Document of

The World Bank

FOR OFFICIAL USE ONLY

41; 3@f-

Report No. 6948-EC

STAFF APPRAISAL REPORT

ECUADOR

SECOND NATIONAL LOW-INCOME HOUSING PROJECT

December 15, 1987

Infrastructure and Energy Operations DivisionLatin America and the Caribbean Regional Office

This document has a re;tricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit = Sucre (S/.)Annual Average 1986 US$1 S/.151

Since August 14, 1986, the Ecuadorian currency has been floating.As of August 1987, th. rate was as shown below.

US$1 = S/. 195S/.1 = US$ .005

S/.1000 = US$ 5.12

WEIGHTS AND MEASURES

1 meter (m) - 39.37 inchesi square meter (m2) 10.76 square feet1 kilometer (km) 3 0.62 mile1 hectare (ha) 2.47 acres1 liter (1) 0.26 US gallon

FISCAL YEAR

January 1 - December 31

ABBREVIATIONS AND ACRONYMS

BCE - Banco Central del Ecuador(Central Bank of Ecuador)

BEDE - Banco Ecuatoriano de Desarrollo(Ecuadorian Development Bank)

BEV - Banco Ecuatoriano de la Vivienda(Ecuadorian Housing Bank)

GTZ - Gesellschaft fur Technische Zussamenarbeit(Society for Technical Cooperation - Germany)

IDB - Inter-American Development Bank(Banco Interamericano de Desarrollo)

IESS - Instituto Ecuatoriano de Seguro Social(Social Security Institute)

JNV - Junta Nacional de Vivienda(National Housing Board)

USAID - U.S. Agency for International Development

FOR OMCIAL USE ONLY

ECUADOR

SECOND NATIONAL LOW-INCOME HOUSING PROJECTSTAFF APPRAISAL REPORT

Table of Contents

Iff, No.

LOAN AND PROJECT SUIR*ARY *.................. ............. ii

I* TBE SECTOR ....................................... 1General ....................................... 1Housing *....... ... .................................

Sector Institutions ...................................... 2Problems ard Constraints in the Sector ......................3Government Policies ......................... 00000000000004

International Lending in the Sector .........................4Bank Sect~er Strategy ............................. 6

II. THE PROJECT 6

Project Origin ....,......................................6Project Rationale 6Project Objectives and Relation to the Sector 7Project eclto7Project Costs .

linancing Plan ... OOoO,. .. o... 9

Status of Deeign Works ........... ............ o.........10Land Acquisition ........................100#000000*0*4000-0.10Institutional and Legal Arrangements 10Project Execution 12 .......Procurement 1Disbursements 00

Financial Analysls ................, 15Operating Results ................. 15Interest Rates 11Construction Period .... 17

Persotnel Expenses 18Accounts and Audits 19Cost Recovery 19Benefits 2Ecouomic Analysis .......UbenPoefits Xp ............................................... .. #21

Urban Poverty Ipc..00.o00Risks 02

III. AGREEMENTS REACHED AND RECOMMENDATIONS 23

Agreements Reached During Negotiations. .....................23Conditions of Loan Effectiveness. ............................24Conditions of Disbursement....0.. 000oo000000000000000 24Reco _ ndation ******o***oooooo*ooooo025

This report is based on the findings of an appraisal mission which visltedEcuador from January 26 - February 6, 1987. The mission was comprised ofMessrs. T. Persaud and A. Zuniga (LCPUR) and Mr. P. Doty (Consultant).Ms. T. Carbonell assisted in the production of the report.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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ANNEXES

ANNEX 1: Housing Sector Profile

ANNEX 2

Table 1: Total Project CostTable 2: Average Cost by Shelter PrototypeTable 3: Estimated Schedule of Disbursement

ANNEX 3: Construction Details and Materials

ANNEX 4: Implementation Schedule

ANNEX 5: Summary - Terms of Reference and Estimated Costs ofConsultants for Technlcal Assistarce

ANNEX 6: Summary of Personnel BEV and JNV, 1984-1986

ANNEX 7:

Table 1: Condensed Balance Sheets 1984-93Table 2: Condensed Statement of Results 1984-93Table 3: Condensed Statement of Sources and Uses of

Funds 1984-93

ANNEX 8: BEV-Unsecured Home Loans and Mortgage Loans

ANNEX 9- New Lending System

ANNEX 10: Action Program 1988

ANNEX 11: Economic Rate of Return Caletlations

ANNEX 12: Price and Wage Index 1970-1986

Map: ~IBRD 18179

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ECUADOR

SECOND NATIONAL LOW-INCOME HOUSING PROJECT

Loan and Project Summary

Borrower: Republic of Ecuador

Beneficiary,: Banco Ecuatoriano de la Vivienda/Junta Nacional de laV4vienda (BEV/JNV)

Amount: uS$60.0 million equivalent

Terms: Repayable over 17 years, including 4 years of grace, withinterest at the Bank's standard variable rate.

On-LendingTerms: The Borrower would onlend the entire proceeds of the Bank

loan in Sucres to BEV at a variable rate established fromtime to time, equivalent to the rate paid by BEV onsavings deposits (currently 20X). The Government would bearthe foreign exchange risk.

P-r2iectDescription: The loan would finance a share of BEV's 1988-1993 investment

program which would be implemented throughout Ecuador throughBEV, JNV and private developers. It would also supportadoption of new financial policies and instruments to improveresource mobilization and allocation and housingaffordability in the sector and promote institutional reformswithin BEV and JNV to make them more efficient. The loanwould finance (i) approximately 12,000 serviced lots with orwithout dwelling units, (ii) about 15,000 home improvementcredits (iii) vehicles and equipment for projectimplementation and (iv) technical assistance for projectagencies.

Benefits: Apart from the construction of shelter, a maJ.r benefit wouldbe the introduction bv BEV of a long-term mortgage instrumentbearing market-related variable interest rates and featuringpartial capitalization of interest. This would promotemobilization of domestic resources for shelter whileimproving resource allocation and shelter affordability. Asa result of the institutional restructuring of BEV and JNV,and the adoption of the above-mentioned mortgage instrurent,by the end of the project BEV would function more effectivelyas a financial institution, JNV would function moreeffectively as a developer, and BEV would mobilize a largershare of its rer-urces fror the market. The project wouldalso encourage private developers to build low-incomehousing.

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Risks: There is little risk regarding physical works; JNV has an adequateland acquisition program underway and ample experience withdeveloping necessary services. Rome-improvement lending faces noparticular physical risk. The main risk is that the new Governmententering office in August 1988 may not sustain the financial andinstitutional policy reforms which underpin the project. The riskthat this might occur is tempered by the fact that: (i) theproposed institutional reforms are extensions of ones which havealready been accepted and are underway under previousBank-supported projects in the sector; and (ii) the austereeconomic climate that will likely prevail during the life of theproject will continue to require that the thrust of the proposedreforms be maintained.

Estimated Project Cost: Local Foreign Total-- US$ million --

Land and Infrastructure 9.3 3.4 12.7Home Improvement Loans 18.4 5.6 24.0Housing Units 28.4 9.5 37.9Technical Assistance 0.3 1.1 1.4Vehicles and Equipment - 0.5 0.5Project Administration 2.5 - 2.5

Base Cost (November 1987 prices) 58.9 20.1 79.0

Physical Contingencies 2.8 0.8 3.6Price Contingencies 2.3 0.8 3el

Total Project Cost 64.0 21.7 85.7 1/

Financing Plan: Local Foreign Total=---- tUS$ million

IBRD 38.3 21.7 60.0BEV/JNV 17,1 - 17.1Beneficiaries 8.6 - 8.6

= -

Total 64.0 21.7 85.7

EstimatedDisbursements: Bank Fiscal Year

1988 1989 1990 1991 1992 1993-…-- -- -- --(US$ million)-

Annual 10.6 10.7 10.8 11.0 8.9 8.0Cumulative 10.6 21.3 32.1 43.1 52.0 60.0

Economic Rateof Return: 13%

Mtap: IBRD 18179

1/ The tax content of this project is negligible.

ECUADOR

SECOND NATIONAL LOW-INCOME HOUSING PROJECT

I. THE SECTOR

General

1.01 About half of Ecuador's nine million residents currently live inurban areas. Over the past decade, urban population growth averaged 4.5percent (compared to just under 2 percent in rural areas) and Indicationsare that this pace will continue, reflecting both high migration andnatural growth. Apart from two large cities, Guayaquil and Quito, withpopulations of 1.5 and 1 million respectively, about eighteen smallercities have populations between 20,000 and 150,000. Although Qulco andGuayaquil together account for about 28 percent of the national, and about55 percent of the total urban population, these cities produce about 80percent of the national output. Continued national development is thusvery dependent upon socio-economic activities in these cities,

1.02 Petroleum revenues greatly increased overall income levels andstandards of living over the past two decades. Nevertheless, significantpoverty remains in the country; in the large urban centers about 23 percentof the families have incomes below the Bank's relative poverty level ofUS$155/month in household income. For the smaller cities and rural areas,this figure is estimated at about 35 percent. Decline in petroleumrevenues and high inflation since the early 1980's have worsened incomedistribution and living conditions in the country. Recent earthquakedamage to petroleum and gas pipelines, roads, bridges and houses in thenorthern and eastern provinces, and flood damage in coastal provinces havealso negatively affected the economy and the welfare of residents of theseareas.

Housing

1.03 Of the approximately 1.5 million housing units in the country,about 40 percent have some type of deficiency, such as lack of water,severage services and electricity, overcrowding, and poor state ofconstruction. Each year, about 45,000 new families are formed; recentestimates of the Banco Ecuatoriano de la Vivienda (BEV), put the overallurban housing deficit at about 430,000 units. BEV estimates that about 50%of urban families would be willing and able to pay for some type of(largely unsubsidized) housing solution. Many of them currently live inunserviced and poorly constructed units for which they pay monthly rentalsaveraging US$30-55 equivalent. Most of these families would fall withinthe primary target income group of the proposed project, paying for theirunits on a fully cost-recoverable basis.

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1.04 Housing production of the formal sector has recently averagedabout 15,000 units per year. However, the bulk of housing solutions stillcomes from the informal sector through frequent land invasions and illegalsquatter settlements which mushroom on public and unoccupied privatelands, BEV has limited knowledge of the process of financing andconstructing marginal and unauthorized settlements, primarily becauseresidents are reluctant to provide information and also because they oftenlack accurate information on quantities, dates, rates, etc. Currentindications are that, apart from politically organized invasiona, most ofthe present unauthorized and marginal settlements are spontaneous.Typically, owners of vacant unserviced lots subdivide and sell them tobuyers who erect basic dwelling units which they expand and improve mostlywith their own resources, but also with loans from relatives ormoneylenders. Usually, such loans bear interest rates which are muchhigher than commercial mortgage rates but not as high as rates onshort-term working capital loans. These are much smaller and may haverates as high as 100% over the day or two for which they are made. Annex 1provides further details on housing sector deficits and needs.

Sector Institutions

1.05 Institutions involved with shelter development include the BancoEcuatoriano de la Vivienda (BEV), the Junta Nacional de la Vivienda (JNV),the Instituto Ecuatoriano de Seguro Social (IESS), the Banco Ecuatoriano deDesarrollo (BEDE), "mutualistas" (Savings & Loans Associations, S&Ls), 31private banks and about 100 credit unions. Over the years, privatepromoters and developers have also produced housing for middle and upperincome groups. BEV/JNV and the IESS are the principal sources of housingfinance, having between them constructed or financed almost 90 percent ofthe formal middle- and low-income housing projects in Ecuador over the lastfive years.

1.06 BEV is an autonomous public housing finance institution which wasestablished in 1961 with the primary responsibility of providing housingfinance and regulating the nation's savings and loan system (which wascreated in 1963). JNV was established as a Government agency in 1973 andwas empowered to set national shelter policies, coordinate activities ofpublic and private sector agencies and promote and implement low-incomehousing projects. Although BEV and JNV have separate and clearly- definedroles, they share the same President, and JNV has functioned more as theproject implementing division of BEV for housing development with BEVlending to beneficiaries for home improvement loans and long-termmortgages. Investment funds for these agencies come from equitycontributions from the Government, local and international loans,beneficiary savings, bond sales, and income from operations.

1.07 IESS is an autonomous entity established through a 1970presidential decree. It is funded by social security contributions fromthe Government, employers, and workers. An independent Board invests itsresources in a variety of instruments, including co*nsumer and mortgageloans, equity in private firms, and Government bonds. Its lending isconfined so members meeting eligibility criteria such as length of service,.

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amount of contribution, etc., and is provided on very concessionary terms.IESS lending in the housing sector has traditionaally been more than that ofBEV/JN! (US$300 million Vs. US$75 million annualiy), and msainly for themiddle and upper income groups. Recently, however, IESS has experiencedresource constraints on account of its generous subsidA.es and weakactuarial planning, and its Lousing finance role has been drasticallycurtailed. IESS, therefore, is not expected to reassume its lead role Inhousing finance in the foreseeable future.

1.08 BEDE funds public sector agencies implementing Government'sInvestment program. Its funds come from a variety of sources such aspetroleum revenues, external loans to the Government, and surpluses fromits operations. It provides loans to municipalities for financing of worksand it is also a source of funding for social housing projects implementedby BEV/JNV and the S&Ls. However, its recent liquidity problems arisingfrom declining oil revenues will likely diminish its capacity to continuefunding the housing sector.

1.09 The Central Bank intervenes in a variety of direct and indirectways to influence shelter policies according to Government plans. Underthe direction of the Monetary Board, it establishes interest rate limitsand lending conditions for various grou,s of borrowers and also providesdirect lines of uredit to other institutions for specific types of shelterlending. Responding to a decapitalization threat to the savings and loansystem (para 1.10) the Central Bank agreed to buy the low-yield portfolioof the savings and loan system in crder to restore the system's liquidity.These purchases began in 1986 but had to be suspended because of Governmentfiscal constraints.

1.10 The S&Ls and credit unions provide about 10-15 percent of housingfinancing. They were very active initially in the sector, but inflationand high deposit interest rates caused substantial losses on theirlong-term portfolio which carried fixed, relatively low interest rates.The Government therefore intervened and bought some of their low-yieldportfolio (para. 1.09) in an effort to keep them solvent.

1.11 Private developers and contractors have invested their ownresources supported by financing from some of the above-mentionedinstitutions to provide homes to upper-income groups. However, recenteconomic conditions-characterized by recession, high interest rates andthe absence, for legal reasons, of long term financial instrumentspermitting capitalization of interest-have generally curtailed demand fortheir products. Commercial banks have also recently curtailed theirmortgage lending, primarily because of the existence of more attractivealternatives which have fewer risks and constraints than housing loans.

1.12 Problems and Constraints in the Sector. The main sector problemsare: (i) inadequate mobilization and allocation of domestic savings forshelter development; (ii) insufficient production of housing employingnorms and standards affordable by lower income groups; and (iii) lack offinancial instruments adequate to promote housing affordability underprevailing conditions of inflation and interest rates in the 20-30 percentrange.

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Government PolieJes

1.13 The Government is aware of the nature and extent of Ecuador'sshelter problems and has given very high priority to dealing with them.Upon entering office in 1984, the current Administration began to implementits "Plan Techo", aimed at producing 254,000 new or rehabilitated housingunits between 1984-88 at a cost of US$830 million (1984 prices). BEV/JNVwas the primary vehicle for this program, although financing was madeavailable to other qualified participants able to produce shelter solutionsfor low-income groups. Under "Plan Techo", BEV/JNV was allotted the taskof financing 63 percent of the program, averaging 40,000 units per year,with IESS and other agencies financing the remainder. BEV/JNV was expectedto fund its program primarily from BEV's operations, bond sales, 'ocal andinternational loans, and earmarked oil revenues. BEV/JNV completed onlyabout 11,000 units for 1985, mainly because of funding and implementationcapacity constraints. Nonetheless, this was a substantial increasecompared to its pre-1980 annual production level of about 4,000 units.BEV/JNV's output for 1986 was approximately 20,000 new and rehabilitatedunits; consequently the Government's Plan targets are unlikely to be met bythe end of 1988.

1.14 When the Administration came to office in 1984, the cost of theaverage housing solution developed by BEV/JNV was affordable primarily tobeneficiaries above the median household income level (US$262 per month).Since that time, BEV/JNV has moved aggressively to improve housingaffordability by developing a variety of housiag types, ranging from coreunits to 45 square meter houses, as well as developing a program for homeimprovement loans. As a result, (assuming comparable financing terms) themajority of BEV's housing solutions are now affordable to beneficiaries inthe 30-50 percentile household income groups. Consistent with the Bank'sadvice, the Government has also recognized the need to reform financialpolicies, including those in the housing sector, to promote domesticresource mobilization and to develop new long-term lending instrumentswhich would improve housing affordability while improving cost recovery.The drop in petroleum prices and recent loss of revenues from earthquakeand flood damage has also caused the Government to begin to examine thefiecal dimensions of municipal management, to strive to increase efficiencywithin public agencies, and encourage greater private sector participationin the delivery of shelter for low-income groups.

International Lending in the Sector

1.15 The US Agency for International Development (USAID) has providedthree loans totalling US$61 million to BEV and the S&Ls and is currentlypreparing a fourth loan for US$30 million, to be shared equally between aCentral Bank line of credit for S&Ls and BEV/JNV, In 1962, theInter-American Development Bank (IDB) made a US$10.6 million loan toBEV/JNV to finance infrastructure, and in February 1987, it approved aUS$57 million loan for similar works. The Government of the FederalRepublic of Germany has recently provided loans for US$1.9 million tofinance upgrading works in one small town, and about US$2 million to assistvictims of the March 1987 earthquakes. The projects which these loanssupport have generally focussed upon beneficiaries above the median income

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level and few special attempts have been made to deal with sectoral orinstitational issues (e.g., high norms and standards, subsidies, costrecovery, and low productivity).

1.16 Bank urban assistance to the country began with the GuayaquilUrban Development Project (Loan 1776-EC) which became effective in 1980.This US$31 million loan was designed to demonstrate alternative low-costapproaches to providing services to poor beneficiaries with a minimum ofsubsidy. The pro4ect included sites and services, urban upgrading, loansto artisans, and some technical assistance to the Municipality ofGuayaquil, BEV and the other agencies involved in project implementation.On account of the institutional complexity of the project, delays inimplementation were experienced inltially. However, following projectreformulation in 1984, project targets were met substantially. Loansavings of about US$5.0 million arising from devaluations of the sucrewould be cancelled upon loan closing at the end of 1987. Another loan forthe National Low Income Housing Project (Loan 2135-EC) for US$35.7 million,was made in 1982. It was designed to support Government's policies forproviding affordable housing to the urban poor, strengthen theinstitutional, technical, and financial capacity of BEV/JNV, anddemonstrate the feasibility of providing low-cost shelter solutions inQuito and selected secondary cities. Project targets were metsatisfactorily within the initial Closing Date; however, loan savings ofabout US$9.0 million materialized owing to devaluations of the sucre. In1987, approximately US$5.0 million from such savings were reallocated foran earthquake shelter and municipal building reconstruction program. Theremaining US$4.0 million would be used until June 1988 to continuefis.ancing works in the project area similar to those initially includedunder the project.

1.17 Concurrent with implementation of Loan 2135-EC, GTZ developed atechnical assistance program for BEV!JNV. That program has beeninstrumental in promoting reforms within BEV/JNV which are consistent withthe institutional objectives of Loan 2135-EC. Specifically, the GTZprogram has (i) prepared required manuals, procedures and job descriptionsand assessed computing needs to underpin the institutional separation ofJNV from BEV; (ii) financed technical staff to improve low cost housingdesigns and promulgate ideas for improved financial management within BEVand JNV; and (iii) carried out the first market survey to assess the demandfor BEV/JNV's various products. GTZ has agreed to maintain its technical'assistance program in force until 1990; it would therefore overlap with andreinforce the technical assistance to be provided under the proposed loan(para. 2.06). Under its extended program, GTZ would help BEV and JNVimplement their reorganization, implement their computerization program,and improve administrative systems inter alia for financial management andcollections.

1.18 The Guayaquil project successfully sensitized the Government toalternatives for addressing low-income shelter issues (e.g. lower norms andstandards, urban upgrading, and home improvement credit); the second Bankproject continued the process by financing more affordable housing for theurban poor in selected geographic zones involving a share of BEV/JNV's

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investment program. The second project also helped implement institutionalreforms within BEV/JNV, and preliminary steps were taken to separate thefunctions and operations of both institutions. These pro4ects demonstratedthe feasibility and benefits of: (i) providing a variety of low-costshelter units satisiying beneficiary needs and ability to pay;(ii) reducing construction and titling time and allowing beneficiariesearlier access to unizs; and (iii) encouraging greater participation ofprivate developers in activities financed by BEV/JNV.

1.19 Bank Sector Strategy. The Bank's strategy in the sector is tohelp the Government develop policies and institutions to increase thesupply of affordable housing for lower income groups while minimizingpublic subsidies. Consistent with this strategy, the proposed projectwould incorporate agreements affecting BEV/JNV's entire investment program,including those portions being financed by other external agencies such asIDB, USAID, and GTZ. Moreover, it is expected that the new mortgageinstrument and financial policies (paras. 2.27 and 2.35) to be adopted byBEV in the context of the proposed project would serve as a model foradoption by other housing finance institutions (e.g. IESS and the S&Ls).In the near future, the Bank expects to intensify its dialogue on municipalmanagement issues.

II, THE PROJECT

2.01 Project Origin. The proposed project was identified in late1985, and was prepared by BEV/JNV with the assistance of GTZ and Bankstaff. It was appraised in February 1987. Negotiations for the proposedproject took place in Washington from November 16 to 20, 1987. TheEcuadorian delegation was led by Ing. Francisco Albornoz, President ofBEV/JNV. During preparation and appraisal of the proposed project, closecoordination was maintained with the team preparing and appraising theproposed Financial Sector Loan, which would support important reforas ofthe financial system consistent with the financ'al policy reforms beingintroduced under the proposed housing loan. Moreover, the proposed housingproject takes into account the findings of the Bank's 1985 review of thePublic Investment Program.

2.02 Project Rationale. The Guayaquil Urban Development Project (Loan1776-EC) began a process aimed at providing low-cost shelter alternativesand re-orienting the Government's approach to shelter investment. Normsand standards have been reduced significantly, urban upgrading andpartially built (core) units have become widely accepted, and the principleof cost recovery is better understood. The second project (Loan 2135-EC)focussed more directly upon the operations of BEV/JNV and was designed toachieve greater institutional and operational reforms in these agencies,while at the same time, implementing principles of af'ordability and costrecovery within a share of their investment program. Although achievementsunder these projetts have so far been generally satisfactory, there isstill need for Bank assistance to continue to promote reduction of normsand standards and greater operational efficiency within BEV/JNV, andprovide lower-cost shelter units to a larger group of beneficiaries on a

cost recoverable basis. There is reed to work with BEV/JNV to improvetheir product mix, beneficiary selection, costing policies, resourcemobilization, interest rate structure, etc., and make BEV more autonomousin its finances. Private sector participation in providing low-costshelter needs to be fostered. Many of the results of the GTZ andBank-financed studies and technical assistance work under Loan 2135-EC(paras. 1.16 and 1.17) are expected to come to fruition during thisproject. ',onsequently, the proposed project would help consolidate andexpand acli,evements under the previous projects and extend the principlesof affordability and cost recovery to BEV/JNV's entire programs. It wouldalso extend the financial sector reforms being undertaken by theGovernment, with the support of the Bank, to the housing sector.Additionally, increased employment in construction and related sectorswould result from this project.

2.03 Project Objectives and Relation to the Sector. Specific projectobjectives include: (i) increasing the production of low-income housing;(ii) adoption by BEV of interest rate policies and a new mortgageinstrument (paras 2.27 and 2.35) designed to improve resource mobilizationand allocation in the housing sector; (iii) further streamlining andstrengthening of the financial, administrative and productive efficiency ofBEV/JNV within a continued process of rationalization of the Government'spublic housing investment program; (iv) better targetting of BEV/JNVproduction to make it more responsive to the needs of low-incomebeneficiaries; and (v) fostering greater participation of privatecontractors/developers in the production of low-income housing.

2.04 Achievement of these ob4ectives would call for coordination withother lending agencies and consequent reduction or elimination ofconflicting or multiple requirements regarding operational criteria, normsand standards, procedures, onlending terms, etc. Such coordination hasalready been initiated, for example, with USAID and with the IPB sites andservices project which was approved in February, 1987, where there iscongruenw_e with the Bank's contracting requirements and use of demandsurveys to determine BEV/JNV's investment program. The Bank has alsoestablished a close working relationship with GTZ in implementation of itstechnical assistance program (para 1.17).

2.05 Project Description. The proposed project would be a share ofBEV's 1988-1993 investment program. This program, which would 1eimplemented through BEV, JNV and private developers and contractors(para 2.13), would cost an estimated US$312 million with a foreign exchangecomponent of US$80.7 million (26%). It would be financed by USAID(US$23 million); IDB (US$57 million); GTZ (US$3 million); BEV/JNV(US$138 million); beneficiaries (US$31 million) and the proposed Bank loan(US$60 million). Based upon results of a demand analysis conducted by BEValong with implementation rates achieved in recent years, the totalinvestment program will comprise: (a) construction of urban infrastructure(water distribution, access roa( ., drainage, etc.) necessary to developabout 45,000 serviced lots; (b) about 35,000 housing units of varioussizes; (c) credit for about 55,000 home improvement loans; and(d) investments in equipment, vehicles and technical assistance to improveBEV/JNV's operations. The proposed project would include about 12,000

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serviced lots with and without dwelling units of various sizes, and about

15,000 home improvement loans throughout the country over the next sixyears. Technical assistance and vehicles and equipment for BEV and JNVwould also be included under the project. There would be strict advanceidentification and separation of works to be financed by various agenciesto facilitate procurement and supervision. During negotiations it was

agreed that investment decisioas on quantity and types of shelter unitswould be based upon demand analyses which BEV would conduct annually andwhich would be acceptable to the Bank. BEV's 1987 investment program wasprepared after such an analysis.

2.06 The proposed project would focus on BEV as the financing entity,and JNV, along with a special unit in BEV (for the home improvementprogram), and private developers as implementing agents. The technicalassistance component would be important for BEV since one of the goals isto continue with the achievements of Loan 2135-EC (para. 2.02) and the GTZtechnical assistance program for institutional strengthening (para.1.17)to provide BEV with a firmer financial footing and institutional base torespond to sector needs. The project would also strengthen the staffingaud administrative and implementing capacity of BEV and JNV, andestablish norms and standards, and operating systems regarding siteselection, land acquisition, design, contracting, supervision, reporting,beneficiary selection, titling and shelter allocation. The appraisalmission reviewed the 1987-1990 technical assistance program which GTZprepared in conjunction with BEV and JNV and found the program to beacceptable. A copy of the workplan is in the Project Files with a summaryof the consultant needs in Annex 5. Since GTZ would continue itscoordinating role for technical assistance activities during the projectperiod, signing of an appropriate agreement between BEV/JNV and GTZ,acceptable to the Bank is a condition of loan effectiveness.

2.07 Project Costs. The estimated total cost for the share of BEV's1988-93 investment program which the Bank would help finance would beUS$85.7 million equivalent, including US$21.7 million (26%) in foreigncosts. The base cost, expressed in November 1987 prices, would be US$79.0million, net of taxes. Construction costs and average values for homeimprovement loans are based on BEV/JNV's past experience, appropriatelymodified to reflect the lower norms and standards agreed under the project(Annex 3 ). Physical contingencies averaging 5% anl price contingenciesaveraging 4% have been assumed, respectively reflecting (i) the fact thatdesigns and standards have already been agreed for model units, and (ii)the projected levels of international inflation during the project period.Annex 2, contains the detailed project costs (by components) which aresummarized below.

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PROJECT COSTS SUMMARY

US$Million % Total % of_ _ _ ________ Base

Estimated Costs Local Foreign Total F.E.C. CostsLand Acquisition 2.6 0.0 2.6 0.0% 3.2%Design andSupervision (7%) 3.5 2.3 5.8 40.0% 7.3%

Materials Loans 18.4 5.6 24.0 23.3% 30.5%Sites & Services 3.2 1.1 4.3 25.0% 5.4%Serviced Lot + 21sq.m. Core Unit 6.2 2.1 8.3 25.0% 10.5%

Serviced Lot + 37sq.m. Unit 17.8 5.9 23.7 25.0% 30.2%

Serviced Lot + 54sq.m. Unit 4.4 1.5 5.8 25.0% 7.4%

Technical Assistance 0.3 1.1 1.4 80.0% 1.8%Project Adminis-

tration (3%) 2.5 0.0 2.5 0.0% 3.1%Vehicles & Equipment 0.0 0.5 0.5 100.0% 0.6%

Project Base Costs 58.9 20.1 79.0 25.4% 100.0%

PhysicalContingencies 2.8 0.8 3.6 25.4% 5.0%

PriceContingencies 2.3 0.8 3.1 25.4% 3.9%

Total Project Costs 64.0 21.7 85.7 25.4% 108.9%=~~ =

2.08 Financing Plan. The project financing plan is shown below:

AmountSource US$ million %

IBRD 60.0 70BEV 17.1 20Beneficiaries 8.6 10

Total 85.7 100

The proposed Bank loan of US$60 million would include US$21.7 milliontoward the estimated foreign exchange component and US$38.3 million towardslocal costs. BEV would finance US$17.1 million from interual cash

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generation, and beneficiaries would provide US$8.6 million. Financing ofsome local costs by the Bank is justified on account of the Government'ssound economic policies maintained in the face of high externa1 debtservice payments and harsh exogenous shocks caused by declining oil pricesand loss of export flows due to earthquake damage to the country's main oilpipeline in 1987.

Status of Design Works

2.09 All of the shelter prototype models to be used in the proposedproject were reviewed at appraisal and their final designs and costingfound acceptable (Annex 2, table 2). About 60% of the plans for the sitesto be developed during the first year of construction have completed finaldrawings. The remaining 40% have completed preliminary designs, with finaldrawings expected to be completed before December 31, 1987.

2.10 All of the infrastructure works for site development to befinanced under the proposed loan would be constructed in accordance withdes4gn guidelines and engineering criteria reviewed by the Bank and agreedwith JNV. Similarly, all shelter prototype models (para. 2.09) to befinanced under the proposed loan would be constructed according to normsand standards agreed with the Bank (Annex 3).

2.11 Land Acquisition. BEV has already acquired land for the iirstthree years of project implementation. These sites have been reviewed andfound suitable. During negotiations It was agreed that suitable sites forthe remaining two and one half years of project works would be acquired inaccordance with a schedule (acceptable to the Sank) to be completed by June1989. A list of the acquired sites and BEV's land acquisition proceduresare in the Project Files.

2.12 Institutional and Legal Arrangements. BEV would be responsiblefor overall project coordination. Project implementation would be carriedout by JNV, the home improvement lending unit within BEV, and privatedevelopers. While JNV would implement all works through privatecontractors (instead of by force account), private contractors would alsobe encouraged to act as individual developers with financing from BEV,provided they meet project criteria for the units to be built. Withrespect to project monitoring, reporting and liaison with the Bank, BEVwould assign responsibilities to specific individuals in its relevantdepartments.

2.13 Responsibility for implementing various project components wouldbe as follows: serviced lots with and without superstructure - JNV(through private contractors) and private developers; home improvementloans - BEV's home improvement division; technical assistance -GTZ/BEV/JNV and consultants. BEV would provide construction financing toJNV and to private developers in accordance with legal agreements withthem; such agreements would specify inter alia, a description of the worksto be financed (in accordance with demand surveys), the duration of theconstruction period, and onlending terms and conditions from BEV to JNV andprivate developers.

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2.14 The Borrower under the proposed Bank loan would he the Republicof Ecuador. It would on-lend the entire proceeds of the loan in Sucres toBEV at a variable interest rate established from time to time, equivalentto the rate paid by BEV for its savings deposits. BEV would provideconstruction financing to JNV and private developers at the same interestrate as that charged by the Government to BEV. The interest rate chargedto final beneficiaries would be sueh rate plus a spread initially set at1.5 percent p.a. and increasing to BEV's full administrattve costs aftertwo years. The revenues from the difference between the Bank's lendingrate and 'he rate charged to BEV would be used by the Government towardscoverage of the foreign exchange risk which it would bear on the Bankloan. The adequacy of BEV's spread would be reviewed annually with theBank. The mortgage instrument used by final beneficiaries would providefor annual adjustment of loan amortization payments to reflect theaffordability and interest rate criteria presented in Annex 9. Signing ofSubsidiary Agreements acceptable to the Bank between the Government and BEVand BEV and JNV would be conditions of effectiveness of the proposed loan.Approval by the Bank of a model contract between JNV and private developersand between BEV and private developers would be conditions of disbursementfor relevant components of the project.

2.15 BEV has agreed to formulate its overall investment program (i.e.,for all funds it receives, whether from IBRD, other lenders or its ownresources), on the basis of a demand analysis which would be conductedannually in low-income areas using the methodology and procedures whichhave been reviewed and found acceptable by the Bank and agreed with USAIDand IDB. The results of such study and the proposed investment programresulting therefrom would be submitted for Bank comments. (The first suchanalysis was carried out in 1986 for BEV's 1987 investment program.)Additionally, BEV/JNV would prepare and submit to the Bank for review andapproval an annual detailed investment program including the location andmix of proposed shelter solutions, and estimated costs for low-incomeshelter beneficiaries. Projects which are not consistent with agreeddesign standards or with the aforementioned demand analysis survey wouldnot be eligible for Bank financing. These conditions would apply equallyto JNV and to private contractors. It is therefore expected that therewould be strong incentive for compliance with these norms and standards inorder to obtain Bank financing.

2.16 Using the results of demand analysis, BEV would plan its annualnational investment program in light of resource availability. Since thedemand analysis is likely to indicate greater effective demand thanavailable resources, there may be need to pro-rate the number and types ofshelter solutions in line with the survey results. The investment programwould be publicized, and JNV and private developers would compete foravailable BEV funds by offering proposals for BEV financing. Given thepresent lack of experience by private developers acting independently todevelop low income housing, it is expected that their role would initiallybe rather small. However, since JNV would subcontract its works to privatecontractors, the private sector would play a prominent role insubcontracting. It is thus expected that JNV would provide the platformfrom which private developers would be launched into independent businesses

as developers of low-income housing. For both JNV and developers, part oftheir obligation would be to locate and pre-screen potential buyers for theunits before construction begins. While construction is underway, the listof pre-screened beneficiaries would be further screened by BEV officialsusing a set of criteria acceptable to the Bank. When the units are ready,BEV would offer mortgage financing to the pte-selected beneficiaries, withJNV and the developers receiving the'r value added from BEV, which wouldinclude this in the sale price of the unit, in accordance with a pricingsystem acceptable to the Benk. JNV and private developers would not berelieved of their financial and legal obligations to BEV until they had abeneficiary selected for the completed unit and the beneficiary was foundacceptable to BEV.

2.17 For home improvement loans, a special division within BEVexperienced with such lending would administer this component. Homeimprovement loans would be administered in a similar fashion as BEV loansto JNV and private developers. After the home improvement loan isdisbursed, BEV would administer and recover the funds from beneficiariesthrough its collection division.

2.18 Project Execution. BEV and JNV are generally adequately staffedto execute the project; however, should demand analysis reveal the need toadjust their implementation capacity during project execution, they wouldrecruit staff as necessary. In terms of staffing and implementationcapacity, BEV's home improvement unit is well equipped to handle its tasks,but it will require some additional computing equipment and vehicles whichwould be financed under the project. For new housing construction, JNVwould be hiring contractors to do the work and it has the land available.Based on JNV's performance under Loan 2135-EC, a five and a half-yearimplementation period with a disbursement period of twelve semesters isestimated. The project is expected to be completed by June 30, 1993.Annex 4 provides further details on project implementation.

2.19 Procurement. Procurement under the proposed project would be inaccordance with procedures acceptable to the Bank. Approximately US$45.2million of civil works, US$0.5 million of vehicles and equipment, and aboutUS$1.5 million in technical assistance would be procured under the proposedproject. On the basis of prior experience under Loan 2135-EC, packages forcivil works totalling US$1.2 million or more would be procured throughInternational Competitive Bidding (ICB) while other civil works would beprocured through local competitive bidding (LCB) using proceduressatisfactory to the Bank. Given the nature of the works and the localexpertise available in this type of construction work, it is not expectedthat foreign firms would be interested in bidding for contracts smallerthan this amount. About 200 contracts are expected to be let for civilworks for the urbanization of sites and construction of shelter units. Thephasing and dispersion of works over the entire country is not conducive topackaging of contracts for different sites. Nevertheless, within givensites and for similar phases of works, bids would be invited for packages.To allow participation of smaller companies, firms would be permitted tobid on all or parts of the packages. Vehicles and equipment would beprocured through LCB because the associated contracts are not expected toexceed US$150,000 and are therefore not suitable for ICB. The project

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would4also finance about US$26.7 million in home improvement loans whichwould be granted directly to beneficiaries who would make materialpurchases from local suppliers. Consultants f-.nanced under the technicalassistance component of the project would be selected in accordance withBank Guidelines, and under terms of reference satisfactory to the Bank.Outline terms of reference are attached at Annex 5. The limits for priorBank review of bidding documents (the first five contracts, regardless oftheir value, as well as all subsequent contracts in excess of US$1.2million) would result in a coverage of about 63% of the estimated value ofcivil works contracts. This would result in review of about 34% of theapproximately 200 contracts which are expected to be let. Further detailson procurement (with proposed Bank disbursements in brackets) are providedbelow:

Component Procurement Method

ICB LCB Other N/A Total

…-…-(US$millions)----

1. Lan --d 2.7 2.7(0.0) (0.0)

2. Dsgn. & Spvn. 3.4 3.4(0,0) (0.0)

3. Home Impvt. Lns. -- -- - 26.2 26.2(21.3) (21.3)

4. Shelter Units & 27.0 18.2 - 45.2Civil Works (22.0) (14.7) (36.7)

5. Tech. Asst. -- 1.5 - 1.5(1.5) (1.5)

6. Project Admn. - 6.2 6.2(0.0) (0.0)

7. Vehicles and Equipment 0.5 - 0.5(0.5) (0.5)

Totals 27.0 18.7 1.5 38.5 85.7(22.0) (15.2) (1.5) (21.3) (60.0)

2.20 The Bank has recently conducted a detailed review to determinethe consistency of Ecuadorian procurement procedures with Bank Guidelines.During the review, the following specific points of conflict betweenEcuador's Procurement Law and Bank Procurement Guidelines were identified.Local law (i) permits, without further review, contract changes of up to35% in quantities of goods or services, vs. 15% to 20% permitted by the

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Bank; (ti) requires that foreign bidders have a local representative;(iii) specifies a two-envelope bid submission system, whereas the Bankrequires a single envelope; (iv) requires that bid and performanceguarantees be supplied by a bank established in Ecuador, whereas the Bankaccepts banks established anywhere; (v) does not allow for priceadjustments; (vi) does 'ot permit the submission of bids by mail;(vil) does not specify clear evaluation criteria for selecting a bid;(viii) requires that the financial solvency of a foreign bidder, whencertified by a foreign bank, must be recertified by a local bank;(ix) requires that letters of credit or other advances to cover purchasesof goods or services be secured by a 100% Bank guarantee by the seller orservice provider; (x) requires that consultants be registered in Ecuador tobe eligible for hiring; and (xi) requires that consultants be associatedwith Ecuadorian etonsultants having at least a 30% participation in theassignments under consideration. However, Ecuador's Procurement Law(Article 45) also provides that the procurement procedures of internationalfinancial institutions supersede local law, so long as such procedures areexpressly stated in the relevant contracts. Accordingly, the LoanAgreement contains express provisions to resolve in the Bank's favor thespecific conflicts between the Bank's Guidelines and local law. Theseprovisions were confirmed during negotiations.

Disbursements

2.21 Consistent with procurement prior review limits (para 2.19) andBank practice in Ecuador, for contracts valued at less than US$1.2 million,disbursements would be made against statements of expenditures (SOEs).Documentation for these expenditures would not be submitted to the Bank,but would be retained by BEV for periodic inspection by Bank staff. Toexpedite project execution, a Special Account would be opened in theCentral Bank (para 2.33) with a deposit of up to US$4 million, representingfour months' peak disbursements. The Closing Date for the proposed loanwould be December 31, 1993. The disbursement period is estimated at 6years, consistent with experience under prior Bank loans in the sector inEcuador. Annex 2, Table 3 provides an estimated schedule of disbursements.

2.22 The Bank loan would be disbursed against;

(a) 81% of expenditures on civil works for urban infrastructure,construction of shelter solutions, and subloans made tobeneficiaries for construction, expansion or renovation ofdwellings;

(b) 100% of foreign expenditures for vehicles and equipment and 81%of expenditures for imported goods procured locally; and

(c) 100% of expenditures for consulting services.

There would be no Bank disbursements for the cost of design, supervision,and project administration costs. Retroactive financing of US$2 million isprovided for urbanization and new home construction works which began afterNovember 20, 1987, and are in accordance with Bank Procurement Guidelinesand norms and standards agreed to during appraisal. Such financing isneeded to allow BEV to proceed with identified project works while theproposed loan is being processed.

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Financial Analysis

2.23 General. Up to 1986, BEV and JNV had one set of financialaccounts, with all transactions of JNV recorded as part of BEV'soperations. In 1986, BEV/JNV received about 31% of their financing fromthe Government, 13% from savings deposits, 15% from suppliers, 18% frominternational agencies, 9% from bond sales, 6% from local lenders, and 8%from reserves and accumulated earnings. In 1986, assets amounted to aboutUS$254 million equivalent. As part of the technical assistance programsupported by Loan 2135-EC and GTZ (para 1.17), it was decided that,consistent with plans to make each institution more efficient with greaterindependence and accountability, BEV and JNV should have separate budgetsand accounts. For JNV, one of the basic financial implications would bethat it would borrow funds from BEV for construction financing with costsbased on the contract delivery price determined at the time of proposalsubmission, or determined on a cost-plus basis. BEV's financial recordswould be considerably simplified as it would only show loans to JNV(instead of works in progress) thereby building BEV's identity as afinancial institution. Also, for both institutions, their assets, payroll,overheads, etc., would be separated under the new system. The Boards ofboth institutions have agreed to such a proposal and the new proceduresgoverning relations between BEV and JNV have been approved. These newprocedures were reviewed by the Bank and found to be consistent withproject goals. They are included in the Project Files.

2.24 BEV's operations have expanded significantly throughout thecountry since 1984. As Annex 6 shows, between 1984 and 1986 BEV's staff inits 27 field offices increased from 1,037 to 1,556; during the same period,its staff outside Quito increased from 375 to 642. With the greatergeographical dispersion of activities, preparation of accounting recordsmanually and their storage in the regional offices impeded smooth andtimely management information flows. The current system, while adequatefor statutory Central Bank deposit requirements, does not provide enoughdetail on a timely basis for improved management actions. This shortcomingis being addressed through computerization of the national system alongwith a staff strengthening program of technical assistance which is to becoordinated with GTZ (para 2.06).

2.25 Operating Results. Results of operations for the years endingDecember 31, 1984 to-1986 with projections for 1987 to 1993 are detailed inAnnex 7, and summarized below. Between 1984 and 1986, net earnings rosefrom a loss of about 16 million sucres (US$0.2 million) to a profit ofabout 28 million sucres (US$0.3 million) after reaching just over 151million sucres (US$1.5 million) in 1985.

ECUADOR

SECOND NATIONAL LOW-INCOME HOUSING PROJECT

(millions of Ecuadoran sucres)

Actual Estimated

1984 1986 1980 1980 1968 1980 1980 1991 1992 1998

Inc...:Interest on loans 1,097 1,711 1,837 3,873 7,549 18,140 29,001 28,677 89,289 62,808Rentals, c_slons and other 252 1,328 1,085 1,220 1,461 1,744 2,088 2,499 8,680 3,698

1,949 8,037 2,922 4,899 9,G90 14,884 22,087 81,076 42,280 60,412----- ___ _____ ----- _______ ____- __-_ _-- ------- - …__

Costs and expense:Interet 191 1,391 496 1,759 8,678 6,179 8,724 11,892 10,294 26,889Personnel and aWin. costs 1,126 1,144 1,882 2,568 38,99 6,743 8,072 11,038 14,873 19,876Deprecation and amortization 49 441 517 68 83 64 66 68 71 76

Total Expenses 1,98S 2,M8e 2,894 4,402 7,e47 11,997 16,881 22,998 31,088 40,841

Not ineom (loss) for the year (16) 161 28 497 1,386 2,898 6,226 8,978 11,261 16,671

* Figures through 1987 are for BEV/JNV jointly. Later Projections are for BEV alonesince JNV would have its own accounts.

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2.26 Three key factors explain much of the relatively poor operatingresults over the last three years, viz., the low rate of interest chargedto borrowers compared to inflation and cost of funds; the long periodbetween construction and final sale of units to beneficiaries; and apersonnel build-up in BEV/JNV. These are discussed below along with thecorrective measures being proposed to improve performance.

Interest Rates

2.27 BEV's current interest rate on new loans averages 19%. Inflationfor the year endlng June 1987 averaged 31%, owing partly to the effects ofthe March 1987 earthquake. As Annex 8, indicates, the current average rateof interest on BEV's overall portfolio is just over 13% and most of itsloans have from 5 to 10 years remaining maturity. Nevertheless, BEVcurrently has to pay around 20% on savings accounts. The negative marginon savings accounts is somewhat compensated by non-market sources of funds(loans from international institutions, loans from BEDE, and compulsorypurchases of its bonds by commercial banks) on which it pays around 13% onaverage or, on Government contributions to its equity, nothing at all.Like other institutions, BEV cannot charge more than the "MaximumConventional Rate," currently 28% p.a., on its long term loans. Under thenew mortgage loan contract that BEV has developed (Annex 9) BEV will beginto charge a variable interest rate equal to the rate which it pays onsavings deposits (now 20% p.a.) plus a spread of 1.5% initially, so therate to final beneficiaries is expected to remain below the present MaximumConventional Rate. The Bank has received assurances that the Governmentwill allow BEV to charge the interest rate resulting from the agreedformula, which is acceptable so long as BEV's savings deposit rate ismarket related. The formula proposed to determine interest rates under theproject would be consistent with similar formulae applied under other Bankprojects affecting the financial sector and would yield a markedly improvedinterest rate structure for BEV. Should BEV's savings deposit rates becomeinadequate relative to savings deposit rates in the wider banking system,BEV and the Bank would have to agree on a modified method of determininginterest rates on its loans. During negotiations, it was agreed that BEVwould complete a study before June 30, 1988, to determine itsadministrative costs and that it would implement a phased program toinclude the full amount of such costs in its onlending rate by November 30,1990. Moreover, it was agreed that the adequacy of the level of BEV'sdeposit rate would be reviewed annually with the Bank.

2.28 The new mortgage system (para 2.35) will also permit BEV tomobilize an increasing proportion of its resources from the market. As BEVshifts from non-market to market sources of funds, its average cost offunds will rise, but not by enough to jeopardize an improvement in itsfinancial performance arising from the application of market-determinedinterest rates to a larger proportion of its portfolio. It was agreedduring negotiations that BEV would begin using the newly developed mortgagecontract for all BEV loans starting in November 1988. The new systemcannot be implemented earlier than this date because lt involves extensivechanges throughout BEV.

2.29 Construction Period. While about 70% of the works financed underLoan 2135-EC were completed and sold within twelve months of start of

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construction, for JNV's other works the figure was only about 40%. Theselong construction and sales periods are due to many reasons, the primaryones being delays in: (1) completion of urbanization works; (ii) carryingout completion supervision, and ascertaining final project and unit costs(for legal agreement with beneficiaries); and (iii), finding and selectingbeneficiaries. Also, problems In obtaining municipal permits haveoccasionally led to construction delays in the past. Most of theseproblems should be eliminated in the future, since JNV and privatedevelopers would obtain municipal permits In advance and superstructureconstruction would begin only after all urbanization works are complete.The new computerization and staff strengthening system which GTZ wouldpromote (para 2.06), should accelerate determination of closing costs.Regarding beneficiary selection, the proposed annual demand analysis (paras2.04 and 2.16) would help assure that units are constructed In accordancewith target beneficiaries' demand and willingness to pay. Additionally,the process of beneficiary selection would begin on or before constructionworks commence so that units could be immediately sold upon completion.The new graduated mortgage system (Annex 9) would also assist in makingunits more marketable to beneficiaries as it would help reduce the initialincome level needed to qualify for a unit,

2.30 Personnel Expenses. BEV's senior management does not envisageany further need for significant expansion of Its staff as it plans toretrain and redeploy existing staff to other areas as needed to meet BEV'sexpanded and modified work program. However, there would still be need forsome Incremental staff since additional skilled key personnel are likely tobe identified through the technical assistance program (para 2.06).Overall, over the project period, staff expenses are not expected toincrease by more than about 2% in real terms.

2.31 Details of expected financial improvements in BEV's operationsare provided in Annex 7. By 1993, BBV's financing beae is expected to bere-oriented to more market borrowing and internally gent -ated funds (e.g.,savings as a share of total cash source would increase ..om about 16% in1987 to about 27% in 1993). These overall changes noted above would beprimarily due to: (i) the proposed new mortgage system under which BEV'slending rate would be pegged to the rate it pays on savings deposit;(ii) considerable reduction in duration of construction time and in thevolume of unsold units; and (iii), slow increases in its staff and overheadexpenses.

2.32 JNV's financial system is expected to be substantiallysimplified. It would essentially borrow working capital from BEV andbuild shelter units through contractors, after which it would repay BEVbased on the sale price or cost-plus amount of completed units (para 2.10).JNV's proposed accounting system Is designed to comply with statutoryregulations and is adequate for such purpose; however, in its present form,it does not provide several key outputs such as monthly investment in eachproject and sub-project, relation of physical progress with financialtransactions, and an updated system to project funding needs. Duringappraisal, these and other shortcomings of the system were discussed withJNV, and assurances were received during negotiations that they would betaken into consideration under the technical assistance program(para 2.06). In terms of Immediate requirements, JNV needs to appoint aNational Finance Division Chief, a Department Head of Cost Accounting, a

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Section Chief of Control and Planning, a National Director of InformationSystems, and a National Director of Promotion of BEV's housing program.Assurances were received that such appointments would be iade before loaneffectiveness. An Action Plan establishing performance indicators for BEVwas agreed to during negotiations. It would be reviewed annuallythroughout the life of the project (Annex 10).

2.33 Accounts and Audits. The Government would estabJish and maintaina Special Account in the Central Bank to finance project works.Withdrawals and replenishments would be made in accordance with establishedBank guidelines. The Government has agreed to have independent externalaudits of this account as well as of the SOE's (para 2.21) and allaccounts of BEV and JNV. These audited reports, including relatedmanagement letters, would be sent to the Bank no later than four monthsafter the end of the fiscal year of these entities. Under Loan 2135-EC,BEV/JNV's accounts were audited by independent external auditors for thefirst time in 1984. The audit for both its 1984 and 1985 accounts hadseveral qualifications with respect to such areas as incomplete accounts,mispostings and some control deiiciencies. BEV/JNV's 1986 audit continuesto reflect some of the problems identified previously since these problemscould not be rectified fully during the intervening period. Nevertheless,BEV/JNV have already initiated various corrective actions. The internalaudit system has been strengthened with qualified staff and there arecurrently 31 full-time employees who regularly visit each of the fieldoffices. The auditors use uniform audit programs, and have madesubstantial progress in such areas as standardizing procedures and systemsand conducting internal seminars. The mission selectively reviewed theinternal audit program and found it to be satisfactory. While the existingaccounting and control systems within BEV/JNV are adequate to meet projectrequirements, there is still need for the audit system in BEV to beimproved, and the separate audit system for JNV to be established and madefunctional. The technical assistance package (para 2.06) will addressthese issues which would be included within the Action Plan (Annex 10)which was agreed to during negotiations and would be reviewed annuallyduring project implementation. Agreement between BEV/JNV and the Bank onTerms of Reference and implementation schedule for a program to rectifydeficiencies in BEV/JNV's accounting systems would be a condition of loaneffectiveness.

2.34 Cost Recovery. Under the previous Bank projects, the principlesof cost recovery and affordability were introduced, and in general, havebeen widely accepted. Inflation and increased production costs have beenamong the distortionary elements under Loans 1776-EC and 2135-EC which haveled to some concern regarding affordability and full cost recovery. Theproposed project would continue to refine and improve cost recoveryprocedures (e.g. in beneficiary screening, mortgage instruments, collectionand follow-up systems), and so promote affordability and replicabilitygoals (e.g., in the number and variety of shelter solutions offered and inlowered norms and standards). Expected reforms in BEV's interest ratepolicies (para 2.27) would also increase levels of cost recovery under theproject.

2.35 In the context of the proposed project, a new mortgage systemwould be adopted by BEV for use in all its operations (Annex 9). Thissystem would use adjustable rates which would vary annually with the

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rate which BEV pays on savings deposits. An administrative charge,initially set at 1.5% but lncreasing to full costs after two years, wouldbe added to this rate, and to maintain affordability, there would be a capon monthly payments which could not exceed 25% of household income. Anypayment amount in excess of this share would be automatically capitalizedfor later payment. Should there be a need, the loan could be extended toaccommodate a longer repayment period. Expectations are that this featurewould only be necessary under unlikely circumstances in which historicallyhigh real deposi. rates prevailed and real wages lagged. In the unlikelyevent that a beneficiary is required to exceed his or her initial loanrepayment period by more than 30% and such beneficiary is up to date withhis or her monthly payment, BEV would forgive the rest of the loan. Thisfeature is provided to assure beneficiaries that they would not be tied toan indefinite repayment schedule if they are without overdue payments.

2.36 Full and direct cost recovery would be achieved frornbeneficiaries for the urbanized lots with and without various units, andalso for home improvement loans. These components comprise approximately99% of total project costs. As is customary, technical assistance costs(about 1% of total project costs) would be borne by the Government. BEVwould compute the costs of the units as the total of: the price of land,all preparation and off and on-site (pro-rated, if needed) urbanizationcosts (including design and supervision), superstructure cost (whereapplicable), and the cost of capital during construction. The interestrate charged to final beneficiaries for both the sites and service andcredit programs would be the rate BEV pays on its savings deposits plus anadministrative fee set at 1.5% annually (para 2.27). The rate would beadjusted annually with appropriate adjustments made to beneficiaryrepayment schedules. Household connection and user charges will be thesame as those which the utilities normally levy against similar users.

2.37 Benefits. The proposed project is not expected to have anyadverse environmental impact. All of the envisaged work would be inestablished cities where the beneficiaries already reside and thereforedisplacement and relocation of residents would not occur. Constructionworks would be on land zoned for such development and these lands would bepurchased by BEV, JNV, and developers and titles would be transferred tothe beneficiaries as they meet their obligations. In the context ofdeveloping an earthquake reconstruction program for financing under Loan2135-EC (para 1.16), the Bank and BEV agreed on constructicn standardscapable of sustaining normal earthquake risks. These standards would beapplied under the proposed project. The proposed project would havebeneficial environmental impacts in (i) its contribution to orderlyregulated development of the project sites and reduction of erosionresulting from squatter settlements along hillsides, and (ii) eliminationof unhealthy living conditions for those beneficiaries who would receivenew units or renovate their homes and upgrade sanitary facilities.Approximately 12,000 families would receive urbanized lots with and withoutsome type of unit, while about 15,000 families would receive homeimprovement credits. As a result of the application of reducedconstruction norms and standards to BEV/JNV's total investment program, theweighted average cost of the housing units funded by BEV would be reducedby about 20%, concomitantly improving housing affordability. By the end ofthis project, the restructuring of BEV and JNV is expected to be completeand they would be re-oriented toward working in a concerted manner to

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address shelter needs on a national basis. Adoption by BEV of the newmortgage instrument would promote mobilization of domestic resources forshelter while improving resource allocation and shelter affordability. Bythe end of the project, it is expected that BEV would function with greater'ependence upon market sources of financing. It is also expected that JNVwould be considerably strengthened in its role as a developer. Along withnew and renovated homes, there is expected to be greater savings andinvestments in durable goods as beneficiaries try to consolidate theirhomes and furnish them. This, and the continued expansion of housingproduction, is expected to have ultimately a beneficial impact uponemployment and other national economic activities.

2.38 Economic Analysis. Annex 11 contains greater details oncomputation of the internal economic rate of return (IERR) of the project.For the new shelter component, project costs include the price of land, allinfrastructure and superstructure works which are done both before andafter the plots are sold to beneficiaries (including all cost of labor,muterials, etc. for consolidation) and an annual maintenance chargeamounting to 3% of the non-land cost of the investment (i.e. 60% ofinvestments). For the non-land investments, a residual value was computedbased upon a twenty-five year useful life with a straight-line depreciationschedule. Land cost was then added to this figure. Benefits of the newshelter component were based upon imputed rental figures which wereestimated from surveys of current rental values for similar units withsimilar amenities, locations, service levels, etc. For the homeimprovement loans, since there would be a wide variety of works which wouldbe financed under this component, it was assumed that expenditures forabout US$1,321 would result in improvements which were the same as havingan addtional room in the housing unit being renovated. This conversion wasdone for the convenience of having a common measuring factor. However,field surveys indicate that most of the works are for room additions and,even for the other works, the benefits accruing from them are similar tothose of a room addition, in terms of their cost/benefit ratios.

2.39 No assumptions were miade regarding the "without project' casesince this involves a great number of subjective elements (e.g. regardingsettlement patterns, Government reactions, etc.). Nevertheless, givenhistorical evidence on the way such settlements originate and develop, itis reasonable to assume that in economic terms, the costs of such analternative would be much higher, and its benefits, much less than thosearising from this project. The figures in Annex 11 indicate that theoverall economic rate of return (IERR) for the project is about 13% withthe new housing component having a rate of about 11% and the homeimprovement component, 18%. If there were to be a one-year delay inproject lmplementation, the overall IERR would fall to 11%, and if allcosts were to rise by 10% with no compensatory increase in benefits, theresulting overall IERR would be 12%. Further details on the assumptionsand analysis are presented in Annex 11 and in the Project Files.

2.40 Urban Poverty Impact. The table below indicates the range ofbeneficiaries to whom the project is expected to be affordable. The homeimprovement loans would be affordable to about 85% of urban families whilethe largest unit (the 54 m2 unit) would be accessible to the top 40% offamilies in terms of household income. The urbanized lots would beaffordable to about 80% eL the population. The project would promote

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improved accessibility under bEV's entire program since affordabilitytargets would be established for ail of BEV's wor'-s (rather than just asubset as under Loan 2135-EC). Additionall,, the new mortgage system wouldallow greater flexibility for beneficiary inclusion since lower initialpayments could he made to the extent that they do not result in repaymentschedules longer than twenty-five years. In arriving at the aboveestimates, it is assumed that approximately 25% of the initial payments dueby beneficiaries would be capitalized by BEV. With the above distributionof beneficiaries, about 50% of the project works would be affordable tourban families at or below the poverty level (approx. US$155 per month inhousehold income).

Share of UrbanShare of families toDemand wltich units

Shelter Total Program Project (1987) are affordableSolution Type (1988-1992) (1988-92) % %

Urbanized Lot 10,350 2,760 23 80Lot + 21 m2 Unit 9,000 2,400 20 70Lot + 37 m2 Unit 22,050 5,880 49 50Lot + 54 m2 Unit 3,600 960 8 40

Total 45,000 12,000 100 -

Home Improvement Loans 55,000 15,000 85

2.41 Employment. Assuming that labor comprises approximately 20percent of the total cost of the project and the average wage level isUS$150 per month, the project is expected to generate directlyapproximately 114,000 person months of employment with an additional 50% inindirect employment. All of these jobs would of course not be net to theeconomy sinice there would be some degree of displacement of existing lowerpaying ones.

Risks

2.42 There are risks of nonachievement of project goals. Most ofthese are related to the change of Government which would take place inlate 1988. If a new management of BEV/JNV were to decide that it cannotaccept demand surveys as the basis for its investment decisP'ns, this couldaffect marketability of BEV/JNV's products and their affordability, andresult in stocks of unsold houses. Also, if the management decided not tocontinue with Bank/GTZ supported reforms in BEV/JNV, this wouldsubstantially reduce project achievements, since the proposedadministrative, technical and financial changes are necessary to increaseproductivity and efficiency and reduce subsidies. The proposal for fullcost recovery in the context of market-based interest rates and adjustmentof payments in line with inflation are other important aspects of thisproject which would curtail its achievements, if not fully sustained.Continued Government acceptance of a growing role for private developerswould be important to stimulate the supply of low-income housing, as isbeneficiary willingness to repay their loans. In this regard, should therebe a sustained decline in the real income level of beneficiaries, erosionof BEV's financial base would result since beneficiaries would not be ableto meet their debt-service obligations.

- 23 -

2.43 All of these risks have certain probabilities of occurring;however they are not great, mainly because this is not the firstBank-financed project in the sector, and BEV/JNV and the beneficiaries haveall accepted and institutionalized the basic Bank-supported principles ofcost recovery and affordability. In each step of project preparation,there were extensive discussions with the responsible officials, and apartfrom agreeing to the solutions proposed, there have been important actionstaken to achieve the identified goals. For example, the Boards of BEV andJNV have already approved plans to separate the institutions' activitiesand functions, and the Government has already adopted monetary reformpolicies which are consistent with the functioning of the new mortageinstrument to be introduced under the project. Regarding the possibilityof wage levels declining in real terms for sustained periods, the record(Annex 12, pages 1 and 2) indicates that there has been a consistenttendency to maintain real wages over the past eight years. This is a verysensitiv, issue in Ecuador and it is not likely that the historical trendwould be easily reversed, at least over the short term. Regardingquestions of beneficiary acceptance and the role of private developers, thesecond project (Loan 2135-EC) has already indicated beneficiarysatisfaction with the solutions offered and the participation of privatedevelopers in project works is allowed under the Government's ongoing "PlanTecho".

2.44 Reversal of these trends by any new Government would involvepolicy reversals at various levels (e.g. in monetary policy and economicphilosophy), and more importantly, it would requlre the new Government toprovide greater public subsiO!es (to the extent that beneficiaries do notbear project costs and current projected output levels are maintained).This is a step which would be difficult, given the likely climate ofeconomic austerity in Ecuador over the next few years. It is therefore notexpected that policies would be adopted which would negatively affect theproposed project.

III. AGREEMENTS REACHED AND RECOMMENDATION

3.01 The following agreements were reached during negotiations:

(i) BEV's investment decision on quantity and types of shelter unitsto be based on demand analysis which BEV would conduct annuallyand which would be acceptable to the Bank (para 2.05).

(ii) All infrastructure works for site development to be financedunder the proposed loan would be in accordance with designguidelines, engineering criteria and norms and standardsacceptable to the Bank (para 2.10).

(iii) BEV to acquire suitable sites for the remaining two years and ahalf of project works in accordance with a schedule acceptable tothe Bank and to be completed by June 30, 1989 (para 2.11).

(iv) Project beneficiaries to be selected in accordance with criteriawhich are approved by the Bank (para 2.16).

- 24 -

(v) Procurement for project works, and consultants to be hired inaccordance with Bank guidelines under TORs acceptable to the Bank(para 2.20).

(vi) Government to agree that REV may charge beneficiaries a variableinterest rate equal to the rate which BEV pays on savingsdeposits plus 1.5% initially (para 2.27).

(vii) Bank and BEV agree on an Action Program establishing performanceindicators for BEV, to be reviewed annually; (para 2.32).

(viii) JNV's financial accotnting system and records would bemodified/enhanced in accordance with findings under the technicalassistance program (para 2.32).

(ix) Special Account to be maintained in the Central Bank. Statementof Expenditures (SOEs) and this account as well as BEV and JNVaccounts to be audited by independent auditors acceptable toBank, with audited reports sent to the Bank no later than fourmonths after end of each fiscal year of the respective entities(para 2.33).

(x) Cost of units to comprise price of land, all preparationand off and on-site (pro-rated, if needed) urbanization costs(including design and supervision), superstructure cost (whereapplicable), and the cost of capital during construction(para 2.36).

3.03 The following would be Conditions of Loan Effectiveness:

(i) BEV/JNV and GTZ should enter into a contract, acceptable to theBank, under which GTZ would continue its role as coordinatingagency for technical assistance to BEV and JNV (para 2.06).

(ii) Government and BEV to enter into a Subsidiary Agreementacceptable to the Bank (para 2.14).

(iii) BEV and JNV to enter a Subsidiary Agreement acceptable to theBank (para 2.14).

(iv) JNV to appoint a national Finance Division Chief, a DepartmentHead of Cost Accounting, a Section Chief of Control andPlanning, a National Director of Information Systems and aNational Director of Promotion of BEV's housing program(para 2.32).

(v) The Bank and BEV/JNV to agree to Terms of Reference and animplementation schedule for a program to rectify deficiencies inBEV/JNV's accounting systems (para 2.33).

The following would be Conditions of Disbursement

3.03 Approval by the Bank of model contracts between JNV and privatedevelopers and between BEV and private developers (para 2.13).

- 25 -

Recommendation

3.04 With the above assurances and conditions, the proposed project,would be suitable for a Bank loan of US$60 million to be paid over a periodof seventeen years including four years of grace.

- 26 - AM= 1

ECUADODR

SECUDNATO1ALLOW.c-ZCME HOUS ING PROJECT

Housing sector Profile

J. foplatio Igto ad Ibaold lomtloe. 0. be k aii a5 . lotrpl. Other Orb. ToeAreaM rbe bSb-tot4 Iuol hti

eou total Avg. Iso. . .. .........................hp. in Iblhd(t0) (08) ien heusold 1981-M081 T1.0 15,6 155,60 0,6 I6,m

.... ....... ....... ....... bataidar duollip:194 6,5 5S 1,8l6 lesirablo 7,000 148,0 227,300 0,009 hIJ,OS1$15 6,704 5.4 1,242 lu-rpairable 26,100 30,400 S,1i0 41,60 ,1l2 6,0a .3 s. , .....0 .. ... . .... .. . ..12 7,01 5.2 1,1303 sb-total 11,709 264,30 44,0013 41,7 331,7ml 16,283 5.1 1,421 le' u1 acpled1979 7,48 4.9 1,528 babitable duelliags 4,000 I,'m 10,000 11,00 21,$ll10 767 4.8 1,004 I B l,ll -- - -- .- --1t1 ,9t12 4.1 1,684 Total homesi a"da 111,700 25,300 430I , 40016 910,7tl1l02 0,1l0 4.6 1,19 ----. -- ........ -. . . . .M603 1,301 4.5 1,059

194 8,01 4.4 1,95510S 6,72 4.3 2,026

c. Deficit i lmfrastruetue Seiesn.

lotrops. terTotalbfouIS&Id uit: Ars Ste as htio ll

bs houses 72.28 16.96 19.78 45.481. Yard 4.08 3.8 9.48 6.78Pros tabs or oalls 2.18 1.11 26.68 28.42room rivers 6.3 1.43 32.48 14.18Ire ter trcs 19.55 4.13 6.48 10.6Others 1.43 7.48 3.56 2.8E

gleetrlelty:CMosUsea 14.16 8.6 32.68 62.91bt eom teed 5.13 11.48 67.28 31.18

kthromu:mrivate or saw S.C. 19.58 74.43 15.32 34.01pit Itrlao 12.58 12.38 14.18 14.16... 13.43 16.18 51.18

Swer 5"te:Sfvr lie M2.Rn 61.33 5.45 34.91Spti tWe 20.9 14.53 11.28 14.02I... 16.48 24.21 83.31 51.18

Soieeo: lEC, Satna) P0olatin Camsus, 1114 oad 1982.

ECUADOR

SECOND NATIONAL LOW-INCOME IOUSING PROJECT

Total Project Cost

(US$000, November 1987 prices)

1988 1988 1983 1989 1099 1998 1991 1991 1992 1992 1998C O M P O N E N T TOTALS SEa SEM SEM SEM SEM SEN SEN SEN SEN SEN SEW

1 2 1 2 1 2 1 2 1 2 1

LAND ACqUISITION 2,556 282 282 232 232 282 282 282 282 282 282 282DESIGN AND SUPERVISION (76) 5,775 625 526 525 526 525 25s 625 25 52 525 525MATERIALS LOANS 24,803 2.162 2,182 2,182 2,182 2,182 2,192 2,182 2,152 2,182 2,182 2,102SITES A SERVICES 4,218 888 8B8 888 888 88 888 888 u88 88 888 888 SERVICED LOT + 21 oq.m. CORE UNIT 8,249 749 749 749 749 749 749 749 749 749 749 749SERVICED LOT. 37 sq... t6IT 23,742 2,158 2,158 2,168 2,158 2,168 2,158 2,158 2,168 2,158 2,158 2,158SERVICED LOT . 54 sq.m. UNIT 5,827 Su Su 58s 5C80 5ao 580 ca3 Su sao S SuTECHNICAL ASSISTANCE 1,377 125 126 126 125 126 125 125 125 125 125 125PROJECT ADNXNISTRATWN (8M) 2,475 225 226 225 225 226 225 225 225 225 225 225VEHI I EQUIPUENT SW 0 l9 19 89a a 0 a 0 a a 9

OASE COSTS 78,718 7,11P 7,210 7,219 7,410 7,110 7,110 7,110 7,110 7,110 7,119 7,119PHYSICAL CONTINNCIES (5S) 8,988 858 a5 8s5 85 856 8 8 858 86 83 8PRICE C4iT9ENCIES (4%) 8,O86 0 56 ll 169 207 246 285 828 411 $49 on6

TOTAL PROJECT COST 85,714 7,488 7,624 7,699 7,987 7,676 7,714 7,758 7,792 7,879 6,917 6,157

Note: Descreponcy in total figures due to rounding.(US el 1)

Financing from: ----

rm 800.BEV/JNV 17.1 mBneeiclarlos 8 .6

65.7

- 28 Table 2

ECUADOR

SECoiD NATIoNAL LOW-INCOME HOUSING PROJECT

Average Cost by Shelter Prototype (US$)

:. IIIJID: N11. L0T: .11. LOT : M. Lt1MT :: : * l8sq.a.: t 31sTq..: * 5hg.11.NIT W(I? : HNIT

uLD: 204: 204: 204: 2

DiStl IDO un sRIYsIoI(TX) :: 114 222 305: 392

IIFlASTl1TlIl :: 1429 1429 1429: 1429

SIlE Y :: 0: 1544: 2721: 3156

DIIIIIISTlAflO (3S) :: 49: 95: 131: 16U

IIU0CIAL (1i) :: 163: 318: 43: 50T 0 T I L S (1$) :: 1959: 3812: 5225: 6tl1

-29 - ANNX2

ECUADOR

SECOND NATIONAL LOW-INCOME HOUSING PROJECT

Estimated Schedule of Disbursement

(US$ millions)

fiscal Semester Seoester Cmlati"v isbt.Year oding: Iisbt. (OSIil) (t of tot)

1988 Jue 30, 1988 5.3 5.3 0.61Dember 31, 1906 5.3 10.6 17.72

1989 Jue 30, 1989 5.3 15.9 26.52cmber 31, 1989 5.4 21.3 35.52

1990 Jue 30, 1990 5.4 26.? 4.52Dember 31, 1990 5.4 32.1 53.52

1991 Jue 30, 1991 5.5 31.6 62.72cember 31, 1991 5.5 43.1 71.86

1992 Jue 30, 1992 4.9 48.0 80.62Dember 31. 1992 4.0 52.0 16.?2

1993 June 30, 1993 4.0 56.0 93.32December 31, 1993 4.0 60.0 100.1K

- 30 - AIN 3

he 1 of 9

ECUADOR

SECOND NATIONAL LOW-INCOME HOUSING PROJECT

Construction Details and Materials:

FOUNDATION Reinforced concrete slabs with a compressive strength of

210 Kg/co2a to serve additionally as a "subfloor," with

a smooth finish.

STRUCTURE Reinforced concrete anchor braces and columse with a

compressive strength of 210 Kg/cm'.

MASONRT Structural blocks or bricks, exposed, with just the

joints "patched and pointed."

PLASTERING Vertical in bathrooms and kitchens, as backing for

plumbing fixtures and shower cubicles.

POTABLE WATER Threadable-typ. PVC pressure pipes, in accordace witb

SUPPLY standard ASTH D-1785.

INSTALLATIONS

RAINFALL AND PVC pipes In accordance with Inen standard No. 1374 foe

WASTE ATER the internal system and cement pipes for the emssl

INSTALLATIONS system.

-31 - AMEX 3

Page 2 of 9

E I ICAL No ducting Involved& twin cables, 2 x No. 12 AWG and 2

INSTALLATIONS x No. 10 AWG, in plastic coated lead.

ROOF Asbestos cement sheets with ridges (apexes) of the sam

material, attached to metal purlins type IPAC (80 x 40 x 15

x 3).

DOORS Rollow, of laurel or cinnamon wood, with metal frames, type

IPAC 4 x 4.

WINDOWS Of shaped iron, with 3 - clear glass.

PLUMING Glazed tiles, white.

FIXTURUS Toilet: With low flush tank, gasket, cover and shut-off

valve.

Rand basin: With chrome spray faucet, metal trap and

shut-oft valve.

Kitchb sink: Single-unit sink of enameled iron, with

extended faucet, metal trap and shut-off valve.

LAUNDRY Washing stone with water supply pipe and tank with exteuded

faucet.

-32 -

Page 3 of 9

Standard Urban Design and Engineering Specifications

A. UrbanA.~~~~

Front regular single-family lot

6. in the Sierra and Oriente

regions

6m - 7. in the coastal region

Area of regular single-family lot

72-102m. in th6 Sierra and

Oriente regions

72-105z2 in the coastal region

Maximum width of walkways 6m

Maximum width of main roads 14.

Maximum width of secondary roads l3m-12m

(10m roads with sidewalks of

1.50m and a pavement of 7a

is preferable).

Length of a (street) block 90-120m

Distance between roads approximately 300m

Ratio of parking places to Not greater than 1:10

numbstr of lots

Land utilization coefficient

The land utilization coefficient will have to be calculated based on

the usable land area. Except in cases of land allocated for special purposes

(fov example transmission towers, railways, etc.) or where road widths are

predetermined by an urban master plan, or where the designs involve more than

2,600 houses, the minimum acceptable land utilization coefficient will be 60S.

~ 33 - ANNEX 3Page 4 of 9

Where land has been allocated for special purposes or road width is

predetermined by an urban master plan, the above land use coefficient

requirement must still be met, but the calculation -- depending on the case

will be based on the total useful area less the area specially allocated or

the excess road width resulting from the width predetermined in the urban

master plan.

The above will not apply in those cases where the area allocated is

used as a green area, for parking or vehiculer traffic.

In the latter case, the area allocated for this purpose in excess of

10% of the total area can be deducted.

In cases where the design covers more than 2,600 units, the minimum

acceptable land utilization coefficient will be 552.

B. Water

Maximum design allocation

Quito 150 per head/day

Sierra The amount to be provided in

towns and cities of the Sierra

will be negotiated with them,

based on a design flow of 100

Per head/day, with as a maximum

figure the established for Quito.

Guayaquil, coastal area 180 per head/day

and Oriente

Twin household connections of 19mm (interior diameter) reducing to

12 - (interior diameter).

PVC pipes

Minimum diameter 50m (interior/diameter).

- 34- ANNEX3Page 5 of 9

C. Sevr

Plain concrete pipes

Twin household outlets of 150mm (interior diameter)

Minim= diameter of pipes 200m (interior diameter)

D. Drains or Combined Drains/Severe

Concrete pipes, plain or reinforced depending on interior diameter,

minima diameter of pipes 250D (interior diamter).

S. Electricit,

Overhead system, preferably using timber posts.

Public lighting systems with 125 W - 250 V lamps set on distribution

system posts.

Aluminum alloy conductors.

DMUp . 2.05 (VA, except in the case of SMLNORTS and KLEPCO, where

the use of DMWp a 2.56 and 2.96, respectively. will be acceptable provided

application is made for such reduction.

: W - -~ g 0

V0 -G -- . -u~ 4-w _W 4WT~W~ . -.-

-~~~~~~-

-4'------- t _ + .- T *.- + -T ~ ~ ~ ~ ~ --- _. + , | w T w

U _~~~~~~~~~~~~. I - _ _U - O -- '_ t_U a. t '.1 |jI#.#,0. -- t-+_-

J ^ f ;~~~~~~~ _ _ - - -Q - W v - - - - - - - - *t

4~~~~~~~~~~~~~~( - , |

-36-

ANNEX3Page 7 of 9

,. I@f!

.~~~ ~ ~~~~ 4'_.

1 I~~~~~~~~~4

{ 000-S.9!i-qs~~i -S~ ]!-- ---------

40~~~~~~a

't 11 - - . C .. IJI

ANNEX 3__- 37-_ Page 8 of 9

_i l;'w #_ w "- W -' t 1j i\ '

~~~~~~~~~If . 'uTd | 1;l t 3~~~~~~~~~~~

I~~~~I

9~~~

.~~U

a o~~~~~.'

.~ ~ ~ ~~~~~~S

i _ _ _ ;.~~~~~~~

I - - .b

ANNEX 3

- 38- Pa8 9 of 9

EE E ;L

JE El <aI :

03 E 9

_~~~~~~~ .

1 E3E

EB.E9

El =B El

El El E

ECUADOR

SECOND NATIONAL LOW-INCOME HOUSING PROJECT

Indicative Project Implementation Schedule

(Number of Solutions)

19 6 196 109 1969 1996 196 1991 19 1 1 19COMPONENT MTOAL SEN SEM SEM SEM SEN SEN SEM SEN sE SEN SEN

1 2 1 2 1 2 1 2 1 2 1

ATERIAS LOANS 1456 1327 1327 1327 1327 1827 1327 1327 1327 1827 182 1327SIES A SEivCES 2664 241 241 241 241 241 241 241 241 241 241 241SEuICEu LOT e 21 *q... CUE UIT 2654 241 241 241 241 241 241 241 241 241 241 241SEICEO LOT. + 37 eq.. WM 5573 SW 5m7 667 667 W ? 6 my 66 ? 661 7SEICED LOT 54 q.s. WIT 1991 96 90 96 96 96 96 96 96 96 91 96

TOTAL MRER OF SOLUTIONS 2656S 2412 2412 2412 2412 2412 2412 2413 2412 2412 2412 2412

. ._~~~~~~~~~~~~~~~~~I

- 40- ANNME 5

328C Page of 3

9aZ Tem of ire" Fdtlamid O(bt of (_atats for 2m1cl AsuIe

,_V _ d iurume dlam S w_

Qu4ficatfon of QadtitA. PW#/JWWM

(1) Omttat to advse ad vork vith JW/V and train A. (i) SeFior lX. Inw advd - 1 1187 toudeut* In redadq and anlyuin stin data I(o q ) io 3 6

1lfd IF tda stu team idetifyl WA ait e fiyw U ine0-m,dda needs ad aTwgft for c0oion of kewo m f PEW iqil6

these, elWq ad Japlawi a systq for plan- inel thru* a deUtaaed lzmt-aft, pZegmIU Ieltatkm, o_dimnati ad tUti with several branob .a .aontml ad inestm prcgtan t _rnt V/IWoffices in 1aMdr.

L Dad ad _oew i amlysda. B. (1) Sociolgist Wtth Iad - X 11/ to(or eqiivalant) ad d tatiti 36 162,000

(1) a,lzas to rwevi adtirtE daeme d maci- bedgpazd ad at lent five amseomoc sav ad deelop and inplt a apeyim In desgning, S0linizpaImaI follinww ad updating systn and and interpretliv hnahU dolpwide tholy IXt* to ER/JNV _romt to wrap ard bauidary pnfile.andat to f onld of the amil immnoprog1= amligE understudy ad developmutof rdu,t panBliw sa are also to be &eby emultant.

(1i) Consltant to wor with above-described ow ltat in (ii) Remdt with at lent first ds, I - U/8? toXSiadli oeesuk paoti of srwys ard aalye or eqidvaleit ad tee 111 / 9 0 36 54,0ad udertabig so dt evalatiai o reimdsd aperifaee in inuui asulysi ofinetmt prupWm. ngsir or sdI projects.

C. Mm I7rsdi Pojet C. (1) tJrbg Pler with audwa desr - X O1/88 to(or qutvalet) ad a dtabli 120 36 162,000

(1) 4 ltgnt to reee editig data ad apeimm of reotd of add t for simlwft tedulad auuitoe umit in the pilot urban works in simiar avir t.

8z.q prdect fianed y GQereas ad to aml-IN this Wth otae sti. If neee, in order to (ii) ne e ith advad X X 01/8S to.,d1e the a ,nt a the destability ad/or need dree (or oqAvalent) ad pw w90 36 56,000of od r udw mWfa project, ad if redj, to xperlence in simiar arh.dloUp, i n ad coordlrate ah pwojects (a alimLtad bad& ad prepa a prg for further pro- (l) Omgtfng fixm iAthiwide peria I 08 toJ=it wih n- dlits4 ad othr local awthocittes In urbae qingr prsti e. w10 150,000

D. Via and Adainistratim

(1) tat to rene exitig data ard rem=wA&- (i) Finanial Aslyst With an alvand doem - X Ol/88 totis c the tedadra latstad unit ard to wak (or equvalat) Ad at least five yeam O6/W 16 72,100wih mt staff to u,dify the prposal ste, If experlom In simil qirsti.

ed, ad to iaplm the pmpos, aptally inthe a of financal plantig, awt eccounting,flnogcal i_ I ad cotrol ad portfolio

_w-.

L intonation Wsta

(1) n-aat to reelr eistin data a proped (i) Systes Atalyst wth at lat five ya - 07/87 toeatfturz IaMStIaa of the tedhidal apeieae in etstbllt ald 07/90 36 54,0O0

aestste unit, idatify ad maect aitknal supervising e_xatarid ttngdata If rapirmd, ad work with the unit staff In qeratc with bIndi offices.IWIlwtft an aWrda*e caputerized eysta inall WJ/JNV offie alag with foultia of an (ii) Tbo pI a with wde eslume in I - 11/87 toapee -pr gem for usirg vsr mervi for sailar operata ad ith ablity to M0/90 72 72,000antdia m-s, trainin staff, etc., to ure train staff, develop proodure adeffidat use of the installed equipezt. mM&, etc.

(111) Other abort tere iwultant to ale- - - 11/87 toMnt specific ttmi d. 10/90 12 56,00

F. Smdns ad In-me Training

00* trainn Pr n for VarA ataff in both catral Varlow csultdants deped pa type X I _ - 100,000ad field chim a project is bein ipiE d. and level of exptise needed.

0,vpe sttxs ina, etc.

. dl 1,,woc

cOION AMlOML LOW4NCOk* NOUWW1 PROJMCn goNzOly cotf am Im~ EcugkodM. de la dmondo (E

Ea~~~~amm

- - - - - - - - - - - - - -n - - M

swEsD __ ------- 4 w

;~~s 'm 0 ,

, --- n _- - L--- C _J

L .1~~~~~~~W4A IP4%

mx * r- --------^ - "*L

~~~aE WTWEDMORl

_R I~~~~~~~~~~~~~~I

sat.~~~~~~~~~~

__ ~~~SA6flC$O UDOC)A

S*R#VON cR506 &ALE? _. I DSE

_ n T -- ~_ I AR smrn c1 11 EE

! - - - I

H 1H 10-- | | H| 4~~~~~~~~~*| S3l| _

H 1& 1E b I ~~~~~~~~~~~~S^ tJ", . . ,. - 1 hw - .1, H 1 X, ~~~~~~~~a

H I t-t 1,1 " ' - '' - i ...... ' ..................... '.1 H~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1

, , ,, ,. ,, 11 .................. .l _ ,,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~'

-42-

ANNEX 5Page 3 of 3

i~~~~~~

g1't v

L-J I

- 43 -

ECUADOR All 6

SuO IA!IOA LOW-INON DOSING PRJWECT

SuLMMarY of Personnl BEV at JNV 1984-1986

total KE Quito Saquil A1 stw,

198 19 1906 1984 1965 1 1M4 1965 199 1964 1965 196

Claif icationmTop mahpot 34 43 56 13 14 22 2 4 3 19 25 31Profiusonl 91 130 231 44 50 72 29 44 61 18 36 qTKchical 37 50 134 33 21 54 14 22 27 10 1 53dbinistratimn 646 7n9 823 231 272 269 IJI 184 227 244 3 327

Swwvico 229 258 312 5 84 100 60 69 79 84 1o 1i

1,037 1,270 1,55 40 441 517 276 323 391 375 50 642

FunctiontNanaqeat 650 820 1,012 276 29% 3u1 150 1" 205 234 325 446Portfolio and savinp 283 326 348 89 102 107 9 67 91 116 137 150proj)t control 104 124 19b 42 4U 49 37 37 101 25 44 46

1,031 1.270 I5 406 441 517 276 323 391 375 50 642mas m _sam sam sea _sam ssa ae ae aas mm.

Percent of totaltQuito 39 35S 33Susauil 2n 252 26?

All oths 342 40S 41?

100t 1002 1002m am asam atsas

total JNV Permnest Contract

1 185 19 I1984 1965 1" 194 1965 1996Classification ---- ---- -

Top uaquet 14 15 15 14 15 15Professional 305 403 413 1" 293 29 107 110 120Technical 199 199 201 65 108 109 134 90 92Abinistration 196 234 235 88 151 151 tO0 83 84Service 167 226 224 30 79 79 137 147 145

ee1 1,076 1,098 395 646 647 496 430 441eases sass sass aea mmao mson mess mess* ase

Total 8EV and JNV

19B4 1985 198

Top anaeomt 49 S8 71Professional 396 533 644Technical 236 248 335tldanistration 842 1,023 1,058Serv:cn 396 484 536

1,918 2,346 2,644

ECUADOR

SECOND NATIONAL LOW-INCOME HOUSING PROJECT

C0hQ00 SALAWNCE SEs AS OF 0ECMER 3 *

YEAW BODO OECE 3 U

(d llon. of i 1n1 £c er.)

Ae4l IEstibstd

1064 1t6 1066B 1067 1s6 1339 160 1s1 1092 Is"

Cash 2,844 8,680 3,351 9,66 12,3 12,678 10,867 16,387 13,422 2,36Saving and loans 601 1,374 1,74 I7M 1,77 1,607 1,63 1,3 1,311 1,070Loa. rmivabl. 6,662 0,226 13,414 24,213 45,560 70,622 101,47 13.7n22 166,097 240,049ConstcXtion 10,516 15,140 21,060 27,M 20,456 86,220 45,617 57,624 72,443 0,56other soot. 1,477 4,502 7,549 5,00 5,318 4,B00 4,33 4,236 4,865 5,617

21,819 33,074 47,104 69,561 94,467 126,161 169,614 220,077 260,769 860,492

Liabilities and euity

Liabi I tie:Savings account. 7,108 10,170 12,132 15,054 20,360 27,09 36,279 47,707 62,735 62,4S6IEV bond. 1,97 3,846 4,679 7,441 10,612 14,320 19,910 25,090 88,862 42,345Sank loans- national 1,264 1,529 2,416 3,400 4,078 4,415 0,67 15,142 23,749 38,585Bank loans- intornational 2,3s 3,161 5,760 13,3 23,268 33,544 43,327 O0,713 64,560 62,622Other account. payable 1,086 4,609 6,630 8,007 9,860 11,87 15,806 19,513 24,434 &),199

13,763 22,60 31,603 43,65 6,486 92,855 124,601 150,084 1968,89 241,016

Equi ty:Covern.ont grant 6,654 6,973 13,510 16,510 22,453 27,383 33,644 41,246 50,373. 62,607 J Rorves and sec. earnings 1,382 1,20S 1,695 2,192 3,C45 6,443 11,666 19,747 30,907 46,66 *

6,036 10,179 15,205 20,702 26,900 88,625 46,212 00,993 61,670 108,475 -21,619 33,074 47,104 69,596 94,467 126,181 169,313 220,077 260,769 350,4932=2_= = I-=saz= -- =- vm$ . - Mmm=

* Figures through 1987 are for BEV and JNV jointly. Later projections are for BEV alone since JNV wouldhave its own accounts.

ECUADOR

SECOND NATIONAL LOW-INCOM HOUSING PROJECT

CONDENSED STATEMENT OF RESULTS OF OPERATCNS

YEAR ENDD# DECEER 81

(milion, of noMinal Ecuador.n mro.)

Act I Esmated

1964 1965 1996 1967 1968 1969 1990 1901 1992 198"

Income:Interest on loan 1,082 1,676 1,741 8,617 7,896 12,97T 1i9,X 38,496 ,109 52.

other Intnrest 1S as to 156 319 1 169 13 197

Reals, comision aN other 252 1'2 1,65 1,225 1,461 1,744 2,66 2,498 , 5,

1,949 8,oa7 2,922 4,619 91, 14,964 22.,6 311,171 42,26c7 56,40

Coot an expefses:Interest-

Sav"nge 7M4 1,145 1,840 2,761 8,69" 4,712 0,196 6,M 3,4 6 15,638

National loa_ aN KV bonds 478 417 65 1,17 1,97 2,W0 8,822 4,403 6,06 6,011

International debt e1 146 7 1,80 2,421 3,7 5,162 6,76 s,8o ,761

_ ~~~- - _ -_ _ af __

Yotal 1,238 l,796 5,184 5,819 7,7m 30,706 14,638 19,261 25,847 82,418

Personnl s.d rloted Coots 04 591 1,271 1,525 2,1 5,11 4,132 6,67: 9,6S 12,02

Ads;nlstrstlvo 621 563 11 1," 1,629 2,816 8,161 4,26 6,5,1 7,431

Deprcaltion an amortization 49 441 6a7 68 e8 04 0 71 76

2,412 8,298 5,5a 7,691 11,675 16,559 22,66 39,266 46,186 12,126

Interes and adnistrtiwo:Charge to constrwctloo '345) (302) (2,832) (2,96) (2,476) (3,94) (4,14?) (5,242) (6,666) (6,236)

Charge to purchaser (102) (106) (897) (665) (1,696) (1,69) (1,651) (2,523) (2,061) (5,7m)

Net costs and expenws 1,965 2,666 2,894 4,896 7,594 11,696 16,691 22,726 30,819 49,206

Not ;ncoe (loss) for the year (10) 161 28 511 1,496 2,999 5,86 6,849 11,66 16,263_ = 8 ==: :=~= 85=S 8

a Figures through 1987 are for BEV and JNV Jointly. Later projections

are for BEV alone since JNV would have its own accounts.

-46 - AXl 7

Table 3ECUADOR -

SECOND NATIONAL LW-INCOME HOUSING PROJECT

STlE AMMN OF WAI,S W (19 WEBO FMl

VW Witill DC1E 81

(mIll lam of namiml Eandarm ews)

tcttl Egtl Ited

1064 10865 1868 1987 19 1989 1990 1991 1992 1993

IosrtIims-Not mas for ths year (10) 151 28 47 1,358 2,8 522 8,078 11,251 15,571Ohelgtton t d uortlstln 49 '441 517 58 83 64 so 68 71 78tles of hes 1,437 1,685 3,850 5,289 13,988 18,676 16,131 20,218 25,725 32,205Loudl costs In sats (102) (105) (307) (605) (1,603) (1,569) (1,651) (2,320) (2,951) (3,705)Add, mortlat on (nig.) love 7 43 5a3 21 (822) (1,809) (1,035) (2,057) (2,780) (4,747)Less, J ortos lued (1t,) (1,582) (8,50) (4,173) (110,0) (10,63) (12,776) (16,018) (2,874) (25,577)

489 1,077 1,121 1,807 1,W97 2,029 4,681 7,975 10,942 13,91200w 8"ur8

= o t grats 1,878 2,319 4,587 5,a o 8,94 4,929 6,181 7,702 0,627 12,034fnroaose In svriltp soomats 1,658 8,062 1,982 8,822 5,0Q8 6,609 8,690 11,428 15,028 19,761Not Inclrse In KWV bands 617 11,37 1,833 2,782 8,371 4,106 5,000 0,078 7,884 8,963KmW b*k loa 863 1,020D ,518 10,034 10,789 11,432 17,845 17,045 17,725 13,000Inorss (duo) other pyebtb9s (31) 3,663 2,191 1,W7 1,264 2,527 3,511 4,120 4,915 5,785

Total saraw. 4,687 12,606 14,682 24,132 28,3 32,534 48,088 54,848 85,821 73,436

uses:Investment In program-

-A costrction costs 4,106 5,004 7,121 6,418 11,574 15,783 19,729 24,OB1 30,82B 38,5331V hM credlt 450 2,219 6,887 9,470 12,913 16,142 20,177 25,222 81,527

Total dIret csts 6,854 9,840 15,805 21,044 23,6W 35,871 44,838 58,048 70,060JW adi. Wd lntereot 00cts 845 aQ2 2,332 2,98 2,478 8,084 4,147 5,242 6,565 8,208

Total IwNstnnt 4,453 6,6 11,672 18,M 23,521 31,781 40,018 50,081 82,613 78,2S8

Raymetse buk loom 830 686 809 2,100 4,188 5,248 5,381

OWr, Inore_ (decra :'Ote asets 155 3,480 8,564 (1,521) (569) (386) (471) 43 859 808Savlos ad Loom (239) 573 868 32 15 20 2 84 45 59Prior prlod adjtam 55 87 (451) 0 (0) 0 0 0 (0) 0

(29) 4,366 8,468 (1,4) (574) (3) (445) 77 7 867

Total use 4,424 11,023 15,141 17,614 23,813 82,215 42,378 54,348 6.854 8,N

lnrot0 (dIrO) alh 283 1,465 (470) 6,517 2,487 818 3,694 0 (2,94) (11,93)

- 47 -

ANNEX 8ECUADOR

SECOND NATIONAL LOW-INCME WOUSING PROJECT

BEV - Unsecured Home Loans and Mortgae Loans December 1986

Percent

lot No. of Annual NO.rate loans Capital Avg. interest lous Capital

0t 54 1,535,736 29,440 0 0.4? 0.0X4q 94 I,02,959 21,444 72,118 0.72 0.1l52 1,294 74,537,272 58,051 3,724,864 10.12 2.326? 1,134 94,720,334 83,529 5,683,220 8.9% 2.927S 1,737 279,14,201 160,890 19,562,634 13.7? 9.bS8? 721 98,281,969 136,313 7,862,558 5.72 3.0?92 591 93,600,029 159,374 9,424,003 4.62 2.92102 717 190,415,394 265,572 19,041,539 5.6S 5.8%11 1,017 321,517,54? 316,143 35,366,930 8.02 9.9X12? 1,698 601,596,824 354,297 72,191,619 13.32 19.4?122142 564 251,657,404 446,201 35,232,037 4.41 7.7215? 200 120,619,121 603,096 18,092,861 1.6? 3.7?162 1 182,303 102,383 29,191 0.0? 0.02172 167 246,696,716 1,477,226 41,938,442 1.3? 7.6118? 2,526 79,264,672 316,0t9 143,687,641 19.9? 24.5?192 64 22,396,106 349,939 4,255,260 0.5? 0.n202 6 1,255,826 209,304 25,t165 0.0? 0.0221? 34 18,618,725 547,610 3,909,932 0.3? 0.6222? 6 2,506,675 417,779 551,469 0.0? 0.1?23? 0 0 0 0 0.0? 0.0?19? 1IB 41,204,174 349,939 7,828,793 0.9? 1.32

13.12 12,723 3,260,876,067 256,303 427,708272 100.0? 100.0?2832 t83a :ua:usaa uauaaa auuaasu msa mamm

- 48 -ANNEX 9Page 1 of 3

ECUADOR

SECOND NATIONAL LOW-INCOME H'USING PROJECT

Banco Ecuatoriano de la Vivienda

New Lending System

The introduction of a new mortgage loan contract by BancoEcuatoriano de la Vivienda (BEV) is an important innovation in theEcuadorian financial system. The new contract has been designed toreconcile the need of BEV's borrowers for more affordable housing withBEV's need to become financially stronger and less reliant on publicfunds. Although designed for BEV, the new loan contract is expected tobecome a model for the private savings and loan associations and, with somefurther adaptation, for other long-term lenders. The purpose of this noteis to explain the operation of the new contract.

BEV's reliance on the market for the resources to finance itsambitious housing program will grow in coming years. With the inflationaryconditions expected to prevail in Ecuador, the key to reconciling theaffordability of housing loan payments with the need for BEV to earn enoughIncome to pay adequate returns to its depositors lies in using loans withvariable interest rates combined with partial capitalization of interest.Without variable rate lending, BEV cannot ensure that its income from loanswill be sufficient to compensate depositors, cover its costs, and earn areasonable return on equity. Without interest capitalization the realpattern of loan repayments would fall sharply. This sharp fall wculd notbe congruent with the real income of borrowers which, in the worst ofcases, would only decline moderately and should be expected to rise in thelong run. The specific type of adjustment proposed by BEV is discussedbelow.

The interest rate on BEV's loans will be set annually by formulainitially adding 1.5 percentage points above the current interedt rate paidon savings deposits by BEV. Because interest on deposits is paid quarterlywhereas loan payments are made monthly, and BEV charges two points for loanorigination fee along with a requirement for beneficiaries to maintain twopercent of the loan in a non-interest bearing account, the effective spreadwould be approximately 3 percentage points. BEV will conduct a study todetermine its true administrative costs and the margin to be included inits onlending interest rate would be adjusted to fully reflect such costswithin two years. Loan payments will be adjusted each year by 75% of theamount by which the official minimum wage has changed. The initial loanpayment will be set to amortize the loan at an interest rate (the "paymentrate") considerably below the nominal rate resulting from the formula. Thepayment rate will be set to cover the real rate BEV expects to pay on itsdeposits, plus its administrative costs. As annual payments are divorced

- 49 -

A'NNEX 9Page Z of 3

from the amounts owed year by year, there is no guarantee that the loanwill be paid off in exactly the initial repayment period selected. Underall but the most unfavorable environments, however, simulations indicatethat the loan will be paid off in less than the selected period (5-25years). If necessary, BEV would extend the amortization period by 30% ofthe initial period in order to accommodate the need for deferred payments.Any amount not paid after the extended period will be forgiven, providedthat the beneficiary is up to date with his or her payments. Given thepayment rate, the loan amount will be set so that borrowers' initialpayments do not exceed 25% of household income. Assuming incomes rise atthe same rate as minimum wages, the percentage of household income devotedto housing loan payments would fall over time.

In order to illustrate how the model would work, the accompanyingtable shows the amortization of a BEV loan using the new loan contractunder the following conditions:

1. The real interest rate on deposits is +1% p.a.2. The real interest rate on loans is +5% p.a.3. Real wages fall by 30% over the life of the loan.4. The payment rate is +12%.5. Inflation varies, but averages 40%.

Under these assumptions the loan is amortized in 15 years.Additional calculations, (not shown) indicate that the loan would still beamortized within 25 years even if the real rate on deposits rose to 4% p.a.

ECUADOR

SECOND NATIONAL LOW-INCONE HOUSING PROJECT

Banco Ecustoriano de la Vivienda - New Mortgage Loan

Sno Stuatovtoam de la Viviaen" - WV llortaeo Loa

I AveTabeI 0 1 2 3 4 5 6 7 S 9 10 13 12 13 14 1s 16Inflation 3 28.04 20.04 40.04t 20. 0PI 50.0% 70.0%t 30.0% 10.0% 30.0% 40.0% 10.f% 40.0% 40.0% 30.0% 40.ft 50oos 60.0%Price Index I I 100 120 168 202 302 514 668 735 956 1529 2752 4404 6165 80t35 11221 148131 26930Av. Inta1ttLon 40.10% 1 20.0% 29.6% 26.3% 31.9% 38.7% 37.2% 31.0%b 32.6% 15.ra 39.3% 41.11 41.o% 40.1% 460.1% 40.7%o 41.9%I Ch.ange Malmm Uase I 18.0% 36.0% I8.0% 1.5.0% 63.0% 27.0% 9.0% 27.0% 54. 0 72.0ft 54.0% 36.0% 27.0% 4o00% 50.0% G0.0%W&n"imin 1853. I 536 632 840 1014 1471. 2S91 3044 3318 4214 640 11163 17191 23380 29692 -41569 62354 99761ffin Vsagfinflation elastic I 0.0% IHI". vowiae/a3nAt £leaacc(i 3 90.0% 3C"om Decline Real Min. Mae" 3 -30.83% 30ptni. Rasts I INokminal (3) 1 1 21.2% 4t.4% 21.2% 51.5% 71.?% 31.3% tt.1% 31.3% 61.6% 911.8 61.6% 41.4% 31.3% 41.6% 5I.5% G1."%kw "Mr. effective (2) 3 41.sft%Real I I I-00t 1.00% 1.00% 1.00% 1.00% 1.00% 1.90% 1.00% 1.00% I.00" 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%AV. Real I 1.00% I

Lending RateSt INominal (3) 1 3 26.0% 47.1% 26.0% 57.6% 78.6% 36.6% 15.5% 36.6% 68.1% 89.1% 6811-% 47.1% 36.6% 41.1 1 f 7.6% 60.1 0iLv. Mom. UEttcttv. (4) 3 41. 146% IReal I I 5.04% 5.04% 5.04% 5.04% 5.04% 5.04% 5.04% 5.04% 5.04% S.04% 5.04% 5.04% 5.04%A S.04% 5.04% 5.04%AV. Real t 5.04% I

Paynent Ret. (5) 3 12.00% IAOa I 1000.0

WAGE INDEXED PAWIWIT I3EWIINL IIlnterest I 3 260.5 5181.8 367.81 884.7 1634.3 1162.1 571.4 1289.8 2671.4 4692.4 5289.8 4415,.8 3690.7 393. 4 2975. 4 0.0laplicit Capitalization I I 188.5 418.8 248.1 707.6 1350.4 803.5 163.4 745.5 1817.4 3224.0 3013.1 1428.8 .544.1 -2228.7 .4448.2 0.0Aaortiaatioo I I 86.0 109.1 123.3 164.4 251.2 306.5 311.0 349.4 414.1 720.3 915.6 1119.0 1109.7 1061.3 721.0 0.0Total cath view I (133.9) 1 .1000.0 158.0 209.2 243.0 361.5 535.1 W-5. 719.0 893.7 1329.1 2188.7 3252.3 4306.1 532.5 7279.4 8144.6 0.0LtAn AMOUnt t 1000.0 1102.5 1412.1 1536.9 2080.1 3179.3 3676.3 3528.7 3924.8 5260. 1 7771.8 9809.3 10119.0 8465.2 5169.2 0.0 0.0

REAL 3 Interest I 5.04% I 217.1 306.8 182.5 292.5 3117.9 1731.9 77.7 13S.0 174.7 170.5 120.1 74.9 46.1 WS. 17.7 0,0Total Cash Flow .1000.0 131.6 124.5 120.6 112.9 104.1 99.5 97.8 93.5 86.9 79.5 73.9 69.8 66.8 64.9 48.4 0.0S Of HMAnim 11age I 1 25.0% 24.3% 24. 0% 23.2% 22.3% 21.8% 21.7% 21.2% 20.5si 19.6% Is.9% 18.4%i 18.0% 17.5% 13.1% 0.0%6Loan Amount I I 1000.0 918.8 840.6 762.4 687.9 618.4 550.1 480.0 410.7 344.S 282.4 222.7 164.1 105.6 46.1 0.0 0.0

Yeare to rwtile 3 15~.0 1 3.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 0.0 0.0

(33 lintlation # I1%(7) compounded Quarterly(3) Mos. Deposlt Rate + 3%(4) Compounded Monthty(5) Assumption

'0

- 51 -ANNEX 10Page 1 of 2

ECUADOR

SECOND NATIONAL LOW-INCOME HOUSING PROJECT

Action Program 1988

Banco Ecuatoriano de la Vivienda

Actign Lestensibilitv DateStudy administrative cost ofresource mobilization andloan administration BEV/external auditor March 31, 1988

Review results of administrativecost study with the Sank BEV/lank June 30, 1988

Prepare a plan for the elimi-nation of force accountworkers JNV June 30. 1988

Include estimates of actualand projections of performanceindicators BEV/external auditor March 31, yearly

Prepare a schedule of loanamounts affected by arrears BEV/external auditor March 31, 1988

Prepare a plan to reduce loanamounts affected by arrearsto less than 2% December 1988and further reductiors by 1989 BEV June 30. 1986

Agree with Bank TORs and imple- BEV/external auditor Condition of effectiveness

mentation schedule for aprogram to rectify BEV's andJNV's accountina deficiencies

Conduct annual study of construc-tion cost BEV June 30, yearly

Conduct annual demand analysisstudy BEV October 31, yearly

Conduct survey of inventory ofunsold houses BEV October 31, 1988

Prepare plan to reduce inventoryto acceptable levels BEV March 31, 1988

- 52 -ANNEX 10Page 2 of 2

in 1i ison 1ins in 1991 1992 1993

Rource obilIlzatlonOperationsTot Fuw Sources 7.BX 5.4 7.23 9.02 10.62 14.72 18.72 18.9xSvg Acot/Tot FLIg Wos 18.42 15.* 19.12 20.8X 18.92 21.02 22.92 26.9aBEV bnd&fot FVd SuroW 9.1S 11.4 12.N 12.02 10.92 11.22 11.31 12.21Bat* ions/Tot Fut Soues 24.01 41.6* 41.12 35.11 38.71 81.41 27.01 17.71GTrrt Grants/Total Fuw Sources 30.91 20.12 15.02 15.22 13.41 14.21 14.71 16.4x

&pIl lore ordts/otal FVwg Souroe 14.91 5.02 4.0 7.81 7.6 7.61 7.52 7.9K

ProfitablilItyInt. Inu/Avp Asts 4.8 8.32 9.23 11.92 13.5X 14.72 15.71 16.7KInt. Eb vgAv . Lle. 7.6 9.12 9.52 9.-X 9.9S 10.02 10.22 10.4XOthor lIrm/Ave Asset 2.71 2.11 1.86 1.81 1.41 1.31 1.22 1.1KAdaln. EwmAvgs. Assts 4.71 4.4X 4.8X 5.21 5.51 5.7X 5.9X 6.3KProfIt/Avea EqIuty 0.22 2.8K 5.8S 9.71 13.2X 15.2X 15.81 18.31

Operatlrn Eff lotnoIntrst Inbe/introt ee 58.6 88.92 97.23 121.31 135.91 148.91 153.4X 161.01

Operatios IinventoryNtr of UnitsValue/AssetsForce Acowct Workes

Loan PortfolIo Affected by Arrers:

30 - 0 days> 90 days

- 53 - ANNEX 11

ECUADOR Page I of 4

SECOND NATIONAL LOW-ICOQ MOUSING PROJECT

Economic Rate of Return Calculations

(in November 1987 prices)

0 1 2 3 4 5 6198? 1918 1969 1990 1991 1992 1993

fee icpv Ins: ..-- . .. .nDmber 1,32? 2,654 2,654 2,654 2,t64 1,32? 1,32?atge sise:

Qs$ 1,920 1,020 1,92o 1,920 1,920 1,920 1,920

Total loacs (US$000) 2,548 5,096 5,090 ,081 5,096 2,546 2,548

Sied lots & eg units (1):s,cd lots 211 482 142 182 482 211 241sved lots * 21 s2 core 241 462 42 "2 482 241 241mved lots * 37 2 core 50? 1014 1014 1014 1014 501 50?sied lots + 54 .2 core 96 192 192 192 192 96 96

totAl 1l085 2,170 2,170 2,170 2,170 1,085 1,085

Quit costs (5$S ezcl price coatingeaci):secd lots 1,8l8 1,181 1,861 1,881 1,681 1,1881 1,881svcd lots + 21.2 core 3,660 3,660 3,660 3,660 3,660 3,660 3,86teyed lots + 37.2 core 5,016 5,016 5,016 5,016 5,016 5,016 5,016svcd lots * 54.2 core 6,450 6,450 6,450 6,450 6,450 6,450 6,450

Total costs (06)000):svcd lots 453 906 906 006 906 453 453seyd lots t 21M2 core 8l8 1,764 1,1764 1,764 1,784 882 882sved lots * 37.2 core 2,543 0S66 5,1088 5,086 5,086 2,543 2,543svcd lots t 54.2 core 619 1,238 1,238 1,236 1,238 19 619

. . ........ .. ........... . .......... ... ......... ------- ........... .......

total 4,498 8,995 8,996 8,195 8,996 4,498 4,498.-.----.--...... . ..... . .. .... ..... ........ ..... ....... -----

Available uits (8):(2 bIt & sold Io in 10 10)t 80$S 80 o6 Sol 100*svcd lots 145 434 530 482 402 289 269sied lots + 21st con 145 434 530 482 182 289 289sycd lots + 31.2 coro 3N4 913 1,ll5 1,014 1,114 608 60Uswed lots + 54.2 core 5S 173 211 192 192 115 11

.... .... ..... ..... .....

651 1953 2381 2110 2110 1302 1382

Ill'tUl l"'l

"Il Pit pi to

1WSS'l Y!R'l - P"° Ptt* f Po

*!£l U'torp -tot Po

tS PSt Pti to till"0 0 m Ill on too 11I m m 0~~l 00. 665 Ingg3 UM Psit i 110 P0 0 m m of lot O" m of of of~~~ as Wn Pit,uoWIPo

olg, * .ar . z g,* ejqPw

ofo ow: oetl : . 9P * P-

~~~~~~~~~~~~~.= . ..... ..... ..... ..... ....... ...

OOt fit t :01 PM"Tm PU-3 3 3 Zl " s "& 10 §1 " " "& " .01: - - 5" NI t nq0 ~We3~~~~~~~~~~~~~~~~~. 01 0 ' 0,06 IS9S9,! " p. *,

got o U no "I :W I + 4S Po3 Ut 0Ut 6g OL OL OL OSu OI Ilt Ol OlL aIL OI"tOnLt SIT SugSl0 o

* U 06m as asI 0of lot of0 of1 05 051 W ofI a0 loll pai

is IN: sn IN: WS of f o o f': s sof so: s: o: of Ps m Pt

1"'l~~~~~~o a"t al"t 01' a't in' a &t 11:' a s M IS " Pt:+ttmo m's ws uos ~g rn's s"I ofo Uso: Ii' lo' Ill Ill a5 PR 30 . pit

flt UtWO Lt'S Uf @l sa 'i oS n " t' 'S *10'l " t ': rIs to at so Mtz p .0 Pt:11 1'1 't (1'1 W'l "I "Itot'I lln o (iL n '1 Ng1 P'I 16 at 5t" o 4 3015I 0 0 6 0 n 6t of 0 of in a Pit Nw

:UUS

Ii IS 11 161 161 16 lIt 201 1,11 2001 201 20 201 200 twO

S 16 20 20 US 305 *01 lS *05 *6 II 20 201 20 Stw511

IS 205 206 16 *1 * w 05 0 so a t w 0 0 St I0 Pit to0 * no zo zo zo zoo mo zo rn us Ws: usU twosw

a o 10 ~~ a1 t as a a as i 2 0 a 2101 t I

"t " " " " " " ~ ~ PtG m" t

* 9 50 C SI21 .M

- 55 -

ANNEX 11Page 3 of 4

ECUADOR

SECOND NATIONAL LOW-INCOME HOUSING PROJECT

National Household Income Distribution Level

Income Range Income Range % of urban(suc/mth) (US$/mth) hsehlds In rnge

From: To: From: To: simple ¢umul._____- -- -_-_--- --- ------ ----

0 189es0 0 111 9% 9%18,891 28,114 111 167 18% 27%28,116 32,914 167 219 10% 37%32,915 38,034 219 240 10% 47%38,038 48,018 240 307 9% 86%48,019 87,874 307 388 11% 87%87,875 72,226 388 482 9% 78%72,227 > 482 3 24% 100%

Source: BEV/JNV Household Income Survey, 1986.

p o

11i 1ot itultMD d m1 o t _ mot S

hhO ttP't us1's ie'lt i.e is ain' issl' t(t ) a': (uSt's) at's istaSo 't WSit' own i. it. ts t's ur' t p0't ot tie's avie.t em. em's ms'u it t too t' ttMIA mow as': ste' is

P'.: soot t'alS 5uU I" Dte ttS'9 It' &"t 'OW' G$ Ut"' t Os'. sos' su'i it. ie its"' us' s't e' se's t*va'.e op. t5,t isalt itS it. ti'e t'A s mot sw't seW's aU slt woo m's aril too Too tt"§ tnl& MT owt ew St

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op' t s'et w184 W't tO its its's tS's MIT we'l sal't ttIo e's ts.'t em's Ol'Us too ISO tso's ast s'; I't see' O't t

on"'s 'wt sal Oulu tw tn S"92 tall m salt Wt ml% 9Stt~'* u'. em's oWls it its '1'S 55' Us's i't so' see' s at's w't M's ml'i iS'St t. S't *s iI 'S vwt OMI't SOt'i 0"'t 9 l'; 5

vall anot' =e'. slet' ans's eM ane's wa's (sea) it s's ow' s see': aso't tee't (see's) (w.'O gto', uIoi ees' as t's M's (0's) ws's os'tt sI se':)t mso cu't S(so's) ( Sts's) o's "s'st us' st9 M's se's (U' mot mos';: se so te' toe'; e(em':) (two) tt's o's so's Mee sl'* se's (a'4) o's s'.t M o't te', w't s(ti'. (us'1) st Gall M's Su 'l# s s's (s:t's) e':t st'slt 41at So'i toe'sl se a(au'la (an) as ose't Ms' e e't sss (us's) SW s'a1 - At'T os'Pt Ga'i t

5

inJOJd t.it. - 1 UU °1411653 *S b aW6$*U Se1 1t0 @6t. ES-Pt%t.Ut

(ttA -"*m *I i 9 9 t I)we ses S m0 t _ m _"q hl _

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- 57 -ANNEX 12Page 1 of 2

ECUADOR

SECOID NATIONAL LOW-INCOME HOUSING PROJECT

PRICI AND WAGE INDEX 1970-1986

Price index Wage index

Raw Indexed Raw Indexed

1970 37.1 34.8 600 30.01971 40.7 38.2 750 37.51972 43.7 41.0 750 37.51973 49.0 46.0 750 37.51974 60.1 56.4 1,000 50.01975 68.7 64.5 1,250 62.51976 75.7 71.1 1,500 75.01977 85.5 80.3 1,500 75.01978 96.7 90.8 1.500 75.01979 106.5 100.0 2,000 100.01980 120.1 112.8 4,000 200.01981 137.8 129.4 4,000 200.01982 158.0 148.4 4,600 230.01983 234.0 219.7 5.600 280.01984 307.0 288.3 6.600 330.01985 394.0 370.0 8,500 425.01986 474.0 445.1 10,000 500.01987 568.8 534.1 12,000 600.0

Source: Ecuador 20 AAon de Vivienda . Page 20

ECUADOR

SECOND NATIONAL LOW-INCOME HOUSING PROJECT

PRICE AND MINIMUM WAGE INDICES500-

450C-

400

350 ji

300 -/

200L-- - i9 2150 //

200 /1

50

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986o N

YEAR (1979 = 100)0 PRiCE INDEX t1 MINIMUM WAGE INDEX

m-JAP SECTION

. * z~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

SonfrcicoC 0 L 0 M~ B I A

Atocdmes '' C~~~~~~~~~~~~~w~~~vonR.saoc

E$MERALDAS / TtJLCAN

o~~~~~~~~~~~~~~~~~~~~~~~~~~~Au

e ~~~~~~~~~~~~~~~~~~~~~~~~~~~~IShhus6nd,

O 'o Eftia~6fSon Sebosaio del OOL

I~~~~~~~~~~~~~~~~~~~~~~rmsod rtw4-"fo ~ ~ ~ ~ ~ ~ N

Schio de N'.a'faqwz lu k~~~~~- ~ ~ '''\,Tpu,n

nw~ ~ ~ ~ ~~~>AU<>ATZS. JCKi~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Z~~~~~~~~~~- t\9 A9 -- 2.1P)La U

.. J y i , i ECUADOR

Tenda Jt; > AEwS 5n4rd1inzcS4 PRIMARY ROADS

- - - - -- C Poved

Salmos~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Goe

I i~~~~~~~~~~ - SECONDARYROD

__J__ PavedMACHbs4A R -° i° uao s-- Gravel

Rivers

s TPUOS J iG f i, 3 ~~~~~~~~~~~~~PHYSICAL REGIONS

la~~~~~~~~~~~~~~~~~~~~~~ot

/- .rC Alomr° \ _ o. Sier to

-' Cazadoresl.._____-- -2 f ,___X~ iOlA \d/ 8 OAientes~~Ci Ceio , , ZMOR Provinc;al Boundaries

PoInternational Bndortes

; K ~Mocar .|\ is^__.e ^_ . ; , : ¢,<,_, ;¢ o~~~~~~~~~~~~ 20 40 40 80 .xC

4*w) l^Go?NumbdolattlT

P E R U k j . ; the t>os n on ths rmp do 7ttsDn|v

_toartr temlC or anraxotsentat

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