Mexico - Low-income Housing Project

D~ The Wor * FoR OmaA Repwt No. 9984 PROJECT COMPLETION REPORT MEXICO LOW INCOME HOUSING PROJECT (LOAN 2612-ME) OCTOBER 15, 1991 Country Department I Infrastructure and Energy Operations Division Latin America and the Caribbean Region 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 (As of May 1991) Currency Unit - Mexican Pesos (Mex$) US$1.00 = 3000 Mexican Pesos GLOSSARY OF ABBREVIATIONS BANOBRAS - National Development Bank for Public Works FONHAPO - Low-Income Housing Fund FOVISSTE - Housing Fund for State Service Works INFONAVIT - Housing Fund for Workers NGOs - Non governmental Organizations  FOR OFmFCIAL USE ONLY THE WORLD SANK * Washington. DC 20433 U.S A Office (i Dveectm-C sl Optagwou ivaIutgnm October 15, 1991 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Mexico Low-Income Housinx Proiect (Loan 2612-NE) Attached, for information, is a copy of a report:entitled "Project Completion Report on Mexico - Low-Income Housing Project (Loan 2612-ME)" prepared by the Latin America and the Caribbean Regional Office. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment 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.  FOR OFFICAL USE ONLY MEXICO PROJECT COMPLETION REPORT LOW INCOME HOUSING PROJECT (LOAN 2612-ME) TABLE OF CONTENTS Page No. Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Evaluation Summary .... . . . . . . . . . . . . . . . . . . .....ii PART I PROJECT REVIEW FROM BANK PERSPECTIVE Project Identity . . . . . . . . . . . . . . . . . . . . . . . . . . . Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Project Objectives and Description . . . . . . . . . . . . . . . . . . 2 Project Preparation, Design and Organization . . . . . . . . . . . . . 3 Loan Amount and FONHAPO's Institutional Capacity . . . . 3 FONHAPO's Cost Recovery . . . . . . . . . . . . . . . . 4 Type of Housing Solutions . . . . . . . . . . . . . . . 4 Procurement .... . . . . . . . . . . . . . . .... 4 Sector Reform .... . . . . . . . . . . . . . .... 5 Project Implementation .... . . . . . . . . . . . . . . . . . . . . 5 Loan Amount and FONHAPO's Institutional Capacity . . . 5 FONHAPO's Cost Recovery . . . . . . . . . . . . . . . . 6 Types of Housing Solutions . . . . . . . . . . . . . . . 6 Procurement .... . . . . . . . . . . . . . . . . . . 7 Sector Reform .... . . . . . . . . . . . . . . . . . 7 Lessons Learned From the Implementation Process . . . . 7 Project Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Policy Impact .... . . . . . . . . . . . . . . . . . 9 Poverty Tmpact . . . . . . . . . . . . . . . . . . . . . 9 Macro-Economic Contribution . . . . . . . . . . . . . . 10 Institutional Impact ................. 10 Lessons Learned From Project Results and Impact . . . . 11 Project Sustainability . . . . . . . . . . . . . . . . . . . . . . . . 11 Bank Performance .... . . . . . . . . . . . . .... ..... . . 11 FONHAPO Performance .... . . . . . . . . . . . . ........ . . 12 Project Relationship . . . . ....... . . .... . . 12 Consulting Services .... . . . . . . . . . . . . . . . . . . . .. .12 Project Documentation and Data .... . . . . . . . ........ . 13 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.  TABLE OF CONTENTS (cont.) Page No. PART II PROJECT REVIEW FROM BORROWER'S PERSPECTIVE . . . . . . . . . . 14 PART III STATISTICAL INFORMATION Table 1. Related Bank Loans . . . . . . . . . . . . . . . . 17 Tablo 2. Project Timetable . . . . . . . . . . . . . . . . 17 Table 3. Cumulative Estimated and Actual Loan Disbursements 18 Table 4. Project Implementation . . . . . . . . . . . . . . 18 Table 5A. Project Costs . . . . . . . . . . . . . . . . . 19 Table 5B. Project Financing . . . . . . . . . . . . . . . . 19 Table 6. Project Results . . . . . . . . . . . . . 20 Table 7. Status of Major Loan Covenants . . . . . . . . . . 22 Table 8. Use of Bank Resources . . . . . . . . . . . . . . 24  MEXICO LOW-INCOME HOUSING PROJECT (LOAN 2612-ME) PROJECT COMPLETION REPORT PREFACE This is the Project Completion Report (PCR) for the first Low-Income Housing Project in Mexico for which Loan 2612-ME in the amount of US$150.0 million was approved in August 1985. The loan was closed on July 16, 1990, approximately two years ahead of schedule. It was fully disbursed and the last disbursement was in June 1990. The PCR was jointly prepared by the Infrastructure and Energy Operations Division of the Latin America and Caribbean Regional Office (Preface, Evaluation Summary, Parts I and III), and the Borrower (Part II). Preparation of this PCR was started during the Bank's final supervision mission of the project in February 1990, and is based, inter alia, on the Staff Appraisal Report; the Loan and Guarantee Agreements; supervision reports; progress reports; correspondence between the Bank and the Borrower; interviews with Bank staff and with Mexican government officials; and internal Bank memoranda. The project executing agency, FONHAPO, also prepared its own extensive project completion report which the Bank reviewed when preparing this PCR. The FONHAPO report is available in LAC Files.  - ii - PROJECT COMPLETION REPORT MEXICO LOW-INCOME HOUSING PROJECT (LOAN 2612-ME) EVALUATION SUMMARY Obiectives 1. The Bank loan was seen as a means of assisting the Government of Mexico (GOM) in pursuing its objective of improving public management of housin' subsidies. The project was designed to be the first in a series of lend'ng operations in the housing sector to conduct a policy dialogue which would addrese issues such as capital recovery and the measurement, control and reduction of subsidies, while improving distributional equity in the allocation of housing credit. Specific objectives were: (i) to foster the replicable growth of public investment in housing for the poorest and largest segment of the market; (ii) to strengthen FONHAPO (Fondo Nacional de Habitaciones Populares), a newly-created national trust fund, during its critical expansionary period through the introduction of new onlending terms; and (iii) to support a dialogue with the GOM focussing on key housing sector issues. Implementation Experience 2. Approved by the Bank in late 1985, the Loan to FONHAPO was fully disbursed by July 1990, approximately two years ahead of schedule. This was accomplished despite economic conditions that were considerably worse than expected at the time of project appraisal and a major earthquake which struck Mexico City in 1985. In general, the project can be credited with transforming FONHAPO into a major player in the Mexican housing finance sector, and more specifically with the development of FONHAPO's highly capable planning and evaluation unit. 3. Rising domestic inflation led to a drop in FONHAPO's cost recovery ratios in 1986. In response to a project covenant, and with the help of the dialogue established with the Bank, FONHAPO revised its lending terms effective January 1987, opting for a mortgage instrument which increased the outstanding loan balance and monthly payments in response to the periodic adjustments in the minimum wage. The new system proved easily understandable and manageable by FONHAPO sub-borrowers and final beneficiaries alike, and allowed FONHAPO's cost recovery rate to exceed the level covenanted in the loan agreement with the Bank, in a highly inflationary environment. FONHAPO has since gone on to revise its on lending terms to reduce subsidies further and improve their targetting to the neediest population groups. The project also served to focus Government attention on numerous important sector-wide  - iii - issues such as cost recovery, local decision-making and management, the strong demand for low-cost housing solutions and the application of large-scale credit operations to meet that demand. Results 4. All told, FONHAPO financed 142,000 housing solutions under the project, or 99% of the goal set at Appraisal. During the same implementation period FONHAPO grew to include ten regional offices, and its annual loans program jumped from financing around 7,500 housing units in 1983 to a steady 60,000 units per year from 1986 through 1988. 5. During the project period, FONHAPO produced ov'r 270.000 units affordable by families earning between 0.8 and 2.5 minimum salaries (from around the 20th to the 70th percentile of income distribution as of 1984). The majority of these units were affordable by families earning 1.5 minimum salaries or less (about US$150/month in 1990 prices), or those within the bottom 45% of income distributio:a. 6. The large scale of FONHAPO's operation under the project also stimulated a new policy orientation towards low-income housing solutions. FONHAPO was the first Mexican housing agency to actually measure its output against demand and to develop a conscious policy of "more (housing) for less (unit cost)". FONHAPO was success ul in pushing sub-borrowers (i.e., state housing institutes, municipalities, private groups and NGOs) to reduce housing costs. Considering that serviced lots and progressive housing had previously been provided only on a small scale in Mexico, the project gained acceptance for these types of housing solutions on a national scale. 7. Other positive institutional impacts on planning and evaluation, management, and decentralization within FONHAPO extended further to state, municipal and local housing institutions and, finally, to the non-government sector, including housing cooperatives and credit unions, which multiplied in number and in capability in response to the housing credits offered under the project. Sustainability 8. FONHAPO's collection performance (with delinquency rate of less than 52 of outstanding loans) and the actual repayments of final beneficiaries are very satisfactory. Long- and medium-term program sustainability and growth, however, continue to depend on FONHAPO's ability to maintain its low-cost solution approach to housing, to obtain funds from the central government to supplement its resources and to recover loans from subborrowers and beneficiaries. Regarding the latter, as FONHAPO loans link outstanding balances and monthly payments to the minimum wage, FONHAPO's future capital recovery will depend critically on the relationship between the movement in the minimum wage and domestic inflati%in rate.  - iv - Findings and Lessons Learned 9. The rapid and successful execution of the project can be attributed to a number of factors including: (a) the use of a line of credit which offers collective loans to both public and private sector intermediaries representinig pre-detined low-income beneficiaries, (b) the provision by FONHAPO of technical assistance to subborrowers and final beneficiaries in the identification, promotion, preparation and implementation of low-income housing subprojects, and (c) the application of systematic operating rules, including transparent procurement procedures, which required subprojects to be carefully planned and conLstantly supervised to ensure the early identification of problems and their prompt resolution. 10. About 60% of the total number of FONHAPO loans made under the project went to private sector subborrowers, mainly to housirg cooperatives and civic associations. This is strong evidence that such groups have an important role to play in providing housing finance to low-income families. 11i The project underscored the importance, in order to reach the poorer segments of the housing market, of directing financing to low-cost, progressive housing solutions, and of offering a flexible approach to fit housing solutions to beneficiaries' needs and to support self-help construction activities. 12. Finally, the fact that the project originated in Mexico, in response to popular demand, and was strongly backed by the Government, also accounted for its success. Bank staff wisely did not impose alternative solutions, but played a supportive role, emphasizing the achievement of a few policy goals. This was complemented by ptoject conditionality which fostered a strong dialogue between the Bank and Mexican authorities during project execution and proved helpful in addressing important implementation and sector-wide issues.  MEXICO LOW-INCOME HOUSING PROJECT (LOAN 2612-ME) P'ROJECT COMPLETION REPORT PART T: PROJECT REVIEW FROM BANK'S PERSPECTIVE 1. Proiect Identity hame : Low-Income Housing Project Loan Number :2612-ME RVP Unit : Latin America and the Caribbean Country : Mexico Sector : Infrastructure/Urban Subsector : Housing 2. Background 2.01 Despite increasing oil revenues during the late 1970's, Mexico's growing public deficit and deteriorating balance of payments came to a crisis in the early 1980's. Inflation increased to two-digits, the Government withheld payments on external credits and devalued the peso in two dramatic jolts which also led to massive capital flight. The Administration of President de la Madrid, which began its term in 1982, took steps to recover domestic and external confidence and to stabilize the public sector and externial finances. Government measures to speed recovery focussed on the construction industry, which had been hit hard, with a sudden and severe drop in output and lay-offs of over half of the 1.9 million construction workers in 1981. In its "1983-198