Peru - Urban Property Rights Project

Report No. PID6523 Project Name Peru-Urban Property Rights Project Region Latin America and the Caribbean Sector Public Sector Management Project ID PEPA39086 Borrower Republic of Peru Implementing Agency Comision de Formalizacion de la Propiedad Informal(COFOPRI) and Registro Predial Urbano Beneficiaries Owners of marginal urban properties Financing plan IBRD $38.0 million Government of Peru $19.0 million Beneficiaries $9.3 million Total Project Cost $66.3 million Appraisal Date June 1998 Date of Board presentation July 1998 Date of PID May 18, 1998 Background 1. Peru's radical economic reforms since 1990 have led to a striking recovery of the country, but poverty remains a fundamental problem -- half of the Peruvian population falls below the poverty line. Formalizing ownership of real (immovable) property could help significantly in the fight against poverty: properly issued and duly registered titles of ownership provide the security for owners to use property as collateral to raise finance, to invest in the betterment of their property, or to dispose of it as they wish. Many of Peru's marginal urban settlements are formally in public ownership and the Government of Peru (GoP) wishes to pass ownership into the hands of its occupants, yet the existing public institutions are incapable of completing the transfer. As a result, an estimated 70 percent of all urban properties are not inscribed in the registry and the owners of these properties -- among the poorer urban dwellers -- are denied many of the benefits of ownership. 2. Peru's traditional system of titling and registration is complex, inefficient, expensive -- prohibitively so for poorer people -- and prone to rent seeking. Fourteen different agencies are involved in the generation of each title, the courts have rarely been able to validate these titles as the law requires, and the registry of immovable property (RPI) has proven similarly inefficient. At the end of the 1980s, the Government introduced, on a geographically limited basis, a new system of property administration designed to reach poorer, informal owners (including lower middle-class people). The new system adopted a new legal framework designed to forego the need for notaries and, where possible, courts by using community-level information on ownership. A new registry, Registro Predial (RP), with an inexpensive cadastre-based information system, was established. A field campaign methodology was developed to educate people about the advantages of  formalization and to capture economies of scale through large-scale area-based titling and registration. Instituto Libertad y Democracia (ILD), a Peruvian Research Institute, played the dominant role in conceiving, promoting, and implementing all aspects of the new system. A 1992-93 pilot project for the new system, including the design of the field campaign, was funded from part of a Bank-administered PHRD grant. The new system has so far operated on a limited scale, but in a unique achievement for Latin America it registered some 300,000 titles from 1991 to the end of 1995 in urban Lima at a reasonable cost. The economic benefits of formalization are already evident: the value of registered urban properties has typically doubled and private mortgage and consumer credit markets have begun to develop. 3. In 1995 the Bank presented a note on real property rights in Peru (part of the report Peru: Policy Notes, July 21, 1995, 14824-PE) recommending that the GoP urgently commit itself to a national program of property formalization based on the RP system (and the successful pilot program) under the authority of an independent agency. The Government has now moved significantly in the direction of applying these recommendations to Peru's urban areas. In early 1996 President Fujimori announced a public commitment to formalize 1.6 million urban properties over the next five years. Given the Bank's role in the pilot program and its subsequent policy advice, the Government has asked for Bank assistance in implementing this program. 4. To carry out the program, the GoP passed a "Law to Promote Access to Formal Property" (Law 803, March 1996) aimed at allowing greater security of ownership and more access to credit for poorer people as a means of facilitating private investment and more widespread participation in the modern economy. The law established an autonomous agency, Comision de Formalizacion de la Propiedad Informal (COFOPRI), with the principal mandate to formalize existing property in poor urban settlements and generate a policy to manage new urban settlements. COFOPRI issues titles and coordinates the registration of these with the Registro Predial Urbano (RPU -- Law 803 split the Registro Predial into an urban and a rural part). The Minister of Transportation, Communication, Housing and Construction is presiding over COFOPRI and the President appoints a General Manager. RPU, which has so far only functioned in the Department of Lima, has been removed from the Superintendency of Registries, SUNARP, and functions autonomously under the Minister of Transportation. 5. COFOPRI has been carrying out campaigns of formalization since mid-1996 in an initial, pilot program of formalization in Lima and a small number of provincial cities. Under these campaigns, some 200,000 more properties have been newly registered by Registro Predial. Project Objectives 6. The principal objective of the proposed project is to transform informal occupation of land by predominantly poor urban residents into secure and sustainable ownership rights to the same land. To this end the project would support a national program to formalize (i.e. title and register) around 0.9 million properties in eight urban areas by 2001. Through legal and institutional improvements, training, and the development of long-term strategies, it would also strengthen COFOPRI and RPU, the institutions responsible for this program. -2-  Project Description 7. The project would support a package of activities, under three components, to achieve the above objectives. In particular: (a) Urban property market reforms -- actions to promote legal and regulatory reform to facilitate the formalization of property and its use in market transactions in the following areas: - Legal and institutional framework: continuation of the process of resolving problems of informality, including the development of mediation and arbitration. - Investment promotion: identification and development of regulatory measures to improve the ability of formalized property to be used in financial and other markets. - Social and economic monitoring: establishment of a system to measure and analyze the social and economic impact of formalization under this project. (b) National organizations for urban property: - Administrative strengthening of Registro Predial: support for the opening of new regional offices to implement the program, improvement in managerial procedures and policies, information systems, registry and customer-relations services, and development of a long-term development strategy. - Administrative strengthening of COFOPRI: support for improvement in managerial procedures and policies, information and mapping systems, and customer-relations services, - Institutional strengthening of Registro Predial and COFOPRI: identification and development of longer-term measures that will ensure the sustainability of both organizations through better accountability mechanisms and the development of a land-administration policy. - Human resource development: development and implementation of training programs for both organizations. (c) Conversion of existing informal property: - Collection and analysis of ownership-related information: strengthening of the existing process of collecting and analyzing demographic, economic, and ownership information to support the scaling-up of the formalization process. - Implementation of National Formalization Plan: implementation of the plan to formalize properties in eight urban areas (including the completion of the process in Lima and two other cities) using a field-campaign-based method of property formalization. Project Financing 8. The total project cost, covering the registration of 960,000 million properties (of which 800,000 will be individually titled), is $66.3 million. Of this, IBRD would contribute $38.0 million, beneficiaries (through -3 -  registration fees) $9.3 million, and the government $19.0 million. The Government has so far adhered to a policy of free formalization, but RPU is expected to adopt a policy of full cost recovery for the longer term, and the arrangements for this will be investigated as part of the second component above. Project preparation has been funded by a Japanese PHRD grant. Project Implementation 9. COFOPRI will manage the project. COFOPRI has been set up on similar lines to other autonomous bodies such as COPRI, the privatization agency ("lean" management, employees typically from the private sector, with private- sector employment conditions). RPU will play an important role in implementation. RPU will need to be made more independent (through greater cost recovery), as well as accountable to the government. Project Sustainability 10. The main force for sustainability should reside in the economic results and the perceived legitimacy of the formalization process itself: the beneficiaries of a process which increases the value of their assets are more likely to see a stake in the reform process and to demand that it be maintained. This proposition has already been tested: at the end of the pilot project, ILD withdrew its resources from RP, through lack of funds, yet the number of property registrations has continued to grow through market forces. (In particular, one private construction-materials firm directly funded many new registrations in order to create market demand for related credit transactions.) These successful results have also largely put to rest much of the argument within Peru over the security of the new system. Another important aspect of sustainability is cost recovery, and for that the project supports the development of an appropriate fee structure for RPU for all its services. Lessons from Previous Bank/IDA Involvement 11. The potential of Peru's new system is consistent with what the World Bank has learned about property administration systems in other countries. Apart from a series of projects in Thailand, the Bank has few proven success stories. Conventional systems of titling and registration (involving expensive cadastral surveys and the modernization of existing agencies, for instance) have proven costly and ineffective in tackling the pervasive problem of informal ownership. On the other hand, titling and registration systems that proceed area by area, that are based on information held by the local community, and that settle all ownership claims simultaneously have proven effective in formalizing ownership. Bank experience also suggests that a prior condition for developing land markets is to establish policies which eliminate the major market distortions, in particular laws allowing freedom to transact and the removal of taxes and subsidies that distort land values. Peru fulfills this prior condition. Environmental Aspects 12. This project has been assigned environmental assessment category C. Program Objective Categories -4-  13. The project contributes to poverty alleviation by allowing poor people better access to legal rights, hence to participation in the market. Contact Point: The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone No. (202)458 5454 Fax No. (202) 522 1500 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending May 22, 1998. - 5 -