PROJECT INFORMATION DOCUMENT (PID) - World Bank
PROJECT INFORMATION DOCUMENT (PID)
CONCEPT STAGE
Report No.: AB2741
|Project Name |Guatemala Credit Enhancement for Housing and Community Services |
|Region |LATIN AMERICA AND CARIBBEAN |
|Sector |Housing finance and real estate markets (100%) |
|Project ID |P094242 |
|Borrower(s) |REPUBLIC OF GUATEMALA |
|Implementing Agency | |
| |Ministry of Public Finance |
| |Guatemala |
| |BANGUAT |
| |Central Bank of Guatemala |
| |Guatemala |
|Environment Category |[ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) |
|Date PID Prepared |December 12, 2006 |
|Estimated Date of Appraisal Authorization |January 21, 2008 |
|Estimated Date of Board Approval |May 22, 2008 |
1. Key development issues and rationale for Bank involvement
1.1 The percentage of inadequate housing in Guatemala is on the increase and is recognized as problem for economic growth and popular well-being In its 2004 Housing Strategy, the Guatemalan government identified the “qualitative deficit” as the priority issue, citing studies which show that approximately 20% percent of households lack one or more basic urban service (i.e., water, energy, or sanitation) and 25% percent of households suffer from overcrowding. In terms of numbers, at the end of 2002, about 722,000 of the country’s 2.2 million households lived in deficient housing.[1] Inadequate house construction and lack of basic services has repercussions on family health and productivity and represents a cost to overall economic growth and development. Furthermore, with cities growing at around 8% per annum, the “qualitative deficit” appears to be gaining on household formation.
Table 1. Coverage of water connections has declined in key cities
|City |Year |% change in water connections- (% coverage in |Table 1 shows how water coverage |
| | |latest year) |rates have dropped 10- 12% in key |
| | | |Guatemalan cities. Municipal |
| | | |governments, which are responsible |
| | | |for community and basic |
| | | |infrastructure, are unable to keep |
| | | |pace with a growing urban |
| | | |population. Thus the “qualitative |
| | | |deficit” is climbing |
|Antigua |1994- 2003 |- 11% (81%) | |
|Coban |1994-2002 |-17% (75%) | |
|Quetzaltenango |1994-2002 |-13% (76%) | |
|Escuintla |1994-2002 |- 16% (70%) | |
|Chimaltenango |1994- 2002 |-14% (78.5%) | |
1.2 Housing and income levels are strongly correlated in Guatemala. Similar to other Latin American countries, Guatemala’s housing sector is fragmented according to income levels. The “formal” sector, defined as construction by registered companies operating according to building codes and municipal planning ordinances, and financed by private banks, supplies less than half of the nation’s homes. The other half, which corresponds to families below median income level, depends on self-help construction in informal settlements, referred to as “progressive housing” since families begin with minimal construction in unregistered lots, and gradually acquire infrastructure and urban amenities, as they build onto their homes. In the process many families endure housing of inadequate construction and without basic services, a group which constitutes “the qualitative housing deficit” in Guatemala.
|[pic] |Figure 1 shows housing the |
| |sources of financing and |
| |mechanisms for construction |
| |according to income levels. |
| |The information, and the |
| |income distribution pyramid |
| |are taken from the Vice |
| |Ministry of Housing Report on|
| |Housing of 2004 |
1.3 Existing government programs do not reach below the median income level, where the problem of inadequate housing is concentrated. Although the Guatemalan government’s housing agency, FOGUAVI, has improved its performance considerably under the previous government, it still favors the better off families since its subsidies are directed exclusively toward new home construction[2]. Government has no strategy for assisting progressive housing or families in the lower half of income distribution. The present administration has requested help in revamping its overall policy, including FOGUAVI’s operating principles to effectively respond to the needs of the poorest.
In terms of basic services provision, the municipal infrastructure companies and the National Energy Company are responsible for maintaining and operating water, sanitation and electrical power networks. Insofar as they receive infrastructure as constructed by private housing developers, the infrastructure companies do not deal with the installation of new networks. Thus, extension of services to informal communities poses a growing problem as neither the municipal companies nor the National Energy Company count on sufficient budgetary or technical capacity to address existing demand, let alone projected future growth. The waiting time for service installation in informal and low-income communities is estimated to average ten years depending on the municipality.
1.4 NGOs and MFIs are working successfully in the lower income housing market, at commercial terms, but at a very small scale. Guatemala boasts a growing private “social sector”, including micro-finance intermediaries, cooperatives and non-governmental organizations, as well as a few commercial bank subsidiaries with experience in housing and community development. Known by their Spanish acronym as FPDSNFs, they currently finance about a fifth of the demand for home improvements and basic service provision. Since the clients in these cases rarely have fully legalized titles to their property and, even if they do, are frequently reluctant to offer their homes as collateral to a loan[3] the FPDSNFs rely on techniques of micro-credit and on investing in client relations. Overall results have been positive, with low default rates (less than 3%) and growing demand. The FPDSNFs, however, are constrained by their ability to raise capital. While many originated from donations, including from international grants, most now seek commercial bank financing to continue their operations.
1.5 Commercial banks have become interested in the lower-income housing market, but are limited in their lending. Commercial bank lending to FPDSNFs for low-income home improvement and service provision has doubled in the past ten years, but remains limited to less than 2% of overall mortgage lending, which itself is less than 10% of overall lending. Bankers cite regulatory requirements (provisioning), as well as the risks involved in loans with non-traditional guarantees (as opposed to loans secured by titled properties). Furthermore, despite the present high rates of liquidity enjoyed by the banks, the lack of a mechanism to assure access to long-term resources adds to commercial banks’ uncertainties in lending for housing programs in general.
1.6 Rationale for World Bank involvement originates in 2004. The World Bank has been working with the Minister of SEGEPLAN and the Vice-Minister of Housing since 2004 to develop a strategy for reducing the qualitative deficit by helping private banks to scale up their lending to FPDSNF for home improvement and provision of services in low-income communities. Following a memo of understanding drafted following an official visit in March 2005, the Vice-Minister of Housing has carried out a series of studies with financing from Cities Alliance and DIfD leading to a conference in 2005 and to the joint preparation of a book (scheduled for publication December, 2006) on the theme of financial exclusion and community upgrading, by the Government of Guatemala, the World Bank Institute, DIfD and Cities Alliance.
The Government’s proposal, as set forth in the 2005 memo and in the forthcoming book, envisages the creation of a “Guarantee Facility” to offer partial credit insurance to commercial bank lines of credit for home improvement and basic service provision in below-median income neighborhoods. The guarantee mechanism would reduce the risk for the commercial banks, and open the way for longer term loans and more flexible terms. The guarantee mechanism will provide banks with a means to explore this market segment while facing less risk. Such guarantees have been successful in the development of the United States housing and low-income housing market. The World Bank has also had experience supporting micro-credit in housing in Peru and guarantee mechanisms for micro-credit in Africa.
.
The Government has also requested World Bank further support for the housing sector in terms of: i) assistance with a review and reform of existing government subsidies to better reach the low-income groups and ii) development of long term liquidity facility which could benefit the sector as a whole. The Bank has done similar projects in Brazil, Mexico and is currently working in Peru and Colombia.
2. Proposed objective(s)
. Project Objectives
The Project’s development objective is to improve the quality of shelter and settlements in Guatemala by supporting mechanisms which: 1) lead to the development and enactment of a government housing strategy which supports households below median income level while assuring long term liquidity and efficiency in the overall housing finance; 2) stimulate lending for low income and informal sector home improvements and community upgrading; 3) promote more effective planning for basic service provision at municipal levels.
3. Preliminary description
The proposed Project is conceived as a standard investment loan (SIL) although it may combine delayed draw down options, output based aid and a partial credit guarantee in development of Component 2. The Project would address the major sector issues identified through three components described below:
3.1. Component 1 – Government Housing Strategy – (US$15 million) This component would finance technical assistance to support Government in redefining its housing strategy and investments required for establishing instruments to: i) better address the needs of the poorest half of the population and ii) assure liquidity and efficiency in housing finance
3.2 Component 2 - Guarantee Facility (US$25 million)- This component would enhance private lending to reduce the “qualitative housing deficit” through a mechanism to partially guarantee commercial bank loans to (FPDSNFs) for community upgrading and home improvement programs benefiting families below median-income level. The Component would finance the facility’s start-up costs and its risk to capital reserves as well as technical assistance for operational management and risk analyses
3.2 Component 3 Support to local governments and infrastructure agencies (US$10 million) This component would finance: i) technical assistance to national government line ministries to monitor local governments’ service provision; ii) technical assistance to municipal governments to regularize informal settlements and to adjust planning and registry procedures to include “progressive housing”; and iii) technical assistance and financing on a pilot basis for infrastructure agencies to operate, maintain and purchase basic infrastructure networks financed with support from the Guarantee Facility.
4. Safeguard policies that might apply
[Guideline: Refer to section 5 of the PCN. Which safeguard policies might apply to the project and in what ways? What actions might be needed during project preparation to assess safeguard issues and prepare to mitigate them?]
5. Tentative financing
|Source: |($m.) |
|BORROWER |0 |
|INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT |20 |
| Total |20 |
6. Contact point
Contact: Tova M. Solo
Title: Sr Urban Spec.
Tel: (202) 473-4760
Fax:
Email: Tsolo@
-----------------------
[1] Composed of 110,554 units that were inadequate (e.g., provisional housing, or one or more rooms added to a house without adequate access or services), and 611,495 units that were deficient in one or more major aspects, including being overcrowded (5 or more occupants per room excluding kitchen and bath), or suffering from seriously substandard construction materials (e.g., sticks, cane, plastic sheeting).
[2] A family income of Qz. 4,000 per month, which represents the upper limit for FOGUAVI’s target group, corresponds to an annual per-capita consumption of Qz. 9,412 (assuming 5.1 persons per family), which corresponds roughly to the 88th percentile of the consumption distribution in Guatemala; World Bank, “Poverty in Guatemala”, Annex I. Given that the 54% of Guatemalan population with annual consumption below the poverty line is unable to qualify for a bank credit, , we presume that most FOGUAVI subsidies reach families that lie between the 54th and 88th percentile of the consumption distribution in Guatemala.
[3] Low income families’ home constitute their major and in many cases only asset. Using the family home to guarantee a loan is psychologically difficult for this population group, particularly when the loan is a micro credit for relatively minor investments.
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