Public Disclosure Authorized IEG ICR Review Independent Evaluation Group 1. Project Data: Date Posted : 02/16/2010 Report Number : ICRR13109 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized PROJ ID : P101342 Appraisal Actual Project Name : Mx Affordable Project Costs (US$M US$M): 200.5 200.5 Housing And Urban Poverty Reduction Development Policy Loan III Country: Mexico Loan/Credit (US$M US$M): 200.5 200.5 Sector Board : UD Cofinancing (US$M US$M): Sector(s): Other social services (35%) Housing finance and real estate markets (25%) Central government administration (20%) Law and justice (10%) Sub-national government administration (10%) Theme(s): Access to urban services and housing (25% - P) Personal and property rights (25% - P) Municipal finance (24% - P) Other public sector governance (13% - S) Poverty strategy analysis and monitoring (13% - S) L/C Number: L7491 Partners involved : Evaluator : Panel Reviewer : Group Manager : Group: Roy Gilbert James Sackey IEGSE ICR Reviews IEGSE 2. Project Objectives and Components: Board Approval Date : 11/27/2007 Closing Date : 06/30/2008 06/30/2008 a. Objectives: According to Program Document Loan and Program Summary (p. ii): Specific objectives : (a) to support the Government s efforts to improve national policies and institutions for housing and urban development (b) to make the federal housing system more efficient by designing and implement a unified system of subsidies to facilitate access to housing by low and moderate -income families
(c) to bolster systems for housing loans and savings and move them down -market. (d) to strengthen urban real property registries and rights. (e) to increase the supply of and access to urban land for poor people and improve this market s functioning (f) to coordinate and support physical and social investments in poor neighborhoods (g) to increase the capacity to prevent and manage the damage caused by natural disasters [IEG comment: These objectives were similar to from those of the prior HUDPL-II operation] b.were the project objectives/key associated outcome targets revised during implementation? No c. Components (or Key Conditions in the case of DPLs, as appropriate): This operation, called HUDPL-III here, was triggered by 5 prior conditions, summarized below across the 4 thematic areas covered by the project. (i) Macro-framework : Maintenance of a sound macro-economic framework that is consistent with HUDPL -II's policy objectives and programs. (ii) National housing policy and institutional framework : - none (iii) Housing subsidies : GOM has reformed existing subsidy system to improve equity across program; prevent combining subsidies from multiple federal programs; establish consistent rules for beneficiary selection, including by income group; and link receipt of subsidy to household savings through (i) design of operational rules, corresponding budget allocation (2007) and implementation of a new federal subsidy program; and (ii) modification of operational rules of existing subsidy programs. (iv) Housing credit and household savings : SHF mainstreams financing of home improvement, addition, and purchase of existing housing in accordance with the standards agreed between GOM and the World Bank through the introduction of new partnerships and product for housing micro -finance. (v) Urban property registers and rights : Modernization of property registry systems in eleven more states.. (vi) National urban policy, slum upgrading and institutional strengthening : - none (vii) Low and moderate -income land development : - none (viii) Natural disaster prevention and management : - none d. Comments on Project Cost, Financing, Borrower Contribution, and Dates: As is normal practice for DPLs, project costs are regarded as being identical to the loan amount. The HUDPL-III loan was originally intended to be US$100 million. But, at the request of GOM that sought to ease its domestic borrowing requirement, it was raised to US$200.5 million. HUDPL-III was appraised and disbursed one year later than planned to give time for the new Calderon administration to get on board. 3. Relevance of Objectives & Design: Rated Modest : HUDPL-III objectives, the same as HUDPL-II's, were modestly relevant to the four pillars of the 2004 Country Partnership Strategy (CPS), namely poverty reduction, increased competitiveness, institutional strengthening and environmental sustainability. Many ambitious objectives scattered across too many areas where key actions were not always aligned helped undermine relevance. They remain modestly relevant to the more recent 2008 CPS, and its emphasis upon streamlining Bank assistance to Mexico, especially through DPLs. Like its predecessor HUDPL-II, HUDPL-III was less relevant to CPS poverty reduction goals for not referring to poverty reduction as the overall objective of the Program. On the housing side, the objectives remain modestly relevant to country policy that similarly sets poverty reduction as a modest priority for the housing sector, as opposed to increasing housing supply as a whole. This is formulated in Mexico s National Housing Program 2007-2012, an integral part of the country s national development plan for that period, with its priority emphasis upon seeking greater equality of opportunity in Mexico for all people in all sectors, especially housing. On the urban development side, HUDPL-III s ongoing relevance is more difficult to assess, since the equivalent. National Urban Development Program 2007-2012 has yet to be published at this writing. HUDPL-III design was modestly relevant for including prior actions that were not always directly related to the operation s objectives. No prior actions were identified for four of the eight areas covered by the project. Several chosen prior actions were not of sufficient scale that the achievement of the objectives demanded. The relevance of the project design was undermined for still leaving out, as HUSAL -I and HUDPL-II did, key players, notably INFONAVIT and FOVISSSTE, of the housing side of the project. Also, the project design did not make the roles of SEDESOL and CONAVIT on the urban development side of the operation clear. The relevance of the design were further challenged by the ongoing disconnect between the housing and urban development sides, and by the overall coordination responsibilities of SHF s (Sociedad Hipotecaria Federal - Federal Mortgage Company) whose writ did not run to INFONAVIT and FOVISSSTE that finance most of Mexico's mortgage loans. In later comments on this evaluation, the Country Department confirmed that the participation of INFONAVIT, a large off -budget organization, was indeed beyond the scope of the program supported by these DPLs.
4. Achievement of Objectives (Efficacy): (a) to support the Government s efforts to improve national policies and institutions for housing and urban development - modestly achieved. The complex institutional framework with unclear, overlapping and sometimes conflicting responsibilities between agencies remained unchanged. The volume of SHF/Sofoles mortgages that were securitized increased significantly and SHF introduced mortgage insurance for the first time. (b) to make the federal housing system more efficient by designing and implementing a unified system of subsidies to facilitate access to housing by low and moderate -income families - negligibly achieved. CONAVI took over the distribution of up-front subsidies--previously PROSAVI's--through the Esta es tu casa program. Evidence of the income levels of the recipients of these subsidies is thin, making it impossible to verify how low and moderate -income families may have gained better access to housing. Little changed in Mexico's housing subsidy system in which below market interest rate subsidies in loans awarded by INFONAVIT and FOVISSSTE are the most generous to borrowers and continue to predominate. HUDPL-III identified no new prior actions on top of HUSAL -I's. (c) to bolster systems for housing loans and savings and move them down -market - modestly achieved. No systems changes were achieved under HUDPL-III and SHF/Sofoles mortgage lending continued to move up -market, the opposite of what was intended. The sharp expansion of short-term SHF micro-credit in 2007 to moderate income households had a minor impact upon the volume of housing finance made up mostly of long -term mortgage lending. The volume of new short-term micro credit lending, that can be recycled many times over a given period, cannot be compared with the volume of new long-term mortgage lending that ties up funding for extended periods even when securitized. (d) to strengthen urban real property registries and rights - substantially achieved. Progress was made in modernizing and standardizing these registries under the prior loan was extended under HUDPL -III to 18 of Mexico's most populous states. Some of them received direct project assistance from the Inter -American Development Bank too. (e) to increase the supply of urban land and access by the poor and improve this market s function - negligibly achieved. As under the previous loan, there is no evidence of a greater supply or better access by the poor arising out of the HUDPL-III. An effective Bank/SEDESOL dialogue had ceased under HUDPL-III. HUDPL-III identified no new prior actions on top of HUSAL-I's. (f) to coordinate and support physical and social investments to systematically upgrade poor neighborhoods - negligibly achieved. Bank/SEDESOL dialogue on this ceased. Most support to SEDESOL came from the Inter-American Development Bank (IADB). HUDPL-III identified no new prior actions on top of HUSAL -I's. (g) to better prevent and manage the impacts of natural disasters - negligibly achieved. No more significant progress beyond that under the earlier loans was made. Bank/SEDESOL dialogue nor effective. HUDPL-III identified no new prior actions on top of HUSAL-I's. 5. Efficiency (not applicable to DPLs): a. If available, enter the Economic Rate of Return (ERR ERR)/Financial Rate of Return (FRR FRR) at appraisal and the re-estimated estimated value at evaluation : Rate Available? Point Value Coverage/Scope* Appraisal % % ICR estimate % % * Refers to percent of total project cost for which ERR/FRR was calculated. 6. Outcome: As with the previous operations, there was negligible achievement of half the objectives. The strongest achievement was still with modernizing property registries. There was some recovery of mortgage lending, but the SHF/Sofoles system was still moved up-market, a trend that could not be reversed by SHF's new micro -credits to moderate income households that grew rapidly, but still carry little weight in the housing finance market made up mostly of mortgage loans and construction finance. a. Outcome Rating : Moderately Unsatisfactory
7. Rationale for Risk to Development Outcome Rating: The significant risk comes from three directions. First, the continuing complexity of the sector's institutional framework and overlapping and sometimes conflicting responsibilities among key actors within it. Second, the distortions and inefficiencies of the unreformed and increasingly prevalent housing finance and subsidy model of INFONAVIT and FOVISSSTE. Third, the present market aversion to secondary mortgage financing through investment in securities of any kind in the current financial crisis, after which confidence in these instruments is likely to be restored slowly.. a. Risk to Development Outcome Rating : Significant 8. Assessment of Bank Performance: Preparation was prompt, building exactly upon the framework of HUSAL -I. Some minor revisions to the objective statement of HUDPL-II toned down a few of the least realistic aims. But one, making housing subsidies more efficient, was more ambitious than before. Even though prior actions were identified in only half the areas covered by this operation, the scope of its intended outcomes was not reduced. Thus, there was no substantial improvement in the QAE of HUDPL-II over HUSAL-I. Typically of a policy operation, supervision was very light leaving the overall direction of the operation's achievements and dynamic changes to prior conditions unsupervised. Thus supervision has little weight in the rating of overall Bank performance. a. Ensuring Quality -at at-entry Entry:Unsatisfactory b. Quality of Supervision :Moderately c. Overall Bank Performance :Unsatisfactory 9. Assessment of Borrower Performance: While GOM formally supported the objectives of HUDPL -III, and embarked upon new housing policies, not all the sector policy reforms inferred by the DPLs took place, notably those with respect to housing subsidies and on facilitating the supply of urban land. Under HUDPL-III, GOM's top priority for large scale housing delivery became even clearer with President Calderon's target of 1,000,000 units per annum. SHF/Sofoles mortgage lending began to move up-market under HUDPL-III. Large short-term borrowing from commercial banks by SHF in response to growing demand for mortgage loans (in spite of the expansion of securitization ) let SHF's balance sheet weakened. Under HUDPL-III, GOM/Bank dialogue on the urban development side of the project had practically ceased. a. Government Performance :Moderately b. Implementing Agency Performance :Moderately Unsatisfactory c. Overall Borrower Performance :Moderately Unsatisfactory 10. M&E Design, Implementation, & Utilization: The design of M&E for HUDPL-III showed no improvement upon the very weak (almost non-existent) arrangements made under HUSAL-I and HUDPL-II. HUDPL-III continued to use the 2005 baseline data of its predecessor HUDPL-II. But M&E under HUDPL-III continued, like its predecessors, to lack target data. The weaknesses of M&E design were not recognized at appraisal. Nor were they addressed during supervision. The lack of unambiguous reference to the income levels of the poor target groups for housing and urban development remained, as they had for the earlier operations. Yet affordable housing and urban poverty remained in the title of the HUDPL-III operation. Like its predecessors, the HUDPL-III made no use of the readily available data on income distribution in Mexico. These design shortcomings, particularly with respect to the lack of targets and clear idea of the intended beneficiaries, meant that M&E could not be effectively implemented under HUDPL -II. Neither could M&E be utilized to help assess HUDPL -III achievements when there were no explicit targets for M&E to monitor in any of the areas covered by the operation. The M&E failing is partly the result of the limited availability of consolidated information on the housing and urban development sectors in Mexico, in spite of the ready availability of good quality partial data on many sub -sectors of
them. a. M&E Quality Rating : Negligible 11. Other Issues (Safeguards, Fiduciary, Unintended Positive and Negative Impacts): 12. Ratings: Risk to Development Outcome: Outcome: Moderately Bank Performance : Moderately Borrower Performance : Moderately Quality of ICR : ICR IEG Review Moderately Unsatisfactory Reason for Disagreement /Comments Negligible achievement of half of objectives. Substantial achievement on property registries. Some recovery with mortgages, but housing lending still not going down-market Moderate Significant Currently--and for the foreseeable future--market demand for the housing finance instruments sponsored by the operation, especially mortgages, is weak. Unsatisfactory Moderately Unsatisfactory NOTES: - When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006. - The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate. Continued design weaknesses with too much attention to housing actions and too little to urban development actions. Failure of SHF to take mortgages down-market and unwillingness of GOM to take a stand on housing subsidy reform. 13. Lessons: From the ICR: There are trade offs between ambitious and comprehensive sectoral reform programs, which are potentially more beneficial, but inherently more risky, and more focused programs that address a limited range of issues for which both the potential benefits and risks are lower. The Program s relevance decreased when there was no coherent Government policy established in the sector where the Bank intervened, like urban development. A policy-based loan is not the best instrument to address technical issues requiring considerable investment and which are not backed by an adequate policy framework. Instead, a combination of policy and investment loans might have been more effective in meeting the Program s goals. Combining policy and investment loans at the same time, however, might have crowded out other important activities. Inefficiencies and redundancies were produced due to the involvement of too many institutions, which were often at odds with each other over policy issues. This was largely due to the large number of components and sectors under the umbrella of the Program. A more focused approach, as previously mentioned, could have reduced these inefficiencies and redundancies. The comprehensive nature of the Program required that adequate M&E provisions be written into the design of the operation; however this was not done until preparation of the second operation was well advanced. HUTAL should have played a role in fixing the shortcomings of the Program and its implementing institutions in this area. The timing of HUTAL should have been better aligned with the Program in order to provide added value to each component. Additional lessons from IEG: The expected outcomes and scope of an operation should be subject to several reality checks at appraisal. An important one is to ensure that essential partners such as INFONAVIT in this case are fully on board and committed to the operation. If they are not, or cannot be engaged for reasons of political economy, then the
scope should be contained to cover more modest outcomes that can reasonably be obtained without such partners. In large and sophisticated middle-income countries like Mexico, an operation should avoid promising sector-wide reforms when commensurate results cannot be realistically achieved in the short timeframe and with the relatively modest scale of assistance offered. Housing finance through mortgage lending encounters an affordability floor. Experience in Mexico shows that poorer households below the 40 th percentile of the income distribution cannot afford the cheapest formal housing unit through a market-based mortgage loan without a subsidy. An affordability floor like this will vary from country to country depending upon household income levels, house prices and interest rates. Operations aiming to support affordable housing and urban poverty reduction need to be explicit about their target beneficiary populations, with quantification of baselines and targets, and at completion, achievements. Contrary to down-market aims, establishing a sound reputation in financial markets and sustaining a high quality and expanding portfolio can lead a new mortgage financier up -market, by targeting higher income borrowers with larger loans. Markets perceive such loans as less risky. They are also less costly to manage and contribute more to business growth. 14. Assessment Recommended? Yes No Why? 15. Comments on Quality of ICR: This is a satisfactory ICR that, covering all three SALs /DPLs, is a complex self-evaluation exercise. It is clear and accurate in laying out the multiple objectives and actions of each operation in the series. In view of the challenge of attributing sector results to the operations, the ICR is realistic and cautious is claiming what has been achieved. It is also candid about the shortcomings and failings of them. It brings a significant body of evidence to bear upon the self-evaluation findings, and explicitly recognizes when such evidence is lacking. The ICR assessment is weakened however, when it argues that the achievement of only three of the original eight objectives need feed into the final ratings. Unless, they have been reformulated or removed through a formal process of project restructuring, it is important that an evaluation includes a complete assessment of all of them. The ICR provided useful lessons from this rich learning experience, that are especially relevant as the Bank undertakes more DPLs across different sectors. a.quality of ICR Rating :