Mexico - FOVI Restructuring Project

Document of The World Bank Report No: 18854-ME PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$505.05 MILLION TO BANCO NACIONAL DE OBRAS Y SERVICIOS PUBLICOS, S.N.C. WITH THE GUARANTEE OF THE UNITED MEXICAN STATES FOR THE FOVI RESTRUCTURING PROJECT FEBRUARY 3, 1999 Mexico Country Management Unit Finance, Private Sector and Infrastructure Sector Management Unit Latin America and the Caribbean Regional Office  CURRENCY EQUIVALENTS Currency Unit = Pesos (Mex$) LC = US$ US$1.00 = MXP$10.15 (as of 1/25/99) FISCAL YEAR January 1 - December 31 ABBREVIPATIONS AND ACRONYMS ADE Acuerdo de Apoyo Inmediato a Deudores de la Banca (Financial Aid Program for Debtors) AFORES Administradora de Fondos para el Retiro (Retirement Trust Fund) BANCO DE MEXICO Mexico's Central Bank BANOBRAS Banco Nacional de Obras y Sericios Publicos, S.N.C. (National Development Bank for Public Works and Services) CAS Country Assistance Strategy CETES Certificados de la Tesoreria de la Federaci6n (Treasury Bills) CNBV Comisi6n Nacional Bancaria y de Valores (National Banking and Securities Commission) CONSAR Comisi6n Nacional del Sistema de Ahorro para el Retiro (National Commission on Savings for Retirement) CPP Costo Porcentual Promedio de Captaci6n (Average Cost of Term Funds to the Banking System) CSDP L, Il Contractual Savings Development Program DIM Double-Index Mortgage FICOVI Fideicomiso de Cobertura para la Vivienda (Housing Insurance Trust Fund) FANNIE MAE Federal National Mortgage Association (USA) FONHAPO Fondo Nacional de Habitaciones Populares (Govermment Very Low-Income Housing Fund) FOVI Fondo de Operaci6n y Financiamiento Bancario a la Vivienda (Govermment Housing Finance Fund) FOVISSSTE Fondo de la Vivienda del Instituto del Seguro Social al Servicio de los Trabajadores del Estado (Housing Fund for Public Sector Workers) FREDDIE MAC Federal Home Loan Mortgage Corporation (USA) FSRL I, II Financial Sector Restructuring Loans FTAL Financial Technical Assistance Loan GDP Gross Domestic Product GNP Gross National Product ICB International Competitive Bidding ICR Implementation Completion Report INFONAVIT histitutc del Fondo Nacional de la Vivienda para los Trabajadores (Institute of the National Housing Fund for Private Sector Workers) LCS Least-Cost Selection MBS Mortgage-Backed Securities MMWs Multiples of Monthly Minimum Wage NCB National Competitive Bidding NGO Non-Govermnental Organization PLAM Price Level Adjusted Mortgage PMI Primary Mortgage Insurance PRONAFIIDE Programa Nacional de Financiamiento del Desarrollo (National Development Program) PROSAVI Programa Especial de Crddito y Subsidio a la Vivienda (Special Program for Housing Loans and Subsidies) SECODAM Secretaria de la Contralorfa y Desarrollo Administrativo (Ministry of Control and Administrative Development) SEDESOL Secretaria de Desarrollo Social (Ministry of Social Development) SHCP Secretaria de Hacienda y Credito Publico (Ministry of Finance and Public Credit) SOE Statement of Expense SOFOLES Sociedad Financiera de Objetivo Limitado (Limited Purpose Financial Institutions) SMM Salario Minimo Mensual (Monthly Minimum Wage) UDI Unidades de Inversi6n (Units of Investment) US GAAP US Generally Accepted Accounting Principles Vice President: Shahid Javed Btirki Country Manager/Director: Olivier Lafourcade Sector Manager/Director: Danny M. Leipziger Task Team Leader/Task Manager: Richard L. Clifford  3 Mexico FOVI Restructuring Project CONTENTS Pas!e A. Project Development Objectives 6 1. Project development objectives and key performance indicators 6 B. Strategic Context 6 1. Sector-related CAS goals supported by the project 6 2. Main sector issues and Government strategy 7 3. Strategic choices addressed by the Project 11 C. Project Description Summary 14 1. Project components 14 2. Key policy and institutional reforms supported by the project 18 3. Benefits and target population 18 4. Institutional and implementation arrangements 19 D. Project Rationale 19 1. Project alternatives considered and reasons for rejection or inclusion 19 2. Major related projects financed by the Bank and/or other development agencies 20 3. Lessons learned and reflected in proposed project design 23 4. Indications of borrower commitment and ownership 25 5. Value added of Bank support in this project 26 E. Summary Project Analyses 26 1. Economic 26 2. Technical 26 3. Financial 28 4. Institutional 28 5. Social 30 6. Environmental assessment 30 7. Participatory approach 30 F. Sustainability and Risks 30 1. Sustainability 30 2. Critical risks 30 3. Possible controversial aspects 33  4 G. Main Loan Conditions 34 H. Readiness for Implementation 34 1. Compliance with Bank Policies 34 Annexes 35 Annex 1. Project Design Summary 36 Annex 2. Letter of Sector Policy 39 Annex 3. Detailed Project Description 3.a. The FOVI Strategic Plan 45 3.b. Implementation Plan - Technical Assistance 51 Annex 4. Estimated Project Costs 56 Annex 5. Economic Analysis 57 Annex 6. Technical Analysis 6.a. The Mexican Housing Finance System 62 6.b. FICOVI 88 Annex 7. Financial Analysis 7.a. Fiscal Costs and Financing Plan 94 7.b. FOVI Financial Analysis 95 Annex 8. Financial Summary 99 Annex 9. Procurement and Disbursement Arrangements 100 Annex 10. Project Processing Budget and Schedule 104 Annex iI. Documents in the Project File 105 Annex 12. Statement of Loans and Credits 106 Annex 13. Country at a Glance 110  FOVI Restructuring Project Project Appraisal Document Latin America and Caribbean Mexico Country Department Date: February 3, 1999 Task Team Leader/Task Manager: Richard L. Clifford Country Manager/Director: Olivier Lafourcade Sector Manager/Director: Danny Leipziger Project ID: MX-PA-7610 Sector: Infrastructure / Finance Program Objective Category: EA Lending Instrument: Investment Loan Program of Targeted Intervention: [xl Yes [ No Project Financing Data [x] Loan [ Credit [I Guarantee [] Other [Specify] For Loans/Credits/Others: Amount: US$ 505.05 million Proposed terms: [ ] Multicurrency 1X] Single currency Grace period (years): 5 [ ] Standard Variable [ ] Fixed [XI LIBOR-based Years to maturity: 15 Commitment fee: 0.75 % less applicable waivers Front-end fee: 1.00 % Financing plan: US$ 7,310.05 million Source Local Foreign Total A. Government 1. LoanstoFOVI 3,635.0 3,635.0 2. Subsidies 727.0 727.0 B. FOVI Own Funds 1. Proceeds from Secondary Market sales and Debt 2,443.0 2,443.0 Issuance C. IBRD 496.0 4.0 500.0 D. Front-end Fee 5.05 5.05 Total 7,301.0 9.05 7,310.05 Borrower: Banobras, S.N.C. Guarantor: United Mexican States Responsible agencies: FOVI, SHCP Estimated disbursements (Bank FY/US$M): 1999 2000 2001 2002 2003 Annual 105 150 150 90 10 Cumulative 105 255 405 495 505 Project implementation period: 4 years Expected effectiveness date: March 1999 Expected closing date: June 2003  6 Mexico FOVI Restructuring Project A. Project Development Objectives 1. Projecd development objectives and key performance indicators (Annex 1) The proposed project supports the sound development of the social interest housing sector through greater private sector participation in its financing. ' Specifically it supports three actions to be undertaken by FOVI, a Banco de Mexico trust fimd for social interest housing finance, that operates through the private sector: (i) an increase in the flow of fimds to the sector; (ii) a restructuring program that will strengthen FOVI's products and services for the primary and secondary markets, finances and management structure; and (iii) the implementation of a new subsidy policy. These objectives follow from the sector diagnostic (Section B.2.a of the PAD), the Government strategy (Section B.2.b and Annex 2 - Letter of Sector Policy), and the strategic choices made by the Government and FOVI (Section B.3). Key indicators of progress toward project objectives are defined in the logical fiamework. B. Strategic Context 1. Sector-related Country Assistance Strategy goals supported by the project: CAS Document number: 16135-ME. December 17, 1996 Date of latest CAS updating discussions with Government: March 26, 1998 The project is consistent with the core priorities of the World Bank lending program over the next three years. Primarily, the project supports social development by improving the efficiency and quality of social sector spending. It does this by developing FOVI mortgage designs that separate subsidies from finance in social interest housing, and by improving the targeting and transparency of the remaining subsidies. Also, by expanding the supply of private finance and deepening the social interest housing finance system, the project reduces pressures on scarce public resources in the housing sector. An important if indirect impact of the project is to improve social stability by encouraging the resumption of private bank lending to housing and of employment-generating housing production. * Secondarily, the project supports the objectives of growth with stability and focuses on sound financial and capital market development. It contributes to promoting banking system soundness by strengthening and disciplining the social interest housing primary mortgage market through sound, standardized underwriting standards, market-based lending and the improved management, pricing and allocation of risks in the mortgage markets. It also supports the development of a private sector led secondary mortgage market for social interest housing instruments 'Social interest housing, is generally targeted at households earning 3-8 times the monthly minimum wage that is now equivalent to about US $100 per month. Persons in this target group constitute the urban, working poor.  7 2 Main Sector Issues and Government Strategy 2a Sector Issues The preparation of the project has included the first in-depth diagnosis of the housing finance system for more than a decade. 2 This work includes the modeling of the flow of fuids from the main sources of public and private mortgage finance in Mexico between 1991 and 1997. The main sector issues and their appropriate remedies are: Segmentation of the housingfinance system and its domination by public and quasi-public institutions running separate and uncoordinated direct mortgage lending programs at the federal and state levels. Mexico's housing finance system dates from the 1970s when inward looking economic strategies and strong directed credit policies led to the creation of specific institutions established for different market segments and income groups. Mexico's financial system remained quite small and savings mobilization was weak. Access to housing finance was dominated by political and administrative processes rather than market driven. The present system has relied on three sources of funds: