Middle East & North Africa

Regional Affordable Housing Project

Concept Note- October 2013

The World Bank

Financial and Private Sector Development Vice Presidency

Sustainable Development Network Vice Presidency

Middle East & North Africa Region Vice Presidency

Contents

I. STRATEGIC CONTEXT...... 5

A. Regional and sector context...... 5

B. Specific sector background...... 6

C. Alignment with the Transition Fund objectives...... 8

D. Alignment with national strategies...... 9

II. PROJECT DESCRIPTION...... 11

A. Project Objective...... 11

B. Project Components...... 12

C. Key Indicators Linked to Objectives...... 16

III. IMPLEMENTATION...... 16

A. Partnership Arrangements...... 16

B. Institutional and Implementation Arrangements...... 17

C. Project Budget and Financials...... 18

ANNEX1- RISKS AND MITIGATION MEASURES...... 21

Regional Affordable Housing Project

Proposal Summary

Proposal Outline / The proposal aims to support the Transition Fund objectives for the countries of Egypt, Jordan, Libya, Morocco and Tunisia in the field of affordable housing and housing finance. With a booming population, growing urbanization and calls for social reforms in the wake of the Arab Spring, the region needs to provide enough affordable housing options for its inhabitants. The project will provide technical assistance to advance country-led policy and institutional reforms to support (i) a scaling up in the supply of affordable housing,(ii) an expansion of affordable housing finance;and (iii) knowledge building and sharing across the region in the field of affordable housing. The program would run over a fiveyear period and be implemented at a country level, with some overarching regional initiatives.
Project Phasing / The participation of Transition Fund countries in the Project will be phased in accordance with the willingness and ability of individual target countries to join, and the availability of funding. The Programmatic Technical Assistance format is used for this purpose where a framework for the program has been developed to identify a set of pillars and list of countries to be covered by the program, which is approved at the outset. The framework is applied once a targetcountry is engaged to identify a subset of priorities for each government based on discussions during field missions and the review of their ongoing programs.
Target countries are selected in stages, the initial participating countries will be Tunisia and Morocco. Other Transition Fund countries will be added as conditions allow and as requested by them.
Implementation Arrangements / The Project will be run as an Arab Monetary Fund - World Bank managed and implemented Trust Fund. The WB team implementing the project will cut across sectors covering urban development (SDN) and financial sector development (FPD). There will also be strong collaboration with a number of counterparts aside from the national governments of participating countries. In particular, the Wharton School of the University of Pennsylvania will be a key partner in implementing some of the Technical Assistance and capacity building work.
Program Objective / The objective of the proposed project is to support the recipient Governments in designing reforms of programs and policies to promote access to affordable housing for the low to middle income households. The objective will be achieved by (i) supporting the governments in the evaluation of their existing programs for affordable housing, (ii) designing the key policies that will be catalytic and transformational in improving the supply of affordable housing and the availability of affordable housing finance, and (iii) supporting cross-regional knowledge sharing and expertise strengthening in the area of affordable housing and housing finance.The project will ultimately contribute to improving the living conditions of the populations through integrating housing development with access to better social and economic prospects, and generating opportunities for growth and employment in the context of post Arab Spring upheavals.
Fit with transition Fund Objectives / The proposal delivers on the Transition Fund's objectives of(i) fostering inclusive economic growth by promoting housing production and access to housing finance to underserved and young households; (ii) job creationthrough the expansion of housing production which has a proven record as a generator of employment and (iii)enhancing economic governance and supporting sustainable growth through a more efficient deployment of fiscal resources in support of growing a sustainable market-based affordable housing system.
Timeframe / The project is expected to run for a 5 year period, allowing sufficient time to engage in significant change and to have meaningful impact.
Overall Budget / The amount initially requested is approximately USD 4.2million over the 5year program period. This will be split across the 3 program components and 2 target countries.
Summary Program Components / Component 1: Scaling up Production of Affordable Housing, from the supply side (approx. USD 900,000 per country)
This component will provide technical and policy support for the development of affordable housing solutions and aims to remove blockages constraining supply of low cost housing
Regional Themes: (i) tackling restrictive urban planning and building regulations, including streamlining land subdivision and construction permissions; (ii) strengthening coordination of housing policyand urban planning to achieve sustainable urbanization objectives; (iii) addressing upgrading policies to regularize and improve squatter/informal settlements; (iv) exploring Public Private Partnerships to expand affordable housing delivery market; (v) developer capacity building and financing to service the lower income groups; (vi) support to owner driven construction.
Component 2: - Expanding Access to Affordable Housing Finance, from the demand side (approx. USD 900,000 per country)
This component will provide support for policy reforms of the legal, regulatory and institutional framework to promote affordable housing finance.
Regional Themes: (i) reform credit risk sharing guarantee schemes or contractual savings schemes for low and informal income households;(ii) support to targeted and market efficient systems of subsidies; (iii) supporting availability of long term finance for affordable housing, (iv) addressing regulatory environment and product development for Islamic housing finance, in countries where demand is growing; (v) efficiency of security/mortgage rights; (vi) developing prudential frameworks for housing finance;
Component 3: Regional Knowledge Building and Sharing in Affordable Housing and Housing Finance (approx. USD 200,000 per country)
This component would aim to share best practices and create some regional dialogue across the program countries in relation to the above stated regional themes- mainly through the delivery of regional training programs, workshops and seminars. In particular, an annual housing finance training program will be developed and anchoredinthe region in partnership with the Wharton School of the University of Pennsylvania. The program will be embedded within a MENA-based academic institution and will provide executive intensive education in policy innovations and institutional, financial and managerial aspects of affordable housing finance, with a MENA focus. It is intended to become a permanent fixture and self-sustaining program, after initial technical and financial support is provided during the start-up and establishment period. This course will be complemented by local workshops, regional conferences, and creation of an e-platform for knowledge consolidation and exchange. Translation into local languages will also be an important aspect that will enable outreach and engagement by stakeholders. This component will be launched early in the program to assist with the identification and assessment of existing initiatives in the region.
Regional Themes: (i) Regional workshops and knowledge sharing.

I.STRATEGIC CONTEXT

A.Regional and sector context

With a booming population, growing urbanization and calls for social reforms in the wake of the Arab Spring, the region needs to provide enough affordable housing options for its inhabitants. Population growth is around twice the world's average and the age profile is young. Rural populations are migrating rapidly to expanding cities, increasing the demand for new homes and public infrastructure. Given that housing demand is driven primarily by the two key factors of population growth and age structure, this means the demand for more homes, in particular at the lower segment of the market, is increasing rapidly in the region.
The chronic shortage of affordable and quality housing was one of the underlying causes of the social unrest and the resulting political turmoil that has spread across the region during the Arab Spring of 2011. Recent regional studies indicate that while there is an oversupply of upscale or luxury housing in many countries, there remains a shortage of more than 3.5 million affordable dwellings across the major markets within MENA. The largest current shortfall is concentrated in few countries such as Egypt (1.5 million) and Morocco (800,000). There are also notable shortages of formal and good quality housing for low income households in Libya, Jordan and Tunisia. The scale of the housing shortage in the region may have contributed to mounting frustration, especially among the region's youth, which pushed them to revolt.
Egypt, Jordan, Libya, Morocco and Tunisia have been making major strides to address the substantial housing needs, however in recent years, these policies stagnated, and housing became increasingly inaccessible, squeezing out the poor as well as the middle class. Governments pursued ambitious social housing agendas to address demand for housing, often through incentive programs for developers providing free or low cost land and tax breaks. They also made available a range of housing subsidies, which, in some countries, imposed a heavy burden on public finances, making such efforts unsustainable, while satisfying only a small part of the demand and not reaching targeted income groups. Finally, with the exception of Morocco, the experience of Public Private Partnerships has not been encouraging to date and there is a need to rethink these agreements to attract more private developers into affordable housing.
Housing – both delivery and financing – would be a visible proof to citizens that governments are moving actively to aid them in their lives. If the new Governments can deliver results on these fronts, this will transform the social and political landscape of these countries. The industry’s importance lies also in its potentialfor economic development through job creation, and addressing unemployment and underemployment, particularly for people who are poor, low-skilled and otherwise have limited job prospects. Furthermore, with government increasingly financially constrained, more efficient use of scarce government resources and more active private sector involvement is an essential part of their strategy to provide additional affordable housing investments. This requires a housing finance system to be functional for home buyers and real estate developers as well as to have efficiently designed public incentive mechanisms to promote affordable housing production and acquisition by households.

B.Specific sector background

Egypt, Jordan, Libya, Morocco and Tunisia’s affordable housing markets are at different stages of development but face many common challenges. The missing housing market for low income earners is often a result of both inadequate supply and ineffective demand. Depending on the country, strong obstacles often prevent the development of affordable housing, including certain land policies, markets, construction costs and developer strategies. Public finance is often used to offset high price-levels of housing units, which is unsustainable if the increase in price is driven by demand-supply structural inefficiencies Not only does such a policy result in inefficient fiscal expenditures, but also perpetuates imbalances if the factors causing high prices remain un-remedied because of the purchasing power injected by governments.
Effective demand is constrained by low incomes and difficulty to reach target groups. Poverty levels in the region are high as more than 40 percent of the MENA population lives under $2 a day and 20 percent lives under $1.25 per day. The region has also some of the least affordable housing prices in the world, with the average house price for a low income household requiring from 25 to 18 times the annual salary. This is in contrast to the accepted affordability limitof between 3 to 5 times annual salary, which makes housing inaccessible to the local MENA population. Even households that may have capacity to take on credit to pay for housing are difficult to identify due to informal incomes and lack of recorded financial histories, so that it is costly for financial institutions to undertake the due diligence required to ensure that these households are credit worthy.
Obstructions in the housing supply chain, such as land acquisition, urban zoning, building permits, access to low-cost and appropriate construction materials, and developer financing, are preventing an integrated approach to the formal production of affordable housing. In all countries, access to serviced urban land with the required titles, permits and registration is a costly and prolonged process. In Tunisia, Libya and Egypt, construction materials have increased in cost substantially since the Arab Spring. Apart from Morocco, formal private developers are almost exclusively building units for high-income households, where their rising costs of construction can be covered and profit margins are greatest. Inadequate supply of affordable housing has left low-income families little option but to build incrementally on illegal and unserviced subdivisions. Addressing access to urban land, minimum plot size, the supply of construction materials, security of purchasers’ advances and developer finance will allow governments to create an enabling environment for private investment into increasingthe production of formal affordable housing to respond to effective demand.
Affordable housing delivery will need to be complemented by strengthening of urban management practices to ensure sustainable urbanization. Coordination of housing delivery with strategic urban planning and greater capacity for urban management is critical to ensure that new residential developments are integrated with the delivery of infrastructure, connectivity to social services and economic opportunities to promote the development of sustainable communities. Sustainable urban development is achieved through integrated approaches to urban management that consider environmental, social, economic and institutional factors. This may involve connecting housing policy to participatory planning with communities, procedures for on-going maintenance, economic development activities, energy efficient and ‘green’ buildings, mixed-use zoning, density considerations, linkages to existing urban areas, and the accessibility for residents to public transport options, schools, healthcare, sports and community services, as well as to employment.
Affordable rental is another tenure option, yet has been traditionally neglected from national housing policies of most countries in the region and has significant potential in expanding access to housing to the lower income. Rental housing has remained a neglected area of national housing policy which has instead focused, often exclusively, on promoting home ownership. Consequently, rental housing has been overlooked with very few governments implementing any kind of policy to help develop or regulate this form of housing and there is a lack of equity options that will encourage the growth of a rental market. Yet, rental housing is a key component ofa well-functioning housing market. An adequate supply of reasonablypriced rental accommodation is likelyto reduce the temptation for poor familiesto mount land invasions or to buy plots inillegal subdivisions.In addition, housing tenants increasepopulation densities, reducing urbansprawl and cutting some of the demandfor expensive infrastructure in peri-urbanareas. Finally, renting is sometimes a more suitable tenure option for the youth who are becoming more mobile in order to find employment.While renting is not the panacea to solving the housing challenge in the region, it does constitute a significant and vital housing tenure option that should be promoted alongside homeownership.
Overall the region’s housing finance markets are undeveloped with significant impact on affordability. Figure 1 below sets out the most recent data in terms of the size of the residential mortgage markets in the countries being covered as part of the proposal. Even within the region there are marked disparities, but all countries have far lower levels of penetration than developed economies where on average across EU the mortgage debt/GDP is over 50 per cent and reaches over 70 per cent in US and UK. The reasons for the lack of development are many and varied, ranging from issues with land titling and property registration, credit risk management, foreclosure, as well as scarcity of capital andaccess to long-term funds.

Figure 1–Residential Mortgage debt to GDP - (most recent data available)

Source: World Bank mortgage database collated from Central Banks and other national sources.

The availability of suitable housing finance for low and middle income groups is an important driver of affordability and a condition for transforming the population's housing needs into effective demand.Specifically, the region lacks appropriate financial products for lower income groups – such as housing microfinance, and appropriate mortgages for new housing, as well as upgrading to bring substandard housing up to par and improve living conditions. The availability oflong-term housing financemakes housing more affordable by spreading large investment costs overtime, and limits exposure to volatile payments by the use of fixed interest rates. Without such a system lending remains short term and translates into prohibitive terms for lower and middle income groups.

C.Alignment with the Transition Fund objectives

This project is a timely response to the increased priority placed on improving living conditions as well as generating opportunities for growth and employment by the targeted transition governments following the Arab Spring upheavals.