PROGRAM EXPENDITURE AND FINANCING ASSESSMENT

Transcription

1 Affordable Rural Housing Program (RRP UZB 50022) PROGRAM EXPENDITURE AND FINANCING ASSESSMENT 1. The program expenditure and financing assessment reviews the extent to which the new revised State Affordable Rural Housing Program (SARHP) of the Government of Uzbekistan has a clearly defined expenditure framework that enables the Asian Development Bank (ADB) to provide support via the Affordable Rural Housing Program (ARHP), using the results-based lending (RBL) modality. A. Expenditure Framework 2. An expenditure framework, as defined by ADB, is used to make an RBL program operational and ensure the priorities and costs are realistic. It may be supported by a mediumterm expenditure framework (MTEF) that may in turn be part of a sector expenditure framework. 1 The program expenditures and financing must form part of the government s budget and should be well-defined i.e., (i) comprehensive and realistic in the revenues and proposed spending coverage; (ii) clearly defined in the budget classification system; and (iii) include information on key expenditure composition (e.g., reflected as shares of salaries, operating and capital spending, and spending on key activity types). 3. The government places a high priority on the SARHP. Total annual expenditures under the previous State Rural Housing Program have increased annually, from $44 million in 2009 to $905 million in The government s financing share has accounted for around 40% of actual expenditures during The Ministry of Economy (MOE) does not have an MTEF for rural development, or for the housing sector as a whole. 2 However, in 2016 MOE prepared a Program for Construction of Affordable Housing with Updated Standard Designs in Rural Areas for , which includes multi-year output-based expenditure and financing projections for the SARHP. 3 The projections are not prepared within the context of a fiscal framework intended to ensure that the estimated annual state budget shares are eventually linked to matching resource allocations; as a result, the linkage between the multi-year estimates and subsequent annual budgets is weak. The five-year plan provides a conceptual framework for focusing on the rural housing sector, while the government s annual budgets aim to control the allocation and use of funds. 5. The SARHP program document (footnote 3) will serve to guide development of the rural housing sector and related infrastructure to meet the need for affordable housing outside urban areas. It forecasts construction of 75,000 housing units over the five-year period, and related infrastructure for road networks, water supply, and the supply of gas and electricity. The expenditure forecasts are based on detailed estimates for the unit costs for housing (using a standard three-room apartment in a multi-apartment building, a three-room house on a 200 sq.m. lot, a four-room house on a 400 sq.m. lot, and a four-room house on a 600 sq.m. lot as averages for calculation purposes) and infrastructure (using length [km] as the basis for calculations). The costs have been calculated using 2017 estimates developed for through the use of deflators. 4 1 ADB Staff Guidance for Piloting Results-Based Lending for Programs. Manila, p The government s National Rural Development Program aims to stimulate rural economic activity and provide job opportunities. It includes an integrated approach to rural community development. 3 Ministry of Economy and Ministry of Finance Program for Construction of Affordable Housing with Updated Standard Designs in Rural Areas for (Draft). Tashkent. 4 The Ministry of Finance has used the following deflators for housing construction 2018: 7.0%; 2019: 5.0%; 2020: 5.0%; and 2021: 5.0%. Deflators for related infrastructure are 5% to 15%. Given recent macroeconomic developments in Uzbekistan, these values appear reasonable. The conversion of local currency cost estimates in dollars is based on the following annual average exchange rate projections 2017: $1.00 = SUM3,555; 2018: $1.00 = SUM3,893; 2019: $1.00 = SUM4,262; 2020: $1.00 = SUM4,667; and 2021: $1.00 = SUM5,111.

2 2 6. The SARHP construction program includes an overview of the projected expenditures for housing and related infrastructure, which covers all direct costs. The expenditure framework does not include the value of land (this is provided at no cost by the government), 5 or other in-kind government contributions or incentives, including tax exemptions. 6 Table 1: Expenditure Framework for the State Affordable Rural Housing Program, ($ million) Total Share (%) Housing , Infrastructure MMU capacity development and operating costs a Total , Share (%) MMU = management and monitoring unit. a Includes MMU operating expenses for Note: Numbers may not sum precisely due to rounding. Source: Ministry of Economy and Ministry of Finance Program for Construction of Affordable Housing with Updated Standard Designs in Rural Areas for (Draft). Tashkent. Annexes Total SARHP costs are estimated at $2,724.7 million, including $2,445.6 million in housing construction costs (89.76%), $ million in related infrastructure costs (10.21%) and $1.0 million in MMU capacity strengthening and operating costs (0.04%) (Table 1). Total cost allocations per year are about 18% 24%. The inclusion of housing and infrastructure expenditures produces a comprehensive projection of the expenditures needed to ensure a fully operational SARHP. 8. ADB has reviewed the unit cost calculations underlying the SARHP expenditure framework as made available by MOE and the Ministry of Finance (MOF). The cost figures are based on detailed calculations of standard design requirements, as prepared by and approved by Qishloq Qurilish Invest (QQI) and Qishloq Qurilish Loyiha (QQL), 7 and the cost calculations are vetted by MOF. MOF has also made assumptions about the future exchange rate, price deflator, and minimum wage. On that basis, ADB considers the SARHP expenditures to be realistic in terms of prioritization and coverage. 9. The key elements of the SARHP estimated expenditure needs for housing and infrastructure over the full 5-year period are in Table 2. 5 District hokimiyats (local governments) are required to provide SARHP housing sites from state reserve land, assure that the sites are approved for residential use in accordance with state regulations, and coordinate access to basic infrastructure and utility services. Home buyers have a right of use, but not actual ownership of the land. 6 Tax exemptions are provided to home buyers (mortgage payment tax credit and property tax over the mortgage period), contractors and suppliers (all taxes and mandatory contributions to state funds [except the Pension Fund], and value-added tax), and Qishloq Qurilish Invest (all taxes and mandatory contributions to state funds and educational institutions). Also, one of the participating commercial banks (QQB) is exempt from profit tax and property tax as well as customs payments (except customs clearance fees) for imported banking equipment and devices. 7 QQI is an engineering company. Through its head office in Tashkent and 13 regional offices, QQI acts as the developer for rural housing construction based on approved model designs. QQL is a design and research institute and the primary organization implementing the government s policy on rural construction.

3 3 Table 2: Estimated Total Costs for the State Affordable Rural Housing Program, ($ million) Components Housing Infrastructure MMU Total Amount Share Amount Share Amount Share Amount Share Equipment and inventory % % % % Construction materials 1, % % - - 1, % Salaries % % % % Operational expenses % % % % Contractor expenses and fees % % % Insurance % % Total 2, % % % 2, % MMU = management and monitoring unit. Note: Numbers may not sum precisely due to rounding. Source: Calculated based on cost data provided by the Ministry of Economy and Ministry of Finance. 10. The largest expenditure component is for construction materials (61.3%), followed by salaries (17.9%) and contractor expenses and fees (11.8%). 11. The following specific observations are made regarding the cost projection (expenditure framework) for the program: (i) Effectiveness. The government s policy papers and regulations set out priorities for inclusive economic growth within the context of the National Rural Development Program (NRDP), as well as a vision to continue development of services in rural areas. 8 The SARHP will support this through construction of housing, based on access to affordable financing, and related infrastructure in rural areas. This will help to raise the quality of life for the rural population both directly (including through better houses and access to clean water) and indirectly (by creating economic activity and employment), and is particularly relevant given that more than half of Uzbekistan s low-income population lives in rural areas. The ARHP will provide funding for construction and help improve governance and capacity of the involved entities, especially QQI. The resources will be used for rural housing and infrastructure and to achieve the development outcome of the ARHP. The SARHP, of which the ARHP is one part, includes an expenditure framework that is developed from detailed calculations of the costs of building standard houses and related infrastructure, and benefits from the experience gathered by the involved state agencies over several years, 9 and takes into account the demand for housing in rural areas. The calculated expenditures appear to correspond with the planned results, and are likely to help achieve the expected program results. (ii) Efficiency and economy. The estimated costs for housing, which make up about 90% of total SARHP expenditures, are based on a detailed cost estimate of the technical designs for a standard three-room apartment in a multiapartment building, a three-room house on a 200 sq.m. lot, a four-room house 8 For example, the welfare improvement strategy developed with ADB support (Government of Uzbekistan Welfare Improvement Strategy for Tashkent.) and the Program for Accelerated Development of the Service Sphere in Rural Areas. 9 The ARHP is in practice an extension of the support that ADB provided during ADB Report and Recommendation of the President to the Board of Directors for the Proposed Multitranche Financing Facility for the Housing for Integrated Rural Development Investment Program. Manila.

4 4 (iii) on a 400 sq.m. lot, and a four-room house on a 600 sq.m. lot (the latter design is expected to be phased out after 2017), used as an average cost of dwelling units that will be built in each massif (housing site). The technical designs have been prepared by QQL and the related cost estimates by QQI. MOF has assessed the cost data, and (with consideration of historical cost patterns and potential cost-savings) developed an expenditure item-based unit cost for housing (Table 2); this unit cost has been discussed and agreed with MOE. Similar approaches have been applied by MOF for related infrastructure items with inputs from and consultations with the Republican Road Fund and local governments (roads and water connections), Uzbekenergo (electricity distribution), and Uztransgaz (gas distribution) based on which expenditure item-based unit costs have been prepared. In terms of developing rural housing, the involved entities deem the selected designs to be the best use of the available funds and the most cost-effective in terms of achieving the planned results. Furthermore, the government funds allocated from the state budget (Table 3) leverage a significant amount of private sector funding in the form of down payments, additional payments from the home buyers, and mortgage financing from the participating commercial banks (PCBs). Adequacy. SARHP expenditures projected by MOF and MOE are based on the planned annual housing supply and the estimated unit costs for a standard house and related infrastructure. The land value and tax exemptions have not been quantified because financing for them is not required, and an annual presidential decree ensures that the program remains operational. (Nonagricultural land is made available for rural housing by local governments and taxes are not levied.) The allocation of resources for SARHP, both as a whole and across its components, is calculated to match the expenditure requirements for housing construction and related infrastructure, and is deemed sufficient to generate the planned results. The state agencies involved, including QQI, are assessed to have adequate implementation capacity, and problems with absorption of funds are considered unlikely. B. Financing Plan 12. The program financing plan for is shown in Table 3. Table 3: Financing Plan for the State Affordable Rural Housing Program, Amount Share Source ($ million) (%) Home buyers (down payments and additional payments) Government of Uzbekistan (state budget and SOEs) a 1, Commercial banks (mortgage financing) Asian Development Bank Ordinary Capital Resources Islamic Development Bank Total 2, a The government is discussing two loans in amount of $30 million each with the Kuwait Fund for Arab Economic Development, which are expected to be approved in 2017 and 2018 to co-finance water supply and road infrastructure. SOE = state-owned enterprise. Source: Ministry of Economy and Ministry of Finance Program for Construction of Affordable Housing with Updated Standard Designs in Rural Areas for (Draft). Tashkent, Annex The largest funding source (accounting for 39.3%) is the state budget, which will be used as a resource base for PCBs to provide mortgages and for related infrastructure (roads and water). Part of the government funding is from the state-owned enterprises for electricity (Uzbekenergo) and gas (Uztransgaz) infrastructure. Down payments and additional payments

5 5 by the home buyers will account for 17.5%. The share to be provided directly by the PCBs is 13.8%, while ADB and Islamic Development Bank will cover 18.4% and 11.0% respectively. The program has no financing gap. 14. The government has requested that ADB provide a $500 million loan from ADB s ordinary capital resources to help finance the SARHP program, which will account for 18.4% of total funding. 15. Regarding the mortgage financing to be provided by the PCBs, 70% is planned to come from the three PCBs that will be part of the ARHP, 10 while 30% is to be provided by three other banks. 11 The actual mortgage financing to be provided by the banks will be agreed annually based on the number of houses to be built (outlined in a presidential decree), and the distribution agreed between the government and the banks. 16. Based on the information provided and analyses undertaken above, the following observations are made regarding the financing plan for the program: (i) Adequacy. The financing plan matches the projected and calculated expenditure needs for SARHP. If realized as outlined, it should help ensure achievement of the planned results within the resource envelope. (ii) Predictability and sustainability. The outlined financing plan is assumed to accurately indicate all funding sources except for the share from international financial institutions, as the details of the loans from and formal agreements with these institutions have yet to be established. Also, ADB funding is not disbursed until it is agreed that the disbursement-linked indicators are met, although partial disbursements are possible if an output is partially achieved. 12 Direct funding from the state budget accounts for the largest share (39.3%) of total funding, followed by contributions from home buyers. The latter supports funding sustainability, as does the projected increase in the PCBs share, from 14.5% in 2017 to 15.3% in Given ordinary market developments and macroeconomic circumstances, as well as the continued commitment of the government, it is reasonable to expect that funding will be provided in accordance with the financing plan. Overall, the financing plan appears to be sustainable. C. Managing Risks and Improving Capacity 17. No major risks related to the expenditure and financing aspects have been identified. The public should be able to easily obtain relevant information on the budget allocations, expenditures, and financing of the SARHP. MOE will agree on a template with ADB and publish (annually) a table on a government website that provides a comprehensive overview of the SARHP budget, actual spending, and funding sources. 10 Ipoteka Bank, National Bank of Uzbekistan, and Qishloq Qurilish Bank. 11 Uzpromstroybank (Industrial & Construction Bank), Asaka Bank, and Xalq Bank (People's Bank). 12 If a partial disbursement is made, the remainder of the allocation tied to the disbursement-linked indicator can be disbursed at a later date, once the output has been achieved in its entirety, as long as the achievement is during the ARHP s duration.