review of urban & regional development studies 8 ( I 996)

THE DESIGN OF DIRECT DEMAND SUBSIDY PROGRAMS

FOR HOUSING IN LATIN AMERICA

Bruce Ferguson

Inter-American Development Bonk, 1300 New York Ave. NW, Washington, D.C. 20577, USA

Jacobo Rubinstein and Vicente Dominguez Vial

Abt Associates, 4800 Montgomery Lane, Bethesda, MD 2081 4, USA

Received January 1996, final version July I996

Traditional Latin American housing programs, which have used below-market interest rates to convey subsidies, have suffered from serious vices: high per-unit cost and subsidies, low population coverage, lack of transparency, benefits to the middle-class rather than the poor, and inefficiency. Chile broke out of this flawed traditional mode by launching a housing program that conveys subsidies directly to households in the form of a one-time, non-reimbursable grant This approach has spread to other Latin American countries, increasingly with the support of donors. The paper describes and then analyzes the strengths and weaknesses of direct subsidy programs in Chile, Costa Rica, Colombia, and Uruguay to distill ten design lessons: target to low-income households and ensure political autonomy; replace below-market interest rates with direct demand subsidies; use group mechanisms for low-income households; stimulate supply, not just demand; adjust key amounts for inflation; balance progressivity and financial feasibility; join the efforts of various levels of government; use NGOs; establish mechanisms for on-going consolidation of housing solutions; and include measures to promote broader housing sector reform. The conclusion applies these lessons to the design of a housing pilot project h Venezuela.

I . Introduction

Traditional Latin American housing programs have suffered from serious vices. Typically, they have produced highly subsidized, high-cost solutions. Subsidies have gone largely t o professional and middle-class households through political influence despite a rhetoric that supposedly targets low- income families using objective selection criteria. Given limited resources, these high per-unit costs and subsidies have resulted in low production and low population coverage relative to housing deficits. These programs have usually transferred subsidies in the form of fixed below-market interest rates to contractors and projects (supply). Hence, subsidy amounts have fluctuated widely and only indirectly reached households (demand). I

Governments have developed these housing projects using turnkey methods - often far from jobs, where land is inexpensive. Under “turnkef projects, a government agency: ( I ) specifies the parcel, the design, and the construction criteria for the housing development; (2) contracts out the construction t o a private firm that submits the lowest bid; and (3) selects the household beneficiaries and transfers the units to them. Households have had to accept government’s choice of location

I As inflation, and hence the market interest rate, changes, so does the subsidy amount, which is the present value of the difference between payments a t the market interest rate and the below-market program rate.

6. Ferguson, 1. Rubinstein, and V. Vial, Housing Subsidy Programs in Latin America 203

and the type and quality of the unit in order to gain access to the subsidies. The large private firms often contracted by governments for the construction of these projects have faced l i e risk, enjoyed guaranteed profits, and hence formed an uncompetitive oligopoly. In sum, traditional housing programs in Latin American have proved regressive, untransparent, inefficient, and poorly connected to demand.

Chile broke out of this flawed traditional mode by launching a housing program that conveys subsidies directly to households, i.e. demand, (hereafter called a "direct subsidy") m the mid I ~ ~ O S . ~ In the late 1980s and 199Os, three other Latin American copied the Chilean model - Costa Rica, Colombia, and Uruguay. Direct subsidies are now spreading to other Latin American countries, often w'kh donor support, particularly through the Inter-American Development Bank and the United States Agency for International Development.

Direct subsidies have proved a marked advance over the traditional mode. However, the design of these programs presents challenges. In particular, direct demand subsidy programs have worked much better for moderate-income households than low-income households. Hence, an assessment of the experience in these four Latin American countries that have pioneered housing vouchers has special importance for the emerging programs elsewhere on the continent.

This article summarizes the experience of Chile, Uruguay, Costa Rica and Colombia to distill a

number of critical lessons for the design of direct subsidy housing programs, especially for those directed to low-income households. Data collection for this assessment included field visits to Uruguay, Costa Rica and Colombia, and that served to interview a wide variety of actors and collect operational literature. One author has played an important role in the design and operation of the Chilean direct subsidy housing program.' The article concludes by applying these lessons to the design of a housing pilot project for Venezuela (Ferguson, 1996) sponsored, in part, by the Inter- American Development Bank (IDB). The three authors have participated as consultants in structuring this p r~g ram.~

2 . Key Principles for Direct Subsidy Systems

Government facilitates the private sector, rather than develops or lends directly. Traditional turn-

key methods have given government tight control over the development and operation of social housing. Government decides on the site, the size and design of the units, the quality of construction, the price, the downpayment and the loan amount the monthly payment, and other

' In the Latin American context (that of this paper) "direct subsidy" refers to a non-reimbursable grant - typically funded by government - to households for the purchase, rehabilitation, o r new construction of an owner-occupied house. This direct subsidy can take - bve need not take - the form of a voucher. A "voucher" K a direct subsidy that can be redeemed for cash (typically by the contractor/developer. rather than the household on delively of a finished unit) that households can use on any solution that meets basic eligibility standards. A "direct subsidy" that is not a voucher has more limited use, i.e. "portability." For example. households may be able to use direct subsidies that are not vouchers only on projects built by government Conway and Mikelsons' survey of direct subsidy programs shows that they are widespread throughout developed and emerging countries. However, the Latin American form - a grant for home ownership - is unusual. In other countries, direct subsidies have more often gone to support monthly payments of low/modetate-income families for rental housing.

These entities include government housing agencies, private-sector developers, and NGOs. Jacobo Rubinstein conducted the field visits to Colombia, Venezuela, and Costa Rica. Vicente Dominguez Vial provided first-hand information on Chile. ' Vicente Dominguez Vial.

The information and opinions contained here are entirely those of the authors and do not reflect those o f the Inter-American Development Bank or any of its affiliated institutions.

204 6. Ferguson, J. Rubinstein, and V. Viol, Housing Subsidy Programs in Latin America

factors. Government develops the units, selects beneficiary households, lends to these households, and collects on the loans. The private sector may perform the construction of units under turnkey programs, but little else. Households must accept government's choices if they want access to the large subsidies typically contained in these developments.

In contrast, direct subsidy programs have sought to use the private sector for the development and finance of housing. These programs try to privatize the selection and purchase of land, design and construction of units, construction finance, marketing of units to households, and household loans. The rationale is that competition will make the private sector more responsive to household demand than government. The private-sector agents include for-profit and non-profit developers, financial institutions, construction contract0 rs, and "promoters,"6

Traditional Latin American housing programs often purport to assist the poor. In practice, they usually end up transferring much greater amounts of subsidies to middle and upper-income households than to low and moderate-income households. Indeed, the structure of these programs sometimes consistently excludes low-income households from benefits. For example, the social housing programs of many Latin American countries have derived their funding from forced "social security" contributions.' Households and employers in the formal sector must pay some share of monthly payroll into this social security fund. Typically, this fund ends up providing large subsidies mainly for middle and upper-middle income housing. As the fund remains uncorrected for inflation, it quickly decapitalizes. Thus, such "social security" contributions often amount to a payroll tax in practice.

Direct subsidy programs seek to transfer a greater subsidy amount to lower-income households. Because of the difficulties of accurately measuring household income in countries where the informal sector is large, direct subsidy programs typically use the cost of housing solutions as a proxy for income. Direct subsidy programs usually seek to deliver more in subsidy to lower-cost units - which, it is assumed. tend to go to lower-income households - than to higher-cost units.

Beneficiary selection in direct subsidy programs often occurs through a point system (as in Chile, Uruguay, and Venezuela) that rewards both household need and savings. The criteria for need include households' size, income, and existing shelter and infrastructure. The criteria for saving include the amounc regularity, and length. Periodic competitions select the households with the greatest number of points to receive the direct subsidy. The emphasis on savings - which is the key factor in winning a subsidy given relatively constant need - transforms the incentive structure for low-income housing programs. Traditional Latin American housing programs - which use only need as a selection criteria - have encouraged households to act and say they are poor, and to seek

Target benefits progressively to low-income households thot save.

"Promotion" involves informing and counseling households about direct subsidy programs, assisting in communication and the flow of information and documents between formal-sector financial institutions and builders and these low-income households, and - sometimes - preparing construction designs and cost estimates. Thus, "promotion" in Latin America bears similarities to rhe "home counseling" that often accompanies low- income housing programs in the United States, Canada, and Western Europe.

For example, under Venezuela's National Housing Law (Ley de Politica Habitacional). which started operating in 1991, Venezuela has required that employers pay 2 percent of payroll and tha t employees pay I percent of payroll into the "Fondo de Ahorro Habitacional." This sum is supposedly a contribution into a social security account for the employee. However, it remains uncorrected for inflation, which exceeds 50 percent per annum, and quickly loses its real value. The fund then ends up providing a large subsidy (typically, 60 to 80 percent of the purchase price of a US$I 5.000 home) to middle and upper middle-income households for home purchase channeled through financial institutions in the form of below market-rate loans. In conuast, lowlmoderate income Venezuelan households typically can afford homes of only US$2.000 to f6,MlO. See Ferguson. 1994. Many other Latin American countries have or have had similar schemes for social housing,

0. Ferguson, 1. Rubinstein, and V. Vial, Housing Subsidy Programs in Latin America 205

political patrons for help in gefting subsidies. Rewarding savings as well as need gives households the ability to compete h the selection process and encourages investment.

Government and households share responsibility for financing the housing solution. The Chilean experience has established the financial model for household finance under direct subsidy programs. It consists of three parts: the downpayment, the direct subsidy, and a market-rate mortgage loan. Households must save a minimum downpayment to compete and receive the direct subsidy. The direct subsidy is a non-reimubursable one-time grant to households. A market-rate mortgage loan makes up any gap remaining between the sum of the subsidy plus the downpayment and the total unit cost for moderate-income households. Financial institutions qualify families for these loans.

Sizing the amounts of the downpayment, the direct subsidy, and the mortgage loan is the main key t o the financial feasibility of these programs. The policy and operational challenges of sizing the amount of the direct subsidy determines the size of the other two financing components. If the direct subsidy is too small (and, hence, the downpayment andlor the mortgage loan are too large) households are either unable to save the downpayment amount in a reasonable period of time (typically, two years) andlor unable to support the necessary debt service. In effect, a small voucher threatens the financial feasibility of units. If the direct subsidy is too large, the program runs the risks of low population coverage and poor targeting by becoming highly attractive to professional and upper-income households.

In sum, direct subsidy programs should result in striking advances over traditional housing programs. Traditional programs are regressive, unttansparent, poorly connected to demand, and poorly targeted. In principle, direct subsidy programs are progressive, transparent in their beneficiary selection (through a point system to select beneficiaries and a one-time non- reimbursable grant), demand driven because of the competition among private sector agents that perform key functions (development, lending, promotion etc.), and targeted to low-income households. Not surprisingly, direct subsidy programs fall short of these ideals. The next section describes and contrasts the experience of four Latin American countries with direct subsidy programs.

3 . Direct Subsidy Housing Programs in Chile, Uruguay, Costa Rica, and Colombia

3.1 Chile

Chile has proved unusually fertile ground for direct demand subsidies to housing and has served as a model for other Latin American countries (Rojas and Green, 1995). Chile started its housing direct subsidy programs in 1976, when the country suffered from many of the macro- economic and financial problems other Latin American nations continue to grapple wid^ - large government deficits, high and fluctuating inflation, and inconsistent growth. Chile has now largely overcome these problems.* Since I99 I, Chile has produced more units of formal-sector housing d-~an the number of new households formed. Hence, the country's housing deficit has decreased. Land invasions and the creation of new informal settlement - which still plague much of the rest of Latin America - no longer occur in Chile.

Chile's direct subsidy program has proved a key element in this decline in the housing deficit. The country now has a wide variety of direct subsidy housing programs. Each of these programs

Real economic growth averaged 6.3 percent per annum from 1983 to 1994. Unemployment is around 6 percent; inflation is in single digits. Savings exceeded a quarter of gross internal product for 1994 and 1995. Central government runs a fiscal surplus.

206 B. Ferguson, J. Rubinstein, and V. Vial, Housing Subsidy Programs in Latin America

covers a different income range. Chile has attempted to establish a set of common principles and mechanisms in the programs, including those now shared broadly by other countries using direct housing subsidies enumerated above (in Section 2): (a) selection of beneficiaries through a point system that rewards both household need and saving; (b) progressivity - lower-income households are to receive a greater absolute amount in subsidy than higher-income households; (c) demand- driven use of the direct subsidy; rather than government development of projects through turnkey methods, these programs attempt to delegate the development and finance of housing to the private sector and have households choose among private-sector providers; and (d) three financial components t o home finance - a downpayment, a direct subsidy that decreases as income increases, and a market-rate mortgage.

However, Chile has violated all of these principles at some point in its housing program system. In general, direct subsidies have worked as intended for middle and upper middle income households, but have failed to follow these principles for lowlrnoderate-income families. Middle- income households compete through a point system that rewards need and savings. The winners receive the direct subsidy h the form of a voucher, and individual households then shop among the products offered by private developers and are able to acquire mortgage finance at market rates from commercial finance institutions (to make up the difference between the value of the voucher plus the downpayment and the purchase price)!

In contrast the three Chilean direct subsidy programs targeted to low-income groups fail to follow this model (Rojas and Greene; Uniapravi, 1995).1° Rather, government develops the units through turnkey methods and finances the purchase of them directly through a subsidy (for the two lowest income programs) or rediscounts loans to these low-incomes households (for the third program). Thus, lowlmoderate-income households cannot freely choose among units. They must accept the units developed and financed by government. These three programs operate only

through two financing components - a direct subsidy to households and a required minimum downpayment that households must save. The main reason for these drawbacks is the lack of interest of private developers and financial institutions in serving lowlmoderate-income groups. Two recent innovations, however, hold promise for making these three programs for low-income households more demand driven and suited to the needs of these groups." They are: (a) use of

The Chilean housing system uses a direct subsidy in the form of a voucher that completes a downpayment and a market-rate mortgage loan only for middle-income groups - households in the third income quintile. Thus, subsidy Certificates I, I I , and 111. which encompass the middle-income range, are the core of the direct subsidy system in Chile. Even here, however, the system functions fluidly only for the upper range of middle income. For example, many commercial financial institutions offer the debt finance to households necessary to complement the voucher and the downpayment in the top of these three categories - for Certificate 111. Only a couple of financial institutions, however, are willing to serve the lower rungs - Certificates I and 11.

lo The first program directed at low-income households - the Basic Housing Program (BH) - finances a 34 to 40 square meter (m') unit on a lot of 100m' in two phases. BH conveys a subsidy of US$3,950, and requires that households contribute $310 as a downpayment Production under this program has averaged around 25.000 units per year over the last decade. The Basic Housing Program, however, failed to reach the lowest income groups. Hence, the Chilean government launched the Progressive Units Program (FU) to cover the poor - earning US$O - 85 per month. PU also has two phases. A third program - the Workers Program - targets lowhnoderate-income households that earn somewhat more than those eligible for the Basic Housing Program.

I I Previously, households had to apply to these programs individually. Now, they can participate collectively. Households, rather than individuals, organize into groups tha t apply, compete for the subsidy, and move together into the development The collective mode has demonstrated better performance by encouraging households to save more and t o assemble necessary documentation, and by creating a sense of community. Second, private-sector entities can now develop these projects. Under the "private mode" as it is called, the government (MINVU) evaluates the technical and economic feasibility of projects that have been approved by applicants to the program. Private developers can receive construction finance with advances from the subsidy,

B. Ferguson, 1. Rubinstein, and V. Vial, Housing Subsidy Progrorns in Lotin Americo 207

direct subsidies by groups of low-income households that make some of the key development decisions rather than individual households that must accept the decisions of government; and @) more involvement of the private sector in development.

The Chilean system also violates the principle of progressivity at various points. It transfers more in subsidy in various guises (below-market interest rate loans and rediscounted loans that complement vouchers at less than par) to higher income households than lower income households.

3.2 Uruguay

The relatively short experience of Uruguay with direct subsidies demonstrates some similar strengths and weaknesses to that of Chile. Uruguay is a relatively small, well-off country, with a population of 3,100,000 that is growing slowly (0.6 percent per annum). Housing represents a manageable problem. I 2 The direct subsidy program of Uruguay started in 1992, stimulated largely by an Inter-American Development Bank (IDB) loan and technical assistance. Personnel contracted by IDB - not employees of the government - have managed this program. It has currently disbursed all of i t s funding.

The program allows for use of a direct subsidy to: (I) acquire a basic unit of 30 square meters (Nucleo Basico Evolutivo - NBE) or an existing unit that meets program criteria for the lowest income groups, earning from 0 to 30 URs (Unidades Reajustables - URs, the Uruguayan constant value unir (2) purchase new or existing housing for the next income groups, households earning 30 to 60 URS; (3) construct a unit on a house owned by the beneficiary; and (4) purchase a lot. Options three and four have yet to f~nct ion. '~ Thus, the program has financed existing and new housing. The program sets price ceilings for each subsidy level.

As in Chile, the Uruguay direct subsidy program succeeds in using demand-driven mechanisms only for middle-income households, and continues to produce low-income housing through traditional turnkey production. The financial structure of the program for the lowest incpme households for the NBE has consisted of: (I) a direct subsidy of up to 93 percent of the cost of the unit (a maximum US$15,400); and (2) a 7 percent downpayment. The Housing Ministry develops the NBE through turn-key contracts witfi the private sector. In contrast, the program provides a

voucher - declining in amount as income rises - t o middle-income households. Households can use this voucher to purchase either existing or new units. The financial structure of the program for these middle-income groups resembles that of Chilean middle and upper-middle-income families. consisting of ( I ) a voucher; (2) a mortgage loan; and (3) a downpayment

Uruguay, as Chile, has sought to make the program more demand-driven for low-income households by requiring the use of direct subsidies by groups of families rather than individual families. Increasingly, organized groups of low-income households assisted by NGOs make key development decisions such as the parcel of land to purchase, the design of the units, and b e selection of the contractor.

downpayment, and the household loan. Thus, the collective and the private modes increase household choice, but not as much as a portable voucher.

I 2 The number of housing units (980,000) exceeds the number of households (862.000) by 120,000. However, these I20,000 units are typically large, in poor condition, and located in the center of the country's largest urban areas. Legal restrictions block the division of these large units into smaller units that could be sold or rented profitably. For these and other reasons, authorities estimate a housing deficit of 80,000 units.

l 3 The UR corrects for inflation and is currently worth about US$15.00.

208 B. Ferguson, J. Rubinstein, and V. Vial, Housing Subsidy Programs in Latin America

The overall results also bear some parallels with those of Chile, taking into account the short time that the Uruguay program has functioned. As in Chile, the direct subsidy program of Uruguay has stimulated considerably purchase of homes. The program has provided a large number of vouchers (8,000) in l i e time (end of 1992 to end of 1994) for such a small country (with only a deficit of 80,000) - in effect, covering 10 percent of the housing deficit The beneficiary selection point system - as that of Chile - receives high praise.

A key weakness involves supply. The direct subsidy has yet t o succeed in stimulating developers to supply new housing in significant scale. As a result, many beneficiaries have used it to buy existing housing. " The problems with supply come from three factors. Foremost, developers say they cannot develop new units that meet the ceilings established under the program. inefficient and costly construction finance partly underlies this difficulty. Second, the municipal development approval process i s cumbersome and lengthy. The program has produced a substantial number o f finished units now occupied by beneficiaries that have yet to receive final municipal approval. Developers, however, must wait until receiving this approval to receive cash reimbursement from the voucher, creating considerable carrying costs. Third, with the end of IDB financing, developers wonder if the program will continue. In contrast to the twenty years of direct subsidy experience in Chile, the four-year direct subsidy program of Uruguay has yet to become a focture of the national budget with wide recognition.l5

A second serious problem is that the program has stimulated housing inflation, raising prices o f suitable existing housing by, on average, 20 percent. In addition, political influence has resulted in providing a large number of vouchers at election time, exacerbating this problem. Thus, atthough Uruguay has succeeded in maintaining the integrity of the beneficiary selection system free o f political influence - no small accomplishment - politics has interfered with the direct subsidy program elsewhere.

3.3 Costa Rica

The Costa Rican direct subsidy system bears some similarities to those of Chile and Uruguay. However, it succeeds where all other direct subsidy programs have, so far, failed. It has overcome the special problems of low-income households through demand-driven mechanisms, resulting in high production for these groups. For this reason, the Costa Rican program is, perhaps, the most successful direct subsidy system and deserves careful examination.

Costa Rica, with a population of 3,300,000, has 786,62 I housing units, of which approximately 100,000 are informal. Authorities estimate the housing deficit at 164,000. Inflation was 19.9 percent m 1994. The Gross National Product grew at 6.1 percent in 1993, and 4.5 percent in 1994 in real terms. The direct subsidy program started in 1987. The authorities largely copied the structure o f Chile's direct subsidy program. The financial structure of the program consists of: (a) a voucher,

I4Two versions of this problem were reported to the authors in a field visit The official version is that only 20 percent of the 8,000 vouchers have gone for existing housing. However, developers say that the program has succeeded in stimulating only 1,600 new units of the tod 8,000. and that the remainder (6,400) b existing housing. More new housing would be preferable. However, the modest housing deficit of Uruguay - a country that is growing a t only 0.6 percent per annum - makes use of the direct subsidy for existing housing less objectionable.

I s For example, by law. one percent of salaries goes for housing. The IDB-sponsored program envisioned using this money for vouchers. The Ministry of the Economy, however, does not deliver the entire amount of these funds. In 1995, the one percent generated US$ I00 million, but the Ministry of the Economy delivered only US$60 million "in order to avoid inflation."

6. Ferguson, 1. Rubinstein, and V. Vial, Housing Subsidy Programs in Latin America 209

which declines as household income increases; roughly eighty voucher amounts exist, geared to small variations in household income; (b) a mortgage loan, given by an "authorized entlty," including government banks, NGOs, cooperative federations, and Savings and Loans; these entities have authority to choose beneficiaries, deliver the direct subsidy, and extend a loan to complement the direct subsidy and the household's downpayment; the government housing bank (BANHVI - Banco Hipotecario de la Vivienda) then buys their social housing portfolio at lower than market rates; and (c) a downpayment. Households earning up to one minimum salary (US$177) need not make a down payment.

The process works largely through the authorized entity. Households go to t h e authorized entities and ask them how much they can afford to pay for a housing solution. The authorized entity specifies the maximum price of the solution, the loan amount, and the required downpayment to the family. The household then looks for a housing solution with this maximum price and knows the downpayment that it must save. The authorized entity then sells the loan to BAHNVI at a discount. The largest voucher - which goes to the lowest income households - currently has a value o f US$4,I30.

Products eligible to be bought with the voucher include: construction on lots already owned by the family (50.7 percent), purchase of a lot and construction of a unit on this lot (30.7 percent), purchase of an existing or new unit (17.2 percent), and improvement (1.2 percent). Recently, the program has allowed purchase of lots (0.2 percent).

In contrast to Chile, Colombia, and Uruguay, the direct subsidy program of Costa Rica has succeeded in targeting low-income groups in a demand-driven fashion. The main reason is that NGOs experienced in housing development and in working with low-income groups have become the main developers under the program rather than for-profit developers.I6 A t firss for-profit developers used the direct subsidy program as well. Recently, for-profit developers have stopped using the program, mainly because of increased risk from political and economic sources.'' NGOs have largely stepped in to fill this gap. Some NGOs often help households construct a unit on an existing lot by providing technical assistance. Other NGOs that are "authorized entities" assemble groups of their members, extend the credit, and develop the unit (through contracting for-profit construction firms). The NGOs that are authorized entities are highly successful. These N G O authorized entities even issue bonds to raise money on public markets for housing finance.

The program has proved quite stable, delivering a significant number of direct subsidies each year since its inception in 1987. The total number delivered from 1988 through 1994 (93,049) represented 13 percent of households in the country. Government funding has proved regular, although below mandated amounts.'* The process is rapid, because it depends on the speed of the authorized entities and not the government. A large number of beneficiaries come from the

l 6 Other reasons include: (a) the program has required that the authorized entities must work with low- income groups to qualify as authorized entities; and (b) BAHNVI rediscounts the mortgage loan and purchases the voucher from authorized entities faster if these loans and direct subsidies go to low-income households.

" Political influence threatens to change the rules of the game too easily, particularly the real value of the subsidy. Private developen also say that the lowest priced unit (42 mz) now costs US$8.700. Purchase of th is unit requires 4 minimum salaries. But households who have 4 minimum salaries do not want this 42 m2 unit Finally, variability in the rates of construction finance threatens developers' profit margins (largely set by government ceilings for units). '* The government is supposed to fund the voucher program with 3 percent of its budget However, it never transfers more than about 1.5 percent The other main source of funding, however, has proved more dependable. Employers, by law, contribute 4 percent of payroll to a "social fund" (fondo social); 33 percent of this social fund has reliably gone to finance the voucher program.

210 13. Ferguson, I. Rubinstein, and V. Vial, Housing Subsidy Programs in Latin America

informal sector. Beneficiaries repay the credits well, with few arrears, even though many have low income.

The most serious flaw has been that the direct subsidy amounts stay fixed in nominal terms for a time, and hence lag in real value behind inflation until they are re-adjusted. This lag periodically makes development uneconomic and shuts down the system. As in Uruguay, politics has caused some distortions, although not to the beneficiary selection system. The political party that won the recent elections printed fake certificates that purported to give the holder access to a voucher. Also, in election years, the party in power tends to give out more vouchers, flooding the market.

3.4 Colombia

Colombia has 35.9 million inhabitants. Seven and one-half million households exist Authorities calculate a "quantitative" housing deficit of I .2 million, and a "qualitative" housing deficit of 900,000, for a total deficit of 2.1 million. Thus, the total housing deficit represents 28 percent of households. Inflation has run between 18 and 22 percent for much of the last two decades, although the country has a constant value unit that corrects for inflation, called an UPAC (currently about USs8.80). Colombia has three direct subsidy programs operated by different entities. Although these programs have issued a large number of vouchers, this excessively complex system typically grants too little in subsidy amount to stimulate development.

In the other countries where the direct subsidy functions, it has become the most important housing program. In contrast, Colombian authorities view direct subsidies as one of a number o f mechanisms for housing. Colombia created its direct subsidy system in 1991 based on the Chilean model (Dominguez. 1993). BUS the Colombian system has changed very rapidly, and become increasingly complex. Much of the complexity comes from the many organizations involved. Three entities have created different voucher systems: (a) the National Institute of Urban Reform (Instituto Nacional de Reforma Urbana - INURBE); the central government budget funds this direct subsidy program; @) the Rural Credit Association (Qa Agraria); this organization operates a direct subsidy system for the countryside, also funded by the central government; and (c) the Employee Credit Associations (Cajas de Compensacion). Sixty-four of these semi-public, private organizations e x i ~ of which fifteen operate a third direct subsidy program. Employer contributions (4 percent of total salary) fund these groups in part

The current government has made many changes in the program. In particular, the new administration has resumed direct state construction of large housing projects. The new government has also attempted to concentrate social programs - including the housing voucher - in poverty zones through municipalizing them. A social network ("red de solidaridad") at the local level decides on which zones to focus these programs, including the housing vouchers of INURBE and the Caja Agraria. The eligibility rules and beneficiary selection system apply to all three types of vouchers. However, imporrant aspects of the three voucher programs differ. l 9

Together, these three entities have issued a large number of direct subsidies. From 1991 to 1994, the three programs delivered a total of 21 1,000 151,000 from INURBE and the Caja Agtaria; and 60,OOO from the Cajas de Compensacion. However, these programs suffer from two serious weaknesses. FirsS the government has set direct subsidy at amounts too low to effectively stimulate

l 9 For example, the Caja de Cornpensacion allows used housing. However, the other two voucher programs do not. In addition, the Caia de Compensacion has higher ceilings. For example, a family living in a city of IO0,OOO to 5O0,OOO inhabitants that applies to the Caja de Cornpensacion to construct its own housing unit can receive 250 UPAC. But if this family goes to INURBE, it can receive only 210 UPAC.

6. Ferguson, J. Rubinstein, ond V. Viol, Housing Subsidy Programs in Latin Americo 21 I

demand, given lowlmoderate-income households‘ savings and borrowing capacity. For example, the maximum value unit that a low-income family can purchase with a direct subsidy is roughly US$12,870. However, the maximum subsidy this family can receive is about US$3,000. Hence, the direct subsidy represents a fraction of the purchase price - less than one-quarter in this case. Households frequently cannot save a downpayment and qualify for a market-rate mortgage loan sufficient to bridge the large remaining gap. Hence, many households have a direct subsidy, but can do nothing with it; 60,000 of the 210,000 vouchers given from I991 to 1995 remain unused.

Second, the beneficiary selection point system suffers from manipulation, which threatens to undermine these programs’ legitimacy. At election time, politicians also have promised large quantities of housing vouchers, while employees of the two government-operated programs have sold forms for applying for the housing voucher. The privately operated Qa de Compensacion direct subsidy, however, has a better reputation.

The third problem results from delays in cashing out the voucher. Private-sector developers that deliver the voucher received from home purchasers in exchange for a unit often wait as much as six months for cash. Partly as a result, the great bulk of private-sector developers have no interest in the program. Other problems also have hindered its operation. 2o

4. Design Lessons for Direct Subsidy Housing Programs

Ten design lessons emerge from the collective experience of Chile, Uruguay, Costa Rica and Colombia. These lessons apply to direct demand subsidy housing programs in Latin America, in particular. They appear relevant to housing subsidies in lowlmoderate-income countries, generally.

I. Target to low-income households ond ensure political autonomy. First, politics and changes in government have greatly affected three of these four direct subsidy programs - those in Colombia, Costa Rica, and Uruguay. Direct subsidies have become an electoral tool in Colombia and Costa Rica. New governments - especially in Colombia and Uruguay - often radically change direct subsidy programs without compelling reasons, except to put their political imprint on them.

Hence, direct subsidy programs must have considerable autonomy. The beneficiary selection system, in particular, must be carefully protected from political influence. But a good beneficiary selection system alone is not enough. Uruguay has an excellent beneficiary selection system praised by all. However, politicians have manipulated the voucher through issuing great numbers at election time. Hence, direct subsidy program rules must also restrict the number of vouchers issued at

election time. 2 Replace below-market interest rates with direct demand subsidies. Traditionally, governments

have used below-market rate mortgage finance to convey subsidies to families. This mechanism has many serious drawbacks. Foremost, the below-market interest mechanism makes variable and obscures the amount of the subsidy for both households and government. Government cannot accurately estimate their budgetary impact, because the real value of these subsidies varies with inflation and, hence, market-interest rates. Many households have little idea that they receive a subsidy under below-market rate mortgage finance, and think they are paying the full cost of their unit

2o Particularly because the voucher can fund the purchase of IOU. the program has also stimulated inflation in land prices. Land prices in large metropolitan areas have roughly doubled in from I99 I to I995 in real terms, from about US$ I O h ’ to USS20, a t I east pardy (according to informed respondents) because of the voucher.

212 6. Ferguson, 1. Rubinstein, and V. Viol, Housing Subsidy Progroms in Latin Americo

The problems with below-market interest rate as a subsidy mechanism have led to adoption o f direct demand subsidies. In effect, government makes a one-time grant to eligible households. The amount of the grant is uansparent Households easily understand it and government can easily account for it.

3. Use group mechanisms for low-income households. Low-income households throughout Latin America acquire shelter and settlement solutions largely through collective action. This collective action includes invasion of land, pressuring government and infrastructure supply agencies for services, and often a paralegal system of land rights and land-use and conflict resolution wkthin existing informal settlement.

Increasingly, direct subsidy programs for the poor have harnessed this potential by moving from individual use to collective use. These collective direct subsidy programs have performed better. They have stimulated more savings for downpayments. In Chile, for example, two-thirds of low- income families using group direct subsidies have saved the necessary downpayment compared to only one-third for the individual direct subsidy. Collective direct subsidies operate through technical assistance intermediaries - usually NGOs - that assist low-income groups in many of the development functions (finding land, designing the project and unit etc.) rather than rely on the for- profit private sector. Hence, they are a key to solving the supply problem for direct subsidy programs aimed at low-income groups. Collective (as opposed to individual) direct subsidies can also promote consolidation of solutions, maintenance, and group solidarity.

4. Stimulote supp/y, not just dernond. Stimulating demand through direct subsidies has proved insufficient to call forth a supply response, particularly for low-income households. For-profit private sector developers and lenders often refuse t o serve low-income groups because they think the risk is too high and they have other more profitable opportunities to serve the middle-class, either within or outside direct subsidy housing programs.2' Uruguay is a typical case. Although the Inter-American Development Bank structured this program carefully, it has resulted in relatively few new solutions for low-income groups. Uruguay and Chile have had to use a turn-key approach to produce new units for low-income households.

Costa Rica is the only Latin American country that has established demand-driven mechanisms that achieve scale production for low-income groups using direct subsidies (Uniapravi, 1995). Strong NGOs rather than for-profit companies developed these units. In Costa Rica and elsewhere, a network of strong non-profits experienced in both housing development and working with the poor appear essential for reaching low/moderate-income groups with direct subsidy housing programs. A

2 1 A number of factors have joined to make production for low-income households and, sometimes, even moderate-income families unattractive to for-profit firms in all four countries. First, the sales price of unirs 6

often capped. Because of this ceiling and because of the lower absolute amount, the profit margin on these low- income units is much less than for middle and upper-income units. Second, governments often delay cashing vouchers, and create considerable carrying costs (in interest, staff etc.) for developers. Third, construction finance has been a bottleneck Commercial finance institutions resist financing construction as well s take-out loans to households for low-income projects. But most voucher programs have relied on commercial financial institutions to provide construction finance. When commercial construction finance has been available, the interest rate has often been high and fluctuating. Joined with other factors - in particular, the sales price ceiling - this high, unstable construction interest rate creates too much risk for for-profit developers. Fourth, most programs have channeled vouchers to individuals rather than groups. However, low-income households often lack the background to use individual vouchers effectively. In contrast, low-income households have learned to function well in groups to solve their shelter problem. The sum result is that large developers and financial institutions have shown little interest in direct subsidy programs in Latin America. Typically, large, well-established for-profit supply agents enjoy oligopoly profits from other activities in which they bear little r isk They often receive major turnkey construction contracts from government for industrial. commercial, as well as residential development Hence, few reasons exist to compete and run the r isks created by a portable voucher program for lowlmoderate income households.

B. Ferguson, j. Rubinstein, and V. Vial, Housing Subsidy Programs in Latin America 213

number of other approaches hold promise in resolving the supply problem: (a) use turnkey government production in the f i rs t one to two years of direct subsidy programs to jump start supply, then phase it out; (b) provide construction finance as part of the direct subsidy program; (c) use collective direct subsidies and not individual ones for low-income groups; and (d) gear and market direct subsidy programs to smaller developers and contractors.

5. Adjust key amounts for inflation. The amount of the subsidy and other key amounts must be adjusted for inflation. In Costa Rick for example, the erosion of the real value of vouchers periodically contributes to shutting down the operation of the system. Other key amounts that must be corrected for inflation include value ceilings and household income maximums and categories.

6. Balance progressivity and financial feasibility. Two important goals of direct subsidy programs - progressivity and financial feasibility - typically conflict to some extent, requiring compromise. Direct subsidy programs often target a range of income groups, not just low-income households, and seek to be "progressive." Typically, "progressive" is interpreted to mean that these programs should transfer a greater subsidy amount to lower-income households than to moderate-income households, and to lower cost units than to moderate-cost units.22

However, direct subsidy programs also must prove financially feasible to work. Financial feasibility concerns the balance among the financial components that make up the total development cost of the solution. The subsidy must be high enough to place the other components of finance - the downpayment and the mortgage debt - within the reach of households that earn the program's target incomes. Achieving both a progressive subsidy structure and financial feasibility has proved difficult. Largely for th is reason, Chile has ended up vansferring more to moderate and middle- income households than to low-income households. When financial feasibility is ignored - as in Colombia where direct subsidies are often too low - direct subsidies remain unused (almost 30 percent in Colombia) or have a marginal impact in stimulating supply. Many Colombian households simply cannot save andlor finance at market rates the gap between a low direct subsidy and the total development cost of a unit In practice, then, direct subsidy programs must reach a compromise between progressivity and financial feasibility. The nature of this compromise depends on the

factors that influence the elasticities of demand and supply for units - such as household income distribution and unit cost

7. join the efforts of various levels of government. Governments must join together to make direct subsidy programs work. Often, however, they do not cooperate. In Uruguay, municipalities of the opposing party resisted direct subsidy programs created by central government. Municipalities also sometimes do not want low-income housing and obstruct programs that produce it

Cooperation should take specific form. For example, the municipality can provide land and development approval. State government and regional infrastructure supply agencies can provide services. Central government and - sometimes - state government can provide finance.

8. Use NGOs. NGOs can have a massive impact on low-income housing and are important tools for direct subsidy programs. In Costa Rica, sophisticated NGOs produce the great bulk of low-income solutions for the direct subsidy program. In other countries, NGOs acting as technical assistance intermediaries for community housing groups perform many development functions.

9. Establish mechanisms for on-going consolidation of housing solutions. A ninth principle derives from experience with low-income housing programs in general as well as vouchers: progressivity. Neither governments nor individual low-income households can afford the cost of a complete

22 A "softer" interpretation of progressivity is that lower cost units and low-income households should receive a greater share of total development cost in subsidy than moderate-cost units and moderate-income households.

214 B. Ferguson, 1. Rubinstein, and V. Vial, Housing Subsidy Programs in Latin America

solution up front. The role of low-income housing finance programs is to finance all o r a part of a basic solution and to establish the relationships and financial mechanisms for improving this basic solution.

The key relationship is typically between a technical assistance intermediary and a community group composed of low-income households. The intermediary provides on-going assistance to the households of this community group in a wide range of areas necessary to consolidate solutions. These areas include regularization of land tenure and connection to and payment for basic urban services as well as consolidation of the unit The intermediary must receive financial support to perform th is role. Thus, direct subsidy programs should establish these mechanisms, particularly for solutions such as sites and services that require extensive assistance in consolidation.

10. Include measures to promote broader housing sector reform. Some evidence (Conway and Mikelsons, 1996) indicates that direct subsidy programs do not necessarily promote greater efficiency and equity in the housing sector. In Chile, for example, government still is involved in 7D percent of housing production in some fashion after twenty years of direct subsidy experience. This critique has merit. Direct subsidy programs eliminate the worst abuses of traditional housing programs that contribute to distorting the sector (interest-rate subsidies, regressivity, lack o f transparency) and promote demand-driven mechanisms that stimulate markets (competition, savings, private sector involvement). However, direct subsidy programs do not necessarily reform housing finance markets, rigidities in land supply, cumbersome development approval processes, fragmented infrastructure provision, non-existent cadastres, and other bottlenecks to efficiency and equity in the sector. A strong argument exists that direct subsidy programs should include measures and lay the groundwork for addressing some of these critical bottlenecks.

5. Applying the Lessons to the Design of a Housing Pilot Project in Venezuela

5.1 Context

Venezuela offers an example of the dilemmas of applying the above principles in a complex and challenging context. The country has long suffered from the vices of traditional housing programs. These problems include clientelism, massive filtering of units intended for low-income households to the middle class, lack of transparency because of interest-rate subsidies to supply, high per-unit cost and subsidy, low production relative to housing deficits, and disappearance of a market-rate mortgage instrument with the on-set of high inflation.

These problems have resulted in unusually poor performance in the housing and settlement sector. Venezuela's large share of unauthorized and squatter housing - 54 percent - is particularly striking given the country's relatively high per-capita income. Formal-sector housing production, which averaged 72.93 I solutions from I980 to 1992. is well below household formation - now over 95,000 annually. This gap increases pressures for land invasions and the creation of new squatter settlements. Land invasions - the main form of residential development in Venezuela - end up costing government huge sums. Squatters often locate far from existing infrastructure lines on unsuitable land to which state and central government infrastructure supply agencies end up extending services.

Recent housing programs and policy m Venezuela consist largely of the experience of the National Housing Law (Ley de Politica Habitacional - LPH). The LPH was first approved in 1989, and took effect in 1990. This law has created a fairly complicated subsidy and social housing production system based on subsidies in the form of below-market interest rates. The LPH has created two sources of funding (the "five percent" and the "three percent") for housing finance to invest in

B. Ferguson, j. Rubinstein, and V. Vial, Housing Subsidy Programs in Latin America 215

three "areas" (Areas I, II, and 111). Area I supposedly targets low-income households - those below three minimum salaries (ranging from about US$250 - $350 over the last five years). Area I I supposedly serves moderate-income households, and Area 111 - which has yet to function - middle and upper-middle income groups.

Under the LPH, financial institutions make the loans t o households t o purchase homes and to developers to construct the housing projects.23 The long-term loans to households have a maximum term of twenty years. The LPH has conveyed its subsidy in the form of below-market interest rates both on loans t o households and on loans to developers. T h i s subsidy has been high and variable - ranging from 60 t o 80 percent of the total development cost of units.24

Despite some advances, the LPH has failed t o break with many of the traditional vices that have beset Venezuelan housing.25 The most grave is the continued transfer of the great bulk of subsidies intended for low-income families to middle-class and professional households. In effect, financial institutions end up choosing the recipients of the LPH subsidy because they qualify households for the loans that contain the subsidies. N o t surprisingly, these financial institutions systematically channel subsidies t o middle-class and professional households because they are better credit risks. Second, the LPH is highly regressive. It transfers roughly two and a half times the absolute amount of subsidy t o middle-income and professional (around US$I5,000 t o Area 11) households as t o low-income (around US$6,000 to Area I) households.26 Third, the LPH has continued the high per-unit cost and high per-unit subsidies of previous programs. Partly as a result, production is well below that needed to reduce pressures for land invasions.

Venezuela's macro-economic and macro-financial circumstances pose a challenging context for housing program design. Starting in the late 1980s. inflation has increased t o high levels - up to 8) percent per annum currently. The country has failed to respond through measures such as indexing mortgage loans either t o inflation, to incomes, o r t o both (as in Mexico), o r by creating a constant value unit Hence, market-rate mortgage finance has all but disappeared. Government's huge fiscal deficit and other policies have contributed to negative real rates of interest on both savings and loans. 2'

5.2 Housing Pilot Project Design

A team that included the authors of this paper designed a pilot housing project t o operate in four Venezuelan states sponsored, in part. by the Inter-American Development Bank in order t o

23 However, some direct government finance srill occurs. 24 Based on present value calculations of the gap between the subsidized interest rate and market rates. This

subsidy amount fluctuates with market rates and, hence, is highly untransparent both to households - many of whom do not know thatthey are receiving a subsidy - and to government, which cannot reliably calculate the budgetary implications of its LPH commitments.

25 Foremost, it has succeeded in amassing large sums for housing - over $I billion from 1990 to 1994. The LPH has also made some progress in moving the implementation of government-funded housing programs from the public to the private sector and from central government to state government. Finally, the legal structure of the LPH provides considerable flexibility for housing programs and policy. As a result, the implementation of the LPH could change radically without much change in the law.

26 In addition, the contributions of low-income households (Area I). which represent about 70 percent of the total funding of the LPH, finance middle-income households (Area 11). For this reason and because very few households that contribute receive any benefit from the LPH, most Venezuelans consider the program an abuse.

27 Hence, most households have no place to protect their savings from inflation. In principle, borrowers can make money h real terms by taking loans; however, few economic activities can sustain even the very high nominal rates of interest - over 45 percent.

216 6. Ferguson, I. Rubinstein. ond V. Viol, Housing Subsidy Progrorns in Lotin Arnerico

demonstrate a more effective approach than that of the LPH. The design meshes best practices and principles from direct subsidy program in other countries with the Venezuelan context and institutions. This section keys a discussion of the Venezuela pilot project’s design to the lessons distilled from other direct subsidy housing programs presented above in Section 4.

I. Torget to low-income households ond ensure politico/ outonorny. Under the LPH, Venezuela lacks a system of targeting housing subsidies to low-income households. Massive filtering of units and subsidies upwards t o middle-income and professional households occurs. Hence, the pilot project design establishes a point system similar to that used in other Latin American countries - particularly Uruguay and Chile - for selecting beneficiaries. Households compete for subsidies based on two overall criteria: need and effort.

Households must qualify as low-income to be eligible for the pilot project. ”Need” also includes factors such as: (a) family size and composition; larger families and those with more young children receive more points; @) single parent status; such parents receive more points; and (c) current housing and infrastructure situation; households with poorer existing housing and services receive more points. An interview and data collection on each household verify th is information.

“Effort” consists of length and time of savings. Households that save more and for a longer period of time in a bank account established for the pilot project receive more points. Because need is relatively static - households cannot easily change their size, income levels, o r current housing and infrastructure situation to earn more points - savings becomes the key factor in winning a subsidy. As in the other countries such as Uruguay and Chile, the importance of savings promises to transform the incentives surrounding housing programs in Venezuela.

Involvement of various organizations - including an NGO that the poor widely respect - serves to cross-check the data and monitor the operation of the beneficiary selection system to shield L from political manipulation. The frequent use of housing and infrastructure programs for clientelist ends in Venezuela and elsewhere indicate the need for such special attention.

2 and 3. Replace below-morket interest rotes with direct demond subsidies used by groups. In contrast to the LPH, which conveys its benefits in the form of below-market interest rates to individual households, the pilot project transfers a direct demand subsidy collectively to groups of households.

For decades, a few sophisticated Venezuelan NGOs have organized low-income groups to build and consolidate housing. Over the last five years, the central government has built on these efforts by supporting two nationwide NGOs to train local organizations to provide technical assistance to community housing groups. Thus, the evidence indicates that in Venezuela, as experience in Chile, Uruguay, and Colombia demonstrates, collective approaches hold particular promise for housing the poor. Hence, the pilot project requires that low-income households organize into groups to compete for the direct subsidy. The pilot project supports local consortia of NGOs and developers to assist households in organizing into groups, saving a downpayment. competing for the direct subsidy, finding land, preparing the preliminary and final project design, and assisting households in moving into the completed unit Support to these consortia includes development fees (agreed on between the household groups and the consortia), administrative seed money and training.

Home finance has two components under the project: the direct subsidy and the downpayment. The financial structure contains no mortgage component - the third finance component used in middle-income direct subsidy programs in more stable macro-financial contexts such as Chile and Uruguay. The high and uneven inflation that has led to the disappearance of a market-rate mortgage instrument in Venezuela and the difficulties of institutional mortgage finance o f

5. Ferguson, J. Rubinstein, and V. Viol, Housing Subsidy Programs in Latin Americo 217

low-income households even in the best of circumstances would have made such debt finance highly problematic.

4. Adjust key amounts for inflotion. Venezuela lacks a constant value unit and other forms o f indexing to correct for inflation. Hence, the pilot project design denominates key amounts, such as the direct subsidy amounts and household income eligibility ceilings, through monthly corrections of the Consumer Price Index of the Central Bank of Venezuela.

5. Stimulate supply, not just demand. The pilot project takes a series of measures to stimulate supply as well as demand. First, it provides construction finance - a key missing component m some other countries' direct subsidy programs (such as Uruguay) - from the Project's own funds (the direct subsidy monies) and from the downpayments of households. Second, the design includes a first-year Transition Program in order to jump-start supply. This pilot project must show results quickly in order to establish its credibility. Hence, the project allocates 20 percent of total capital funding for central and state governments to contract the immediate development of new units, largely on government-owned land for which development approval has been received. This Transition Program ends after the Project's f i rs t year. Third, the collective nature of the subsidy, which only groups - rather than individuals - can use. provides a mechanism for low-income housing development missing in many programs. fourth, the Project intends to target marketing efforts to small developers and contractors, rather than to large developers, who have many other options.

Many direct subsidy systems provide some degree of subsidy to a wide range of income groups. In contrast, this pilot project targets only low- income households because it is a demonstration program. Because the project contains only one income category; no need exists for progressively transferring less subsidy to higher-income groups.

But the project does allow use of the direct subsidy for a range of four housing solutions with dramatically different development costs - improvement of barrio units, new construction of a basic progressive unit on a barrio lot, serviced sites, and new development of basic progressive units2' The total development cost of these four solutions ranges from US$1,600 (upgrading of barrio solution) to US$7.000 (new development of a progressive unit). The Project requires a 20 percent downpayment from households on all four types of solutions, and grants the remaining 80 percent in the form of a direct subsidy. Market studies indicate hat, with substantial effort, households can save these downpayments over one to two years. Hence, these solutions are financially feasible.

However, this financial structure grants more in subsidy to higher-cost units than to lower-cost solutions. A number of factors make this violation of the second aspect of progressivity (less subsidy to higher cost housing solutions) less However, the project requires some compromise to make a range of housing solutions with different costs financially feasible. Even so, the project conveys an average subsidy of approximately US$3,000, well below the US$6,000 in interest-rate subsidy of comparable programs of the LPH.

7. Join the eforts of various levels of government. Too often, program decision-making in Venezuela ends up centralized in Caracas. The Project design takes special care to establish a central office with limited but key powers such as funds accounting and adjusting the subsidy amount and household income limits for inflation, The Project reserves operation and hence the great bulk o f

6. Balance progressivity and financial feosibility.

28 This cost of a basic progressive unit is sufficient to construct a 27 square meter structure containing a bathroom, a kitchen area, and a multi-use room on a serviced lot, that households are expected to expand.

29 In particular, the households that receive the lowest cost solution - upgrading of an existing barrio unit - already own this solution. Hence, they have less need for housing assistance than families that own no housing solution, who are the only ones eligible for the other three higher-cost solutions.

218 8. Ferguson, 1. Rubinstein, and V. Via/, Housing Subsidy Programs in Lotin Americo

decision-making, to four regional offices, one in each of the four project states. Among their key functions, the regional offices involve and coordinate other governments and agencies in the Project. In particular, the Project is likely to depend largely on publicly owned land for new development. The regional offices help developers and groups of low-income households secure this land from a wide variety of sources, including municipal government, the national agrarian reform institute, and the two main national housing agencies.

8. Use NGOs. Two types of non-governmental organizations play a pivotal role. First, the Project delivers its subsidy to organized groups of low-income households. Many poor Venezuelan neighborhoods contain neighborhood associations and other organizations that can help form these groups. Second, the Project uses technical assistance intermediaries to help organize these community groups and, jointly with developers, to perform many of the development functions such as finding land, preparing preliminary and final building designs and cost estimates, and providing home counseling. The Project supports these intermediaries in various forms, including development fees, training, and administrative seed money. These intermediaries, in consortia with private developers. are the key institutional innovation t o channel the demand created by the direct subsidy to generate supply.

In particular, these intermediaries provide the support to groups of low-income households necessary to consolidate the basic housing solution provided by the Project. Intermediaries enter into agreements with these low-income groups to help connect housing solutions to services, regularize land tenure, and guide in the upgrading of the basic solutions provided by the Project.

10. Include meosures to promote brooder housing sector reform. Although its direct operation is limited to four states, the pilot project includes measures that affect the country as a whole and lay the groundwork for broader housing sector reform. The project provides technical assistance to adapt and disseminate the beneficiary selection system throughout Venezuela. As housing agencies at the state and central level still largely lack an effective means of beneficiary selection, this reform promises great progress in promoting equity - transferring subsidies to lowlmoderate-income households, rather than to the middle and professional households to whom they currently go in large part The pilot project also includes funding for studies to establish a market-rate mortgage system and to rationalize the central government's housing and land agencies.

9. Gtoblish mechonisms for on-going consolidation of housing solutions.

6. Conclusion

Despite four decades of great effort and study, housing and settlement programs in emerging countries often create more problems than they solve. In particular, many suffer from poorly structured subsidies that are highly inefficient and inequitable. The interest-rate subsidies that have dominated housing and settlement programs in many Latin American countries are an example. These interest-rate subsidy programs typically benefit the middle-class rather than the poor, result in high per-unit costs and solutions and, hence, low population coverage, fail to reflect household preferences and demand, and lack transparency.

Starting with Chile, direct demand housing subsidy programs in Latin America have sought to replace these vices with a virtuous circle. These direct subsidy programs have made progress in stimulating saving for downpayments, targeting low-income households, lowering per-unit costs and subsidies, raising population coverage, connecting with demand, and clarifying the subsidy amount Nevertheless, design of direct demand subsidy housing programs remains challenging. A key task is to extend the mechanisms that have worked for middle-class programs to lowlmoderate-income

B. Ferguson. 1. Rubinstein, ond V. Vial, Housing Subsidy Progroms in Latin America 219

households. A point system for selection of households, group mechanisms, and stimulating supply - as well as demand - hold particular promise for making this transition.

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