Document of The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 9853-POL STAFF APPRAISAL REPORT REPUBLIC OF POLAND Public Disclosure Authorized HOUSING PROJECT MAY 29, 1992 Public Disclosure Authorized Infrastructure Operations Division Country Department II Europe and Central Asia Region Public Disclosure Authorized Thisdocument has a restricteddistribution and may be used by recipients only in the perfonnance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization. CURRENCY AND EOUIVALENT UNITS Currency Unit = Zloty (Zl) AVERAGE EXCHANGE RATES (Zlotys per US$) May 1987 1988 1989 1990 1991 1992 US$1.00 = Zi 265 430 4,000 9,500 11,000 13,700 WEIGHTS AND MEASURES Metric System POLAND: FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ARM = Adjustable Rate Mortgage BGZ = Bank for Food Economy BUDBANK = Housing Development Bank DIM = Dual Index Mortgage EBRD = European Bank for Reconstruction and Development EC = European Community ETP = Economic Transformation Program FRM = Fixed Rate Mortgage HFPO = Housing Finance Project Office GDP = Gross Domestic Product GOP = Government of Poland IBRD = International Bank for Reconstruction and Development MF = Mortgage Fund MOF = Ministry of Finance MOSEC = Ministry of Spatial Economy and Construction NBP = National Bank of Poland PKO BP = National Savings Bank FOR OMFCIL USE ONLY STAFF APPRAISAL REPORT POIANP HOUSING PROJECT Table of Contents Pace No. Loan and Project Summary ......... .................. i I. THE HOUSING SECTOR A. Overview ......................................... 1 B. The Housing Stock ......... .......... ............ 1 C. Housing Supply ....... 4 D. The Fiscal Problem . .............................. 6 E. The Financial Problem ............................ 6 II. THE GOP HOUSIOG STRATEGY AND WORLD BANK SUPPORT A. The Challenge ....... 9 B. The Approach .....................................9 C. Reducing Subsidies on New Housing Production ..... 10 D. Reducing Subsidies on the Existing Housing Stock.11 E. Managing the Public Housing Stock ................ll F. Redefining the Role of Supply Agents .............13 G. Revising the Legal and Institutional Framework ...13 H. Summing Up . .. ...................... 15 III. THE PROJECT A. Introduction ................ 17 B. Project Objectives and Description . ...... 18 C.' Project Components 9. ... 19 D. Criteria of Sub-Project Eligibility .20 E. Project Cost and Financing ....................... 21 F. Environmental Impact .24 G. Project Implementation . ............ ..... 24 H. Procurement . ...... 26 I. Commitments and Disbursement .28 J. Supervision, Reporting and Monitoring . ..... 29 K. Accounting and Auditing .30 This reportwas preparedon the basis of a May 1991appraisal mission by a tem comprisingGian Cado Guarda TCaskManager), Mrgret Thalw (Eomist), Pete Doty,Lubom. Fiindd li,Han Matrasad TimothSmit (Consdlta). EC2 frastructure is dt resone division(Hans J. Apiz, Chid, EC21N)in the C;etral Empe Departmni (Kn Deris, Director,EC2). BertrandReaud AMT and Robot Bkley INURD) acd s Peer Reviews. L"raie Ftgerad, Hes Fros, Per Wag, and Jams Lacr asemMedthe report. 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. Table of Contents (cont.) Page o2. IV. THE FINANCIAL INTERMEDIARIES A. Current Structure of the Financial Sector ** ...... 31 B Ongoing Reform of the Financial Sector ....... .......31 C. Housing Finance Issues ................................32 D. The Mortgage Fund ........... ......... o_.. ...... 34 E. The Participating Banks ................. .. .37 V. PROJECT BENEFITS AND RISKS A. Benefits.................. 40 B. Risks ........... 41 VI. AGREEMENTS REACHED . ................... .. .......... **42 VII. LIST OF TABLES.............................................. Table 1: Occupied Dwellings by Type of Investor-- and Location ............. o . , .2 Table 2: GOP Housing Expenditures in 1990 and 1991 Budgets.. 7 Table 3: Project Costs ................ .............. .22 Table 4: Financing Plan for Construction Component ... 23 Table 5: Financing Plan for Mortgage Component ........... 23 Table 6s Consolidated Financial Plan . ............... 24 Table 7: Project Procurement and Dlabureement.- ...........27 ANNEXES Housing Policy Statement ................. ........ *9*A Legislation Affecting the Housing Sector ...... Ordinance of the Council of Ministerss March 25, 1991 ...... C-1 Ordinance of the Council of Ministers: October 1, 1991...-C-II Resolution No. 2 of BUDBANK Assembly of Shareholders .......D-I Resolution No. 3 of BUDBANK Assembly of Shareholders ...... D-11 Operational Manual Contents..... ...................... E Application for Construction Credit F. ............ .1' Standard Contract Forms ........ ......... *-*. Cash Flow Projections of the Mortgage Fund ... Dual Index Mortgage Amortization Table ..................... Project Profiles ......... .............. , *; Analysis of Project Costs ..... ..... Technical Assistance Program. ......... L Reporting and Monitoring System ..... ...... .. Estimated Schedule of Disbursement .... .......... Selected Documents and Data Available in the Project File .. .... ...... ... .. .. O .. .. REPUBLIC OF POLAND HOUSING PROJECT LOAN AND PROJECT SUMMARY Borrow rs Republic of Poland Executina Ministry of Spatial Economy and Construction of the Republic A&encies: of Poland; BUDBANK Beneficiaries: Approximately 27,000 individual households purchasing homes or flats under mortgage arrangements; private developers, participating municipalities Amounts US$200 million equivalent Terms: Seventeen years, including a four-year grace period, at the Bank's standard variable interest rate. Relendina Terms: BUDBANX's Mortgage Fund would finance up to 80 percent of the value of mortgages issued by the participating banks at a variable interest rate at least 300 basis points above the Basic Interest Rate of the National Bank of Poland. Repay- ment would be linked to the cashflow of the underlying indexed mortgages. Proiect To support the transition from heavily subsidized, centrally Obiectivess controlled housing production to more efficient, market- based supply through private initi$tive. The project objectives are: (i) creation of banking services to finance mortgages; (ii) greater private sector role in housing production; (iii) incentives to split existing cooperatives into smaller home-builder associations; (iv) competitive bidding for construction contracts; (v) pricing of land as part of housing costs; (vi) removal of legal and regulatory constraints to private initiative; and (vii) greater efficiency in the use of scarce local Government resources. Proiect A Line of credit for Mortaaaes: To alleviate the risks of pescrihtion: long term-lending when inflation is high and volatile, the mortgage instrument would be one that charges a variable market rate of interest while regularly adjusting payments to changes in nominal wages (a Dual Index Mortgage or DIM). When payments are less than amortization due, the unpaid part would be added to the loan balance to be paid off over the lifetime of the loan. The onlending banks, therefore, should be able to bridge the resulting liquidity gap. The special credit program supported by the proposed loan would finance some 27,000 dual index mortgages. - il - A Line of Credit for Construction: A line of credit (up to three years) would finance construction of about 15,000 new dwelling unlt- in projects to b- carried out by developers. Costs may include civil works, land, smaller infrastructure and worklng capltal. A first-year pipeline of sample sub- projects has been identified in fourteen cltiea throughout the country with an estimated aggregate cost of US$210 mlllion. Technical Aseistance: The principal reciplents of Technical Assistance would be: i) the Mortgage Fund; Li) the Project Unit within the Ministry of Spatial Economy and Construction; iii) participating banks willing to engage in mortgage lending; and iv) municLpalitLes undertaking reform of land use practices, financial management and urban infrastructure planning. Benefitg and The principal benefits of the project would be efficiency Rieks: galns from a market-based system of housing production and finance. The project would contribute to the recovery and restructuring of the sector and would increase mobility and choice in the housing market. Competitivepricing would stimulate productivity and help contain unit costs. Additional benefits would accrue from the extenslve program of technical assistance to local governmente, banks and investors. The project's principal beneficiarieswould be families of middle and lower-middle income. The project has been designed to offset the following rikes: (L) relatively high inflation rates and slow growth in real Lncome would be neutralized by the mortgage instrument; (ii) interest rate subsidies would be eliminated to protect development of market-baoed housing finance; (iii) inexperiencedbanking inetitutions,central and local administrations,and private investors would receive technical assistance to apply new policies, instruments and procedures; (iv) escalating constructloncosts should be contained through price competition so as to preserve affordabilityto the original target group; and (v) obsolete municipal regulations would be revised to encourage private initiatlve. - itii - Prolect Costs: Local