Ukraine - Housing Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-6722-UA MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$17.0 MILLION TO UKRAINE FOR A HOUSING PROJECT FEBRUARY 13, 1996 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 September 1995 Currency Unit = Karbovanets US$1 = 180,000 Kbn. AVERAGE EXCHANGE RATES per US$1 1992 - 2,212 1993 - 7,623 1994 - 63,224 Sep. 1995 - 180,000 WEIGHTS AND MEASURES Metric System hectare (10,000 sq. m.) = 2.47 acres ABBREVIATIONS AND ACRONYMS CEU - City Executing Unit ha - hectare USAID - U. S. Agency for International Development UKRAINE - FISCAL YEAR January 1 - December 31  UKRAINE FOR OFFICIAL USE ONLY Housing Project Loan and Project Summary Borrower: Ukraine Implementing Agency: The City Administrations of Kharkiv, Lviv and Odesa The State Committee on Housing and Municipal Economy and the State Committee on Urban Development and Architecture Beneficiaries: Households and private housing developers in Kharkiv, Lviv and Odesa Poverty Category: Not Applicable Amount: US$17.0 million equivalent Terms: Payable in seventeen years, including five years of grace at the Bank's standard variable interest rate. Commitment Fee: 0.75 % on undisbursed credit balances, beginning 60 days after signing, less any waiver. Onlending Terms: The Bank loan funds will be onlent by the National Government to the Project City Administrations in US dollars at the standard Bank terms and conditions with a spread of 1%. Financing Plan: See Schedule A. Economic Rate Return: 25% Staff Appraisal Report: Report Number 15033-UA Map: IBRD 27170 Project ID Number: UA-PA-34581 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.   MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO UKRAINE FOR A HOUSING PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed loan to Ukraine for the equivalent of US$17.0 million to help finance a project for housing. The loan would be at the Bank's standard variable interest rate, with a maturity of seventeen years, including five years of grace. The proceeds of the loan would be onlent in US dollars with a spread of one percent per annum to the Cities of Kharkiv, Lviv and Odesa on the Bank's standard terms and conditions. Country/Sector Background 2. The housing sector in Ukraine is undergoing a gradual transformation from central planning and government allocation to increased reliance on private initiative and development of a housing market. Prior to the start of housing privatization in 1993, over 60% of the housing in urban areas was owned by local governments or state enterprises. The government constructed apartment buildings and allocated the units to families on the official wait list. Management and maintenance of the apartment buildings were carried out by municipal housing management enterprises which relied on government subsidies because tenants paid only notional rent for their apartments. Subsidies for housing, water, heat and other utility payments were estimated to be around 20% of GDP in 1993. However, the system has not been able to provide adequate housing: over 2.1 million families (or about 18% of the households) were on the wait list for housing in the urban areas, there was limited flexibility to adapt housing in line with needs (younger people with growing families were not able to move to larger apartments or older people with grown children to smaller ones), state owned apartments were of poor quality because of poor construction and lack of maintenance. 3. The housing sector is a critical element in the transition to a market economy and will play an important role in the development of the Ukrainian economy. Increased private ownership of housing and household involvement in selection, management and maintenance of housing will contribute to the reduction of government subsidies which will impact on the government budgetary deficit and overall macro economic stabilization. Development of a housing market will support growth of industrial and commercial enterprises by allowing for divestiture of state owned housing and facilitating labor mobility. Growth of a real estate market will allow for greater flexibility in constructing offices and other commercial buildings in urban areas. Housing can provide an attractive investment for households and provide motivation for savings. Finally, cramped quarters and poor quality of housing are seen by the people as one of the more visible shortcomings of the central planning system. Better housing will provide evidence of economic reform. 4. Housing privatization was one of the earlier reforms implemented by the government. The Law on Housing Privatization was passed in 1992 and became operational in 1993; as of September 1995, over 30% of eligible apartments have been privatized. In June 1995, the legislature approved the government's Housing Policy Concept Paper which advocates a market based approach to housing development with the government playing an enabling role in the housing sector, promoting the development of housing finance systems, encouraging growth of private construction companies and targeting government assistance to low income families. The Concept Paper provides a broad framework for sector development, but specific policy measures still need to be formulated. At the local level, several reform-oriented city administrations have piloted land auctions, organization of homeowners associations and contracting out of housing management and maintenance, with  - 2 - technical assistance from USAID. The project is targeted to support these reform oriented city administrations. 5. A market for real estate is slowly emerging in the urban areas. Privatized apartments are being legally transacted and real estate brokers have emerged to service the needs of those wanting to sell or buy apartments. Some housing construction enterprises have begun to construct housing for sale, responding to cutbacks in government funded housing construction. However, the market still remains limited, constrained by lack of a financing system to provide long term loans for housing purchase or construction, limited access to land for housing construction in urban areas, and complex government regulations. 6. Development of the housing market is an integral part of the transformation of the economy and the sequencing of housing reform will depend upon progress on the overall economic reform and stabilization program. Key elements of a housing market, such as a housing finance system, can only be developed after a reduction in inflation and domestic interest rates. Similarly, the development of private housing construction and building materials enterprises will be part of enterprise privatization. The Bank is supporting economic stabilization, enterprise privatization, financial sector development and land reform through a series of ongoing and proposed projects. Therefore, the emphasis in this initial project is on smaller pilot activities which will: (a) demonstrate market based approaches in lieu of state housing; (b) develop the regulatory and policy framework for the operation of a housing market; and (c) lay the basis for future Bank projects. Project Objectives 7. The overall objective of the proposed Housing Project is to support the development of a housing market to meet the housing needs of the people of Ukraine. Specifically, the proposed project aims to: (a) foster private ownership of housing and fully privatized apartment buildings by selling all completed apartments to city residents; (b) promote resident take-over of the management and maintenance of their buildings through formation of homeowner (condominium) associations; (c) encourage the growth of private housing developers by providing access to land with infrastructure for housing construction and simplifying building regulations; (d) pilot competitive bidding in selection of contractors; and (e) further housing reform through policy studies. Project Description 8. The project is a pilot which will support reform oriented city administrations in their efforts to institute housing reform at the local level. In order to participate in the project, the city administrations agreed to sell completed units (as opposed to allocation to families on the wait list), continue the land auction program to increase developer access to urban land, review and simplify land and building regulations, and select contractors through competitive bidding. The project will be carried out in three large regional cities, Kharkiv, Lviv and Odesa, over a three year period and will include: (i) Completion of the unfinished municipal housing (about 1,000 apartments) for sales to households in Lviv and Odesa (US$16.7 million). Construction on municipal housing has stopped or slowed down significantly due to lack of funding. The completed buildings, originally intended for allocation to families on the wait list, will instead be sold with costs fully recovered from sales proceeds, a major departure from past practices.  - 3 - (ii) Provision of off-site infrastructure to develop serviced land (approximately 15.2 ha.) for sale to private developers for housing construction in Kharkiv and Lviv (US$10.0 million). The project will finance installation of water and sewer distribution, drainage, roads, heat distribution, electricity and other trunk infrastructure to develop land parcels for sale to private developers who will construct housing. (iii) Technical assistance, consisting of housing policy studies (housing finance development and review of government housing assistance), review of land and building regulations at the city level and consultancies and training to assist with project implementation, project monitoring and beneficiary assessment at the national and local levels (US$1.2 million). There was limited interest among developers to take over unfinished municipal buildings. The funding of uncompleted municipal housing for sale is a transitional measure. The project cities will move from construction and allocation of housing to provision of infrastructure for housing development by private developers. Improved access to land and simplification of land and building regulation will promote the growth of developers who are expected to be the key suppliers of housing in the future. 9. The total project cost is estimated to be US$27.9 million equivalent, excluding local taxes but including cost of works already completed by the city administrations on buildings and sites to be financed under the project. A Bank loan of US$17.0 million will finance 61% of total project cost net of taxes (55 % of costs including taxes) or 93 % of the foreign costs and 42 % of local costs. The estimated costs and financing plan are presented in Schedule A. Proceeds of the Bank loan will be onlent by the national government to the three project cities in US dollars on the Bank's terms and conditions with a spread of 1 % to cover the administrative costs and risk. The project cities will bear the foreign exchange risk. The Bank will enter into a Loan Agreement with Ukraine and a separate Project Agreement with each project city. The national government will enter into a Subsidiary Loan Agreement with each city administration. Project Implementation 10. Implementation of the housing completion and land development components will be carried out by the respective city administrations. Each city will establish a unit (the city executing unit, CEU), reporting to the mayor and comprised of staff from the departments handling construction and housing, for this purpose. A project steering committee will be established at the national level for overall policy coordination and project oversight. The steering committee will be co-chaired by the State Committee on Urban Development and Architecture and the State Committee for Housing and Municipal Economy, the two key sector agencies, and will include the other national government agencies involved with housing. A small technical unit reporting to the steering committee will carry out routine project monitoring and coordinate and implement the technical assistance component. Project Sustainability 11. Homeowners will be responsible for the management and maintenance of the buildings themselves. All the apartments constructed under the project will be privately owned and the new owners will form homeowners (condominium) associations to take over management and maintenance of the buildings financed under the project. Owners generally take better care of their buildings than renters; the management and maintenance tasks will initially be easier because newly constructed  - 4 - buildings face fewer problems compared to older buildings where maintenance has been neglected in the past. The city administrations will be responsible for maintaining the roads, drainage systems and other infrastructure constructed through the project. Rationale for Bank Involvement 12. The proposed project supports the transition to a market based economy. The proposed project will foster the growth of the housing market which, over time, will lead to greater mobility of population (and flexibility in pursuing employment opportunities), improved quality of housing and more efficient distribution of housing according to households needs. The project will contribute to reduction in the direct role of government in the economy by completing and selling unfinished municipal housing and by promoting the growth of private housing developers through improving access to land for housing construction and simplifying building regulations and procedures. In addition, the project will introduce competitive bidding in the selection of contractors for housing construction and infrastructure development. Local construction enterprises will also gain experience in tendering by participating in the procurement training to be carried out as part of project implementation. The technical assistance studies will lay the foundations for future development of the housing market and a less direct role for the government in the housing sector. This project is consistent with the limited Country Assistance Strategy as discussed by the Board of Directors during the presentation of the Ukraine Rehabilitation Loan (Loan 3831-UA) on December 22, 1994. A full Country Assistance Strategy will be presented to the Board soon. Agreed Actions 13. Prior to negotiations, the Government established the project steering committee, confirmed city ownership of the buildings and sites to be financed through the project and developed a land auction plan for 1996 and 1997. During negotiations, agreements were reached on: (a) sales of completed housing and developed land, continuation of the land auction program, review of building regulations, and competitive bidding in selection of contractors; (b) commitment by the cities not to carry out additional new residential building construction for sale which will conflict with private developer projects; (c) the financing arrangements for the technical assistance program; (d) on- lending terms and conditions; (e) preparation of a marketing plan for completed housing and land; (f) the project implementation arrangements and (g) a mid-term review to assess implementation to date and actions following the technical assistance studies. Signing of subsidiary loan agreements, satisfactory to the Bank, between the Government and two out of the three project cities and the establishment of CEUs in the same two cities are conditions of loan effectiveness. Prior to the start of disbursements for the remaining project city, the remaining subsidiary loan agreement will need to be signed and the CEU established. Lessons Learned from Previous Bank/IDA Involvement 14. The Bank has limited experience lending to Ukraine and for housing in Eastern Europe. The three housing projects under implementation in Eastern Europe (the Poland Housing Project, Loan 3499-PL, the Albania Housing Project, Credit 2534-AL, and the Russia Housing Project Loan 3850-RU) adopt different approaches to housing, reinforcing the importance of designing projects according to the needs and level of transition in the respective countries. The Albanian project, which finances unfinished housing and thus is similar to this project, points to the risk that the cities may go back on their commitment to market housing and allocate them to households on the municipal housing wait list and/or continue in their role as housing developers.  - 5 - The project is a small pilot working with progressive city administrations which have undertaken and agreed to housing reforms and promoting private developers. These agreements are reflected in the legal documents. Poverty Category 15. Not applicable. The project aims at promoting the development of a housing market and is not targeted at addressing the shelter needs of the poor. Under the previous central planning system, all households were provided with housing and minimal basic services so the poor do not necessarily face an immediate crisis meeting basic shelter needs. The apartment units to be completed under the project are smaller than the larger apartments being constructed to meet the demands of the richer segments of society and should appeal to the middle and lower middle income groups. Environmental Aspects 16. Project activities are expected to have minimal negative impact since the project sites will be located within urban areas, are in accordance with overall city development plans and will be provided with adequate infrastructure to prevent pollution of adjacent areas. The project is expected to have a positive impact on people's (beneficiaries') standard of living through improvements in housing design. Improvements in ventilation, heat controls and other design standards will ensure a more healthy indoor environment; better insulation, heat controls and metering have the potential to contribute to the country's energy conservation program. An environmental analysis was carried out in accordance with the category "B" environmental rating for the project. Program Objective Categories 17. The development of the housing market, reduction of the role of the cities in direct provision of housing and measures to promote private housing developers will contribute to overall improvements in economic management and private sector development. Participatory Approach 18. The key stakeholders in the project are the city administrations and potential beneficiaries, the city residents and the emerging real estate developers. The city administrations have been involved in project preparation and the need for improving access to land and simplifying building regulations identified through interviews with developers. As construction proceeds, community organization and participatory approaches will be needed to help facilitate formation of homeowners associations, especially since there is a lack of tradition of urban residents coming together to jointly reach decisions on amounts of expenditures needed for routine maintenance of buildings or emergency repairs (which they had previously left to the city). The Bank will collaborate with Odesa city administration to introduce participatory approaches in city investment decision making. Project Benefits 19. The project will foster the development of a housing market by promoting private ownership of housing and homeowner management of multifamily apartment buildings, improving construction enterprises' access to land for housing construction and simplifying business regulations. The project will support reform oriented city administrations in their move from allocation of housing  - 6 - to provision of infrastructure, creating an environment for private developers to construct housing in line with market demand. The studies financed under the project will assist the national government to operationalize its Housing Policy Concept by formulating policies on government assistance for the housing sector and housing finance development. Progress in city level reforms and follow up from the policy studies will be the focus of a formal mid-term review to be carried out with senior government officials during the first half of 1997. Over the long term, the development of a housing market would provide greater choice of housing, allow greater mobility of population, generate employment in the construction industry and contribute to domestic resource mobilization by providing a motivation for households to save. Using estimated sales revenues as a measure of project benefits, the housing components are estimated to have a weighted average economic rate of return of 25%. Risks 20. The project faces many of the risks inherent in transition economies. If the economic situation continues to deteriorate, lack of economic growth, depressed incomes and high inflation would constrain the growth of the housing market, limit effective demand for new apartments and dampen developer interest in purchasing serviced land for housing construction. To address these risks, the scale of the project has been kept small; apartments constructed under the project account for less than 0.1 % of the housing stock in the project cities and the scale of the land to be developed has been reduced. The Bank loan will not impact severely on the cities' finances; the maximum annual payment of interest and repayment of principal is estimated to be less than 1.5% of the cities' current budget expenditures. Another risk is that project costs may increase because of lack of experience in competitive bidding and real appreciation of the local currency relative to the US dollar which would result in the project costs, expressed in US dollars, increasing above international inflation. The project contingencies were estimated taking these factors into consideration. There is a political risk that the city administrations will go back on their commitment to housing reform, for example due to leadership changes. There is an awareness at the city level that both the national and local governments lack the resources to return to the previous state provision of housing and hence a willingness to experiment with alternatives. The project includes more than one city to spread this political risk. Agreements on the city level reforms are incorporated in the legal agreements which will allow for accelerated repayment of the subloan in case of deviation from agreed policy reforms. The study on government assistance to housing will explore alternative measures to promote homeownership that the Government could introduce to defuse the problem of the families on the government waitlist which continues to be a serious political issue at the local level. Recommendation 21. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and I recommend that the Executive Directors approve it. James D. Wolfensohn President Attachments: Schedules A - D Washington, D.C. February 13, 1996  - 7 - SCHEDULE A UKRAINE HOUSING PROJECT ESTIMATED COSTS AND FINANCING PLAN Millions of US$ Forex Base Local Foreign Total Cost Project Costs Housing Completion 5.8 4.8 10.6 45 47 Land Development 2.8 2.2 5.0 45 22 Sunk Costs 5.9 - 5.9 - 26 Technical Assistance 0.2 1.0 1.2 80 5 Base Costs (in April 1995 prices) 14.7 8.0 22.7 35 100 Physical Contingencies 1.3 1.0 2.3 45 10 Price Contingencies 1.5 1.4 2.9 47 13 Total Project Costs 17.5 10.4 27.9 36 123 Financing Plan World Bank 7.4 9.6 17.0 Government 10.1 0.8 10.9 Total Financing 17.5 10.4 27.9  SCHEDULE B - 8 - UKRAINE HOUSING PROJECT SUMMARY OF PROPOSED PROCUREMENT ARRANGEMENTS (IN US$ MILLIONS) Procurement Method ICB NCB Other NBF Total Cost 1. City Components 1.1 Kharkiv Land Development 2.0 - - - 2.0 (1.5) (1.5) 1.2 Odesa Housing Completion 9.4 - - 1.0b_/ 10.4 (7.6) (7.6) 1.3 Lviv Housing Completion 4.9 - - 1.4b_/ 6.3 (3.9) (3.9) Land Development 4.5 - - 3.5b_/ 8.0 (3.7) (3.7) Sub-Total City Components 20.8 - - 5.9b_/ 26.7 (16.7) (16.7) 2. Technical Assistance 2.1 Consulting Services - 0.9a/ - 0.9 (0.3) (0.3) 2.2 Studies - 0.3 c1/ 0.3 Sub-Total Technical Assistance - 0.9 0.3 1.2 (0.3) (0.3) Total 20.8 - 0.9 6.2 27.9 (16.7) (0.3) (17.0) Note: Numbers in parenthesis are World Bank loan amounts. a / Services to be procured in accordance with Bank guidelines. b-I Sunk costs. c_/ To be provided from multi-lateral grant sources.  -9- SCHEDULE B DISBURSEMENTS Category Loan Amount Expenditure to be Financed (in US$ million) 1. Housing Completion 11.5 80% of the civil works 2. Land Development 5.2 80% of civil works 3. Technical Assistance 0.3 100% of consultant services Total 17.0 ESTIMATED BANK DISBURSEMENTS (IN US$ MILLIONS) Bank Fiscal Year 1996 1997 1998 1999 Annual 2.1 7.8 6.0 1.1 Cumulative 2.1 9.9 15.9 17.0  SCHEDULE C - 10- UKRAINE HOUSING PROJECT TIMETABLE OF KEY PROJECT PROCESSING EVENTS (a) Time taken to prepare the project: One and a half years (b) Prepared by: The city administrations The State Committee on Housing and Municipal Economy The State Committee on Urban Development and Architecture (c) First Bank mission: October 1993 (d) Appraisal Mission Departure: June 1995 (e) Date of Negotiations: January 1996 (f) Planned Date of Effectiveness: May 1996 (g) List of Relevant PCRs/ICRs: Not Applicable  - 11 - Schedule D Ukraine Housing Project Status of Bank Group Operations IBRD Loans and IDA Credits in the Operations Portfolio (as of February 2, 1996) Ukraine Original Amount in US$ millions Project ID Fiscal Year Borrower Purpose IBRD IDA Cancel- Undisbursed lations UA-PA- 1993 GOU Institution Building 27.0 - - 23.61 9106 UA-PA- 1995 GOU Rehabilitation 500.0 - - 0.75 9108 UA-PA- 1995 GOU Agric. Seed 32.0 - 32.0 9117 Development UA-PA- 1995 GOU Hydropower 114.0 - 114.0 8820 Total disbursed (IBRD and IDA) 502.63 Of which repaid 0.0 Total now held by IBRD and IDA 502.63 Amount sold 0.0 Of which repaid 0.0 Total undisbursed 170.37 a. Actual Disbursements to date minus intended disbursements to date as projected at appraisal. * Actual Disbursements year-to-date minus formally revised estimate year-to-date. b. Rating of 1-4; see OD 13.05, Annex D2, Preparation of Implementation Summary (Form 590). Following the FY94 Annual Review of Portfolio Performance (ARPP), a letter-based system will be used (HS=highly satisfactory, S=satisfactory, U=unsatisfactory, HU=highly unsatisfactory); see Proposed Improvements in Project and Portfolio Performance Rating Methodology (SecM94-901), August 23, 1994. Following the FY94 ARPP, "Implementation Progress" will be reported here.  - 12 - Schedule D Statement of IFC Investments (as of FYE95) Amount in US$ millions Fiscal Year Obligor Business Loan Equity Total 1994 Ukraine Fund Venture Capital $2.0 $2.0 Fund Total gross commitments $2.0 Total commitments now held by IFC $2.0 Total undisbursed (including participant's $2.0 portion)  MAP SECTION   200 25' 300 35