Arrangements. The implementation of the project involves two separate loans: one to CIH for US$77.5 million and one to the Kingdom of Morocco for US$3 million. Both loans will be made on standard Bank terms and conditions for Morocco: 20 years' maturity, including five years of grace, at the standard variable interest rate. CIH will use the loan proceeds to refinance subloans for the construction and acquisition of low- and  moderate-cost housing. These subloans will be made on ClI's standard terms and conditions; the lcnding rates are those established by MOF in April 1988, (i.e., 13.5% for land develcpment and construction loans and 12% for mortgages, including individual construction loans). These rates are well above present and projected inflation (2.52 in 1988 and 52 thereafter). Maturities on loans for land development and construction are up to four years with balloon payments; those on mortgages and individual construction loans can reach 25 years but generally do not exceed 20 years. Low-income households granted mortgages and individual construction loans for low- and moderate-cost housing units below US$35,000, are charged subsidized interest rates varying from 72 to 101 according to the appraised real estate value of the unit. The interest subsidy is borne by the Government and paid directly to CIH. Bank refinancing of CIH lending will amount to 651 of subloans for the housing units with maximum value less than the equivalent of DS 150,000 (US$17,500), 401 of suSloans for units with a value between DR 150,000 and DU 300,000 (US$17,500 and US$35,000), and 502 of subloans for land improvement. About 80% of the loan proceeds is expected to be disbursed for construction loans to developers to be later consolidated into mortgages, 151 for individual construction loans for new housing units, and 5% for land development. The loan to CIH will also finance 100l of the cost of the studies to be carried out under the project. The loan to the Kingdom of Morocco will cover 100% of the cost of studies underpinning institutional development in MOI and MOH. 12. AEreed Actions. CIH, MOI, and MOH will implement their respective project components in compliance with the objectives, conditlons and schedules described in this memorandum and the Staff Appraisal Report, and reflected in the loan documents. 13. In addition. CIH ani the Government have agreed on the following actions: (a) CIH will continue to maintain sound financial policies and meet agreed upon targets of capital adequacy, liquidity, profitability, operating expenditures, and loan exposure; b) the Government wil, settle its remaining arrears to CIH for foreign exchange losses, interest-rate subsidies, and government-owned hotel loans in default by December 31, 1989; and c) the Government will share the foreign exchange risk on the Bank loan to CIH according to arrangements agreed upon with CIE in June 1989, which were found satisfactory to the Bank. 13. Justification. By providing CIH with credit for financing the construction and purchase of about 15,000 low- and moderate-cost housing units over a two-year period, the project will contribute to relieving the housing shortage in major urban areas, to promoting homeownership by low- and moderate-income households, and to redirecting part of the domestic funds available for housing finance towards more cost-effective types of construction. Bank assistance to CIH will also come at a critical juncture for the institution. Its growth objectives to meet the financing needs of the housing sector face important challenges related to its resource structure and requirements, its profitability, the recovery of Government arrears for foreign exchange risk losses and interest-rate subsidies, and its relationship  with the commercial banking system. Continued Bank assistance to CIH will help the institution synchronize its organizational growth and expanded lending activity with appropriate sectoral development and resource mobilization policies. By supporting institutiont development in MOI and MOH, the project will facilitate coordination among local authoritiea, util.ity agencies, landowners, and developers for the production of affordable serviced land and housing. This will have a positive environmental impact by limiting the proliferation of unauthorized housing on unserviced land. 14. Risks. There are three main risks tinder the project. The first is related to the type of housing subprojects that will be actually financed. The project is expected to channel about 502 of Baink financial assistance to the development of low- and moderate-cost housing with a real estate value of less than US$17,500. CIH, however, will be unable to reach that objective in the absence of an adequate supply of low- and moderate-cost housing. To mitigate this risk, the project supports institutional development programs designed to ease present constraints to the construction of low- and moderate-cost housing, and the promotion of developers' activity in this field. The second risk is related to the possibility that CIH's future lending operations and profitability may be adversely affected by Morocco's tight financial market and rising cost of long-term resources and by the Treasury's inability to reimburse CIH for advances it has made for interest-rate subsidies. This risk can be minimized through effective project supervision to ensure CIH compliance with the financial covenants set forth in the loan agreement and Government respect of its financial commitments vis-a-vis of CIH. Recent fiscal reform programs will ease this governme;.t task by yielding greater revenues. The third risk is the capacity of MOI and MOH to manage their respective institutional development programs. Both Ministries have recently undergone reorganization of their departments dealing with housing and urban development and are adapting to the new government decentralization policies. Bank advice during the execution of the envisaged programs will enhance the prospects of successful implementation. 10. Recommendation. I am satisfied that the loans will comply with the Articles of Agreement of the Bank and recommend that the Board of Directors approve them. Barber B. Conable President Attachments Washington D.C. August 25, 1989  Schedule A KINGDOM OF MOROCCO ,SFOND *iOUSING FINANCE PRO C E=MATED PROJECT COSTS AND FINANCING PLAN Proleot Costs Subproiects Financedb the Line of Credit to CIH Total Cost of Subprojects (US$ Million) local foreism Total Land Development Loans 30 6 36 Individual Construction Loans 28 10 38 Construction Loans to Developers 216 61 277 TOTAL 274 77 351 Institutional DeveloDment Programs Total Cost (US$ Million) CIH Program Study on housing supply system 0.2 Study on new lending and savings products 0.1 Study to adapt the management information and internal audit systems, and procurement of related computer equipment 0.2 TOTAL 0.5 Government Program Urban Development Plans and General Study 2.0 Study cn Housing Supply 1.0 TOTAL 3.0 Financing PL local foreign Total (US$ Million) Sub-borrowers 84.0 84.0 CIH 190.0 190.0 IBRD 80.5 80.5 TOTAL 274.0 80.5 354.5  Schedule B KINGDOM OF MOROCCO SECOND HOUSING FINANCE PROJECT PROCUREMENT METHODS AND DI SURSEMENTS Procurement The line of credit for CIB will refinance civil works, goods, and acquisition of housing units. Public developers will be subJected to Government procurement practices for public works. Private developers will execute construction works, either by themselves, or througn small subcontractors. No contract %ill be suitable for international competitive bidding. The implementation of institutional development programs entails the awarding of contracts for studies and procurement of equipment. Contracts for studies will be awarded to local and foreign consulting firms according to Bank guidelines for the use of consultants. Procurement of equipment will be included in the contracts for studies. Disbursements Disbursemets by CateLorv - Amount - (in US$ million) Percentage Loan to the Kingdom of Morocco Professional Services 3.0 1002 (of expenditures) Loan to CIE Land development 5.0 502 (of CIH's subloan) Low-cost housing 33.0 652 (of CIH's subloan) Moderate-cost housing 34.0 402 (of CIH's subloan) Professional services 0.5 1002 (of expenditures) Unallocated 5.0 (depending on use) Estimated Disbursement Sehedules Bank Fiscal Year US$ Million 1990 1991 1992 1993 1994 1995 Loan to the Kingdom of Morocco Annual 0.5 1.0 1.0 0.5 Cumulative 0.5 1.5 2.5 3.0 % 17 50 83 100 Loan to CIH Annual 11.5 16.5 19.5 19.5 9.0 1.5 Cumulative 11.5 28.0 47.5 67.0 76.0 77.5 2 15 36 61 86 98 100  -8- Schedule C KDIGDOM OF MOROCCO SECOND HOUSDIG FINANCE PROJECT Thuetible of Keo Prolect ProessIN Events (a) Tlme taken to prepare: 6 months (b) Prepared by: TBRD, CI1, and the Ministries of Interior and Housing (c) First IBRD mission: April 1988 (d) Appraisal misaion departure: June 1988 (e) Negotiations: June 1989 (f) Planned Date of Effectiveness: December 1989  - 9- sebeduloa Page I of 2 KINGDOM OF MOROCCO STATUS pF BANK OPERATIONS A, STATIEMLT OF BANK LOANS ANO IDA CREOITS (as of March 31. 19891 Loan or US$ Million Amount Credit fLLs'- Canaellationsl Number Year Borrgawr eurpase fank I Uadisbursd Fourty-five Loans Fully Disbursed 1.682.83 Five Credits Fully Disbursed 4S.16 1602 1978 Kingdom of Morocco Agriculture 40.0 14.13 1681 1979 Kingdom of Morocco Education 88.0 14.82 1848 1980 Kingdom of Morocco Agriculture 18.0 4.66 1943 1981 CIt Tourism 100.0 S.47 1944 1981 Kingdom of Morocco Urban Oevelopment 20.0 10.68 2006 1982 Kingdom of Morocco Water Supply 78.0 33.88 2037 1982 BNOE DFC 70.0 3.83 2038 1982 Kingdom of Morocco OFC (SSI) 30.0 19.27 2082 1982 Kingdom of Morocco Agriculture 16.0 10.71 2109 1982 Kingdom of Morocco Mining 6.3 2.29 2110 1982 Kingdom of Morocco Forestry 15.S 7.52 2149 1982 Kingdom of Morocco Education 38.0 7.87 2217 1983 Kingdom of Morocco Agriculture 22.0 16.21 2245 1983 CIH Housing Otvelopment 60.0 26.97 22S3 1983 Kingdom of Morocco Agriculture 34.0 27.75 2254 1983 Kingdom of Morocco Highways 76.6 34.24 2271 1983 ONAREP Oil Exploration 65.2 2.61 2272 1983 Kingdom of Morocco Village Infrastructure 16.0 4.11 2479 198S Kingdom of Morocco Voca, nal Training 27.1 14.71 2487 1985 Kingdom of Morocco Electrical & Mec. Ind. 25.1 16.84 2508 1985 Kingdom of Morocco Jerada Coal min. 27.0 21.68 2572 198S Kingdom of Morocco Health 28.4 28.06 2656 1986 Kingdom of Morocco Agriculture 46.0 43.51 2657 1986 Port Authority Port of Casablanca 22.0 20.74 2664 1986 Kingdom of Morocco Education 1So.0 62.79 2731 1986 CNCA Agric. Credit 120.0 61.43 2779 1987 Kingdom of Morocco Vocattonal Training 22.3 21.82 2798 1987 Office National des Postes Telecosmunications 125.0 125.00 2806 1987 National Sank for Econ. Oevelop-ont Industr. Export Fin. 70.0 70.00 2820 1987 Kingdom of Mor: co Publ. Enter. Rat. 240.0 121.44 2825 1987 Kingdon of Morocco Nat. Water Supply 60.0 60.00 2826 1987 Kingdom of Morocco Greater Casa. Sewerage /a 60.0 60.00 2885 1988 Kingdom of Morocco Second Agr. Sector Adj. 225.0 225.00 2910 1988 Kingdom of Morocco Power Oistribution /l -.