Morocco - Second Housing Finance Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15511 IMPLEMENTATION COMPLETION REPORT KINGDOM OF MOROCCO SECOND HOUSING FINANCE PROJECT (LOANS 3121-22) APRIL 3, 1996 Private Sector Development, Finance and Infrastructure Division Maghreb and Iran Department Middle East and North Africa Regional Office This document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS Currency Unit = Dirham (DH) (As of July 1989 Appraisal Report) US$ = DH 8.60 DH1 = US$.116 (As of January 1995) US$ = DH 8.62 DH1 = US$.116 FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS CIH - Credit Immobilier et H6telier MOF - Ministere des Finances MOH - Ministere de l'Habitat MOI - Ministere de I'Interieur VIT - Maximum real estate value (valeur immobiliere totale) HBM - Low -and moderate- cost housing (Habitat a Bon Marche)  FOR OFFICIAL USE ONLY TABLE OF CONTENTS PREFACE ....................................................... i EVALUATION SUMMARY ........................................... i PART I: PROJECT IMPLEMENTATION ASSESSMENT ........................ 1 Background .................................................. 1 Statement and Evaluation of Objectives ................................ 1 Achievement of Objectives ........................................ 2 Major Factors Affecting the Project .................................. 4 Project Sustainability ............................................ 4 Bank Performance ............................................. 5 Borrower Performance ........................................... 5 Assessment of Outcome .......................................... 6 Key Lessons Learned ........................................... 6 PART II: STATISTICAL TABLES ........................................ 8 Table 1: Summary of Assessments .................................. 8 Table 2: Related Bank Loans/Credits .................................. 9 Table 3a: Project Timetable Loan 3121 ................................ 9 Table 3b: Project Timetable Loan 3122 ............................... 10 Table 4a: Credit Disbursement: Cumulative Estimated and Actual: Loan 3121 ... .... 10 Table 4b: Credit Disbursement: Cumulative Estimated and Actual: Loan 3122 ... .... 10 Table 5a: Key Indicators for Project Implementation to Loan 3121 .............. 11 Table 5b: Key Indicators for Project Implementation to Loan 3122 .............. 11 Table 6: Studies Included in Project ................................. 12 Table 7: Project Cost ........................................... 13 Table 9a: Status of Legal Covenants for Loan 3121 ........................ 14 Table 9b: Status of Legal Covenants for Loan 3122 ....................... 15 Table 10: Bank Resources: Staff Inputs ............................... 17 Table 11: Bank Resources: Missions ................................. 18 ANNEX A.1: ASSESSMENT OF THE PROJECT FROM THE BORROWER'S PERSPECTIVE (LOAN NO. 3121-MOR) ............................... 19 ANNEX A.2: ASSESSMENT OF THE PROJECT FROM THE BORROWER'S PERSPECTIVE (Loan No. 3122-MOR) .................................. 23 ANNEX B.1: MINISTRY OF INTERIOR'S COMMENTS ON PART 1 ............... 30 ANNEX B.2: CIH's COMMENTS ON PART 1 .............................. 32 Ths 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 wiLhout World Bank authorization.   IMPLEMENTATION COMPLETION REPORT KINGDOM OF MOROCCO SECOND HOUSING FINANCE PROJECT (LOANS 3121-22) PREFACE i This is a Implementation Completion Report (ICR) for the Second Housing Finance Project in the Kingdom of Morocco, for which Loans 3121-MOR and 3122-MOR in the respective amounts of US$ 3.0 million equivalent and US$77.5 million equivalent were approved on September 14, 1989. ii The closing date of Loan 3121-MOR to the Kingdom of Morocco was June 30, 1995. However, the closing date of Loan 3122-MOR to the Credit Immobilier et Hotelier was December 31, 1994. iii The ICR was prepared by Miss Laura Burakreis of the Private Sector Development, Finance and Infrastructure Division of the Maghreb and Iran Department, and reviewed by Mr. Amir Al- Khafaji, Chief MNlPI, and Mr. Rene Costa, Projects Advisor, of the Maghreb and Iran Department. iv Preparation of this ICR was begun after Loan 3121-MOR closed. It is based on material in the project file. Both borrowers contributed to the preparation of the ICR by analyzing their own project files, commenting on the ICR, and submitting their own evaluation of project implementation (see Annexes A and B).   IMPLEMENTATION COMPLETION REPORT KINGDOM OF MOROCCO SECOND HOUSING FINANCE PROJECT (LOANS 3121-22) EVALUATION SUMMARY Project Objectives i The main objectives of the project were: (i) to increase the mobilization of resources for financing housing construction and acquisition; (ii) to increase the relative share of investment and credit addressed to low-cost housing; and (iii) to rationalize the land development and housing production processes in order to facilitate low-cost housing construction. ii To meet these objectives, the project included several components. The first, the investment component (US$ 77.0 million), provided financial support for an ongoing program of targeted lending through CIH, a public development bank and the main supplier of construction loans and mortgage loans in Morocco. The Bank partially financed CIH's loans to developers for construction and loans to targeted households for acquisition of residential properties. The second component was for technical assistance (US$ 0.5 million) for studies sponsored by CIH (i) to improve its knowledge and understanding of the housing supply system; (ii) to develop new savings and credit products; and (iii) to adapt its management information and internal audit systems to its new depository and lending activities. iii The third component, the technical assistance component (US$ 3 million) to the Government was a program of institution building designed to upgrade the capability of two key ministerial departments, the Urban Directorate of the Ministry of Interior and the Housing Directorate of the Ministry of Housing, to guide and facilitate land and housing development. This technical assistance component financed studies sponsored by the Ministry of Housing and the Ministry of Interior. Implementation Experience and Results iv The first and main objective of the loan was largely achieved. The funds under the project provided resources to CIH for loans to developers and home-buyers. These funds were committed and disbursed rapidly. CIH financed a total of 10,800 houses or lots under the project, roughly two thirds the projection of 15,000 units at appraisal. v The second objective was to increase the share of investment and credit addressed to low-cost housing. This objective was not achieved during the implementation of the project. During the six year period from 1989-1994, only 9% of CIH's commitments for building or purchasing individual units were made under the low-and moderate-cost housing program, known as the Habitat Bon Marche program. This is slightly lower than the percentage of commitments, equal to 10%, for the two years preceding the project's approval. vi The third objective which was to rationalize land development and housing production processes in order to facilitate low cost housing development and housing construction was also not achieved during the implementation of the project. Helping the Government to increase the  ii availability of appropriately priced serviced land, simplify housing construction procedures, reduce excessively demanding infrastructure and building standards, and promote private entrepreneurs' activity would have been greatly beneficial and would have fostered the achievement of the first two main objectives. One of the studies was instrumental in engaging the Government in a dialogue on sector reform. The data from the study were incorporated into a World Bank sector report and were used in part as the basis of World Bank recommendations to Government on a strategy for the sector. Although, few recommendations from the consultants' study resulted in policy reforms during the implementation of the project, Government is still keenly focused on designing an appropriate strategy and implementing reforms. vii As for the focused technical assistance to CIH, this component of the project was successful, and fully met its objectives. Summary of Findings, Key Lessons Learned and Future Operations viii Overall, the project can be rated "satisfactory", as it achieved its main objectives of resources mobilization for housing construction and acquisition and institution building of CIH. As regards the objectives not met, i.e., increased share of investment and credit to low-income housing and improved land development, the project design was not appropriate to bring the necessary policy reforms. However, since the lessons learned with the project have facilitated a better understanding of the housing market and conditions in Morocco and have been taken into account in the design of new housing development projects in this country, their impact on the overall project rating is deemed to be minimal. ix An important lesson emerges from this project. Shifting housing production towards affordable standards is particularly needed to meet high volume demand resulting from social and demographic pressure while containing public investment within the limits imposed by the country's fiscal stabilization and economic adjustment. x The studies were an insufficient tool to bring about policy and regulatory reforms. Moreover, greater availability of funds to CIH did not increase the share of investment and credit extended to low-and moderate-cost housing, one of the stated objectives of the project. The force driving credit origination is credit demand, which is inextricably linked to the availability of affordable housing. The project was not properly designed to meet this objective early in the life of the project, for the Bank and the Government did not address up-front the key issues in housing production. xi In future operations, key conditionalities for reforms should be identified and placed up-front to increase the availability of affordable housing for low and moderate income families, by increasing the availability of appropriately priced serviced land, simplifying pertinent administrative procedures, modifying regulations governing infrastructure and construction, and promoting private entrepreneurs' activity, as necessary. xii Another important lesson is that government subsidized low-and moderate-cost housing program, which entail interest rate subsidies, are cumbersome for participating financial institutions and likely to undermine their profitability in the event of non-timely government payments to the financial institutions. An up-front payment of the subsidy to the developer or the participating bank, would eliminate the risk of untimely payments of subsidies and the associated costs over the life of a given loan. Moreover, such payments would be more transparent in the budget. The feasibility of replacing subsidies that are given in the form of subsidized interest rates, with upfront grants in Morocco is being studied under a Bank financed study.  PART I: PROJECT IMPLEMENTATION ASSESSMENT Background 1. In the two decades preceding project identification, Morocco's urban population increased rapidly, expanding from 29% of the total population in 1960 to 45% in 1986. The annual growth rate of the population in urban areas was significantly above the overall population growth rate, 4.5 % versus 2.6% p.a.. From the mid seventies, this rapid urbanization had taken place in the context of a difficult economic situation. And, severe budgetary and balance of payments deficits, compounded by the stagnation in real income, had constrained the capacity of the public and private sectors to respond to the housing, infrastructure, and service needs of an increasing number of urban dwellers. As a result, availability of and access to affordable housing in Morocco was an acute and entrenched problem. The housing shortage was particularly severe for low income households. Overcrowding, shared housing and shanty towns were visible consequences of this situation and affect negatively social stability and economic development. Mortgage lending financed only 15% of related capital investment compared with 20-25 % in most other developing nations. Credit mainly benefited the construction of housing for middle- and higher income groups. Housing for low-income groups was constrained not only by scarce financial resources, but also by the lack of appropriately priced land, infrastructure and building regulations, and rigid administrative procedures. Shifting housing production towards affordable standards was particularly needed to meet high volume demand resulting from social and demographic pressure while containing investment within the limits imposed by the country's fiscal stabilization and economic adjustment. Statement and Evaluation of Objectives 2. Against this background, the project's aim was to help widen the scope and improve the functioning of housing supply, with particular emphasis on low-and moderate-cost housing.' The main objectives of the project were: (i) to assist CIH in mobilizing resources for financing housing construction and acquisition; (ii) to increase the relative share of investment and credit addressed to low-and moderate-cost housing; and (iii) to rationalize the land development and housing production processes in order to facilitate low-cost housing construction. The above objectives were mutually supportive. Formal credit contributed to financing a small fraction of housing investment by about 20% only; the bulk of resources was mobilized by households in the forms of accumulated savings that were often kept out of the financial system. Helping CIH to develop savings scheme, that would recycle these resources had an important multiplier effect. 3. To achieve its objectives the project provided CIH with: (a) a line of credit (US$ 77 million) to support its lending for low- and moderate-cost housing; (b) technical assistance funds (US$ 0.5 million) for studies: (i) to improve its knowledge and understanding of the housing supply system; (ii) to develop new savings and credit products; and (iii) to adapt its management information and internal audit systems to its new depository and lending activities; and (c) funds (US$ 3 million) to the Government to carry out institution-building programs designed to upgrade the capability of two key ministerial departments, the Urban Directorate of the Ministry of Interior and the Housing Directorate of the Ministry of Housing, in order to guide and facilitate land and housing development. 1/ For the purpose of the project, low-cost housing means housing uniLs whose estimated value is DH 150,000 or less. Furthormore, moderate-cost housing means a housing unit whose estimate value is more than DH 150,000, but not in excess of DH 300,000.  2 4. The dialogue on the housing sector between the Bank and the Government dates back to the mid-1970s. This project was the fourth in the housing sector. In the first two operations, approved in 1978 and 1981, (Rabat Urban Development Project, Loan 1508-MOR and the Second Urban Development Project, Loan 1508-MOR) MOH managed projects for upgrading of selected squatter settlements and the development of shelter concepts affordable to the lowest income groups. The third operation in 1983 (the First Housing Finance Project, Loan 2245-MOR), which was close to completion during the appraisal of this project, focused on strengthening CIH's ability to lend for low-and moderate-cost housing production, by funding technical assistance and construction and mortgage loans. Experience under the First Housing Finance Loan indicated that the availability of credit greatly enhanced the development of low and moderate cost housing and access to home ownership. Hence the project, which was focused on financing construction of housing units and mortgage loans for low and moderate income families, was deemed a logical step in the Bank's support for development of the housing sector. 5. The experience gained under the first housing finance project in Morocco, was incorporated into the design of the project. The credit line component for CIH was designed with a view to ensure rapid commitment of the line and subsequent disbursement of loan proceeds. The amount of the credit was based on a careful review of the pipeline of eligible sub-projects. Moreover, sub-project eligibility criteria were carefullv studied to avoid rigidities while ensuring the achievement of the project's main objective. The Bank assistance also came at a critical juncture for CIH, which was the key provider of mortgage loans in the financial system. CIH faced important challenges related to resource mobilization, profitability, and recovery from the Government of arrears which were related to foreign exchange risk losses and interest-rate subsidies.2 Toward this end, the project aimed to improve CIH's profitability as well as its ability to mobilize resources, so that later it could compete in a liberalized financial system. As for the loan to the Government, this loan was designed to provide technical assistance, in the form of studies, to the Ministry of Interior and the Ministry of Housing. The Government was to exchange views with the Bank on the studies and thereafter promptly take all action necessary to implement the programs and recommendations of the studies. Without the Government's agreement on the sector strategy at the appraisal stage, it was unlikely that this objective would be met in the course of the project. Simply having the studies carried out did not commit the Government to rationalize the processes. Achievement of Objectives 6. The first objective of the loan was largely achieved. The funds under the project provided resources to CIH for loans to developers and home-buyers and were committed and disbursed rapidly. CIH financed a total of 10,800 houses or lots under the project, roughly two thirds the projection of 15,000 units at appraisal. Project costs related to the acquisition of these units totaled approximately USD 177 million versus 350 million at appraisal.3 2/ Uinder the sharing arrangement. established in connection with the ITPA 11 Loan (June 1985) and applied to all specialized fiunncial institutions, CIH paid an interest rae on its foreign borrowings equal to their actual ornleding rate (e.g., 12%) reduced by a 3% spread. The difference between the resulting rate (i.e., 9%) and the rae carried by the foreign loan (e.g., 8%), as well as a 1% comunission charged mn the relevant subloans were deposited by CIH in a foreign exchange risk furn i the name of the Treasuay to be maintained on CIH's books and to be used to cover possible exchange losses. In the case of insufficient funds, the additional losses were usumed for an iniial 2% of the currency devaluation by CIH and for the remnainder by the Treasury. Since these losses have largely exceeded the nargin between domestic and foreign interest raes, CIH had accumulated substantial receivables from the Treasury, which did not pay them on time because of cash shortages. 3/ This cost figure is bawd on CIH loan data and an assumption that housing units were financed 90%with mortgage loans, and enly 10% with dhe cambutien of the borrower. Data in the appraisal report is based on a sub-borrower's contribution of 50% which is equivalent to the subborrower's cntriibution for loans to developer iot to households. Ths mostly explains the substantial difference in cost figures.  3 7. The breakdown according to type of units financed is roughly consistent with the appraisal estimates. The actual breakdown according to type of units financed is 43 % for units of a VIT of less than 150,000, 52% for units between DH 150,000 and 300,000, and the remainder for the financing of serviced lots. This is similar to the appraisal estimates which anticipated that 50% of project funds would be for units with a VIT of less than DH 150,000, 45% for units between DH 150,000 and 300,000, and 5 % for the financing of serviced lots. 8. The second objective was to increase the share of investment and credit addressed to low-and moderate-cost housing. This objective was not achieved during the implementation of the project. During the three year period from 1989-1994, only 9% of CIH's commitments for building or purchasing individual units were made under the low-and moderate-cost housing program, known as the Habitat Bon Marche program. This is slightly lower than the percentage of commitments, equal to 10%, for the two years preceding the project's approval. That this second objective was not achieved during the implementation of the project suggests that key factors influencing the supply and the cost of housing should have been addressed in the project design to ensure that this objective would be reached at an early stage in the project's life. That the percentage of commitment were slightly lower over the implementation period also suggests that the availability of long term resources to CIH was not a key factor in the origination of credits for low cost housing. 9. The third objective, which was to rationalize the land development and housing production processes in order to facilitate low cost land development and housing construction, was also not achieved. Helping the Government to increase the availability of appropriately priced serviced land, simplify housing construction procedures, reduce excessively demanding infrastructure and building standards and to promote private entrepreneurs' activity would have been greatly beneficial and would have fostered the achievement of the first two main objectives. In spite of the importance of these studies and government's clear ownership of the technical assistance component, the Government sponsored only one of the two key studies; for this reason only 26% of the loan to the Government was disbursed. The first study on urban development plans, sponsored by the Ministry of Interior was not carried out due to delays in concluding a contract with a consulting company. The second study that was supervised by the Ministry of Housing was completed by October 1993 by the consultant group TEAM MAROC. The analysis was comprehensive and provided diagnostics on several areas of the housing supply system. It concluded with recommendations for reform concerning the construction sector and housing construction materials. The greatest contribution of the study was the wealth of data provided to Government and the Bank. The study was instrumental in engaging the Government in a dialogue on sector reform. The data from the study were incorporated into a World Bank sector report and were used in part as the basis of World Bank recommendations on a strategy for the sector that the Government accepted. Although, few recommendations from the consultants' study resulted in policy reforms during the implementation of the project, Government is still keenly focused on developing a reform program and implementing reforms. 10. Aside from these three objectives as laid out in the appraisal report, the project also aimed to improve the competitiveness of CIH and its profitability. Technical assistance and key up-front agreements on payment of Government arrears related to foreign exchange losses and interest rate subsidies, were instrumental in improving CIH's financial position, in the first few years after loan appraisal. Reaching an agreement on the settlement of arrears, which had accumulated in CIH's balance sheet as of December 31, 1988, was even a condition of negotiation. In subsequent years, however, arrears again accumulated, and in particular those related to interest rate subsidies thereafter were never settled promptly by government, as specified in the guarantee agreement between Government and the Bank.  4 11. As for the focused technical assistance to CIH, this component of the project was successful, and fully met its objectives. CIH adapted its institutional structure to its expanding activities and rapidly expanded its branch network to mobilize household deposits. The later was a key component of a new funding strategy to lower its cost of funds. With this change, during implementation of the project CIH lowered its costs of funds from 8.9% to 7.9%, as a percentage of average assets, and consequently its net interest margin also increased from 2.9% to 4.0%, as a percentage of average assets. 12. As for the overall profitability of CIH, by project closing, its tourism portfolio had severely deteriorated and had become the focus of the Government and CIH management. By 1994, the annual return on CIH's lending operations had fallen to 2.16% slightly below the project's target of 2.20%. This decline was the result of CIH taking provisions for loan losses equal to 2% of its average assets. In so far as CIH previously may have cross subsidized its low and moderated income housing loans with commercial loans in other sectors, the severe deterioration of the tourism portfolio and related costs of provisioning and rescheduling agreements has weakened its ability to continue such practices. Major Factors Affecting the Project 13. Several factors affecting the project were subject to Government control, and raise some concerns about Government's commitment to the objectives of the project. The study to be sponsored by the Ministry of Interior was not carried out essentially because of delays on the part of the Ministry of Interior in concluding a contract. In the final stage of negotiating the contract, however, it was the Ministry of Finance that objected to awarding the contract. The Ministry of Interior successfully conducted an international bid for the project in 1994 on the basis of a short list, as per the legal agreement and common Bank practice. The Ministry also selected a consultant that was acceptable to the Bank. The Ministry of Finance, however, objected to awarding the contract because the international bid was not open. It is worth noting that both the Ministry of Interior and the Ministry of Finance requested that the project closing date be extended until March of 1996 to award a contract and complete the study. However, the Bank denied the request, because the study could be financed in a follow-up operation (See Annex C. 1). The Ministry of Housing, in contrast, by and large managed their study well, and brought it to completion. 14. Another factor under Government control affected CIH's ability to meet secondary objectives under the project, these were to improve CIH's competitiveness and profitability. CIH's profitability was undermined in the later years of the project by Government's non-payment of amounts due related to the coverage of foreign exchange risk and interest rate subsidies. Such payments were the obligation of Government under the guarantee agreement. Project Sustainability 15. The investment component of the project is sustainable. CIH will be able to fund subsidized government program with domestic funds. CIH's deposit base and capacity to mobilize domestic funds in the capital market has improved and is likely to improve further with its new strategy to mobilize retail deposits and greater development of the capital markets. CIH's capacity to mobilize resources, however, will become more dependent on its financial standing, with greater liberalization and competition in the financial system. In this future environment CIH's focus will need to turn to its profitability, and the Government will need to insure that the effective margin which CIH earns on its lending activities in the low income housing program is sufficient to cover its actual costs.  5 Bank Performance 16. The Bank's performance was satisfactory. Identification, preparation, and appraisal took place as scheduled. Negotiations and Board presentation were delayed by 6 months, however, as a result of Government's reaching a settlement with CIH on those arrears which had accumulated as of December 31, 1988. This was a condition of negotiations. As for the design of the project, the Bank succeeded in designing the project so that the funds would be committed quickly and the first objective of the project would be met, that is the financing of housing for low and moderate income families. The design, however, was not well suited to achieve the third objective of the project, that is to rationalize the land development and housing production processes in order to facilitate low cost development and housing construction. This objective was too ambitious, given the design of the project and, more specifically, the lack of an up-front commitment to pursue a particular strategy. As for the supervision of the project, the Bank responded to the requests for approval of pending sub- projects and technical assistance contracts. Borrower Performance 17. CIH's performance was highly satisfactory. In contrast to the first line of credit to CIH, which was negatively affected by slow disbursements during the first few years of implementation, CIH disbursed the proceeds of the second credit line at a fast rate. By August 1992, the line of credit to CIH was fully disbursed, almost two and a half years before the date estimated at appraisal. Funds for the related technical assistance component were also committed quickly and spent effectively. CIH also largely fulfilled the financial covenants (see Table below) included in the Legal Agreement, with the exception of submitting in a timely fashion its annual audit report. CIH promptly submitted all other information which the Bank requested, and CIH and the Bank had a productive working relationship. Table 1: CIH's Compliance with Performance Indicators 1989 1990 1991 1992 1993 1994 Minimun annual return: 2.2 2.5 2.4 2.6 2.7 2.2 A value no less than 2.2%, calculated as operating income less interest payments and provisions, divided by average assets Maxinum operating expenses: 1.2 1.2 1.1 1.3 1.5 1.6 The value of expenses as percentage of average assets not greater than 1.3% Minimium equity to total assets: 1:17 1:14 1:17 1:16 1:15 1:16 Ratio of equity to total assets of not less than 1:18 Minimum liquity ratio on sight deposits: NA 0.2 0.1 0.2 0.3 3.7 Value of not less than 20% for current assets as a percentage of sight deposits 18. The Government's performance in the project was less than satisfactory. Only 26% of the project funds for Government sponsored studies was disbursed, and only one of the two studies that aimed to rationalize the supply of land and housing was completed within the context of the project. Government, in addition, did not design an action plan or undertake substantive reforms based on the findings and recommendations of the one study carried out, as had been expected by the Bank at appraisal.  6 19. With respect to commitments made to CIH, the Government fulfilled only some of its commitments. The government fulfilled its explicit commitments to pay before the end of 1989 all its arrears to CIH, which had accumulated, as of the end of 1988. However, the Government incurred new obligations to CIH in the succeeding years related to interest rate subsidies and the foreign exchange risk coverage scheme, and it did not pay CIH promptly and honor its obligations, as agreed upon in the guarantee agreement. The impact of arrears incurred after 1988 is significant. By December 1994, according to CIH's audit report, government obligations related to the foreign exchange risk coverage scheme totaled 154,610,000 DH (19.3 million USD) and those related to the subsidized housing program totaled 290,180,000 DH (36.3 million USD). Since these are non- interest-bearing assets, the effective cost to CIH of carrying these obligations in 1994 was roughly, 7 million U.S. dollars or stated otherwise equal to 50% of CIH's before tax income in 1994. Assessment of Outcome 20. This project is rated satisfactory. The project largely achieved its investment objectives, however, the studies that were to be carried out under the project had only little impact on policy and regulatory reform affecting the supply of low-and moderate-cost housing for low-and-moderate income families, during the implementation of the project. Key Lessons Learned and Future Operations 21. Overall, the project can be rated "satisfactory", as it achieved its main objectives of resources mobilization for housing construction and acquisition and institution building of CIH. As regards the objectives not met, i.e., increased share of investment and credit to low-income housing and improved land development, the project design was not appropriate to bring the necessary policy reforms. However, since the lessons learned with the project have facilitated a better understanding of the housing market and conditions in Morocco and have been taken into account in the design of new housing development projects in this country, their impact on the overall project rating is deemed to be minimum. 22. A main lesson emerges from this project. Shifting housing production towards affordable standards was particularly needed to meet high volume demand resulting from social and demographic pressure while containing investment within the limits imposed by the country's fiscal stabilization and economic adjustment. 23. However, the studies financed under the project were an insufficient tool to bring about necessary policy reforms. Moreover, greater availability of funds to CIH did not increase the share of investment and credit extended to low-and moderate-cost housing. As the Project Audit Report of the First Housing Loan to CIH pointed out, long term resources are fungible, and Bank funds are only a small fraction of CIH's resources. Consequently, the line of credit to CIH could not have served to meet this objective. The force driving credit origination is credit demand which is inextricably linked to the availability of affordable housing. Given that the Bank did not address up- front the key issues in-housing production, and that the Government would address these issues only after completion of the studies and after reaching consensus on a plan of action, the project was not properly designed to meet this key objective during its implementation. 24. In future operations, key conditionalities for reforms should be identified and placed up-front to increase the availability of affordable housing for low and moderate income families, by increasing the availability of appropriately priced serviced land, simplifying pertinent administrative procedures, modifying regulations governing infrastructure and construction, and promoting private entrepreneurs' activity, as necessary.  7 25. Another important lesson is that government subsidized housing programs that entail interest rate subsidies are cumbersome for participating financial institutions and likely to undermine their profitability in the event of non-timely Government payments to the financial institutions. The Government's poor track record on payments related to interest rate subsidies is a deterrent to participation of private banks in the low income housing program in Morocco. An up-front payment of the subsidy to the developer or the participating bank, would eliminate the risk of untimely payments of subsidies and the associated costs over the life of a given loan. Moreover, such payments would be more transparent in the budget. The feasibility of replacing subsidies that are given in the form of subsidized interest rates, with upfront grants in Morocco is being studied under a Bank financed study.  8 PART II: STATISTICAL TABLES Table 1: Summary of Assessments A. Achievement of Obiective Substantial Partial Negligible Not applicable Macro policies L [ L i Sector policies Li n Li Financial objectives Ll L ci Institutional development F3 Li r Physical objective El El Poverty reduction r. L 3i Gender issue LLi Li Other social objective b i Li Environmental objective Li r Li Public sector management L Li ni Private sector management L El EL Other(specify) oi L Li B. Proiect sustainabilitv Likely Unlikely Uncertain C. Bank performance Highly satisfactory Satisfactory Deficient Identification [I] Preparation r Appraisal O IO Supervision El C D. Borrower performance Highly satisfactoy Satisfactory Deficient Preparation O E rD Implementation E z Covenant Completion [ C Operation (if applicable) Z] z E. Assessment of outcome Highly satisfactor Satisfactory Deficient El [ I  9 Table 2: Related Bank Loans/Credits Loar/credit line Purpose Date of Board Status Approval Preceding operations Loan 2245 To encourage pnvate and public levelopers to March 1983 Closed as of Dec. First housing loan to Credit produce low cost housing schemes affordable to low 1989, and fully Immobilier et Hotelier income groups and to develop ClHhs ability to disbursed by Jan. US$ 60 M appraise low-cost housing schemes and to advise 1990. private and public developers on low-cost housing design. Loan 2272 To assist local communitLies in their eftirts to meet April 1983 Closed as of Dec. Communal Infrastructure fund their basic infrastructure needs, and morp 1989, and fully (FEC) pilot project specifically to assist FEC in formulating operating disbursed by Feb. US$ 16 M principles for project financing. 1990. Following operations Loan 3618-21 To provide serviced residentiai lots to squatter and June 1993 On going and Land development project for low-incomc families provide medium-tern financing scheduled to close low income families to eligible private sector property developers for by June 2000. US$ 130 M construction of housing for low-income families; and to imprc.ve the housing finance sub-sector, housing subsidy policies and the land delivexy process. Table 3a: Project Timetable Loan 3121 Steps in project cycle Date planned Date actual/ l ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~latest estimate Identification (Executive Project Summary) May 1988 May 1988 Preparation May 1988 May 1988 Appraisal June 1988 June/July 1988 Negotiations Nov, 1988 June 1989 Board presentation Jan. 1989 Sept.1989 Signing Oct 1989 Oct. 1989 Effectiveness Dec. 1989 April 1990 Project completion Dec. 1993 June 1995 Loan closing Dec. 1994 June 1995  10 Table 3b: Project Timetable Loan 3122 Steps in project cycle Date planned Date actual/ latest estimate Identification (Executive Project Summary) May 1988 May 1988 Preparation May 1988 May 1988 Appraisal June 1988 June/July 1988 Negotiations Nov. 1988 June 1989 Board presentation Jan. 1989 Sept. 1989 Signing Oct. 1988 Oct. 1989 Effectiveness Dec. 1989 Dec. 1989 Project completion Dec. 1992 Dec. 1992 Loan closing Dec. 1994 Dec. 1994 Table 4a: Credit Disbursement: Cumulative Estimated and Actual: Loan 3121 (US$ millions) FY91 FY92 FY93 FY94 FY95 FY96 Appraisal estimate 0.5 1.5 2.5 3.0 3.0 3.0 Actual 0.0 0.0 0.3 0.5 0.6 0.8 Actual as % of estimate 0 0 12 16.7 20.0 26.6 Date of last disbursement to date Oct. 1995 Table 4b: Credit Disbursement: Cumulative Estimated and Actual: Loan 3122 (US$ millions) FY90 FY91 FY92 FY93 FY94 FY95 Appraisal estimate 11.5 28.0 47.5 67.0 76.0 77.5 Actual 16.4 66.1 77.5 77.5 77.5 77.5 Actual as % of estimate 142.6 236.1 163.2 115.7 102.0 100.0 Date of final disbursement Aug. 1992  11 Table 5a: Key Indicators for Project Implementation to Loan 3121 Key implementation indicators in SAR/ President's Report Estimated Actual MOI and MOH institutional Development Programs': -urban development plans and general study under the supervision of MOI -cost: US$ 2 M US$ 0 -completion Through Dec. 1992 - study on housing market and production system and constraints to low and moderate- cost housing development under the supervision of MOH: -cost: US$ 1 M US$ .807 M -completion Dec. 1991 Oct. 1993 Table 5b: Key Indicators for Project Implementation to Loan 3122 Key implementation indicators in SAR/ President's Report Estimated at Actual L ______________________________________________________________________ appraisal at closing 1 Percentage of loan proceeds to be distributed for construction loans and their 80% NA consolidation into mortgages. 2 Percentage of loan proceeds to be distributed for individual housing 15% NA construction loans 3 Percentage of loan proceeds to be distributed for land development loans 5 % 4% 4 Number of low- and moderate-cost housing units provided by the loan 15,000 10,210 5 To ensure CIH's efficient operations and improve its financial position, CIH agreed to maintain: -minimum annual return as a % of assets; 2.2% 2.2% -maximum operating expenses as a % of average total assets 1.3%; 1.3% 1.6% -minimum equity to total assets ratio 1:18; 1:15 1:17 -minimum liquidity ratio on sight deposits 20% 50% 30%  12 Table 6: Studies Included in Project Purpose as defined at appraisal Study Status Impact of study CIH ProRram: Study on housing supply This study will review the characteristics of the housing Completed by Objectives of the system supply system to help CIH better adapt its lending to Feb. 1993. study were achieved. housing supply needs. The study will include a survey of national scope of developers, contractors, and owners of new housing units. Study on new lending and This study will review the possible features and market Completed by Objectives of the saving products potential of three new products: (i)loans for the purchase Feb. 1993. study were achieved. of existing housing units; (ii) loans for the purchase of existing housing units; and (iii) home improvement loans. The study will help CIH define the optimal terms and conditions of each type of lending, quantify its potential volume, and assess its impact on resource mobilization and use. Study to adapt the These studies will be adapted to CIH's new depository Completed by Objectives of the management information and lending activities. This component will also finance Feb. 1993. study and the and intemal audit systems, computer related equipment. procurement of goods and procurement of were achieved. related computer equipment Government Program: Urban development plans To promote improvements in existing approaches, Cancelled None and general study procedures, and the regulatory system affecting the preparation of urban master plans and land subdivision plans, which in tum affect the supply of serviced land and housing. Study on housing supply To improve the knowledge and understanding of the Completed by Objectives of the housing production precess and system in both the formal Oct. 1993 study were achieved and informal sectors, as well as assess the impact of land- and the findings were use, infrastructure, and building regulations on the incorporated into the development cost of housing and the modifications World Bank Strategy required to foster low- and moderate- cost housing Note and were the development. basis of certain recommendations.  13 Table 7: Project Cost Appraisal Estimate (US$M) Actual/latest Estimate (US$M) Local Cost Foreign Local Foreign I Cost Total Cost Cost Total IBRD supported units 274 77 351 99 76.9 175.9 CIH sponsored studies .5 .5 .6 .6 MOH sponsored studies 1 1 .8 .8 MOI sponsored studies 2 2 TOTAL 274 80.5 354.5 99 78.4 177.4 Table 8: Project Financing Appraisal Estimate (US$M) Actual/latest Estimate (US$M) Local Cost Foreign Local Foreign Cost Total Cost Cost Total IBRD 80.5 80.5 78.4 78.4 CIH 190 190 81 47 Sub-borrowers 84 84 18 84 TOTAL 274 80.5 354.5 99 78.4 177.4  14 Table 9a: Status of Legal Covenants for Loan 3121 Original Type Present fulfillment Section status date Description of covenant Art. In 5 CP Sept. 1990 The borrower shall employ consultants that will be satisfactory to the Bank Sec. 3.02.a based on their experience, terms and conditions of employment. Art. III 9 NC Dec. 1992 The Borrower shall take the necessary actions to ensure that the following Sec. 3.02.b plans and programs will be completed and a copy furnished to the Bank: -develop and apply policies and procedures to enhance the efficient preparation of urban development of priority areas of the Borrower's urban centers, for the purpose of establishing a new operational system for urban development using appropriate and efficient technical and financial instruments; following theses criteria, develop pilot projects comprising: -urban development, land-use plans, and action plans for the development of priority areas of Larrache and El-Kebir, -action plans for the development of priority areas within Tangier and Rabat, -base maps required for said plans. -review the Borrower's legislative and regulatory system goveming urban planning in Morocco, including the preparation of urban development and land-use plans and the deployment of an operational implementation system, and recommend measures to implement such urban plans and programs, C Dec.1991 The Borrower shall take the necessary actions to ensure that the following studies will be completed and furnished to the Bank: -study to analyze the building and housing development facilities and products, and the assessment of the cost elements, taking into consideration the physical, regulatory, and procedural factors, -recommend improvements to the regulatory, organizational and procedural system for enhancing the quality and reducing the cost of low-and moderate- cost dwellings, and serviced land for such dwellings, -develop a monitoring system in the reform of data banks and establish an implementation system to encourage improvements in the architectural design and in the execution of low- and moderate-cost dwellings and land development projects.  15 Table 9b: Status of Legal Covenants for Loan 3122 Original Type Present fulfillment Section status date Description of covenant LOAN AGREEMENT Schedule 2 Borrower conmmitment to objectives and responsibilities under the project: Part A 5 C Financing of Sub-projects aiming at the development and construction of urban settlement sites for low and moderate cost dwellings consisting of the preparation of residential and commercial plots and the construction on roads, footpaths and water, sewerage, electricity and street lighting facilities and the connection of said facilities to appropriate off-site infrastructure. Part B 5 C Financing of Sub-projects aiming at the construction of low and moderate cost dwellings, including the purchase of plots on which such dwellings are to be constructed and other costs required for the construction of such dwellings. Pan C 10 C Carrying out of studies on: I) the system of construction, marketing and financing of housing to develop appropriate lending strategies and instruments to improve the supply of housing, 2) the development and promotion of suitable lending instruments and products designed too facilitate access to housing and improving the existing dwellings, 3) the improvement of the management of information systems and the internal audit department and the acquisition of computer equipment to achieve the above objectives. Schedule 5.1 Loans under Part A shall be made to developers under these conditions: 5.1.b 3 C On going For sub-projects: - which is designed in a manner that the estimated value of a dwelling to be constructed shall not exceed an estimated value DH 300,000; - which are determined to be financially and economically feasible; and - if the Sub-project is estimated to cost over the equivalent of DHl 20,000,000 or more, the subproject is to have a financial rate of return equal at least to the interest rate charged by the Borrower. 5.1.c 3 C On going In case of development sites for single dwellings: - the surface area that can be built upon shall not exceed an average of 120 square meters; - at least 60% of the land to be developed is marketable; and - at least 80% of the marketable land to be developed is for residential purposes. Schedule 5.2 3 C On going Each subloan under Part B to households shall be made under these conditions: 5.2.a To a beneficiary: - which owns no dwelling other than the one to be constructed or purchased under the Sub-project; and - whose monthly income is determined to be not more than DH 3,000 in the case of low cost dwellings. 5.2.b 3 C Ongoing For a Sub-project: - which is for the construction or purchase of a dwelling whose value is estimated not to exceed DH 300,000.  16 Art. III Sect. 3 C The Borrower shall: 3.03. Dec. 1991 - ensure that the studies shall be completed; - exchange views with the Bank on the studies and recommendations; and - thereafter, promptly take all measures necessary to carry out said recommendations taking into consideration the Bank's comments. Art. IV I CP On going The Borrower shall fumish to the Bank not later than six months after the Sect. 4.02.a end of each year the audit report, 4.02.b I CP On going For all expenditures with respect to which withdrawals from the Loan Accounts were made on the basis of statements of expenditure, the Borrower shall: - maintain records and accounts reflecting such expenditure; and - ensure that such records and accounts are included in the annual audit and that the report of such audit contains a separate opinion as to whether the statements of expenditure. 4.05.a 2 C On going Except at the Bank shall otherwise agree, the Borrower shall: - earn and annual return on its operations of not less than 2.2%; - maintain, for each of its FY after its ending on Dec. 31, 88 a ratio of total operating expenses to the average value of total assets of not higher than 1.3%; - maintain a ratio of current assets to current sight deposits of not less than 1:5; - maintain a ratio of Equity to total assets of not less than 1:18. GUARANTEE AGREEMENT Art. Ill Sect 13 CP On going The Government shall at all times maintain the Foreign Exchange Risk 3.02.a Coverage Scheme. The Government shall take all necessary actions to ensure that: 3.02 b (i) 13 C Dec. 1989 - total amount of arrears related to foreign exchange risk coverage scheme, as of December 1988 are settled by the scheduled date; and 3.02 b (ii) 13 NC Ongoing - all other payments due related to the FX scheme should be settled promptly. Art. III Sect The Guarantor shall take all necessary action to ensure that: 3.03 (a) 11 C Dec. 1989 - total amount interest rate subsidies as of December 1988 to be settled by the scheduled date; (b) 11 NC Ongoing - thereafter amounts due related to interest rate subsidies should be paid to CIH promptly. Covenant types: I = Accounts/audits 2 = Financial perfonnance/revenue generation for beneficiaries 3 = Flow and utilization of project funds 4 = Counterpart funding 5 = Management aspect of the project or executing agency 6 = Environmnental covenants 7 = Involuntary resettlement 8 = Indigenous people 9 = Monitoring, review, and reporting 10 = Project implementation not covered by categories 1-9 11 = Sectoral or cross-sectoral budgetary or other resource allocation 12 = Sectoral or cross -sectoral policy/regulatory institutional action 13 = Other C = covenant complied with CD = complied with after delay CP = complied with partially NC = not complied with  17 Table 10: Bank Resources: Staff Inputs Planned Actual Stage of project cycle Weeks Weeks Preparation to appraisal n.a. 34.2 Appraisal n.a. 31.6 Negotiations through Board approval n.a. 54.6 Supervision 35 57.6 Completion n.a. TOTAL 158.7 178  18 Table 11: Bank Resources: Missions Performance rating Specialized Develop- Stage of project cycle Month/year Number of Days staff skills Implementa- meant Types of persons in represented tion status objectives problems fieldI Through appraisal Oct. 1987 3 10 Municipal n. r. n. r. engineer, principal urban specialist, April 1988 3 12 Municipal n.r. n.r. engineer, operations analyst, principal urban specialist Appraisal through June/July 6 18 Municipal n. r. n. r. Board approval 1988 engineer, operations analyst, principal urban specialist, urban planner consultants Supervision Dec. 1989 1 7 Municipal n. r. n.r. engineer Feb. 1990 1 11 Municipal HS HS P, S engineer June 1990 1 9 Municipal HS HS P, S engineer Oct. 1990 1 8 Municipal HS HS S engineer June 1991 1 5 Municipal S HS L, M, S engineer Oct. 1992 1 3 Municipal S S L, P, T, S engineer Completion None - - Codes: HS = Highly satisfactory S = Satisfactory US = Unsatisfactory P = Procurement progress S = Studies progress L = Compliance with legal covenants M = Project management performance T = Technical assistance progress  19 ANNEX A.1: ASSESSMENT OF THE PROJECT FROM THE BORROWER'S PERSPECTIVE (LOAN NO. 3121-MOR) KINGDOM OF MOROCCO MNISTRY OF HOUSING GENERAL SECRETARIAT DIRECTION DE LA PROMOTION IMMOBILIERE November 30, 1995  20 I. Project identification Country: Kingdom of Morocco Name: Second Housing Finance Project Loan no.: 3121-MOR Amount of IBRD loan: US$3 million Effectiveness date: March 30, 1990 Closing date: December 31, 1994 II. Project objectives and description The Borrower was to implement a strategy that encourages the construction of affordable housing for low-income households in urban areas through institution building and actions by the Ministries of the Interior and Housing. To that end, two studies were planned under the project: - one on the implementation of urban development management tools to enhance the efficient preparation of urban development plans. The Ministry of the Interior was given oversight for this study; - a second study on the process of housing production and development in Morocco, entrusted to the Ministry of Housing. III. Conditionalities There were no specific conditions regarding the Ministry of Housing. IV. Evaluation of project activities The project had the following technical assistance funds: * US$2 million to assist the Ministry of the Interior in developing, improving and implementing streamlined urban policies and procedures; * US$1 million to assist the Ministry of Housing to improve the regulatory, organizational and procedural system for housing. The funds earmarked for the Ministry of Housing were used for the study and the purchase of computer equipment. Two contracts were signed under the project, namely: - Contract no. 90502, for the purchase of computer hardware, its installation, training and equipment maintenance, to be used in the study on Morocco's housing production and development. The contract was awarded to Altair Technologies Services S.A. in the amount of DH 999,719.77, including taxes. - Contract no. 90501, for the study of housing production and development, awarded to Team-Maroc/Team-International in the amount of DH 7,568,232, including taxes. The study was intentionally delayed in order to finalize the methodological details (February 1991) and was completed in 1994.  21 The objectives of the study were as follows: 1. Analysis of housing production structures and capacity through an evaluation of the current production potential of all stakeholders in the construction sector and an understanding of the determinants of cost prices by housing category, given the physical, regulatory and procedural factors; 2. The proposing of regulatory, organizational and procedural measures to improve the quality of housing, reduce its cost and optimize the production of serviced lots and housing built by low- and medium-income households; 3. The development of a monitoring system for the sector in the form of housing management information (observatoires d'information) and technical monitoring systems aimed at improving the quality of architectural designs and the implementation of sites and services projects and the construction of housing for low- and medium-income households. The reports produced under the study are as follows: A. Report on housing production structures in Morocco, in six parts: 1. project managers 2. contractors 3. contracting authorities 4. finance agencies 5. construction materials 6. unauthorized housing neighborhoods B. Report on housing production costs, in two parts: 1. housing characteristics 2. production costs and modeling C. Report containing proposals and measures, as follows: 1. description and analysis of the housing production process in Morocco 2. housing finance 3. housing management information system 4. recommendations 5. summary and audiovisual package 6. methodology Finally, the study was carried out under excellent conditions and the findings were most satisfactory. Even though the study got off to a late start, this did not have any impact on the quality of the results.  22 The study culminated with the organization of a colloquium on housing on October 27-28, 1994, which was attended by all ministries, national and international institutions and other housing stakeholders. It accordingly provided an opportunity to discuss the findings of the study and to propose recommendations, in particular concerning: - real estate development and the property market - housing finance and taxation - housing production costs.  23 ANNEX A.2: ASSESSMENT OF THE PROJECT FROM THE BORROWER'S PERSPECTIVE (Loan No. 3122-MOR) CREDIT IMMOBILIER ET HOTELIER (CIII) FINANCE AND TREASURY DEPARTMENT December 13, 1995  24 I. GENERAL INTRODUCTION Like most developing countries, Morocco has a considerable housing shortage. Aware of the priority to be accorded to meeting the housing needs of the populace, government officials have taken a host of measures to promote the housing sector and low-cost housing in particular. Thus, in terms of regulations, incentives have been provided for the sector as follows: revision of standards for the definition of low-cost housing and raising of the benefi- ciary income cutoff for such housing from DH 3000 to DH 3600, in order to reflect changes in a number of components of the cost of housing; tax exemptions over the first five years as regards the turnover tax, corporation tax, the tax on profits from the construction of low-cost housing wherever located, and from any subdivision or construction project located in small and medium-sized urban centers; - a 50% reduction in these taxes during the first five years for projects located in major cities; - exemption from the VAT on loans for the construction of housing whose estimated value is less than DH 500.000 and which does not exceed 150m2; - exemption from the VAT on the construction of housing whose built area and total value per housing unit do not exceed 100m2 and DH 200,000 respectively; - 2 point interest rebate for loans to purchase housing whose estimated value is between DH 200,000 and DH 350,000 and 6 points for housing whose estimated value is less than DH 150,000. In addition, the Government directly promoted low-cost housing in an effort to eliminate slum areas. These efforts were channeled through public establishments specialized in housing such as the seven regional development and construction establishments (etablissements d'amenagement et de construction -- ERAC), the National Infrastructure and Construction Company (SNEC), National Agency for the Elimination of Substandard Housing (ANHI) and the ATTACHAROUK Company. In the same vein, in 1995 the Government launched an ambitious project for the construction of 200,000 low-cost dwellings. A first tranche of the program covering the construction of 48,000 units began in 1995 and will be completed in 1997. The tranche will be financed by CIH, the commercial banks and the Caisse de Dep6ts et de Gestion, entailing total funding of DH 6.3 billion. Meanwhile the World Bank, as part of its policy of supporting the social sectors, has contributed to this effort since 1983 by providing specific lines of credit to finance low-income housing.  25 In this context, CIH has benefitted from three IBRD lines of credit: - the first, Loan 2245-MOR, was made available in 1983 in the amount of US$60 million; - the second loan, 3122-MOR, discussed in this report, was provided in 1989 in the amount of US$77.5 million; - a third line of credit, for US$40 million, was agreed in 1993 and should be totally disbursed before the end of 1995. II. FEATURES OF IBRD LINE OF CREDIT 3121/3122-MOR IBRD Loan No. 3122 is the second line of credit made by the World Bank to CIH for the refinancing of credits for the construction of low-cost housing. The general loan conditions as set forth in the Agreement are as follows: 1. Amount: US $77,500,000 2. Duration: 20 years, of which 5 grace 3. Repayment: 30 six-monthly installments 4. Interest rate: IBRD lending rate + 0.5 % 5. Commitment fee: 0.25 % 6. Eligibility criteria: The following operations may be refinanced under the line of credit: (a) Subdivision and servicing of lots for the construction of housing for low- or middle-income households that meet the following criteria: - the housing to be built on the subdivided lots must be worth an estimated value less than or equal to DH 300,000 and must be no larger than 120m2; - at least 60% of the land to be serviced must be saleable; - at least 80% of the saleable land must be used for residential purposes. (b) Pre-financing, self-construction or the purchase of housing for low-income house- holds, provided that: the estimated value of the dwelling is less than DH 150,000; the house is smaller than 100m2; the beneficiary's income is less than DH 3000. (c) Pre-financing, self-construction or purchase of housing to be used by middle-income households, provided that the estimated value is between DH 150,000 and DH 300,000. (d) Carrying out of studies on housing construction, marketing and finance systems. (e) Purchase of necessary computer hardware for sound management of refinanced sub-projects.  26 7. Financing ratio: Lot servicing operations 50% Self-construction prefinancing or purchase of housing for which VIT (valeur immobiliere totale, or maximum property value) < = DH 150,000 65% Self-construction prefinancing or purchase of housing for which VIT is between DH 150,000 and DH 300,000 40% Technical assistance 100% III. USE OF THE LINE OF CREDIT As can be seen from the following table, unlike the previous line of credit (2245-MOR) for which repayment was spread out over a very long period of eight years, the credit line under Loan 3122-MOR was utilized in two years. This is due primarily to the more flexible refinancing conditions under the latter loan, which were less restrictive than for the former, especially with regard to higher estimated cutoff values for refinanceable housing and the refinancing through the retroactive effect of loans frozen after October 1, 1988. Disbursements under line of credit 3122-MOR were as follows: Year Amount in DH Amount in $ % of Loan 1990 398,136,869.64 48,053,984.17 62.01% 1991 242,144,165.97 29,226,109.93 37.71% 1992 1,825,757.85 219,905.90 0.28% Total 642,106,793.46 77,500,000.00 100% A. IBRD line of credit 3122-MOR as a share of CIH resources CIH issues in foreign exchange from 1990 to 1992 (in DH millions) l Year External Resources in Foreign Withdrawals/ B/A C/B C/A resources (A) exchange (B) 3121 (C) 1990 3,517 1,189 398 34% 33% 11% 1991 3,588 242 242 7% 100% 7% 1992 3,223 169 2 5% 1 % 0% Total 10,328 1,600 642 15% 40% 6% The above table shows that during the three years from 1990 to 1992 CIH mobilized total external resources of DH 10,328 million, of which DH 1600 million, i.e. 15 %, in foreign exchange. Withdrawals under line 3122 represented 40% of funds disbursed under external financing lines denominated in foreign exchange. Compared to total external resources mobilized during the ab- e-mentioned reference period, withdrawals under the credit line accounted for only 6%.  27 B. IBRD line of credit 3122-MOR as a share of housing finance Type of credit Disbursements Disbursements Disbursem No. of Average US$ DH (A) ents in % dwellings credit DH or lots OPVT (land development 3,383,543.41 28,033,497.73 4% 590 95,029 loans) 150,00 < = VIT 33,513,992.44 277,871,753.30 43% 6,835 62,500 150,00< VIT < = 300,00 39,953,977.86 331,028,632.41 52% 3,375 245,206 Technical assistance 648,486.29 5,372,870.02 1% TOTAL 77,500,000 612,106,753.46 100% 10,800 The number of dwellings or housing lots financed by this line of credit was 10,800 i.e. 44% of the total number of units financed during the three years from 1989 to 1991. In financial terms, this represents total disbursements of some DH 642.1 million and accounts for 13% of real estate loans made available by CIH during the same reference period referred to above. The distribution of refinanced loans by category of dwelling indicates that 52 % of disbursements were for loans relating to housing with an estimated value between DH 150,000 and DH 300,000, whereas the share of low-cost housing was 43%. Lot servicing projects received only 4 % of dis- bursements. IV. EVALUATION OF IBRD CREDIT LINE 3121/3122-MOR Compared to CIH's other financing arrangements, the IBRD line has several advantages, in particular: 1. Interest rate Compared to the market rate, the interest rate associated with the line of credit is favorable (IBRD reference rate plus an intermediation margin of 0.5 point). The interest rate is variable and from January 1990 through July 1995 moved downwards overall from 7.73 % for the first payment in January 1990 to 7.13 % for the payment on July 15, 1995. On average, the rate was 7.51 % during the above-mentioned reference period, which is markedly lower than under the previous line of credit (2245), when the rate was 1.97% in 1983 and fell to 7.70% by 1990. An important factor to be considered in calculating the financial cost of this loan is the amortization coefficient, which overall developed favorably. In practice the average amortization coefficient for payments made up to now is 0.9557. The currency pool system, whose goal is to spread the exchange risk across the totality of Bank borrowers, therefore considerably benefitted this line of credit, as regards both the payment of principal and interest.  28 The commitment fee was 0.25% instead of the 0.75% charged on Loan 2245-MOR. Hence the amount in question was only DH 1,592,335.67 as against DH18,061,276.93 on the earlier loan. This represents only 0.25% of the loan amount, compared to 3.36% for loan 2245-MOR. 2. Long-term stable fmancing The second advantage of this line of credit lies in its term of 20 years. As CIH grants mortgages for 15 to 25 years, the Bank loan provided it with relatively stable resources over 20 years, as against the 17 years for the previous line of credit. Given that IBRD loans are designed to finance a two-stage process, i.e. construction of houses and their purchase, and to make it unnecessary for the Borrower to have recourse to other resources, it would be desirable for the dura- tion of lines of credit to be brought into line with that of low-cost housing mortgages, i.e. 23 years on average. 3. Flexibility in the disbursement procedure The procedure for withdrawing funds under IBRD line of credit 3122-MOR is flexible and simple. Justification for disbursements take the form of a detailed work progress report prepared by CIH technical services. All disbursements require the following certified documents duly signed by the authorized agents of CIH: - disbursement request, in two copies - expenditure statement, in two copies - form D, in two copies. In addition, computer monitoring of refinanced programs that shows current status of the dwellings is available at all times. V. Relations with the Bank Relations with the Bank were cordial and characterized by mutual trust. The commitment of the two parties to carry out the project successfully required frequent contacts, all of which were characterized by a spirit of openness and mutual understanding. In this connection, the various missions that visited CIH to monitor this line of credit should be mentioned. The second IBRD credit line, discussed in this report, was followed by a third, which incorporated two restrictions: the refinancing both of loans for the purchase of housing and of programs launched by public agencies is excluded. Limiting the benefits of the credit to private promoters entails a reduction in its size, since most low-income housing programs are carried out by public agencies. Private operators, although controlling construction costs more effectively, are not interested in this market niche, whose profitability is less attractive. Consequently, to help make up the deficit in low-income housing and enable low-income groups to obtain access to financing for home purchase, future Bank assistance should restore the  29 categories excluded from the third credit line. This strategy is particularly justified in Morocco's case in light of the 200,000 low-cost housing units launched recently by the public authorities, whose success depends on financing being found. Given the small local financial market, IBRD assistance is key to the success of this program, which to a large extent is being promoted by state agencies. The negotiations between the CIH and IBRD on a fourth credit line to finance low-income housing should focus on the following points: this line wouid basically be applied to the financing of dwellings that are part of the 200,000-unit program. Programs initiated by public agencies and loans for home purchase should therefore be reincorporated in Bank financing, since the first tranche of 48,000 units will be built almost entirely by public agencies, and the most important stage of the process is financing the buyers, not prefinancing the promoters. finally, the Bank should reintroduce the fixed interest rate system for some categories of loans to whose beneficiaries the variable rate cannot be applied, so as to avoid exposing CIH to the exchange risk and match types of rates between uses and source of funds.. The financing of low-income housing is a case in point, since the management of individual loans on a variable rate basis is very burdensome; in financing these loans the Bank should reconsider a system based on fixed rates.  30 ANNEX B.1: MINISTRY OF INTERIOR'S COMMENTS ON PART 1 MINISTRY OF INTERIOR Directorate General of Urban Development and Design and Regional Planning Directorate of Urban Development and Design Urban Planning Division Office of the Minister Rabat, January 15, 1996 The Division Chief Private Sector Development, Finance and Infrastructure Division Country Department I, Middle East and North Africa Regional Office The World Bank Washington, D.C. Dear Sir: Subject: Second Housing Finance Proiect (Loan 3121-MOR) Ref: Your fax of December 14. 1995 We acknowledge receipt of your abovementioned fa message referring to the draft version of the World Bank's [Implementation Completion] Report on the Second Housing Finance Project, a communication in which you ask for the comments of the Directorate General of Urban Development on the project [component] to develop instruments on which to base a new operational system for urban development -- that is, the study identified as Part A of Loan 3121-MOR. In reply, I wish to inform you that the contract for this study was not approved by the Ministry of External Finance and Investment because a limited competitive bidding process was employed. Given the specific characteristics of this study, limited competitive bidding for selection of consultants was decided on for three main reasons: * Conformity with the minutes of the loan negotiations: The terms of Loan Agreement 3121-MOR stipulate, in the article dealing with procurement, that the Ministry of Interior should issue a direct limited international call for bids. * Budget constraints: It was agreed with the Bank that as a first step limited competitive bidding and a budget of US$400,000 would be used for the "general study" [Part A] portion of the project. On successful completion of this work, another round of international competitive bidding, this time open, was to be launched for the rest of the loan. However, the sum allocated for the general study meant that an open international bidding process was out of the question,  31 since its cost would have been high compared to the total budget. * Basis of prequalification: The limited call for tenders was issued on the basis of an open international call for tenders previously issued by the Directorate General of Urban Development, on September 30, 1986, as part of the process of pre-qualifying parties interested in bidding on contracts to execute urban development and regional planning studies. In order to facilitate commitment to this contract [for the general study] on the part of the Expenditure Commitments Control Division of the Ministry of Finance, the Directorate General of Urban Development complied with all the Division's requirements, particularly in respect of the use of limited competitive bidding. In view of the above, and given the importance the Directorate General of Urban Development places on this study, I ask that you examine the possibility of extending the loan closing date and also that this request be included in the final version of the [Implementation Completion] Report submitted to the Executive Board of the Bank. Such an extension of time would mean that this project [component] could be re-launched on a new basis that would include reformulation not only of its objectives but also of the requirements surrounding the procurement process. Isl Lahcan Tagrit Office of the Minister, etc.  32 ANNEX B.2: CIH's COMMENTS ON PART 1 Casablanca, January 12, 1996 CREDIT IMMOBILIER ET HOTELIER (CIHI) Finances and Treasury Department COMMENTS ON DRAFT COMPLETION REPORT ON IBRD LOAN 3122/MOR I. INTRODUCTION We consider the evaluation report prepared by World Bank experts on Loan 3122/MOR to be complete and to contain a wealth of information on the housing sector, in that it discusses all the components connected with development of production of low-cost housing in Morocco and explains the obstacles in the way of large-scale provision of housing for low-income households. The report as a whole is accordingly viewed as most conclusive, since it underscores the handicaps which are the root causes of the present housing shortage which affects low-income households in particular, such as: - non-availability of affordable sites, - property taxation, - the regulations governing infrastructure and construction, - the inflexibility of the pertinent administrative procedures, - the lack of adequate financial resources, - the additional financial burden caused by the Treasury's delays in paying over to CIH the interest rebates due on eligible loans, together with the exchange differential. The conclusions of the evaluation, namely that the objectives initially set for the project were partially achieved, are also very objective and realistic; however, certain points regarding the new housing refinancing strategy, and also some quantitative data used in the evaluation warrant discussing. We accordingly trust that our comments and suggestions set out in the following can be taken into consideration by the Bank's Board, with a view to enabling IBRD to contribute more effectively toward accomplishment of the objectives set for the housing sector as a whole, and for low-cost housing in particular.  33 II. COMMENTS A. THE FINANCING STRATEGY As noted in the report, the World Bank's objective in the Moroccan housing sector is threefold, namely: To help CIH mobilize resources for financing housing, through the granting of subloans to promoters and buyers; to increase the relative amounts of capital investment and credit for low-cost housing; to rationalize the site development and housing construction process in order to facilitate the building of low-cost housing. Regarding these three closely interrelated points, we have noted a fundamental change in the Bank's strategy, consisting in a very marked reduction of its sphere of action by exclusion of both CIH loans to public promoters for housing construction and also the long-term loans to buyers which form the last link in the chain leading to property ownership. In view of the volume of funds required for financing these two categories of subloans, compared with a national capital market of still very limited scope, support by the Bank in financing these two categories would undoubtedly help to stimulate the real estate sector and to ensure a more plentiful supply of low-cost housing. As we see it, limitation of the lines of credit to private promoters simply constitutes a brake on the production of social housing, since the bulk of the construction programs in this category are carried out by public promoters. Private promoters, while better able to keep construction costs under control, are not for the moment showing interest in this type of work because of its less attractive profitability. These operators, who are used to earning comfortable profit margins on building homes of a certain standing, as a result of their thorough knowledge of the market, are not prepared to risk their resources in social projects requiring a special design, investment and marketing effort. This is all the more true now that the first tranche of 48,000 low-cost units, included in the ambitious program launched by the authorities and aimed at production of 200,000 dwellings, will be executed almost exclusively by the public sector. Moreover, and in light of the principle that the selling price of low-cost dwellings results from the law of the market regardless of the nature of the promoter, it might be appropriate to let competition exercise its pressure on the prices of the dwellings offered, and to provide CIH with the sources of financing needed to meet the demand for credit without restriction as to type of promoter. As regards the loans for buyers, we consider it necessary that the Bank provide for their refinancing by means of lines of credit to be set up later, because in addition to the very limited capacity of the national capital market, there are absolutely no suitable resources available in the market, bearing in mind that the terms of CIH subloans for purchase of low-cost housing can be as long as 25 years.  34 An approach along the lines suggested would therefore make it possible to offset the dearth of long-term funds in the national market while also placing at CIH's disposal an adequate volume of funds suitable for very long-term lending. B. ACCOMPLISHMENT OF THE PROJECT'S OBJECTIVES NUMBER OF DWELLINGS FINANCED FROM THE LINE BELOW TARGET: In point of fact, as is evident from the report prepared by CIH for the evaluation of Loan 3122/MOR, nearly US$70 million was allocated to partial financing of 10,800 housing units or plots, instead of 15,000 units as specified by IBRD at the time Loan 3122/MOR was granted. The number of dwellings financed with the loan proceeds remains, in our opinion, very reasonable, and the fact that this number is smaller than the initial target is in no way due to an increase in the cost of housing. The fact is that during the period 1989/91 the cost of low-cost housing remained relatively stable, as is demonstrated by the average subloans granted by CIH from the loan funds for each category of housing. Thus, for dwellings the VIT (Valeur Immobiliere Totale or Total Property Value) of which does not exceed DH 150,000, whereas the maximum allowable subloan can be DH 135,000, i.e. 90% of the VIT, the average refinancing from the line of credit was only around DH 625,000, which explains the financing of a large number of units. The same applies for the category with VIT between DH 150,000 and DH 300,000, for which the average CIH subloan was about DH 245,000. REDUCTION OF THE PROPORTION OF LOW-COST HOUSING SUBLOAN APPROVALS IN CIH'S TOTAL ACTIVITY A decline in low-cost housing subloan approvals in CIH's total activity to 8%, compared with 10% earlier, was indeed observed during the three-year period 1990-92. However, the importance assigned by the Moroccan State to this form of housing financing will unquestionably result in an unprecedented increase in this category as of the 1995 fiscal year. That year was in fact when construction of an initial tranche of 48,000 low-cost dwellings was started, which are programmed to be placed on the market as of the second half of 1997. Execution of this tranche will require an estimated DH 6.3 billion, to be mobilized by CIH by means of sale of bonds to the banking system and to the Caisse de Dep6t et de Gestion. In view of the scale of this operation, financial support from IBRD is earnestly sought, the more so since these are programs to produce low-cost housing intended exclusively for low-income households, and at very carefully calculated low prices.  35 IMPROVEMENT OF CIH'S COMPETITIVENESS AND PROFITABILITY In order to eliminate the losses caused by the delayed payment of interest rebates due to CIH, the principle has been adopted of advance authorization by the Treasury of sums becoming payable over a twelve-month period. These payments will take the form of an advance of DH 3 million from which CIH will be authorized to draw the rebates due to it. This fund will be regularly replenished by the Treasury whenever necessary. Regarding the hotel portfolio, it should be noted that the solution adopted, consisting of restructuring and rescheduling of the debt and of the amount overdue, will make it possible to rehabilitate this portfolio and thereby put an end to the non-recovery of installments due on loans granted to this sector. As regards the margin on lending for low-cost housing programs, the tripartite negotiations between the Moroccan monetary authorities, CIH and the potential subscribers to the bonds that CIH will issue for the 200,000-unit program, have resulted in agreement on the following: * The bonds to be issued as needed will bear interest at a rate that will enable CIH to obtain, at all times, a margin of 2.5 points with respect to the rates for the subloans to be granted under the program. The term of these bonds will also be aligned on the maturities of the CIH loans to the promoters and to future buyers. The bonds will be guaranteed by the Moroccan State, for whom CIH will act as agent.    IMAGING Report No: 15511 Type: ICR