I.Al Zq -7 - Documents &...

Document of

The World Bank

FOR OFFICIAL USE ONLY

I.Al Zq -7 Lt_

Report No. 6997-PH

STAFF APPRAISAL REPORT

PHILIPPINES

HOUSING SECTOR PROJECT

June 1, 1988

Infrastructure DivisionCountry Department IIAsia Regional Office

Ths document has a resicted ditibuton and may be used by redpiens only in the performance oftheir offici dutes. Its contents may not otewise be dicosed wikhot Wodd Bank authorrUtiDon.

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CURRENCY EOUIVALENTS

Currency Unit Peso1 Peso US$ 0.049US$l - P 20.4

WEIGHTS AnD NEASUR

1 meter (m) - 39.37 inches (in)1 square meter (sq m) - 10.8 square feet (sq ft)1 kilometer (km) - 0.62 mile (mi)1 square kilometer (sq km) - 0.386 square mile (sq mi)1 hectare (ha) - 10,000 square meters (sq m) or

2.47 acres (ac)

ABBREVIATIONS AND ACRONYMS

ADB . .. ... Asian Development BankARNM.............adjustable rate mortgageBB........... ..Builder's Bricks Development CorporationBDC.... ,, ...... Bliss Development CorporationCIAP ............ Construction Industry Association of the PhilippinesCOA ......, ..... Comzilm*ion on AuditDBM .... ....... Department of Budget and ManagementBP ........... ..Development Bank of the PhilippinesDOF. ...,.... Department of FinanceDPWH .... Department of Public Works and HighwaysEO . .... Executive OrderGNP .... .... Gross National ProductGDP . ...Gross Domestic ProductGSIS ... Government Social Insurance SystemHDMF . .. Home Development Mutual FundHFC ... Housing Finance CorporationHIGC........... Home Insurance Guaranty CorporationHLURB ...... Housing and Land Use Regulatory BoardHSDC ........... Human Settlements Development CorporationHSRC ........... Human Settlements Regulatory CommissionHUDCC ......... Housing and Urban Development Coordinating CouncilIBRD .. .... ...... International Bank for Reconstruction and DevelopmentMCR .... .... mortgage contract receivableMHS ... Ministry of Human SettlementsMMC ............. Metro Manila CommissionNEDA ....... ,.National Economic and Development AuthorityNHA. .... National Housing AuthorityNHC ... National Housing CorporationNHMFC .National Home Mortgage Finance CorporationPag-IBIG .Forced Savings Provident Fund administered by HDMPSIR .... Slum Improvement and Resettlement Program of NHASSS . Social Security SystemW ... Woodwaste Development Corporation

JISCAL erJanuary 1 to December 31

FOR OMCL4L USE ONLY

ROUSING SECTOR LOAN

STAFF APRAIML EPORT

Table of Contents

Page N!o-,

LOAN AND PROJECT SUWARY

I. SECTOR CNEA. Background .......................... ......... .1B. Housing Stock and Conditions ............................. 2C. Past Policy and Issues ................................... 2D. Rationalization Plan and Future Policy ................... 7S. Bank Strategy and Project Rationale ...................... 9P. Project Origin and Preparaion........................... 11

II. S CTOL. ZNIIXUIZINSA. National Home Mortgage Finance Corporation (NHC)....... 12D. National Housing Authority (HA) ......................... 21C. The Social Insurance System ................................ . . 29

- Rome Development Mutual Fund (HDMF) ............ ..... 29- Social Security System (S8) ...................... . 31- Government Service Insurance System (GSIs) .......... 32

D. Coordination (HUDCC) ................................. 32

III. THE PROJECTA. Objectives and Desoription............................... 34B. Cost, Financing Plan and Onlending....................... 36C. Implementation .................................. 39D. Procurement ......................................... 40z. Disbursement .............. *,.# ... ,...*... .. 41F. Accounts, Audit and Reporting ....... .. ............ 41

IV. JUSTIFICATION AND RISKS..................X............ ........ 43

IV. AGREEMENTS REACHED AND RECOM ATIgMS........................ 46

This report is bamed on the findings of an appraisal mission consisting ofNesdms/Nessrs. D. Haldane (Head of Nission), A. Van Vugt (financial analyst),L. Xejia (computer specialist), and X. Bueno (banking consultant) whichvisited manila in August/September, 1987. Mr. J. Kearns /consultant) assis-ted in project development.

This document has a restricted distribution and may be used by recipients only in the performaof their official duties. Its contents may not othefwie be disclosed without Wotid 3at-k autheizationt.

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ANNES

1. Seetoral Policy ................................................... 492. Executive Order Number 90 ................................... . 553. Housing Demand and Affordability ............................. 634. Sectoral Investment Plan (1980--1992) .... 675. Sectoral Action Plan . .................................. . 716. Disbursement Schedule ................................................. . 757. Technical Assistance, Trainlng, Equipment and Studies ........ 798. Inflation and Interest Rates ................................. 859. NHMFC . . ................ 8910. NHDFC Policy/Operating Guidelines and Action Plan ............ 10111. NHMFC Financial Statements (1980 - 2006)

A. Income Statement and Ratios ............................ 113B. Balance Sheet and Ratios ............................... 116C. Cash Flow Statement .................... . 121D. Key Assumptions .................... ................ 122

12. NHH.............................. 12313. NA Policy Statement and Action Plan ......................... 13514. NHA Financial Statements (1980 - 2006)

A. Income Statement and Ratios ............................ 151B. Balance Sheet and Ratios ............................... 154C. Cash Flow Statement . .......... .................... 159D. Key Assumptions ............................................ . 160

15. Economic Rate of Return ..... 16116. Selected Documents Available on the Project File ... 163

CHARTS

Sectoral Organization ChartA. Former (41000). . .. . . . . .... . . . . . ... 165B. Proposed (40494) ............... ......... ..... 167

1UDCC Organization Chart (40054) ............................. 169NMFC Organization Chart (31135) ............................. 171NHA Organization Chart (40053) ................... 173

PHILIPPINES1


LOAN AND PROJECT SUMMARY

Borrower: Republic of the Philippines.

Beneficiary National Home Mortgage Finance Corporation (NHMFC), and theAgencies: National Housing Authority (NHA).

Loan Amount: US$l1(O million equivalent.

Loan Terms: Standard variable interest rate and 23 year term including 5years of grace.

On-lending The Government of the Philippines would on-lend the pesoTerms: equivalent of US$80 million to NHMFC for mortgage financing at

terms of 20 years and a fixed rate to be agreed annually withthe Bank, linked to a proxy for long term funds. GOP will bearthe foreign exchange risk. Funding will be blended with fixedrate loans from the Social Insurance System. Onlending fromNHMFC to sub-borrowers for mortgage loans would range from afixed rate of 9% to 15% for up to 25 years depending on loanamount. The US$5 million for technical assistance, training,equipment and studies would be mads available by Government tothe participating agencies on terms agreed with the Bank.

Project Key objectives include (a) improvement in the institutionalDescription: framework, (b) greater efficiency in the use of public

resources, (c) housing stock expansion for lower income groups,and (d) elimination of key bottlenecks to recovery in theconstruction industry. The project would comprise: (a) supportfor immediate imports of construction materials to initiatesubdivision development, (b) a time-slice of NHMFC's mortgageinvestment program, and (c) associated technical assistance,training, equipment and studies.

Benefits: (a) about 54,000 units added to housing stock, of which nearlythree quarters would serve those below the poverty line;

(b) 9,000 existing dwellings upgraded with utilitias, secure tenureand essential community facilities;

(c) approximately 120,000 person years of employment generatedthrough direct constrvuction associated with mortgage purchases,plus an unquantified additional impact through secondarylinkages.

Rate of Serviced sites: Metro Manila ..... 27%Return: Regional Cities .... 28%

Upgrading: Metro Mail............ 31%Regional Cities .... 37%

Project The primary risk Is that such a broad and complex set ofRasks: reforms will prove difficult to acutally lmplement and could be

derailed by political concerns, delayed or stagnate altogether.However, prdSress to date has been promising. Other risksInclude: (a) low collection levels which would necessitate anIncrease in Interest rates, (b) convincing private developersof the profitability of low-cost mass housing whilch in turndepends on high turnover rates on capital and thus NMFSC'sprocessing efficiency and (c) NHA's ability to reduce costs andstandards, and telescope land acquisition, site development andsales, all of which are now required before units can bepurchased by NUfFC. An ambitious institutional strengtheningprogram as part of the project will help address theseconcerns. The NRA now owns a third of the required land,sufficient for the first 18 months. These risks have beentaken Into account In designing the project and measuresIntroduced to mbwiimze potential adverse impacts whereeverpossible. The project's benefits are considered to outweigh Itsinherent risks.

Estimated local Foreign TotalCosts: ---- --- US$ millon --------

Building Materials Imports 0 75.0 75.0NUMFO Mortgage Purchases: 171.S Z3LS 245.0

- NUA: Upgrading 14.4 6.1 20.5Serviced Sites 17.1 7.4 24.5

- Private Developers 140.0 60.0 200.0TA/Training/Eqpmt/Studies 2.5 2.5 5.0

ZOTAL a/ 174.0 11.0 i=L2

a/ Costs include, taxes esatimated at US$12.5 million or 3.,%

Financing Local Foreign TotalPlan: ---------- US$ million ---------

Social Insurance System 155.0 10.0 165.0World Bank 19.0 141.0 160.0

ZQZ&L 174.0 151.0 32S.0

Estimated FY89 FY90 FY91 FY92 FY93 FY94 FY95Disbursements: -------------------------__-_-_-_

Annual (US$ a) 38.5 42.4 7.5 22.3 30.8 13.5 5.0Cumulative (US$ m) 38.5 80.9 88.4 110.7 141.5 155.0 160.0

PHILIPPINES


I. 8XCTORAL CQN=

A. Backround

1.1 Urbanization and Ecgnomic Growth. The Philippines is relativelyurbanized with about 40% of the total population or 23 million peopleresiding in cities. The urban population expanded by about 4% annuallyfrom 1960-1980, almost 50% faster than the 2.7% national average. A thirdof all urban residents is concentrated in Manila, with an estimated 7million people. This pace of expansion is expected to decline onlymodestly, requiring the country to house, feed and employ another 10 millionurban residents -- tantamount to creating another metropolis the sire ofMan'la -- over the next decade. Even with successful regional developmentefforts, much of this Increase will occur in the capital, which generatesover 40% of the country's GDP.

1.2 Growth of this magnitude will place tremendous strains onthe country's ability to provide the requisite employment, housing, andurban services. Rapid economic recovery will be needed to meet thesedemands. The economic and financial crisis which gripped the country from1983-1986 largely paralyzed industrial expansion and severely eroded GNPgains made during the 1970's. Real GNP declined by 6.8% and 3.8%respectively In 1984 and 1985, with industrial growth declining by morethan twice this rate. Growth in 1986 was negligible (0.1%). Underemploymentdoubled to an estimated 60% in 1985, and real wages have shrunk. However,the beginnings of recovery were evident In 1987 when GNP growth registered5.7%. About half (51%) of the 1987 urban population fell below the povertythreshold of about P6,120 (US$3')0) per capita per annum, and about 20%below the subsistence threshold of F3,0o0 (US$150).

1.3 Economic Role of Housing. The housing and constructionindustries were heavily hit by the extended crisis. Housing constitutes asmall but growing rroportion of GNP (about 3.7%), and a somewhat moresignificant share of fixed domestic capital formation, estimated at about15%. Nearly 60% of Philippine formal private sector constructionactivity is in housing, which was the fastest growing industrial subsector(gross value up by 14.4% and value added by 6.1%) in 1982. Housing startsare closely monitored in the Philippines as elsewhere, as a leadindicator of improving or decelerating economic activity, since theindustry's forward and backward linkages are extensive. The P12.1 billioninvested in formally built housing and service improvements from 1980through mid-1984 contribute4 approximately 75,000 direct jobs over thisperiod, net of any secondary linkages. Informal construction activitieswhich still accommodate the majority of the population contributed manymore. Mousing thus plays a dual role as both a major industrialsubsector, as well as a key social and political concern.

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B. Housing Stock and Conditiog

1.4 Growth of new housing stock has not kept pace with the rapid urbanincrease. New stock needed to accommodate urban growth alone averaged about114,000 units per annum from 1976-1981 and effective demand about 97,000annually. Supply through public assistance averaged 13,000 units or aboutll%-13%. Clearly private and informal efforts were still housing most peoplein uncontrolled squatter settlements lacking effective planning, tenure andservices. Publicly assisted production rose in the early 1980's to a peak of29,000 units in 1984 or about 20% of growth needs, and a quarter of effectivedemand, demonstrating progress toward achieving a better match between supplyand demand. Most of these units were built by private developers and financedthrough public institutlons. Thereafter, the economic downturn brought asharp decline in housing production leaving the industry largely stagnant in1986.

1.5 Private production under the expanding financial system, however,was heavily skewed toward higher-income groups. Though direct production byNHA was targeted on the poor, the Authority focused on upgrading andassociated resettlement schemes which made almost no net contribution to newhousing stock. Of the 167,000 new units added to housing stock through publicassistance from 1976-1986, over 90% were completed, contractor-builtdwellings affordable only to the most affluent 10%-20%. The balance 10%served growth among the remaining 80% of the population. Thus demand in theupper income strata was overserved and nearing market saturation, with thebulk of demand for new housing below the 80th percentile largely ignored.

1.6 As a result, dosspite vastly improved conditions in many squatterareas through upgrading, uncontrolled growth has not been curtailed.Encroachment on prime commercia.l properties, illegal seizures of public land,overcrowding and the resultant deterioration in living standards remainserious and growing public concerns. Barong-barongs (shanties) tripled from1970-1980 from 14,000 to nearly 50,000 units. Overcrowding was particularlysevere in Metro Manila where by 1980 nearly half of all families occupied asingle room. The backlog of dwellings requiring upgrading (includingunserviced homes) was estimated in the mid-1980's at about 440,000 units inMetro Manila alone representing about a third of the city, and 700,000nationally. Of these, only about 22,000 have been upgraded and 54,000resettled over the last 5 years, addressing about 10% of need. At this pacefour more decades would be required to deal with the existing backlog.

1.7 To this must be added the approximately 140,000 new units neededannually over the next five years to prevent further deterioration in presentconditions. The urgent dual needs to speed upgrading and expand new masshousing stock to slow or halt further uncontrolled growth forced the nevAquino Government in 1986 to reassess its housing strategy.

C. Past Policy and Issues

1.8 Policy and Institutions. Government's past strategy for meetingshelter needs initially emphasized direct public production of low costshelter combined with extensive squatter resettlement. In 1975, the six

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organizations producing housing in a rather ad-hoc and disjointed manner wereconsolidated into the National Housing Authority (NHA) and its attachedagency, the National Housing Corporation (NHC) which produced buildingmaterials. The NRA was assigned policy-making and regulatory functions, aswell as responsibility for housing production and finance, and, together withNBC, represented the Government's sole housing instrument.

1.9 Three years later, the Ministry of Human Settlements (NHS)was established to oversee policy and regult';ory functions, and seven newagencies were chartered to perform five functions: financial Sourcing,mortgage lending, insurance, production and regulation. The new policyemphasis behind these changes was to stimulate private sector productionthrough provision of low cost housing finance. The MKS network included thefollowing institutions:

A. Financial Sourcing Functions#1: Home Development Mutual Fund (HDMF). The HDMF or Pag-IBIGProvLdent Fund (essentially a mandatory payroll tax refundable toemployees) covered all formally employed persons. Proceeds wereearmarked for housing. About 98% of stipulated contributions wereinitially lent to the NHNFC which in turn purchased mortgagesgranted to HDMF members;

B. Mortgage Lending Functions02: National Home Mortgage Finance Corporation (NHMFC). Designedto provide liquidity to local banks holding mortgages throughestablishment of a secondary mortgage market, the NHNFC over timecame to dominate mortgage financing on privately built units(excluding those built by the Social Security System (SSS), theGovernment Social Insurance System (GSIS), and the NationalHousing Auithority (NHA)). NHMFC initially placed HDMF borrowingsin high yielding s'nort term investments, and utilized the proceedsof bond issuances for mortgages purchased from originatingInstitutions;

C. Insurance Functions#3: Home Finance gorgoration (HFC) recently renamed the HousingInvestment Guaranty CorDoration (HIGC). The HIGC insured bothconstruction loans made by private banks to private builders, andmortgages purchased by NHMFC or held by private banks. TheCorporation also expanded into land dealings and directproduction, provided advisory services to the builders it insured,and operated a bank (Maunlad S & L) through which it arranged someof the construction loans it underwrote;

D. Production Functions(i) Land Development and Housing

#4: National Housing Authority (NWA). The NRA produced lowincome housing through serviced sites for self-help houseconstruction, upgrading of existing slums, and resettlementprograms. It also engaged in industrial estates, workshopdevelopment, small business lending and some higher costhousing for cross-subsidy purposes. The Authority wasfinanced through Government budgetary appropriations,

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foreign loans (prlncipally World Bauk and the Republic ofG"rmany), and local borrowings. NBA also extended long tiermfinancing on the units it built, serviced these loans, andoperated rental estates;

#5: Bliss Development Corporation (Bc). Subsidizedcompleted housing and apartments were the primary output ofBDC, financed by Government appropriations forconstruction. Mortgages were sold to NWUNC, enablitg BDCto roll over its construction funds;

(ii) Buildlna Materials#6. Vqodwaste Comuanv (W). This company produced woodproducts for home construction;

#7: Builder's Bricks (BB). Bricks and masonry productscomprised BB's outputs;

*8: National Housing Corporation tNHC). The NBC producedand warehoused building materials which were sold toGovernment or the private sector, specializing Inprefabricated units for "flexi-homes";

#9: Human Settlements Develovment Corporation (HSDC). Aholding company for over 40 subtidiaries, iucluding BDC,W, BB, and NEC within the housing sector. The RSDC'soverall jurisdiction extended well beyond the sector; and

E. Regulatory Functions#10: Human Settlements Regulatorv Commission (BBRC). The NSRC wasresponsible for regulatory oversight of private builders coverLagsubdivision and building standards, land use and zoning;

1.10 Thus, in the decade following the amalgamation of the previous sixhousing agencies in 1975, the sector once again grew from two corporations toten, plus a governing Xinistry. A Shelter Secretariat was eventually createdto coordinate this increasingly complex Institutional network, but withoutbudgetary or other authority, it remained a :lrgely coremonial function.Chart 41000 presents the former sectoral organizatlon. Throughout this periodthe Social Insurance System (SSS and GSIS) made substantial investments inmortgages, financing half of new stock, but remained independent of the NESsystem.

1.11 Private Sector Resoonse. The private sector's initial response toGovernment's new policy and the expanded availability of mortgage financewas predictably enthusiastic, resulting in spectacular growth between1980 and 1983. Housing starts reportedly tripled from an annual level of28,000 in the late 1970's to a peak of 86,000 in 1983. By mid-1984,utilizing HDMF funds and other borrowings, the NHDEC had pumped nearly P5billion (US$ 245 million) into mortgage financing.

1.12 Housing investments, like most others, sharply decelerated in 1984and 1985 as the economic crisis deepened and borrowing costs soared toover 40% with shortened maturi*ies. The sudden contraction left the industry

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with a major inventory overhang and an extensive pipeline of both completedunits ready for mortgage takeouts and subdivisions under construction forwhich funds were not available. The HI¢C was unable to meet its obligationsin the subsequent wave of construction loan defaults and claims. Constructionloans had to La carried by builders at prohibitive costs leaving the newhousing finance system's credibility badly shaken, and private builders andbankers disillusioned.

1.13 Issues. By 1985 the Philippine housing sector was once again inneed of extensive adjustment to correct flaws emerging from its previous tenyears of operation. Key problems included:

(a) Functional DuNlication and Competition. The system contained anumber of functional duplications leading to competition betweenpublic agencies and wlth the private sector, as well as nonessentialactivities. Public resources were therefore inefficiently used orsupporting services which private business was fully capable ofdelivering;

(b) Inadequate Vglume. Despito substantial initial growth, the newhousing finance system did not achieve the volume production ofhousing stock needed to keep pace with growth and ease squattingprcssures. This was due to several factors. First, unit costs werehigh, constraining the number of units which could be financed.Second, as conceived, Pag-IBIG trust funds were to provide aliquidity pool for more extensive borrowings by NUMFC, thusleveraging the system. In reality, Pag-IBIG funds never exceededabout a 1:1 ratio with other borrowings. Efforts were never made toaccess the larger pools of long term investment funds ideally suitedto housing within the social insurance system (S8 and GS91), mostof which were utilized instead for hotels, airlines e.d othercommercial verttures;

(c) Riab Income Bias. Public housing investmeat under the new housingfinance system favorad those who needed it least. Of total sectoralexpenditures from 1976-1984, nearly two thirds were for unitsaffordable only to the most affluent 20% of urban families, withonly about a third for upgrading or serviced sites for the remaining80% of the population. As noted above, formal additions to housingstock have been almost exclusively at the high cost end of themarket where formal private builders were active.' The NUEA's workamong lower income groups contributed to much improved squatterconditions, but added almost nothing to existing stock. Thus the gaphas wideneS between demand for new housing stock and supply. Thefinancial system's high income bias helped trigger widespreaddissatisfaction with Pag-IBIG during 1984-1985. The regressivetransfer of resources from low-income wage earners to high-income loan beneficiaries at subsidized interest rates became ahighly politicized issue, leading to a mounting clamor for Pag-IBIGabolition or suspension (para. 2.50 and Annex 9);

(d) Inefficient Resource Use/Cost Recovery. Cost recovery has beeninadequate on public sector housing investments, leading to thedecapitalization of key sftctoral institutions. Interest rates,

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pricing policies, sales and inventory management, collectionsefficiency and failure to enforce sanctions have all contributed tocompounded recovery of as little as 36% of amounts invested.Interest rate policies presented apparent incongruities to thepublic, with NHA lending to the poorest families at 12%, NHUFC tothe most affluent at 9%, and GSIS and SSS to those in between at 6%.Both capite aud financial (interest rate) subsidies have beenapplied, c-con In an opaque and ad-hoc manner without any cleargoverning rationale. As a result, subsidies often benefltedthe more affluent. Even where policy was correct, agenciesperiodically ignore internal policy when subjected to political oraffordability pressures. The inability or unwillingness of NHA tofinalize mortgage documentation on upgraded sites or evictundocumented serviced site residents has been a key cause of theAuthority's low corporate receipts. However, collectionsperformance is equally low (in the order of perhaps 60%) for allsectoral institutions, including NHHFC,, GSIS and SSS, r6gardless ofthe nature of their clientele, in large measure becauseadministration is weak and sanctions almost never enforced.

(e) NHA/NHMWC Cooperation. Perhaps the most disappointing featureof the .%hilippine shelter system has been the lack of cooperationbetween its production and financial arms. The two keyinstitutions -- NHA and NHIFC -- never established a mortgagepurchase program for low cost units (serviced sites and upgrading),despite their obvious need for one another and theconsiderable potential synergy of such joint endeavors. As aresult, as noted above the financial system has served almostexclusively higher-income groups while NHA has served low-incomegroups through reliance on foreign borrowings and government equityinfusions, without benefit of access to the most significantsource of domestic housing finance the country has yet created--the Pag-IBIG Provident Fund. Ironically, the Fund's failure toestablish such a link and effectively serve its lower incomecontributors was a major cause of the public disaffection which ledto its ultimate demise;

(f) NHMFC's Viability. NHMFC incurred substantial operating losses inrecent years as a result of a negative spread and poor collectionefficiency and must be restored to profitability if Government'sstrategy of achieving significant private participation in masahousing production is to work. Chapter II (paras. 2.9-2.18) andAnnex 9 outline details of NHMFC's financial problems;

(g) Insurance Liabilities (HFC). Finally, the HFC was undercapitalizedfor the volume of insurance issued, and significantly underpricedits riskiest product-construction loan insurance. The crisis of1983 triggered calls on HFC insurance well in excess of availablecapital. Insurance of NHMFC's mortgages had the further effect oflulling the NHNFC into relaxed collection performance, since theultimate risk lay with HFC, to whom units in default were assigned.To date, HFC has not completed any foreclosure, sale and accountclosures. Thus there has been a significant buildup of contingentliability by Government through undercapitalized and underpriced

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insurance schemes on both mortgage payments ari high risk venturessuch as construction lending in which the ultimate profit accrues tothe private builder and the ultimate liability and risk to theGovernment.

D. Rationalization Plan and Future Policy

1.14 A Rationalization Plan was formulated by the new Government withBank assistance during 1986 to address the problems outlined above. Thehousing sector reform program comprises essentially three parts: (i) theoverall institutional framework and mandates, (ii) sectoral policy, and (iii)individual institutional policies, programs and action plans. The latterlogically flows from the former two. Government has now achieved majorprogress through Executive Order (EO) 90 in rationalizing the sectoralinstitutional structure, dealing with the difficult issue of functionalduplication and competition (para 1.15). A broad strategy has beenidentified for improving both volume production and the past high incomebeneficiary bias. Government's statement of sectoral policy was agreed atNegotiations, (Annex 1). In the third sphere, NHA and NHMFC bhve preparedpolicy statements and associated institutional action plans, which werefinalized at Negotiations. Parallel steps have been taken to improve theconstruction industry's efficiency and a further review of currentbottlenecks is underway. Agreement has been reached with Governmentregarding eventual privatization of HFC's construction and mortgage insurancefunctions under the Public Corporate Sector Loan being processed parallel tothis one. Discussions are underway on a possible private consortium ofinsurance companies to undertake this role in the future. Arrangements underthis project will help establish direct long term programmatic links betweenNRA and NHMFC. Actions already taken or proposed by Government on sectoralreforms are summarized in Annex 5. Chart 40494 presents the sectoralorganization adopted under the Plan.

1.15 On December 17, 1986 Executive Order 90 on the Housing SectorRationalization was signed into law by President Aquino, and in early 1987the Ministry of Human Settlements was abolished. The EO outlined sectorgoals of low/middle income urban focus, and greater private sectorparticipation in mass housing. It established Government's key institutionsin the sector and changes in their mandates to reduce functional duplicationsamong public agencies, and to terminate both extraneous activities andcompetition with the private sector. The NHMFC was continued as Government'sprimary mortgage institution, NHA as its sole producer, and HSRC as the soleregulatory body. Both SSS and GSIS were to provide long term loans toNHNFC, terminating their own mortgage lending programs. The Pag-IBIGProvident Fund was made voluntary. Divestiture of RSDC's productionsubsidiaries of BDC, NHC, VW and BB was _.irected, as well as termination ofHFC's advisory, production and banking activities. Agreement was reachedat Negotiations on the appointment of a conservator for BDC and legalassignment to the appropriate body for sale. Henceforth, NHMFC plans toundertake "self-insurance" on mortgages through introduction of adequate loanloss provisions. Separate boards were retained for all survivingcorporations to preserve and protect their distinct interests. Thus a strongintegrating mechanism was needed to counter the centrifugal force of theseparate boards and the sector's longstanding history of dissonance, and to

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ensure conformance to sectoral policy and objectives. For this purpose theHousing and Urban Development Council (RUDCC) was established, with aprofessional Secretariat. Membership of HUDCC is presented in para 2.67. ItsChairman was assigned authority over individual institutions (NHA, NUXYC,HIOC and HLURB) as Board Chairman.

1.16 Though the Executive Order renamed HFC the Housing InvestmentGuaranty Corporation (HIGC) and provides for its continuance andrecapitalization, agreement was reached in principle with Government underthe parallel Public Corporate Sector Loan to privatize the Corporation.This addresses issue (g) para 1.13 above. Final signature on the sale ofNaunlad S&L, a subsidiary of HIGC, is expected in Jlune, 1988.

1.17 'hus while EO 90 dealt reasonably successfully with the complexproblems of functional duplication and competition ((a) above), and set anappropriate broad framework on sector policy and objectives, it left to thenew HUDCC Council and surviving institutions the design of the importantoperational details of botl sectoral policy and individual agency strategiesto address the five emaining issues (b,c,d,e,and f) outlined in para. 1.13.

1.18 Key elements of Government's new housing policy were contained inthe November, '.986 Six Year Development Plan issued by the National Economicand Development Authority (NEDA). The Plan acknowledged that private sectorinitiative must be harnessed, since the Philipplne population cannot behoused exclusively through funding from public revenues, and that onlythrough combined public/private efforts could the problem of inadequateproduction volume be addressed. The basic thrust of Government's policy,maximizing private production of new stock through financial intermediation,is therefore not expected to change in the second half of the decade.However incentives and controls will be introduced to redirect privateproduction to lower income groups. Increased amounts of mortgage financewill be available at lower-cost ranges, and funding will be restricted athigler cost levels (Annex 10). Direct public production will be expanded forslum upgrading and serviced sites for the poorest half of the population thatprivate builders are not expected to service; some resettlement will becontinued. Policies to impr--"e the efficiency of resource use and costrecovery (issue (d) para 1.13 above) for the individual agencies are beingdeveloped under this project though individual agency Policy Statements andInstitutional Action Plans, and long-term programmatic interlinkages betweenthe NHA and NHMNC will be established through the project's lendingmechanism. Over the longer term, NUNYC will also need to explora othersources of financing to supplement SSS and GSIS. This will be handledthrough a study to explore mechanisms to attract private finance intomortgages and develop the commensurate mortgage instruments needed for NHMFCto remain viable while utilizing variable rate borrowings. A major objectiveof the project is to explore variable rate instruments and develop thecomputer capacity to manage this instrument. The issues of developing astrategy for volume production affordable to an acceptable beneficiaryprofile (issues (b) and (c) para 1.13) are addressed in the Sectoral PolicyStatement summarized in Annez 1, which was agreed at Negotiations. Acoverletter was also provided by Government on its housing sector policydocuments.

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1.19 In early 1987 HUDCC was established, its Chairman named, and aprofessional Secretariat of 12 appointed. The Council meets monthly toaddress pressing operational problems and issues, matters touching onsectoral policy, and to facilitate daily coordination among its members.Paras 2.67-2.69 describe HUDCC membership and operations.

1.20 Major progress has been made by NIWYC and NRA in resolvingindividual institutional issues. By March, 1987 NHiFC had prepared a newBusiness Plan, including its revised Policy Statement and Action Plan (Annex10) addressing Issue (f), and by midyear it had been recapitalized and pastlosses written off (para 2.22). While selected policy issues remain underdiscussion (Annex 10), the new Plan offers a promising framework to restoreNHMFC's viability as well as to redress the financial system's high incomebias. Similarly, the NHA has prepared its Policy Statement including arevised pricing policy, and Institutional Action Plan (Annex 13). Chapter IIelaborates on recent actions taken by both agencies.

1.21 More gradual, but parallel progress is also evident in addressingkey bottlenecks in the construction industry. The dialogue which followedthe 1982 Bank-financed Construction Industry Study eventually led to (a)greater delegation to Departmental Secretaries and the governing Boards oragencies of approval authc :ity for contract awards, with approval ceilingsrevised upward in March, 1987; (b) establishment of an ' bitration body tomediate industry disputes; and (c) streamlining of *ontract paymentprocedures. Establishment of a data bank for planning and operationalpurposes is currently underway, financed under the Bank's Fifth Highway loan(2418-PH), as well as a training program for executives of small and mediumalzed construction companies. Government is currently reviewing furtherpotential bottlenecks to the housing contracting industry's recovery,including poten-ial financing and equipment shortages (see para. 3.2).

E. Bani Strategy and Project Rationale

1.22 Experience and Strategy. The Bank has helped finance fourdemonstration projects over the last decade to establish the acceptability oflower cost approaches involving slum upgrading and serviced sites. Theseoperations focused almost exclusively on the National Housing Authority. Thefirst and second projects (Loans 1272-T/1282-1-PH and 1647-PH) have beencompleted and Project Completion Reports were issued in April 1986, andFebruary, 1987 respectively. The two completed PCR reports concluded thatboth projects were quite successful in achieving their basic objective ofdemonstrating the social acceptability of low cost, self help approaches,but encountered serious delays and difficulties In the pricing, salesdocumentation, and cost recovery of units built. The Third Urban DevelopmentProject (Loan 1821-PH) and Regional Cities Development Project (Loan 2257-PH)contained shelter components which expanded regional operations andexperimented with private sector production of serviced sites. Ezperienceunder these latter projects has provided valuable lessons in handling privatelow cost mortgages and highlighted problems inherent in complex cross-subsidies. Simpler, clearer policies and tighter management of cost recoveryare needed in future to ensure replicability of these demonstrations.

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1.23 Having thus established the acceptability of low cost approaches,the Bank must now address the challenge of volume production. To do sorequires first addressing the sector's structural issues. Significantreforms in the institutional and policy framework are required to structurethe sector in a manner where future investment can be productive. Theinsular nature of the institutional setup established by the MRS needsreworking to fit more sensibly into the overall Philippine financial sectorand the economy. Improved specialization is also needed by individualinstitutions, as well as operational links between institutions both withinthe sector and with outside financial entities.

1.24 The Bank's long term goal is the development of an equitable,viable, housing finance and production system, with an increasing degree ofprivatization. The first step will involve rationalization of the publicsector's role, institutions and policy, and privatization of low costproduction as well as ins rance. Steps will be taken under this project todevelop an adjustable rate mortgage (ARM) policy for NHMFC and develop thecomputerized internal systems needed to manage ARMS. Once these are inplace, subsequent projects could focus on a strategy to privatize housingfinance and enhance the role of local banks. Future Bank assistance willtherefore move away from production-oriented, site specific demonstrationprojects toward structural sectoral reform, and time-slice program supportthrough financial intermediaries. This would be the Bank's first housingoperation through a financial intermediary in the Philippines.

1.25 Prolect Pationale. The rationalization and reform programdescribed above is the result of a collaborative effort between the newGovervment and the Bank. Continued Bank involvement will help sustain themomentum of the reforms, and will further help ensure that the lesson& of thelast decade's experience in the Philippines as well as experience elsewhereis brought to bear on the critical implementation phase of the program whichis just beginning.

1.26 The project fits well into the Bank's overall strategy ofrevitalizing economic growth and rationalizing the public/private interface,and specifically the role of public corporations. Bank involvement in thesector at this juncture would support Government's macroeconomic objectivesand economic recovery efforts by:

(a) stimulating the housing construction industry, and thus the domesticeconomy!

(b) continuing the rationalization of government financial institutionsin the field of housing finance, with restored financial viabilityand inproved efficiency; and

(c) reducing public expenditures through privatization/divestiture offive public corporations, tightened pricing policies, andelimination of NHMFC's negative spread.

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F. Project Origin and Preparation

1.27 Sector work took place in the early 1980's following five yearsof lending operations from 1975 to 1980. The Bank produced one CountryStudy on the Financial Sector (1980) and two reports on Housing Finance (No.3732-PH and an internal report of May, 1983). A Shelter Assessment wasprepared by USAID in 1984. Late the same year, Government completed itsfirst five year National Shelter Plan (NSP). Wide-ranging discussions tookplace throughout 1985 regarding the findings and recommendations of thesereports, leading to the formulation of a Rationalization Plan by the newGovernment in 1986, on which the project is premised. Folloving approval inDecember, 1986 of the basic institutional framework, work was begun on sectorpolicy and preparation of individual agency policies, investment plans andaction plans as well as the investment program which forms the basis of theproposed project. The NHA, NHNFC and HUDCC prepared the project, withcontributions from HIGC and others.

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II. SECTOR INSTITUTIONS

A. National Home Nortgfage Finance Corporation (NHMFC)

Backgmround. Organization and Management

2.1 The National Home Mortgage Finance Corporation (NHMFC) is a publiccorporation established in 1979 under Presidential Decree (PD) 1267 ofDecember, 1977 for the development and operation of a secondary market forresidential mortgages in the Philippines. NMWYC makes forward purchasecommitments to buy up to a specified amount of mortgages from private andgovernment banks accredited by the Corporation in accordance with prescribedstandards. Under its initial operating plan, ULWAC was to act as trustee forHDMF (Pag-IBIG) funds which were not to be placed in mortgages, but in otherinvestments to be used to generate profits for cross-subsidies, and as aliquidity reserve for NHNFC borrowings. These borrowings were to financemortgage purchases. The Housing Finance Corporation (HFC), recently renamedthe Housing Insurance Guaranty Corporation (HIOC), Insured NHNFC's mortgagesagalnst cash flow interruptions and/or default. Eventually mortgages were tobe securitized and sold in the Philippine capital market. Private andgovernment banks participate in the housing finance system through mortgageloan orlgination, loan servicing, and provision of construction(developmental) loans. The NHNFC was therefore intended to complementprivate banking activity in housing finance, providing a liquidity mechanismwhich was to make long-term mortgage investment more attractive. ThoughNHMFC was meant to be eventually privatized, to date this has not occurred.

2.2 Government banks have dominated NHMFC loan originations, accountingfor 45% of all units financed and 41% by volume of financing. TheDevelopment Bank of the Philippines (DBP) was by far the most active singlebank, representing 42% of all units funded and 38% of amounts lent. Thus,private banks originated and serviced only a little over half of NIIMC'sportfolio. For loan origination, banks were paid 3%.

2.3 The NHNFC functions under the guidance of a Board tf Directors, thecomposition of which is given in Annex 10. The Corporation has recently beenreorganized and placed under the Office of the President. It is nowstructured around 13 Departments reporting to five Group managers: Finance,Mortgage Management, Credit and Collections, Treasury and LegalAdministration. Three of these Groups (Mortgage Management,Credit/Collections, and Treasury) report to the Senior Vice President forOperations; the remaining two to the Senior Vice President for StaffService.. The UHMFC is managed on a day-to-day basis by an Executive VicePresident. Though a President has always existed, he has traditionally notbeen full time. Chart 31135 presents NHMFC's current organization.

2.4 NHUFC has some 470 staff, including 350 regular employees and 120temporary staff recruited to help clear a backlog of accounting work. Thisrepresented sbout one staff per 100 mortgages. To allow the Corporation totake on the new role envisioned for it, NHMFC plans considerable staffstrengthening in a variety of functions including corporate planning,computerized manage1ent information systems, mortgage accounting,underwriting and financial management.

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Operational Performance

2.5 Since the beginning of its operations in 1980 through mid-1986,UHMFC financed some 48,000 dwellings worth P6.2 billion (US$304 million) inmortgages. Operations expanded rapidly from 973 units financed in 1980 for amortgage value of P217 million to 16,929 units in 1984 for a total mortgagevalue of P2,223 million. Thereafter, the Corporation's lending declined asthe effects of the economic crises began to be felt, until lending in mid-1986 and half of 1987 was virtually suspended. The primary cause ofsuspension was that the Corporation's major source of funds -- the Pag-IBIGarovident Fund -- was temporarily discontinued. The number of borrowers perAnit averaged 1.8. Table IX-I of Annex 9 presents NHNFC's annual performancefrom 1980-85.

2.6 The Corporation has not attempted to seek geographical or income-group dispersion in its lending portfolio. Based on a sample taken in March1985, two thirds of its loans had gone to borrowers in Manila, about 16% toLuson, 15% to the Visayas, 1.2% to Mindanao and 0.3% elsewhere. Lending byEMWFC has been skewed towards upper-income borrowers, almost exclusively thetop 15%-20%. The average mortgage size advanced by NHNFC in 1986 wasP160,000, affordable to the top 15% of the urban population assumingaffordability of two times annual household income. Funds were sourced fromthe contributions of predominantly lower-income Pag-IBIG contributors,resulting in a regressive transfer of resources from poor to rich. Figure2.1 presents the income profile of HDNF contributors and that of INHNCborrowers, in which a serious mismatch is evident. Due to growing publicawareness of this issue, and consequent public protests stemming additionallyfrom resistance to all Pag-IBIG deductions as economic conditions worsened,provident fund contributions were made voluntary at the end of 1986. Detailsof 1JHKFC's past operations are provided in Annex 9.

2.7 Average loans per borrower are much lower than the average mortgage,since most units are financed by the combined borrowing of two or more Pag-IBIG members. In 1985, for example, the average mortgage per unit was aboutP145,000 while the average loan per borrower was only P74,000, implying anaverage 1.9 borrowers per unit. Prior to 1984, UHEYC also offered an "openhousing" program, under which it allowed non-Pag-IBIG members to borrow at ahigher interest rate. Since most open housing loans were large, averagingP322,000 in 1984, this policy served to reduce the number of householdsbenefiting from NHNFC's limited resources, although it increased yields onthe overall portfolio. As of mid-1986, 79% of the Corporation's loans wereto Pag-IBIG members while 15% were open housing loans and 6% loans to others.The open housing loan program was discontinued in 1984 owing to NHUFC'sliquidity problems.

Financial Performance

2.8 As of the end of 1985, National Homel's assets were predominantly(88%) in mortgage contract receivables, of which about 10% was current.Deferred charges of about P600 million or 9% of the total were also shown asassets, representing operating losses since 1980 which had been capitalizedand were to be amortized against future earnings through the mid-1990s. TheHDNF trust funds totaling P3.9 billion at year end comprised the largest

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single liability (57%), followed by notes and bonds (P1.8 billion or 26%).Current liabilities represented atmit 13%, with equity of about 4%. Thoughinitially intended to be the Corporation's primary funding soXco, capitalmarket instruments (notes and bonds) Initially contributed only about half ofUFC funds, and by end-1985 comprised less than a quarter. The ratio ofmarket borrovings to Pag-IBIG never exceeded about 1:1. The NHNFC'shistorical and projected financial statements from 1980-1993, includingincome statement, balance sheet, and sources and applications of funds, arepresented in Annex 11.

Figure 2.1INCOME PROFILE OF NMBOC RROMEBS AND HDNF ENM BERS

(sample June, 1984)70

60I

20

10

0,v:nw I= C 3

tb%otPq. 50 ile 895%W hChSJ9

H"%MbM NHMF C w

2.9 At end-1985, NHNFC's financial condition could only becharacterized as insolvent in view of its serious capital impairment andliquidity problems. The Corporation had been reporting small annual profitsbut had in fact been incurring losses since 1984 which reached P613 (US$30)million by December, 1985. Offset against equity of P255 (US$12) million,National Home was technically bankrupt with a negative net worth of P358(US$17.5) million. The problems which led to the Corporation's insolvencywere:

(a) lack of sound financial planning;(b) negative spread (due to failure of cross-subsidies);(c) liberal loan terms in conjunction with weak credit

appraisal criteria;(d) poor collections; and(e) accounting backlogs.

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2.10 Financial Planning. Over the last several years, lack of funds hasbeen NHNFC's most pressing problem. The Corporation issued Lines ofCommitment to originating banks without arranging the requisite financing,2ssuming the capital market would provide adequate coverage at reasonableprices as and when needed. Unusually high inflation drove interest rates tobetween 20% and 40% by 1984 (Annex 8) when these commitments fell due,forcing NHHFC to liquidate its other investments, and utilize Pag-IBIG trustfunds to supplement high cost market borrowings costing up to 33% to meeteven a portion of its commitment obligations. Despite this effort, as ofDecember 31, 1985, a balance of P1.0 billion (US$49 million) of contractualtakeout obligations remained, the majority of which were settled throughtransfer to HDNF in 1987. During 1986 and 1987, NHMFC's funding requirementswere estimated at over 3.0 billion, substantially in excess of anticipatedinflows from mortgage repayments and new Pag-IBIG borrowings of about P1.7billion. As NHMFC's liquidity needs grew, funds available from HDNF forhousing shrank as pressure mounted for its abolition. With interest rates atunprecedented levels and Pag-IBIG retrenching, the Corporation faced a severeliquidity crisis, compounded by unusual economic conditions.

2.11 Negative Spread. The Corporation's initial Business Plan calledfor a cross-subsidized interest rate structure with yields on open housingloans to upper income groups and earnings on other high-yielding investmentsexpected to cover the proposed 9.5% subsidized fixed r&te on Pag-IBIGmortgages. Average costs were expected to be 12.5% and average yields13.85%, leaving a positive spread of 1.35% to cover NENFC's administrativecosts, as detailed in Annex 9. For its first two years, NHEFC essentiallymanaged the HD!F fund, earning a sufficient spread on other investments tocover the losses on its modest mortgage portfolio.

2.12 Hovever, NHMFC's borrowing costs from the start were higher thananticipated, and other investments did not produce the expected surplus to beused for cross-subsidy, unsettling NHHYC's delicate cross-subsidy formulaalmost from the outset. By proceeding with the purchase of fixed ratemortgages yielding 9% (with fees, points and charges, 11.2%), withoutadjusting for the higher cost of funds, the Corporation locked itself fromthe beginning into both a negative spread and term mismatch on member loans,still counting on anticipated future profits 'to cover the assured losses. In1983 as the volume of mortgage purchases rose, NENFC's spread turnednegative.

2.13 As rates sharply rose following the 1983/84 crisis, NHNFC wasforced to liquidate its other investments and utilize HDMF funds tosupplement high cost bonds yielding up to 33% to meet even a portion of itsmortgage commitments. Since it was not marketing mortgages per-se, butinstead floating its own bonds and debentures, NHMFC faced the standard S&Ldilemma of fixed-rate, low-yield assets and floating-rate, high-costliabilities. Actual spreads reached negative 4% in 1985 as shown in TableIV-VII of Annex 9. As a result, the Corporation began incurring losses in1983 which were capitalized and included under "deferred charges" to beamortized from future earnings, under liberal accounting practices.

2.14 Loan Terms and Credit ARpraisal Criteria. The terms and criteriaof NHMFC loans to HDNF members have been stipulated by ED)F rather than byNHMFC's own assessment of borrowers' creditworthiness, with the result that

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many borrowers are over-extended. The loan terms normally extended to Pag-IBIG members, for example, were generous, with a fixed interest rate of 9%over 25 years and 90% financing. Originating fees and points totaling 7%were capitalized and added to the loan amount, bringing the effective loan-to-value ratio to about 97%. Loan amounts of four times annual income,regardless of other debt obligations, were allowed. While individual loanscould not exceed P100,000, up to three members could "tack" into a singleproperty costing P300,000. Partnerships with "open housing" loans tononmembers were also allowed.

2.15 Collections. Collection on NHMFC loans was the responsibility ofits collecting banks which have largely not followed up on delinquentborrowers. About 30% of these banks are, in fact, now closed and bankscontrolling nearly 60% of the Corporations lending volume are either closedor being restructured. As a result, collections have deteriorated and overthe last 5 years averaged only 68% of current amounts due and 60% of totalamounts due including arrears. As of December 1986, cumulative arrears wereover P708 (US$35) million or about 9 months receivables. Follow-up oncollections by NHMFC has been obstructed by its slow viAnual posting ofreceipts which is currently 13 months behind, by lack of enforcement ofsanctions and by NHMFC's own accounting backlog and consequent lack ofcollection management and follow-up. Computerization of accounts competesfor staff time with the equally urgent problems of collections and manualpostings.

2.16 In early 1987, P4.7 billion of NHMFC's P6.2 billion mortgageportfolio was transferred back to HDNF, backdated to mid-1986. The HDFY,which has a large, underutilized staff since it became voluntary, has assumedresponsibility for computerizing records, posting backpayments and managingfuture collections. Amounts due were proposed to be offset against Pag-IBIGmembers savings balances, thus collecting by fiat a portion of arrears.Future payments can be deducted at source together with now voluntary Pag-IBIG payments. However, as of mid-1987, the associated P708 (US$35) millionin interest receivables plus P87 (US$4) million in HIOC receivables stillremained on NHHFC's balance sheet. The HDMF has agreed to pay this debt toNHMFC as a priority claim on its mortgage collection cash flow.

2.17 In summary, NHOFC has thus far functioned as a member-orientedlending institution, with lending skewed towards its most affluent membersand non-members. It has not developed a secondary mortgage per-se, but hasbeen operating as a retail housing finance agency. The nature of NIMFC'sprimary business is obscured by the use of originating banks through which ithas operated. The mechanisms of its "secondary" operations, e.g. collectingbanks and HIGC insurance have not, to date, served the Corporation well, andhave, in fact, contributed to its problems. The fact that NHMFC's businessis primarily retail housing finance must be recognized, and its operationsand staffing revised to better serve this function.

2.18 While NHHFC's operational growth was impressive in the early1980's, its original business plan was premised on a risky cross-subsidyformula which quickly succumbed to normal market fluctuations in yields andcosts of funds. By 1983 the Corporation was incurring losses which left itinsolvent by the end of 1984 -- four years after start-up. Its bankruptcywas caused by the interplay between weak financial planning, a negative

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spread due to the failure of cross-subsidies, liberal loan terms, lack ofproper credit appraisal, poor collections management and accounting backlogs.These clearly must be addressed if National Home is to play a pivotal role inmobilizing the private sector participation So essential to meetingPhilippLne shelter needs. Annex 9 presents details of NHMFC's operations andfinancial position.

Future Role and Policies

2.19 Mandate and Key Policies. Government's plan for the rationalizationof the sector calls for NHMFC to function in future as governments principalmortgage finance institution, relying on long-term fixed-rate loansprincipally from SSS, GSIS and HDNF to finance its operations. Interventionsin the capital market will be substantially reduced. However, since the P1.5billion (US$73 million) remaining portfolio is partially financed throughP1.0 billion (US$49 million) in short and medium term bonds, the corporationwill remain exposed to interest rate fluctuations and potential losses asbonds are rolled over until these accounts can be sold to HDMF (for memberloans) or commercial banks. The portfolio carries a 14% yield as of year end1987 and is financed with a blend of equity and bonds costing 9.5%. The 4.5point spread is therefore expected to remain positive until the mortgages canbe sold. By 1990, bonds would represent only 22% of total liabilities ifNHMFC were not able to sell the associated mortgages, and 10% if it can.

2.20 National Home's intention is to shift to mass housing, servicingfamilies down to about the 20th percentile. Annex 10 presents theCorporation's proposed distribution of mortgage purchases, with about threequarters below the 50th percentile by number, and 50% by peso volume.Mortgages will be purchased from individuals, builders, bankers, ngos andthe National Housing Authority. All of NHA's serviced sites and about threequarters of its upgrading mortgages are considered saleable. (Resettlementand the remaining 25% of upgrading will be covered through budgetary support,thus separating NHA's governmental functions from its more viable market-oriented functions). NHMFC will obtain a positive spread of at least 2points over its cost of funds. Financial planning has been strengthened anda computerized commitment monitoring and early-warning system recentlyoperationalized. Selected loan terms have been tightened and a new ceilingintroduced on loan amounts of two times (vs the previous four times) annualsalary. The resulting proportion of family income to be used for housingexpenditures ranges from 22% to 34% depending on income level. Tacking(combining incomes) has been reduced from the fourth degree of bloodrelations to the second, though scope exists for further reduction. TheNHMFC's Board is expected, in future, to determine its lending terms,following consultation with HUDCC.

2.21 Collections, in future, will be more tightly managed by NHMFC, butremitting banks will still be used for loan servicing to avoid the need forNHMFC to establish a natlonal branch network for collections which is notconsidered cost effective. Mortgage insurance by HIGC has been terminated;NHHFC will manage its own follow-up on delinquent loans and foreclosures. Itwill therefore need to introduce a loan-loss reserve, on which COA'sagreement in principle was recently obtained. The accounting backlog hasbeen effectively transferred to HDMP. National Home expect: the P1.5 billionin remaining mortgage accounts to be cleared and posted up to date by

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July, 1988. A summary of NHMFC's revised policies is presented in Annex 10,agreement on which was reached at Negotiations.

2.22 Institutional Action Plan. To achieve the planned turnaround andrestart operations on a sound financial footing, NHNFC plans to undertake theprogram of actions outlined in Annex 10 which was confirmed at Negotiations.Important elements of the Plan have already been completed. These include:

(a) Preparation of a new Policy Statement based on a revised, detailedBusiness Plan which was completed in March, 1987, and has beenapproved by NHMFC's new Board;

(b) Recapitalization. In July, 1987 Government completed the releaseof the agreed P1 billion (US$49 million) in recapitalization forNHMFC. Following write-off of past losses (point (c) below),NHMFC's equity totaled P525 (US$26) million, of which P462 (US$23)million is unimpaired, sufficient to sustain a portfolio of about7-9 billion assuring a capitalization ratio of about 5-6%;

(c) Financial restructuring. Effective December 31, 1986, NationalHome wrote off P561 (US$28) million, representing the bulk of itspast losses, and transferred P4.7 billion in mortgages to HDMF forrefinancing, eliminating the source of its negative spread;

(d) Reorganization. The Corporation has completed its reorganization.It must now secure approvals from DBM and the Civil Service; and

(e) Signature of the Demonstration Sale Agreement dated January 29,1988 between NHMFC and NRA on serviced site units to establishterms and conditions and test procedures, and a Commitment LineAgreement with NHA dated February 4, 1988;

2.23 Key tasks remaining include:

(a) Automation of NHMFC's internal systems and MIS. Six computermodules are needed in 1988. The Commitment Line Monitoring andTake-Out Modules have been completed and tested, and theAccounting and Billing/Collection Modules are expected to becompleted by mid-1988. Two additional modules for Acquired AssetsManagement and Foreclosures will be developed in 1988. A morepowerful, integrated system will be needed thereafter, which willbe developed in 1989 for introduction in 1990. Details of NHMFC'sautomation program are presented in Annex 10;

(b) Strengthening of accounting and internal audit functions whichwill occur in 1988-89;

(c) Development of an adjustable rate mortgage (ARM) policy and acomputerized administrative capability in anticipation of NHDYC'8eventual reentry into the private capital market, and a timetablefor its implementation. This policy is expected to be in place byDecember 31, 1989; and

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(d) Review of future funding mechanisms. A study will be undertaken toexplore instrumentality for reentry into the capital market, orotherwise mobilizing private funds. However, until theseinstruments are operational, NHMFC will mobilize resourcespredominately from long term fixed rate lenders.

2.24 Financial Performance: Assuming NHMFC adheres to its revisedpolicies and pursues the agreed Action Plan, and that HDMF honors its paymentobligation, NHNFC should achieve and sustain financial viability. TheCorporation is expected to realize an after-tax profit starting in 1988 ofP16 (US$0.8) million rising to P30 (US$1.5) million by 1992. The associatedrate of return on equity would be about 5% initially, increasing to 9% by1991.

2.25 For the first few years, NHMFC's income will be derived from therelatively high yield mortgage portfolio of about P1.5 billion which wasretained after financial restructuring. During the first two years (1988-1989) only limited mortgage purchases are expected, while developers arerebuilding their pipeline. The bulk of new purchases are expected during1990-1992 when annual takeouts would reach about P1.0, P1.9, and P3.0 billionrespectively. Interest income from existing mortgages and new takeouts areexpected to increase from about P200 million in 1988 to over P600 million by1992. Minor additional income will be derived from commitment fees, expectedto reach about P30 million by 1992.

2.26 Expenses are expected to increase proportionate to mortgageactivity. Interest expense will increase from about P130 million in 1988 toabout P480 million by 1992. The NHMFC will continue to be vulnerable inrespect to the interest cost of the P1.3 billion of short term bonds nowheld, from which the present portfolio is financed. The bulk of these bondsmature over the next two years. A portion was paid off in 1987, andrefinancing of the rest at more favourable terms seems possible. By 1992about 10% of total liabilities would represent floating rate or short terminstruments. Operating costs of about P50 million in 1986 are expected todrop to about P41 million in 1988 as a result of NHMNC's recentreorganization and reduction in staff. Thereafter, operating costs areexpected to rise only slowly as the benefits of computerization are realized.Initially operating expenses (excluding interest) would represent about 2% ofthe mortgage portfolio including arrears (3% excluding arrears). Withincreases in the portfolio size and reduction of the HDMF receivables, thisrate is expected to fall to 1.0% by 1992, though in terms of absoluteamounts, operating expenditures will rise from P41 million in 1988 to P78million in 1992. A provision for doubtful debts of 5% will be built up overthe first few years, and a 2% fet will be paid to banks for originationservices.

2.27 Overall, the scale of NHEFC's operations is expected to increasethreefold from P2.3 billion in 1988 to about P7.5 billion (net of repayments)by 1992. The major funders of this expansion will be the Social InsuranceSystem (SSS/GSIS/HDMF) with about two thirds of the total, the Bank loan ofP1.6 billion (US$80 million equivalent) or one quarter, and self-generatedfunds the remainder. The Corporation does not plan to seek adtlitionalgovernment equity or subsidy contributions during the Plan period.

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Consequently the NHMFC's gearing ratio (equity as a % of total assets) willdrop from 20% in 1988 to about 10% by 1992, still within an acceptable range.

2.28 Key assumptions in the Corporation's financial projection whichbear close attention by NHMFC's managemenc and the Bank include:

(a) continuing modest local inflation and thus low interest rates onremaining bonds until these bonds are retired;

(b) regular payment from HDM? on the P700 million In interestreceivables, the majority of which are associated with the portionof the portfolio transferred to HDN? in 1986; and

(c) significantly tighter collection administration, prompt follow-upon delinquencies, and vigorous enforcement of sanctions whichrepresents a significant departure froi; past practice. Withoutthis, NHMFC's loan loss reserve of about 5X would prove inadequateand its effective interest rate would have to increase. Theprojections assume a major improvement in collection efficiencyfrom about 60% in the past (74% by some calculations) to initially85% on new takeouts (commensurate with reported collections on theWorld Bank assisted portion of NHA's portfolio), rising to 95% in1993 as realizations are received on properties foreclosed xndresold. NHMFC's new management understands the importance ofimproving collections administration and enforcing sanctions.Tighter future management, computerization of billing, collections,and accounting, and termination of HIGC insurance should result insignificant improvement in collection administration. However,this represents the most critical of the Corporation's managerialactions, without which it cannot remain viable. At Negotiationsassurance was there' re received that NHDFC will ti8htly administercollections and pz.rptly foreclose on delinquent borrowers, andmarket the associated collateral;

In view of NHMFC's policy reforms, the strong commitment of its newmanagement to restore profitability, and the significant systems improvementsbeing undertaken through the agreed Institutional Action Plan and technicalassistance, the Corporation should be fully able to achieve viability.Institutional development and financial targets will be closely monitoredduring implementation of the project. Agreement was reached atNegotiations regarding NHMFC's achievement of key financial performanceindicies.

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B. The National Housing Authority

Backround. Orgnization and Management

2.29 The National Housing Authority (NHA) is a public corporationestablished in mid-1975 by amalgamating six public housing agencies. Underits charter, NHA is mandated to undertake housing, land development andresettlement for lower-income groups, and promote private participation inhousing. In practice, however, it has been involved in diverse programs andservices including high-cost completed units intended to cross-subsidizeshelter for the lowest-income groups; construction of high-cost units injoint venture with private builders; rental housing operations; provision ofsmall business and workshop construction loans; and special constructionprojects for Government, in addition to its primary functions of slumupgrading, aquatter resettlement, development of serviced sites, and theproduction of commercial and industrial (CI) properties. The Authorityprovides mortgage financing for all the above, and services its ownportfolio.

2.30 The Authority is attached to the Office of the President andoperates under a Board, the composition of which is presented in Annex 13.Although the new Board is operational in an advisory capacity, Congressionalapproval must be obtained for its confirmation. The Authority's ChiefExecutive Officer, the General Manager, is appointed by the President, andconfirmed by Congress.

2.31 The NHA is organized around eight operational groups reflecting itsvarious functions, with each group reporting directly to the General Manager(Chart 40053). Small regional offices are maintained in Cebu, Davao, Cagayande Oro, Bacalod and Iloilo. Almost 80% of the Authority's 2,400 staff membersare deployed on operational work, with 18% in central administration and 5%in central technical units. Project managers have high levels ofaccountability for activities on their sites, and are generally experiencedand competent. Staff are generally competent and well motivated. TheAuthority has evolved a highly centralized management structure wbich hastended to restrict delegation of authority within the organization and tohamper lateral communication among departments.

Operational Performance

2.32 Shelter output by NHA during 1976-86 totaled about 148,000 units.Together with the 41,000 units inherited from its predecessors, the Authorityhas handled 189,000 accounts. Production is heavily concentrated in Manila,though regional programs began to expand In the early 1980s. Of NRA's totalproduction, resettlement dominated with over half of all units (52%),followed by slum upgrading (29%), serviced sites (14%), most of which wereused for resettlement, and a few completed, higher-cost units (5%). Capitalinvestments during 1975 to 1984 totaled some P3.1 billion, about a third ofwhich went to slum upgrading and 42% to resettlement sites, as shown in Table2.2. Annex 12 presents details of NHA's annual production and capitalinvestments since 1975, and discusses trends and patterns.

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2.33 Though impressive in absolute terms, NHA's output remains marginalin relation to needs. As noted in para. 1.13, the Authority's contribution tonew housing stock for lower-income groups was negligible over this period,comprising at best a few thousand units, since nearly all the new servicedsites it provided were utilized for resettlement. Of the 257,000 dwellingsidentified in 1978 as needing upgrading in Metro Manila alone, NHA hasserviced only about 43,000 or 17%. (At this pace, another five decades wouldbe required to complete the current backlog.) The NHA recognizes that thepace of upgrading will have to be accelerated and will begin to address thisproblem under the proposed project by carrying out a resurvey of informalsettlements in major urban a.-eas to determine the current backlog, andrethinking its upgrading strategy.

Table 2.2NHA SHELTER PRODUCTION AND CAPITAL INVESTMENTS. 1976-86

Type of Investment Number of Units % Capital Investment %1975-86 1975-86 (P million)

Serviced Sites 20,458 14 NA NAResettlement 76.562 52 NA NA

Sub Total 97,020 66 1,300 42.0Slum Upgrading 43,006 29 1,029 33.0Completed Units 7,930 5 602 19.5Industrial/Commercial Included Included 149 5.0Livelihood Loans NA NA 12 0.5

Sub Total 147.956 100 3.092 100.0Iaherited Units 41,000 -- NA --

TOTAL 188.956 NA -

2.34 The sale price of units built by NHA during 1975-85 averaged aboutP11,800, affordable to roughly 85% of the urban population. Affordabilitywas achieved, however, by subsidizing half of the real cost of production.Average unit costs and sale prices are shown in Annex 12. The NHA'sinvolvement in projects has also been lengthy, suppressing volume delivery.This is primarily due to protracted land acquisition through expropriation,slow sales, and lengthy delays in turning over completed infrastructure(roads, water supply, sewerage) to the responsible agencies. For the mostpart, NRA has been unable to extract itself from infrastructure maintenanceand operating responsibilities which have become burdensome given the sizeand physical dispersion of its portfolio.


2.35 The NHA's financial performance has significantly lagged itsphysical performance and suffers from a combination of ineffective orinappropriate policies as well as weaknesses in its own financial management.The NRA functioned in most respects like a government department, andenforcement of pricing and other financial policies was weak. The Authority'sunwritten financial objective was to realize a marginal profit in nominal

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terms. The financial statements show that this has been achieved over thelast seven years, with a return on equity averaging 0.25%. However,inflation over this period averaged 20% annually, leaving NRA with less thana third of its original 1979 capital in real terms. Direct governmentbudgetary infusions have been necessary to both fund operations and servicedebt. During 1976-85, Government support to NHA totaled some P2.7 billionwhile peso loans sourced mainly from the World Bank and the Federal Republicof Germany contributed an additional P1.9 billion.

2.36 Asset Structure. The NHA's past and projected financial statementsfor 1980 - 1993 are shown in Annex 14, and a detailed writeup of 1985 and1986 is presented in Annex 12. As of December 31, 1985, after a decade ofoperations, about 65% of NHA's total assets (P2.7 billion or US$132 million)was in nonproductive investments in works in progress and properties held forsale or transfer to other government agencies. Productive investments(mortgage contract receivables, completed rental properties and loans tomunicipalities) -- representing the main thrust of NHA's output -- comprisedonly P691 (US$34) million or a modest 17% of total assets. This figure isstrikingly low for a mature institution and is due to a variety of factorsincluding an accounting discrepancy which was noted by the Commission onAudit (COA) in its 1985 audit of NHA's accounts. The discrepancy waspartially addressed by shifting P778 million under "works in progress" intocompleted rental properties, mortgage contract receivables and works held fortransfer, thus reducing works in progress from P1.6 billion to P799 million.(Further adjustments to this item i'ere made in 1987). However, even afterthis adjustment, a substantial amoint remained in nonproductive investments.Para. 2.38 discusses NBA's sales and inventory problems. The Authority'sproblem of overstating works in progress arose in part as a result of thelack of integration among its various operational and financial statements.

2.37 NHA's borrowings at end-1986 were relatively low for a publiccorporation, with government equity and retained earnings representing 55% oftotal funds employed. Liquidity has declined as works in progress claimed anincreasing proportion of assets, with current assets dropping from about aquarter of total assets in 1980 to 14% in 1986. The current ratio alsodropped from neatly 6 in the late 1970's to 1.6 in 1986 but generallyremained within a satisfactory range.

2.38 Cost Recovers. The Authority's reliance on government equitycontributions has been necessary in view of its poor cost recoveryperformance. In 1986, internally-generated funds covered only about 30% ofthe Authority's total debt service obligations which amounted to some P177(US$8.7) million. The low level of cost recovery reflected three majorproblems -- inadequate pricing policies, slow sales, and weak collections.The combined (cumulative) impact of these three factors eroded cost recoveryon residential properties to about 36% of NHA's expenditures on sitedevelopment and 18% on commercial industrial properties, as shown in Figure2.2.

(a) Pricing PolicL. Until mid-1985, NHA's pricing policy was based onthree key principles: (a) significant cross subsidies involvingsubsidized pricing of residential units for the low-income populationto be covered from anticipated profits generated from the sale ofcommercial/industrial (CI) properties at market prices, (b) repayment

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of Infrastructure costs incurred by UHA not from the sale price, butthrough budgetary transfers from relevant municipalities andministries, and (c) non-recoverj of overheads and interest duringconstruction. However, with poor CI sales as a result of the country'seconomic crisis and the inability to recover infrastructure costs fromother agencies, NHA wat forced to revise its pricing policies in mid-1985. First, cross subsidies were eliminated and the prices ofresidential units were set to reflect the real cost of developmentand construction. The objective was to ensure that at least a break-even price was achieved for all units, though differential pricingcontinues. Second, land acquisition is to be completed prior to start-up of civil works, allowing accurate land pricing and prompt sale uponcompletion. Third, the cost of all infrastructure not explicitlycovered under a contract with another agency is to be included in thesale price, thus eliminating the need for interagency transfers.In future, the institutions purchasing the mortgage will determinecredit terms and CI units will be sold for cash rather thancredit. Annex 12 presents details of changes in the Authority'spricing policy,

Figure 2.3NH COST RECOVERY

180_

160

140 -

c1c00i~o 110%

s xo _ECIo 75%

40 36

20 -_kCPA

cosr PRICNG sAM COLUCTONS

The NA's revised pricing policy parallels that of private developers,but could increase lot costs by as much as 50%. However, due to acombination of reduced standards and increases in household income,the resulting prices are still affordable to about 85% of the urbanpopulation. Effective demand was nearly 20:1 in a 1985 market test ofthe new prices. Annex 3 contains a breakdown of proposed unit costsand affordability under the project.

(b) Sales. Since a major proportion of NBA's assets (24%) is tied up inunsold properties governed by the old pricing policy, some time willelapse before the new policy produces improved cash flows. Pocr saleshave become a primary concern for NHA, especially in CI properties,only a quarter of which are showing financial returns (Table 2.3).

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Gradual progress has been made In reducing the unsold inventory from67,000 residential units in 1986 (37% of those completed) to 54,000(28% of those completed) as of March 1987 and 47,000 in May, 1988(about 25% of completed). The Authority is therefore aware of theproblem and is conducting an analysis of its causes, which is expectedto be completed by mid-1988.

Table 2.4NHA INVENTORY (MARCH 1987)

Completed Allocated Under Collectionor Fully Paid

Residential Properties (no.) 193,645 158,719 (82%) 139,437 (72%)Commercial/Industrial (mln m sq) 1.715 0.633 (37%) 0.405 (24%)

(c) Collect2in. The Authority's poor collection performance stems partlyfrom difficulties in initiating regular payment habits among squatterpopulations who have no previous payment history and who areaccustomed to free occupancy, partly from political pressures, andpartly from weak administration. In addition, until 1983 NHA wasable to rely on government budgetary inflows and had little real needto enforce collections to continue its main construction activities.Since the economic downturn curtailed the availability of governmentinvestment funds, NUA has attempted to increase collections, but withmixed results. Payment in World Bank-assisted sites was reported at85% of current amounts due in 1985, a significant iaprovement over the1984 level of 67%. However, performance in 1986 declined to 77% due towidespread nonpayment following the change in Government. The 1985improvement was achieved through tightened collection administration,since NHA rarely enforces sanctions on residential properties and hadrepossessed and resold only 3 units. Collections on the overallportfolio in 1985 were only 71%, with arrears averaging 6.4 months,improving to 77% in 1986 when payments due on resettlement sltes werereduced. Average receivables, however, rose to about 8 months.

Loans for small businesses, home materials, municipalities andresettlement had the highest arrearage levels. Resettlement accounts,which represent half of all units built by NHA and a quarter of totalreceivables, achieved repayment of only 57% with average arrears ofabout 19 months. Resettlement mortgages have proven largelyuncollectible since no real sanctions can be enforced in the event ofdefault. Collection on small business (livelihood) loans, representingonly about 6% of NHA's collection portfolio, totaled only 38% ofcurrent amounts due in 1986 and 4% including arrears, with averagearrearages of over 100 months. Despite lts need for revenue, NUAfailed to repossess units in default or, for municipal loans, to seekdeduction of payments at source from Treasury. NRA's situation wasmade yet more precarious by having no provisions against loan losses

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on its mortgage portfolio, in conformance with a COA rullig. TableXII-VI of Annex 12 summarizes NMA's collection performance during1982-86.

2.39 Accounting System/Audits. The NHA is further hindered by a manualaccounting system which has proven unable to keep pace with the growth andincreasing diversity of its operations, and does not provlde information in amanner to enable "profit center" analysis. As a result, there is a serioustime lag between the Authority's operations (production, sales andcollections) and its formal financial records. In 1984 and 1985, COAqualified NHA's financial statements for inconsistencies between itsaccounting and other records. The lack of integrated, up-to-date financialrecords also renders management decisions based on inaccurate and misleadingdata precarious, at best.

2.40 In summary, NHA's substantial operational performance remainsmarginal in relation to total needs. Upgrading has been slow, and expansionof new housing stock affordable to the lowest 80% of the urban populationnegligible. Lengthy involvement in site development due to protracted landacquisition, slow sales and delays in turnover of completed infrastructuresuppress volume delivery. The Authority's financial performance has been theweakest aspect of its operations, and virtually threatens the Authority'ssurvival as an independent corporation. High initial liquidity has beengradually translated into works in progress, but due to protractedconstruction periods, inattention to marketing, weak accounting procedures,and low collections levels due to nonenforcement of sanctions, these workshave not yet been translated into sales, mortgage assets and income. Itsmixed mandate, including governmental resettlement functions, is the cause ofsome of these problems. As a result, at end 1986, 57% of NRA's assets werein nonproductive investments and the Authority is unable to service itsmounting debt. The Authority's policy of "marginal, nominal profit" hasresulted in its gradual decapitalization in real terms and consequentdependency upon continued infusions of government equity to continueoperations. Though unable to sustain further borrowings, NRA cannot rely infuture on continued major government support. The policy changes describedbelow are intended to address these problems.

Future Role and Policies

2.41 Mandate and Key Policies: Under Executive Order 90, NRA is slatedto function as Government's sole producer of low cost-housing in the overallreform and rationalization of the housing sector. The Authority wouldspecialize in volume land development with gradual transfer of its financialrole to NHNFC, which would continue as Government's primary housing financeinstitution, holding and arranging collection on all mortgages. The NHAwould function as a "publicly held private developer," concentrating onvolume production, quick turnover, and cash payment through immediatemortgage sale.

2.42 Outputs would be primarily serviced sites and upgrading with onlylimited resettlement. Construction of completed units (typically costingover P72,000 in 1988) affordable only to the most affluent half of thepopulation would be left to the private sector. The criteria used by NRA inevaluation and selection of projects have been reviewed and are acceptable to

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the Bank. Resettlement and up to a quarter of upgrading would be undertakenon a subsidized basis through grant financing. Cost recovery would belimited. Thus subsidies would be measurable and transparent, and theirimpact on tha budget predictable. All serviced sites and the 75% remainingupgrading sites are considered saleable. The NMA would shed its functionsin mortgage financing and servicing. Rental units would be sold and estatemanagement functions also terminated. Small business loans would be shiftedto a specialty institution when Government establishes the locus of theseactivities as part of the general government reorganization. Infrastructureworks would be carried out for others only under contract or otherwise fullyrecovered through sale prices. Completed works would be transferred to theowner-agencies promptly upon completion.

2.43 The NHA would generate initial construction cash by selling offmarketable segments of its existing mortgage portfolio, discounting portionsas necessary, and writing off those which are not recoverable. Given thesize of its portfolio, some portion might be transferred to UNHFC togetherwith the associated liabilities. Thereafter, it would simply revolve itscapital. Future construction would be on a rapid turnaround basis withmortgage financing coming primarily from NHIFC. Freed of long termmortgages, NUA will need much less capital to function effectively as adeveloper. A summary of NHA's revised policies is presented in Annex 13,which was confirmed at Negotiations.

2.44 Institutional Action Plan: To prepare itself to take on this newrole, and to address the problems discussed above, the Authority is in theprocess of implementing the Institutional Action Plan detailed in Annex 13which was also confirmed at Negotiations. Key elements of the Plan include:

(a) Reorganization and decentralization of NMA operations, the planfor which is expected to be completed by mid 1989, andimplementation by 1991;

(b) Integrated automation of the MIS, operations, accounting andescate management systems. The Authority has recruitedconsultants for the design, procurement and installation of afully computerized accounting and collection system. Phase I ofthis task began in December, 1987 and will be completed by July,1988 financed under Loan 1821-PH. Implementation is expected tobe completed in 1992;

(c) Balance sheet clean-up and financial restructuring, the bulk ofwhich (Phase I and II) is expected to be complete by August 1988with phased write-offs over the following four years as theexisting portfolio is discounted and sold (Phase III). Phase IIwould include the transfer of completed works built on behalf ofNWSS and other government agencies, together with the associatedliabilities off NHA's balance sheet by December 31, 1988;

(d) Strengthening of accounting and internal audit functions during1989;

(e) Implementation of a sale/docmentation drive on unsold inventory,from January 1988 through the end of 1990;

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(f) Development of a Portfolio Liquidation Plan by July 1988, a draftof which was reviewed at Negotiations and divestiture of estatemanagement functions by 1992; and

(g) Execution uf a major land acquisition program which began in 1987to ensure NHA holds title in future prior to the startup ofconstruction.

2.45 Financial Performance: Assuming NHA completes the agreed program ofactions in a timely manner, and adheres to its revised policies, it isexpected to about break even in 1990 and turn profitable thereafter with areturn on equity of about 3% in 1991 increasing to about 9% by 1992.Significant lead time is required to complete development of new sites andthe associated sales, at which point the impact of NHA's revised pricingpolicies will be felt, and to implement the inventory and asset salesprogram.

2.46 During the next three years, the Authority will depend on a blendof both the sale of, and profits from existing assets for cash. GovernmentequLty infusions will be required for a major land acquisition program andconstruction advances, and grant funds will be needed for resettlement.Subsidies to underwrite interim losses are not considered likely. Of theprojected total revenue of about P160 million in 1988, and P190 million in1990, almost all is expected to derive from existing operations. Asset salesshould begin in 1988 and continue through 1992, by which time the bulk ofNRA's present portfolio of mortgages, units held for sale, and works indevelopment totalling P3.6 billion at end-1986 is expected to be eitherwritten off or sold. By 1992 78% of gross revenues will come from mortgagesales on new units, and 22% from remaining unsold loan and vther assets, suchas rental units. As resettlement sites, small business loans and homematerials loans are written off through balance sheet cleanup or transferredto the new "Trust Account", NHA's collection efficiency is expected to risefrom the 1986 level of 77% to gradually reach about 93% by 1992. This assumesthe Authority begins to foreclose delinquent loans and resell properties,without which collections would be unlikely to exceed about 85%, and NUAwould require further government subsidies. Thus the Authority's commitmentto firm enforcement of sanctions in the interim period is the most criticalsingle element in its quest for financial viability.

2.47 A second important assumption is that NHA will graduallyincrease rents on its rental properties from the present 5% on historicalcost to 7.5% by 1992, in conformance with its new Policy Statement.Alternatively, these properties may be sold. This represents a substantialincrease of 50% over 5 years, or 8.5% annually, required to offset what ispresently a major cause of NHA's financial losses. Although the rentalportfolio presently valued at P165 million is expected to be sold off overthe next five years, the financial projections do not reflect these sales toassess the Impact if delayed.

2.48 With respect to costs, it is expected that operating costs(excluding interest) can be contained at approximately the current level ofabout P110 million, in view of the present underutilization of existing staffand NHA's more limited future role. These figures omit design, supervision

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and site administration costs separately budgeted as part of developmentcosts (14%). Interest costs charged against income will drop from about P90(US$4.4) million in 1988 to about P45 million in 1992, as a larger proportionof interest costs are capitalized as part of unit sales prices.

2.49 Because of the changing nature of NUHA from a major mortgageinstitution into a developer, total assets will remain relatively stable,declining only modestly from P3.6 billion in 1988 to about P3.4 billion by1992. Funds will be recycled by plowing the proceeds of asset (mortgage)sales back into further development, and subsequently rolling over funds whenunits are sold. However, works in progress and held for sale will still bereduced from about 50% of total funds employed to about 38% by 1992.Remaining funds would be distributed among current assets (24%), rentalunits and unsold mortgages (29%), reflecting fairly conservative assumptionsregarding NHA's interim collection efficiency and sales lags from time ofcompletion. Assuming NHA achieves its income targets, total equity willrevert to about P1.7 billion by 1993, or about 50% of total assets, afterabsorbing the losses in 1987-1989. The NHA's capital gearing ratio wouldtherefore remain quite conservative. The current ratio is also expected toremain relatively strong at about 2.6. Agreement was reached at Negotiationsregarding NHA's achievement of key financial performance indicies.

C. The Social Insurance System

Home Development Mutual Fund

2.50 Obiectives and Fnctions. The Home Development Mutual Fund (HDIF),also known as Pag-IBIG, was created in 1979 as a mandatory savings scheme togenerate long-term funds for housing. Pag-IBIG Funds are held andadministered by HDMF which in turn, re-lends to NHMFC under a five yearrenewable trust; agreement. HDMF funds earn a minimum dividend of 7.5% plusbonus dividends averaging about 2.5% comWpa.nded annually. The accumulatedamount is returned to the employee at maturity of the membership in 20 years.The Fund initially concentrated on the provision of housing loans for itsmembers through NHMFC, but, as pressures mounted for the Fund's abolition in1984 (para 1.13), emphasis shifted to furnishing emergency/provident loanswhich reach a larger number of Fund members.

2.51 Employee contributions to HDMF were initially mandatory at 3% ofthe first P3,000 of basic salary per month; employers contributed another 3%.In 1986 employee contributions were reduced to 1% of monthly earnings withemployers at 2% on the first P5,000 of earnings, and in December membershipwas made voluntary. Membership campaigns by HDHF indicate that about half ofcurrent members may continue on a voluntary basis.

2.52 HDMF's operational work consists largely of maintaining individualmember accounts, certifying eligibility of members for benefits, andprocessing applications for loans and withdrawals. Since becoming voluntary,HDMF has computerized its operations and begun issuing statements on memberssavings accounts, more like a private bank. The bulk of contributions arededucted at source and collected from employers by the Fund's head office inManila, although about a third come through the Fund's collections agents,chiefly 88S, GSIS and government banks.

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2.53 Organization. Management and Staffing. HDMF is governed by a Boardof Trustees composed of representatives from both employers and employees.The Board sets HDMF's financial and operating policies and oversees itsperformance. Day-to-day operations are the responsibility of a ChiefExecutive Officer in charge of external affairs and a Deputy concentrating oninternal matters. The Corporation employs just over 500 regular staff andover 300 contractual staff, 80% of whom are in Manila and 20% are at theseven regional offices.

2.54 From its inception until early 1986, HDMF and NHMFC shared the samesenior management, an arrangement which contributed to closer coordinationbut at the same time blurred the legitimately separate interests of the twoinstitutions. This arrangement ended with the appointment in 1986 of newstaff for HDlMF's key positions.

2.55 Operational Performance. As of September 1987, the Fund had over 2million members and nearly P7.7 billion in assets. Assets were investedprimarily in (a) long-term member mortgages (P4.7 billion or 61% of totalassets); (b) cash andishort-term securities (P1.4 billion or 18% of totalassets); and (c) short-term emergency provident loans (PO.7 billion or 9% oftotal assets). Liquid assets are invested conservatively in governmentsecurities. In 1987, HDMF took over management of P4.7 billion (US$230million) in member mortgages from NHMFC. It is presently in the process ofcomputerizing and updating these accounts. Technical assistance is includedunder the project to assist HDMF in this task, and in developing an effectiveat-source mortgage payment mechanism.

2.56 As of early 1986, about 4% of total Fund members had obtainedhousing loans, 14% provident loans and 12% small emergency loans averagingabout P800 each. Remaining members received tax-free dividends on theirsavings averaging about 10% from 1980 - 1985. While this returnsubstantially lagged the 20% inflation rate over this period, it remainedcompetitive with the 9.6% commercial savings deposit rate.

2.57 Financial Performance. HDMF's return on equity in recent years hasranged from 10% to 11%. The Fund is liquid, with a current ratio of 117, andItas no long term debt. initial operating costs in 1981 were high, at 25% ofthe prior year's total assets, but dropped to below 2% by 1986, the ceilingstipulated by law. The portion of start-up costs exceeding 2% has beencapitalized under deferred charges which totaled P102 million (US$5 million)or 1.9% of total funds at end-1985. These costs are expected to be writtenoff in three years starting in 1989.

2.58 The new management appointed to HDNF implemented a program ofaction in 1986 and 1987 to strengthen the institution, improve its efficiencyand effectiveness, and reduce operating costs. The Fund's computing capacityhas been doubled to allow more efficient operations. As noted in para. 2.16,a decision was taken in August 1986 to terminate further losses by NHMFC onthe existing HDMF mortgage portfolio, and allow HDMF to manage its ovnmortgage investments. This move eliminated NHMFC's negative spread, but willhave no adverse impact on HDMF since it will pay out to depositors only therate it receives on its mortgage assets. Thus, future earnings of HDMF willbe determined by the fixed-rate return realized on the P4.7 billion in

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existing Pag-IBIG mortgages, as well as earnings on future loans to MImIC.HDNF is likely to significantly improve collection efficiency on thismortgage portfolio, for the reasons outlined in para. 2.16.

Social Security Svstem

2.59 Established in 1954, the Social Security System (SSS) administerssocial security, medicare and employees compensation for employees in theprivate sector. As of end-1986, SS8 had total assets of P31.2 billion(US$1.5 billion equivalent), total staff of 3,500 and membership of 10.6million. About 57% of the system's portfolio was invested ir DBP and PNBnotes, propping up the ailing government banks, while the remainder wasdistributed among other government securities (25%), housing loans (16%) andmisuellaneous investments (2%). The SSS earned an annual return on assets of15% to 20% from 1975-1983, well above the inflation rate of 11.4% and 19.3%in 1986.

2.60 In the past, the SSS extended mortgage credit to its members forthe purchase of new primary residences. Members of at least 1 year'sstanding are entitled to one mortgage loan during the course of membership.The maximum loan amount is currently P150,000 for a term of up to 25 yearswith repayment in equal monthly installments. Rapidly escalating houseprices in the Philippines has lifted the ceiling on its mortgage loans fromP50,000 in 1982, an increase of three-fold in only five years. Like GSIS,SSS charged an interest rate that varied with loan size: 6% for the firstP30,000 and 9% on the balance. The blend rate on a typical loan amount ofP50,000 was therefore 7.2%. Borrowers are able to finance up to 90% of thehouse value -- a practice which sometimes resulted in loans in excess of thepurchase price. Unlike most other lenders, SSS requires that the borrowerown a developed lot with no house before loan approval. SSS then inspectsthe house throughout its construction and releases the loan in phases asconstruction proceeds.

2.61 From 1976-1986, SSS financed nearly 60,000 housing units,representing about one third of all new stock. Nearly all were completed,contractor built units, but generally of much lower cost than NMHNC's. Nobreakdown of unit costs and affordability is available for SSS lending, butloan sizes averaged close to the maximum of P50,000 during this period.Although the majority of SSS mortgage lending is still concentrated in theMetro Manila area, the proportion of loans going to the other regions hasbeen increasing and appears to exceed that of other mortgage lenders.Collections on SSS units, however, are quite low and do not exceed thesectoral average of about 60%. Housing investments have therefore served todepress SBS' overall returns.

2.62 As of August, 1987 the SSS had committed another P2.1 billion inconstruction lending to be converted to mortgage financing for units to bebuilt from 1987-1990, representing approximately 18,000 units and an averagecost of just below P120,000. However, beginning in 1988, SSS has withdrawnfrom further direct lending, channeling funding for member loans throughMIMIC in accordance with government's new "unified lending" program.

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Government Servige Insurance System

2.63 The Government Service Insurance System (GSI) was established in1936 to provide a variety of insurance sarvices and retirement/disabilitybenefits for public sector employees. All funds are derived from membercontributions or revenue on investments. As of end-1983, ¢8I8 had totalassets of P15 billion (US$750 million equivalent), total staff of 4,400 and amembership of 1.4 million. Its investment portfolio of PIO billion wasdistributed among salary and other loans (34%), real estate loans (27%), andstocks and bonds (39%). G8IS earned a return on assets of 1% to 3% during1975-1983. Inflation over this period averaged 11.4% resulting in a netannual loss in real terms of over 8%. More recent data is unavailable asannual reports were discontinued in 1984.

2.64 The OSIS has been one of the major participants in the primaryhousing finance market, providing about P2 billion in housing loans between1974 and June 1984. Over the decade from 1976-1986 05I1 contributed about27,000 units or 16% of total new stock. Thus far, most of GSIS mortgagelending has been directed toward the upper-income group in the Metro Manilaarea. In 1980 only 1.2% of its members qualified for the average mortgage ofP70,000 provided in that year. Between 1978 and 1983, the average GI8Smortgage doubled from P54,000 to P110,000.

2.65 Loans by GSIS are for a term of up to 25 years and carry graduatedInterest rates that increase with loan size, utilizing the same formula asS88 (para. 2.60). In addition, amortization may be made on a fixed orgraduated basis in an attempt to assist as many applicants as possible. Thishas introduced a major risk element into affordability and collections. LikeSSS, GSIS has encountered serious collections problems. "oans are alsoextended to developers for housing construction. The rate of interest onconstruction loans is a flat 12% compounded monthly, with terms ranging from18 to 36 months and a loan-to-value ratio of 70%.

2.66 As of Auwgust, 1987 GSIS had committed P700 million in new mortgagefinancing for abvout 5,900 units to be built from 1987-1990, vith an averageunit cost of just under P120,000. However, in accordance with E0 90, theGSIS withdrev from further direct mortgage lending in 1988, channeling loansinstead to NHMFC to be used for member mortgages.

D. Coordination (HUDCC)

2.67 The coordination mechanism established under thy, sectoralrationalization plan calls for a Housing and Urban Development CoordinatingCouncil (HUDCC) comprising all public institutions with direct roles inhousing construction, financing, insurance or regulation (NHA, NHMFC, HLURB,and HIGC), the major lending institutions for construction and mortgagefinance (SSS, GSIS, HDMP and DBP), government core agencies (DOY, NMEDA, DBN),the Department of Public Works and Highways (DPM) and two private sectorrepresentatives (Chart 40054). The Council is chaired by a Presidentialappointee and functions essentially as a discussion and a policy makingforum. To achieve the authority required to ensure effectiveness, the

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Council Chairman also chairs the Board of each direct housing institution(NUA, NHMFC, HIGC, aud HLURB). Recent legislative changes brought Intoquestion the legality of this arrangement, established under EO 90. However,a recent opinion of the Department of Justice has verified its acceptabilityunder the new constitution. Without it, the sector would lack an effectivecoordination mechanism.

2.68 A Technical Secretariat was also established to assist the Council,containing four sections: Policy/Planning, Rerearch and Development,Financial Monitoring and Management Information System (HIS). Operations ofthe Secretariat are managed by a Deputy Secretary General, to whom the foursections report (Chart 40054). The Secretariat is lean, comprising 12professional staff plus support. Its duties entail (a) follow-up ondecisions of the Council and its Chairman; (b) establishment of an integratedsectoral data system (each institution currently works from an independentdata base with major discrepancies between them); (c) preparation, in liaisonwith NEDA, of the Six Year Sectoral Investment Plan; and (d) monitoring ofthe sector's performance against the Plan. Two final and critical functionswill be (e) oversight of the financial performance and viability of sectorialinstitutions, and (f) conformance to their stated policies. The Secretariatwas established in early 1987, financed under Loan 1821-PH and is fullyfunctional.

2.69 Oversight beyond the sectoral level will occur through theGovernment Corporations Monitoring and Coordination Committee (GCXCC),established under EO 127-A dated July 22, 1987.

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III. THE PROJECT

A. Obiectives and Description

3.1 Objectives. The project's long-term goal is the development of anequitable, viable, and eventually self-sustaining system of housingproduction and finance, with an increasing degree of privatization. Moreimmediate objectives include:

(a) improvement in the institutional and policy framework, includingelimination of functional duplications between public agencies andcompetition with the private sector, establishment of programmaticoperational links between NHA and NHMFC, improved financial viabilityfor these agencies, and greater specialization;

(b) greater efficiency in the use of public resources, e.g. moreappropriate interest rates ahd spread policies, reduced capitalsubsidies with better vislbility and targeting of those subsidies onthe poor, improved collection performance, and public sectorwithdrawal from direct production of units affordable to the upperhalf of the income curve, as well as from construction insurance;

(c) redirection of new housing stock to lower income groups through bothredirection of the housing finance system (and thus privateproduction) to low and middle income households between about the40th and 80th percentiles, and through greater concentration by NBAon production of new stock as opposed to resettlement;

(d) introduction of greater prudence into the sector's financial and riskmanagement and strengthening of HUDCCs' sectoral monitoring capacity;

(e) stimulation of the domestic economy and direct employment generation;and

(f) assistance to the construction industry by identifying and addressingkey bottlenecks obstructing the recovery of small housingcontractors.

3.2 Description. The project would support Government's sectoral reformprogram as well as finance a portion of the five year investment program from1988-1992. The project therefore comprises: (a) support for immediateconstruction activities by the public or private sector through importassistance for building materials, (b) support of a time slice of NHNFC'smortgage purchase program for low cost units built by NHA and privatedevelopers, and (c) related technical assistance, training, equipment an-istudies required to implement sectoral reforms and resolve anticipatedbottlenecks in the construction industry.

Part I: Construction Industry Support. About 47% of the loan or US$75million would fall within the construction component which would financeimported construction materials, a number of which have been in shortsupply. These materials would be utilized by both private and publicbuilders to initiate production of units, the mortgages on which will bepurchased under Part II of the project. Subdivision development is

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expected to take up to 36 months before reaching a significant volume ofsales. Although the volume of support represents about 15% of qualifiedimports in the first year and is sufficient to help overcome keyimmediate bottlenecks, when prorated over the five years it representsless than 1% of mortgages purchased and therefore does not presentdifficulty with double financing. A study is also being undertaken ofthe current problems being encountered by small private builders andcontractors. Terms of reference have been agreed with the ConstructionIndustry Authority of the Philippines (CIAP), and consultants wererecently selected.

Part II: Mortgage Purchases. Mortgage purchases, comprising theremaining half of the loan or about US$80 million would finance about athird of 63,000 units distributed in major urban areas throughout thecountry. Units purchased would have to meet a range of stipulated saleprices to ensure affordability (see pars. 2.20, Annex 3, and Annex 10)and credit appraisal criteria established under NHMFC's guidelines.Most would be serviced sites or core units for self-help completion.Physical descriptions of unit types and costs are presented in TableIII-E of Annex 3. Though funds would initially be separately earmarkedfor mortgage purchases from NHA and the private sector, unutilizedamounts will periodically be redistributed between the two categories.Bank funds would be directed toward either SSS/GSIS/HDMF members or theself-employed, though NHMFC is more likely to utilize Bank funds for thelatter. Annex 3 presents estimated housing demand and affordability, andAnnex 4 the sectoral investment plan including the estimated number ofunits to be built and investment amounts.

(a) NHA Takeouts: Punds would be earmarked for residential mortgagepurchases by NHMFC from NHA for new serviced sites and upgradingunits affordable to families below the 50th percentile of the urbanincome curve uurrently costing below P72,000 (US$3,500). It wasagreed at Negotiations that a target price distribution andaverage affordability level will be maintained. (Commercial andindustrial units would be sold by NRA generally for cash andresettlement costs would be covered by Government.) The Bank wouldfinance 70% of NHA mortgages purchased by WHMFC from 1988-1992,amounting to about US$30 million. Borrowers would meet creditappraisal criteria of NHMFC. All serviced sites and about threequarters of upgrading units are considered saleable, totallingabout 22,400 new units from 1988-1992 of which about 13,400 or 60%would constitute additional housing (serviced site) stock;

(b) Private Sector Takeouts: Mortgages on units affordable to familiesbelow the 70th percentile of the urban population, currentlycosting below P107,000 (US$5,200) would also be purchased fromprivate sector developers in a range of agreed sale prices andmortgage amounts. It was agreed at Negotiations that a targetprice distribution and average affordability level voild bemaintained by NHMFC. Builders have already been advised of thedownward shift in NHMFC's mortgage funding availability and thecaps on higher cost mortgages, and some have began to design lowercost units which respond to mass demand. NGOs have expressedparticular interest In this market. The Bank would finance 70% of

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qualifying mortgages over a five year period, amounting to aboutUS$50 million. The NHNFC's overall beneficiary profile wouldconform to an agreed curve established by IUDCC by number of unitsand volume of financing. This distribution is presented in Annex10 and was confirmed at Negotiations. An annual review would bemade to determine conformance to the agreed distribution. TheNHYFC is expected to finance about 41,200 private sector units from1988-1992 of which about 45% are likely to be Bank-assisted.Government targets have been reduced about 75% to reflectanticipated delays in program implementation.

Part III: Technical Assistance. Training. EquiOment and Studies. Fundsfor technical assistance, training, equipment and studies costing aboutUS$5 million would be included, representing 1.5% of the total projectcost. Key among these would be the computerization of operations andaccounting systems of NHA, NHHFC, and the Council Secretariat, technicalassistance in establishing a sectoral MIS, assistance to NHA incompleting its asset disposition program, and studies on theconstruction industry, the Right of Redemption Law, and NHEPC's futurefunding options. Details of the technical assistance, training andstudies program are presented in Annex 7. Nan-month costs includingfees, travel, and allowances are US$12,000 for foreign consultants andUS$1,500 for local consultants. A total oif 6.8 foreign staff years areincluded and 17.9 local staff years. Complimentary grant assistance ofanother US$1.5 million is being sought under bilateral arrangements andfrom UNDP/HABITAT for building technology, and experimental programs tospeed upgrading and improve community participation. Cofinancing underthe Japanese grant facility also appears likely (see para. 3.4).

B. Cost. Financing Plan and Onlending

3.3 Cost. Total project cost (Table 3.1) is estimated at about P6.6bMllion (US$325 million equivalent) in current prices. The mortgage purchasecomponent covers a five year period from 1988-1992. Base costs are mid-1987and physical contingencies of 15% as well as price contingencies areincorporated into unit sales prices. Annex llD and 14D present other keyassumptions used in the calculations. Domestic inflation rates of 5.5% havebeen used for 1987, 7.5% for 1988, 9% for 1989-90, and 8% from 1991-92, andfor foreign exchange, rates of 3% for 1988-1990 and 4% thereafter. Foreignexchange costs are estimated at 41% of total project cost, representing ablend of 100% of imported building materials, 30% of mortgage purchases, and50% of technical assistance, training, equipment and studies. Land costs arenot expected to exceed about 20% of the mortgage. Project costs includetaxes estimated at US$12.5 million equivalent o:. 3.8%.

3.4 Financing Plan. The Bank would finance US$160 million or 49% of theUS$325 million total cost, representing 100% of estimated foreign exchangerequirements and a minor proportion (5%) of local financing. Remaining costswould be split between SSS, GSIS, and HDNF together representing 51% as shownin Table 3.2. Bank participation would represent about a third of NHUFC'stotal program. It was confirmed at Negotiations that the loan agreementsbetween NHYFC and SSS and GSIS have been signed. Provision has been made forBank financing of technical assistance, training, equipment and studies.However, US$1.8 million has recently been approved under the Japanese

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Cofinancing Facility, and Government plans to seek other grant financing forthese purposes. Loan funds would therefore be redirected into mortgagelending or import supports for any items on which grant financing is secured.In addition, Government has indicated that it will provide P180 million in1988 and P320 million in 1989 for NHA construction advances required to buildthe units being aurchased under the new program. This was confirmed atNegotiations. These funds would provide NRA permanent rollover financingthereafter, and are not treated as part of project costs.

Table 3.1PROJECT COST

---- P million -- ------ US$ million ----- %Project Component Local Foreign Total Local Foreign Total Foreign

I. ConstructionIndustry Support --- 1,530 1,530 --- 75.0 75.0 100%

II. NHYFC Mortgages 1/ 3.499 1.499 4.998 171.5 73.5 *45.0a. NUA 643 275 918 31.5 13.5 45.0 30%

-Upgrading 420 20.5 30%-S/Sites 498 24.5 30%

b. Private Sector 2,856 1,224 4,080 140.0 60.0 200.0 30%III. TA/Training

Equipment/Studies 51 51 102 2.5 2.5 5.0 50%

TOTAL 2/ 3.550 3L.08 6.630 174.0 151.0 325.0 46%

1/ NHNFC'a 1988-1992 Total Program2/ Costs include taxes estimated at $12.5 million or 3.8% of the total.

Table 3.2FINANCING PLAN

Total Cost Social Insurance SystemProject Component (US$ m) WB SSS/GSIS/HDMF

I. ConstructionIndustry Support 75.0 75.0 0.0

II. NHMFC Mortgages: 245.0 80. 165.0a. NUA 45.0 30.0 15.0b. Private Sector 200.0 50.0 150.0

III. TA/TrainingEquipment/Studies 5.0 5.0 0.0

Z L 1~325.0 160,0 165.0

% Share 100% 49% 51%

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3.5 Onlendint: Loans to NHMFC from the Social Insurance System (SSS,0818 and HDMF) will be for specified amounts at fixed interest rates to bedetermined for each annual tranche. The present blend rate is 10.25% for1987/88 drawdowns. The 10.25% return to the Social Insurance Systemrepresents a virtual tripling of the estimated 3%-4% return of the past (6%-7% typical rate to beneficiaries less an estimated 3% spread to coveradministration) and has been the target of much controversy since itsintroduction in early 1988. The provision of fixed rate loans to members isconsidered a benefit of membership. At Negotiations agreement was reachedregarding the formula being used to establish the Social Insurance System'slending rates. This formula is based on achieving at least prevailing marketrates for SSS's overall returns, a target which has been consistentlyachieved (see para. 2.59). Two ongoing Bank-assisted studies will review thesuitability of the proposed housing sector rates. The first, under theEconomic Recovery Loan will assess the overall viability of the SocialInsurance System and the second, a Bank Financial Sector Study, will reviewthe fit of housing sector rates within the overall Philippine FinancialStructure. Adjustments to the Social Insurance Rates could arise fromchanges in Government policy as a result of these studies.

3.6 With respect to Bank funds, Government would be the Borrower,onlending funds under the mortgage investment component as a peso loan toHNFC for 20 years, at a fixed interest rate set annually during the projectlife linked to the Soclal Insurance System rates. The agreed rate will applyto drawdowns during a 12 month period. However, since Bank funds wouldfinance only the two lower income groups of borrowers, the Bank rate would bepegged to the lower two of the three tiered rate structure on the SocialInsurance funds. The formula would currently result in an 8.5% rate whichreflects a margin of 0.8% over the Bank's current rate and is about the sameas Bank's average lending rate over the last 20 years. The onlending ratewould be reviewed and agreed annually over vhe disbursement period.Government would bear the foreign exchange risk. These onlending terms wereconfirmed at Negotiations.

3.7 Average borroving costs are expected to be about 9.7%. Onlendingto sub-borrowers by NYMC will be at a positive spread of at least 2%. Termson new loans would range from 9% to 15% for up to 25 years, depending on loanamount, and is expected to average just over 12%. The proposed rates areexpected to remain positive in real terms for the foreseeable future, witbinflation estimated at between 7.5% to 9% through 1995. Inflation over thepast three years dropped abruptly following the 1984 spike of 50%, to 23.1%in 1985, 0.8% in 1986 and 5.5% in 1987. Past and projected inflation andinterest rates are presented in Annex 8. The NHMFC will offer a long term,fixed rate instrument since funding will be sourced from long term, fixedrate borrowings. The Corporation will therefore carry no termintermediation risk on the new portfolio. Terms for nonmember loans wouldcarry the same 2% spread as those for member loans. Terms and conditions ofnonmember loans effective for the first 12 months were confirmed atNegotiations (see Annex 10). Because of the P1.5 billion of higher interest(open housing) loans presently in NHHFC's portfolio, the Corporation's spreadon its total portfolio is estimated to range from 4.5% in 1988 to 2.8% in1993. Details of NHDFC's lending terms are presented in Annex 10.

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3.8 In summary, the revised sectoral interest rate structure thereforeachieves two significant improvements: (a) a substantial 50% increase in thelowest rate to subborrowers from about 6% to 9%, and (b) clear targetting ofthe lowest rate on the poorest families. As noted in Para. 1.13(d), underthe previous rate structure NHA lent to the poorest families at 12%, NHMFC tothe most affluent at 9% and the Social Insurance System to those in betweenat 6%-7%. Though scope exists for further improvement in the fit of sectoralrates with prevailing market rates, the agreed rate structure represents adistinct step forward which is judged to be as much as can be achieved in thepresent political climate.

3.9 Loan amounts will not exceed 90% of the appraised value of theproperty except who,re a warranty (buy back guarantee) is provided by theoriginating entity, or a 2% credit insurance fee. Even in the latter cases,however, a small down payment will be required to cover selectedadministrative costs. Table 3.3 below outlines loan-to-value ratios.

Table 3.3LOAN TO VALUE RATIOS

Without Warranty With WarrantyBelow P60,000 Over P60,000 Below P60,000 Over P60,000

ProposedDownpayment: 10% 20% 0 10%Loan toValue Ratio: 90% 80% 98% 1/ - 100% 90%

1/ 2% credit insurance fee may be paid in lieu of warranty.

C. ImDlementation

3.10 National Home Mortgage Finance Corporation (NHMFC) would be theexecuting agency for the mortgage investment component. The Corporation isadministered by experienced staff from banking and real estate backgrounds.It is adequately staffed and has undergone a recent reorganization to improvethe efficiency of future operations. Paras. 2.1-2.28 and Annex 9 describeNIMOC more fully. Private developers, ngos, individuals, and the NationalHousing Authority would all be eligible for mortgage purchases under theprogram. Mortgage loans would be made directly to consumers byoriginating a&encies who would disburse payment to the builder for the unitbeing acquired. The INMYC would then purchase the resulting mortgage fromthe originating bank or entity. Financing of construction materials importswill be handled by an existing unit within the Central Bank which is alsohandling the Economic Recovery Loan. The task is relatively simple,involving the preparation of backup documentation on imports for disbursementapplications.

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3.11 Responsibility for the associated program of technical assistance,training, equipment and studies will lie with each respective agency,monitored and coordinated by the HUDCC Secretariat, which will also helpcoordinate collaborative efforts such as mortgage sales between NRA andNHHFC. An annual training program will be agreed each year against whichindividual training opportunities will be assessed.

D. Procurement

3.12 About half of the loan or US$75 million would be disbursedagainst a list of imported construction materials agreed at Negotiations(Annez 6) utilized by both the public and private sectors. Contracts costingUS$5.0 million or more financed under this component will be procured throughinternational competitive bidding (ICB) in accordance with Bank guidelines.Contracts for the procurement of materials by the private sector estimated tocost less than US$5.0 million will be awarded on the basis of normalcommercial practices of the purchasers. Public sector imports undercontracts below US$5.0 million will be procured in accordance with standardgovernment practices described in para. 3.10 which are acceptable to theBank. Contracts for commonly traded commodities will be undertaken throughorganized international commodity markets or other channels of competitiveprocurement acceptable to the Bank, in accordance with proceduressatisfactory to the Bank. A minor element (about 6%) of oil imports isincluded in the list of qualified imports presented in Annez 6, but will notexceed 20% of the import support component. This represents about 5% ofqualified petroleum products utilized for housing over the project period.

3.13 The remaining half of the loan or US$80 million would finance NHMFCmortgages purchased from both the private sector and NHA. With respect tothe US$30 million earmarked for NRA, all public sector works are procuredthrough local competitive bidding procedures governed by PD 1594 which hasbeen reviewed and found satisfactory. Foreign firms may bid on contractsoffered under local procurement procedures in the Philippines and haveoccasionally done so in the past. Local procurement procedures are undercontinuous review and modifications have recently been adopted partly inresponse to an ongoing dialogue between the Bank and the Government aimed atfurther improving local procurement efficiency. Under the four previousBank-assisted projects with NHA, contract packages have typically been belowUS$2.0 million and are not suitable for international competitive bidding.However, any contract over US$2.0 million would be subject to ICB whereprequalification shows that foreign bidders are interested in competing.

3.14 The remaining US$50 million of mortgage purchases would beearmarked for units developed by the private sector using a mixture of laborcontracting, full contracting, and direct in-house construction appropriateto the particular situation. Such works would be designed and constructed toplans and specifications approved by the Housing and Land Use RegulatoryBoard (HLURB) and would carry certificates of conformity issued by the RLURBafter inspection. Subdivisions would conform to design stsndards specified inBP220 as amended which are acceptable to the Bank.

3.15 About US$5 million (3%) of the loan would be used to financetechnical assistance, training, equipment and studies procured on terms andconditions satisfactory to the Bank. Consultant services would be procured

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following Bank guidelines.

E. Disbursemen

3.16 The Bank would disburse against 100% of the CIF price of directlyimported construction materials, 100% of technical -ssistance, training andstudies, and 70% of qualifying mortgage purchases (thus excluding costs ofland, interest and tazes). Mortgages affordable tV families belov the 70thpercentile would qualify for Bank financing. Purchases by NHMFC of existingNHA mortgages would not be financed by the Bank. Equipment purchases would beeligible for Bank financing of 65% if imported and locally procured, 100% ofCIF cost if directly imported, and 100% of ex-factory cost if locallymanufactured. Adoption of an ARM policy and timetable for its implementationwould be a condition of disbursement for the second $40 million of themortgage financing component (para. 2.23(e)).

3.17 To ensure a smooth cash flow and expedite implementation, aSpecial Account of US$6 million representing the equivalent of about fourmonths reimbursement would be established in either the Central Bank or agovernment commercial bank. The account would be mausaged by the CentralBank. In view of the potentially large number of small transactions underthe mortgage and TA, training and studies components of the project,Statements of Expenditure (SOEs) may be used for payments below US$100,000equivalent for an aggregate value of not less than US$500,000 equivalent.Supporting documentation would be retained by NHMFC and made available forinspection by the Bank.

3.18 The proposed Bank loan of US$160 million would be committed over aperiod of five years FY89-FY93 and fully disbursed by December 31, 1994. Theproject closing date will be June 30, 1994. No appropriate Bank profileexists for this type of hybrid project. However, disbursement projections(Annex 6) closely parallel a typical profile for development financeoperations in the Philippines, once adjusted to reflect the initial drawdownfor imported building materials and the Special Account, which is likely tobe established in about FY91 when mortgage drawdovns reach significantvolume. Prior to this date, Government may wish to open a smaller account.Actual performance will depend on the ability of the private sector torebuild volume production in the targeted cost range, and the ability of theNHMFC to efficiently process loans, including those originated by the publicproducer, NHA. If demand proves strong and NHMFC is able to achievesignificant efficiency gains through computerization and other measures,disbursements could be completed over a shorter period. Expendltures forbuilding material imports and mortgage purchases made after August 1, 1987 upto a ceiling of US$16 million would be eligible for retroactive financing.Key elements of sectoral reforms were In place by July 1, 1987 (paras. 1.15-1.21) and the bulk of those remaining would be in place prior to loandisbursement. Actions noted in Annex 5 have been completed or are expectedto be taken prior to effectiveness.

F. Accounts. Audit and Reporting

3.19 Accounts and Audits. Financial statements of the NHMFC will beaudited by an independent, external auditor acceptable to the Bank, andsubmitted to the Bank together with the Auditor's report within 6 months of

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the close of the Corporation's fiscal year. The audit will contain separatestatements on SOEs and the Special Account. The NHKFC has received qualifiedaudits from the Commission on Audit (COA) in recent years due primarily tothe manner in which it treated past losses which have now been written off.Prospects for an unqualified audit in 1987 are therefore good.Computerization of NHMFC's mortgage accounting and control system will becompleted under the project. Future audits will therefore need toincorporate relatively sophisticated EDP control procedures to protect NHHFCfrom internal tampering and ensure the accuracy of the computerized records.

3.20 Assurances were received at Negotiations that financial statementsfor NHA would also be audited by an independent, external, auditor and thatthese statements, together with the auditor's report would be submitted tothe Bank within 6 months of the close of the financial year. The HousingAuthority has also received qualified audit reports in recent years (para.2.39). Improvements in NHA's accounting procedures have been agreed, andfurther changes are planned as part of their Institutional Action Plan (Annex13). It is therefore hoped that NRA, too, will be in a position to receivean unqualified audit in 1987, following restructuring of its balance sheet,approval of which is expected in 1988.

3.21 Repoting. Quarterly reports will be prepared by (a) the NHHFC onthe mortgage purchase component of the project and (b) HUDCC's Secretariat onthe construction materials and technica; assistance, training, equipment andstudies component. Copies of the NHA's internal quarterly reports would alsobe provided the Bank. Project completion reports would be prepared by NHMFCand RUDCC's Secretariat on the two respective components within 6 months ofthe project's closing date.

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IV. JUSTIFICATION AND RISKS

4.1 The project's primary justification is that it would he: pstrengthen sectoral policy and institutions and improve the efficiency ofpublic housing investments. Public expenditures would be reduced throughtermination of several public corporations, reduction of both capitalsubsidies (through tightened pricing policies) and financial subsidies(through elimination of NHMFC's negative spread). The introduction ofprivate builders into lower cost, mass housing would help refocus the shelterfinance system on lower income groups, thus easing uncontrolled growthpressures. This alone would comprise a major step towards a more realisticapproach to the country's housing problem. Associated construction activitywould provide stimulus to the domestic economy at a much-needed juncture.While some of the preceding benefits are difficult to quantify, theircumulative effect should result in significant sectoral efficiency gains.

4.2 Quantifiable benefits of the project include:

(a) about 54,000 units added to the housing stock (13,000 from NHU and41,000 from NHMFC) of which nearly three quarters would servefamilies below the poverty line (Annex 4, Table 1);

(b) 9,000 existing dwellings upgraded with utility services, securetenure and essential community facilities thus improving sanitaryenvironmental conditions (Annex 4, Table 1);

(c) approximately 120,000 man years of employment generated throughdirect construction activities associated with mortgage purchases,plus an unquantified ad4itional number through forward linkagesInvolving the subsequent finishing, furnishing, landscaping andmaintenance of the homes built.

4.3 The private sector would benefit directly from the infusion of theBank's US$50 million for NHMFC mortgage purchases from private developers fornonmember loans which SSS and GSIS would not otherwise finance, and from theimproved availability of imported building materials under the US$75 millionimport support component.

4.4 Supply is not expected to exceed about 20% of effective demandover the Plan period due to the regearing effort of sector reforms, and theneed to rebuild the pipeline. Additional housing stock financed under theproject will take 2-3 years to build and will represent about 8% of effectivedemand over the remaining Plan period and 14% together with other publicproduction. Privately financed units are expected to remain below 5%,bringing total production to just below 20% (Annex 3). Government targetsare set much higher at 50% overall, but have been discounted to allow fortransitional delays (Para 4.7). Housing completions are expected to build uponly in the last two years of the project. However, this transitional periodand the attendant delays are necessary and unavoidable to set the stage forvolume production in the following six year plan period which wouldultimately achieve a better match between supply and demand.

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4.5 Rate of Return: Based on mid-1987 costs and surveys of rent levelsin major urban areas, the economic rate of return on the houses built underthe project would range from about 27% on serviced sites to 31%-37% on slumupgrading depending upon location as shown in Annex 15. A 20% increase incosts (e.g. due to construction delays) or a 20% decrease in benefits (e.g.due to lower than expected rental levels or delays in realizing rentalincome) would still result in a satisfactory return. The 20% figure isconsidered a probable range of deviation in real terms. These relatively highreturns reflect thb scarcity of suitable accommodation and utility services.Key assumptions and methodology are presented in Annex 15.

4.6 Risks. The primary risk is that such a broad and complex set ofreforms will prove difficult to actually implement and sustain and that theprocess will become protracted, stagnate or even reverse. Even if delayed,however, the reforms would still achieve major benefits. Significant actionshave already been taken, and the pace to date is promising taking intoaccount the unsettled overall conditions. A second concern is that loanrecovery will not reach the 95% rate needed for NHNFC to remain viable at theproposed interest rates. As noted in para. 2.15 NHUFC records currently showrecovery of only about 60%. Hovever, NHMFC indicates a programming flaw mayhave overstated receivables, and actual recovery may be more in the order of74%. The NHA has reported collections of 85% on a similar portfolio. Threeadditonal recent changes will make sigaificant improvement in collectionsperformance likely. First, in future the Corporation will hold soleresponsibility for collection which in the past was shared with originatingbanks, which insured the first three months receivables, and the HIGC whichinsured the rest. Termination of HIGC insurance alone will placeaccountability for collections clearly with NMIFC and should in itselfsubstantially improve performance. In additon, the NHNFC has madesignificant strides in computer systems improvement in the last year, and intightening administrative procedures (paras. 2.21-2.22). Finally, theCorporation's new management is strongly committed to to enforcement ofsanctions, the most critical element in achieving the 95% target rate.Retention of the higher yielding "open housing" loans should sustain NHMFC'soverall spread at about 3%-4.5% during the first few critical years, whilenew systems and procedures are operationalized and tested. Results will bemonitored closely and in the event NHIFC begins to show annual losses,interest rates and/or fees would need to be increased.

4.7 A third risk is that it is likely to prove difficult to convincedevelopers of the profitablility of mass produced, low-cost, self helpunits. Pressures are already building to revert to higher cost levels. Tomake serviced sites and core units profitable, volume production is required.Turnover is the key to profitability. Since most delays and eztra expensesoccur in the finishing stage of house construction when flaws andmiscalculations in foundations and framing show up, and since serviced sitesand core units free the builder from these stages, higher turnover of thesame volume of capital and thus greater profitability is theoreticallypossible. However, quick turnover hinges on the speed and reliability ofNHNFC's mortgage takeout. Thus MU4FC's institutional capacity to deliverprompt, reliable service represents an important corrollary risk. Majorefforts are underway by NHMFC to computerixe operations, and make better useof subcontracting, both of which should result in efficiency gains.

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Government's investment targets have also been reduced substantially for thepurposes of estimating project costs to reflect anticipated difficulties inthe private sector's transition to cheaper units.

4.8 A final risk lies in the possibility that NHA would be unable tosignificantly reduce development costs and standards, and telescope thetimetable for land acquisition, site development and sales, all of rhich willbe required before payment is received under the new system. Pastdevelopments have spanned as much as a decade. Initial construction fundingwill be required by NHA to fund development costs on the first tranche ofunits to be sold to NHNFC. A portion of these developmental funds areexpected to be raised by NMA through sales of existing mortgages to NMUIC,private banks or finance companies. The remainder will have to come fromGovernment (para 3.4). If development becomes protracted, the Authority'scapital base could prove inadequate. However, NHA has moved closer to marketprices for land acquisition vhich should expedite voluntary sales andretitling. Of the 1355 ha. estimated requirement from 1988-1992, about athird or 455 ha. is now owned by NRA, sufficient to cover the first 18 monthsof the program. Of regional requirements, 43% is now in NRA's possession. TheAuthority therefore has made a good start. The inherent restructuring ofincentives by disbursing against completed and sold units rather thanconstruction expenditures should also help address this latter risk. Theadequacy of NHA's capital base will bear close monitoring during projectImplementation.

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V. AGREEMENTS REACHED AND iECONKENDATIONS

5.1 Agreement was reached at Negotiations with respect to:

(a) clarification of the powers of HUDCC (para 1.16), and of the HUDCCChairman's powers to chair the Boards of NIWFC, NRA, HI¢C andHLURB (para. 1.15);

(b) Approval of the Committee on Privatization (COP) for sale of)aunlad S&L (para. 1.16); and, under the parallel Public CorporateSector Loan, government's agreement in principle to privatize HIGC;

(c) the Sectoral Policy Statement, Action Plan and coverletter (para.1.18 and Annex 5);

(d) NHMFC's Summary Policy Statement (para. 2.21); including theaverage affordability level to be maintained by NHEFC for Bank-assisted mortgages purchased from both NRA (para 3.2(a)) andprivate builders (para. 3.2(b));

(e) Institutional Action Plans for NHMFC and NRA (paras. 2.22 and2.44);

(f) agreement on terms of reference for strengthening internalaccounting and audit for both NEMCF and NHA (paras. 2.22 and 2.44);

(g) NHMFC's willingness to tightly administer collections, promptlyforeclose on delinquent borrowers and resell the associatedcollateral (para. 2.28);

(h) the draft Portfolio Liquidation Plan prepared by NRA (para. 2.44

(i) The financial performance of NHMFC (para. 2.28) and NHA (para.2.49), specifically that these institutions would:

(i) carry out annual reviews of interest spreads andprofitability beginning in 1989, and furnish such reviews byJune 30 each year to the tank for comments, and implement anyrecommendations agreed;

(ii) not incur any new long term debt unless a debt servicingratio of at least 1.1 can be maintained; and

(iii) achieve agreed annual rates of return on equity.

(j) NHUFC's commitment to match the terms and conditions of mortgagespurchased or originated with the terms and conditions of fundingsources to ensure a continuing positive spread of at least 2%(paras. 2.28 and 3.7);

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(k) NHA's Policy Statement (para. 2.43);

(1) NHKFC's overall beneficiary profile by number of units and volumeof financing (para. 3.2(b));

(m) Government provision of P180 (US$9) million in 1988 and P320(US$16) million in 1989 for NH. construction advances for the nowprogram (para. 3.4);

(n) signature of the 588 and USIS loan agreements with NHMF¢ (para.3.4);

(o) onlending terms from Government to NHMFC (para. 3.6) and from NHMWCto sub-borrowers (para. 3.7), and the formula by which the SocialInsurance System will calculate its lending rate to NHMC (para.3.5); and

(p) the approved list of imported building materials to be supportedunder the project (para. 3.12)

5.2 The following would be conditions of Board presentation:

(a) appointment of a conservator for Bliss Development Corporation(BDC) and legal assignment of BDC to the appropriate body for sale(para. 1.15); and

(b) Govexunment agreement to transfer completed works built on behalf ofNWSS and other public agencies together with the associatedliabilities off NHA's balance sheet (para 2.44(d)).

5.3 The following would be conditions of effectiveness:

(a) adoption of a Portfolio Liquidation Plan by NHA (para. 2.44); and

(b) Government approvals for the NHA's financial restructuring (para.2.44(d)).

5.4 Subject to the above agreements and conditions, the proposed projectwould be suitable for a Bank loan to the Republic of the Philippines ofUS$160 million for a term of 20 years, including a grace period of 5 years,at the standard variable interest rate.

-49-

-- -SN~WA

mamun r Pap 1

Nay 19, 198

International Bank ForReconstruction and Development1818 H Street NW.V.,Washington, D.C., 20433U.S.A.

Gentleen:

In connection with the prqposed Housing Sector Loan to theRepublic of the Philippines from the International Bank ForReconstruction and Development, I ae pleased to transmit thefollowing documents setting out the Government's policies on thehuusing sector:

(1) Housing Sector Policy Statement; and

(2) The Sectoral Action Plan to be undortaken byPhilippine Government housing agencies.

Very truly yours,

For the Republic of Philippines,

ChaLp ,Phi I~pins Nego ating PanelFor the Housing Sector Project

8b Fwot Alo d BaSnk OM.. AvMa Ave., Makati. M,M. CFO SOm 1424 Mliat1Tel. No 8114251- 7 le. 2050/ 81162625 -231

- 50-

.z~mus oi

Page 2

Way 19, 1988

International Bank ForReconstruction and Development1818 H Street N.W.WashLngton, D.C., 20433U.S.A.

Gentlemen:

Re: Philinginh Housin; SectorPoliv Statement

The following statements will serve to clarify certainprovisions of the Philippine Housing Sector Policy Statementtransmitted to you under separate coverletter of Nay 19, 1988 inconnection with the proposed Housing Sector Loan to the Republicof the Philippines:

(1) Regarding the priority in housing assistance to begiven to lower income households: The Nedium-TermPhilippine Development Plan (ITDP) targets over 60% ofunits for Urban household with incomes below the 50thpercentile. The NTDP sets out details of the proposeddistribution by number of units and volume of funds;

(2) Regarding regional distribution of housing assistance:The NTDP targets over 60% to be in regions outsideMetro Manila. While the regional targets are based onhousing needs, it is expected that effective demandwill determine availment of home financing assistance.

(3) Our government's policies are that any subsidies as maybe given for housing shall be transparent and targetedonly for the poor.

(4) As defined by its enabling law, the Housing and UrbanDevelopment Coordinating Council is a policy andcoordinative body and implementation of policies andprograms is done through its member agencies.

8th Floor Allied Bank Bldg., Avels Ave.. Meati, M.M. CPO Box 1424 MakatiTel. Not 81518251 - 76 loc. 205/203 8125U9 - 31

- 51 -

Page 3

(5)- Regarding the objective to increase private sectorfunding for housing mortgages: Government recognizesthat this can best be through a realistic interest ratestructure, and it is our goal over the longer term tomove in this direction.

(6) Regarding government production of housing through itssole producer, NHA: While a portion of serviced siteswill be sold to upper income households to achievesocial mix, the NHA will not engage in direct housingconstruction for these upper income groups.

(7) Regarding National Government funding for resettlementof squatters: This will be done through grants,subsidies and trust funds rather than through equitycontributions to NHA.

Very truly yours,

l~/SChairman

ousing and Urban DevelopmentCoordinating Council

- 52 -

Page 4PHIlIPPINES


ImNAHOUSING SECTOR POLICY STATEMENT

A. Mandate/Objectives

1. The primary concern of the State is to make available housing andshelter-related basic services to homeless urban households;

2. Priority shall be given in government housing assistance to lowerincome households;

3. The maximum participation of the private sector shall be encouraged inall aspects of housing;

4. The State will undertake programs to regularize land tenure of urbansquatters where possible and to provide suitable resettlement siteswhere necessary;

5. The State will undertake measures to promote housing development togenerate employment and hasten economic recovery.

B. Guidelines/Stratemies

1. The State shall promote volume production of affordable housing on aself-sustaining basis through a program of maximum cost recovery;

2. The production of housing units shall be undertaken where possible bythe private sector;

3. Government's primary involvement shall be in providing long-term homemortgage financing for low and middle income groups;

4. Government shall endeavor to distribute housing assistance equitablyamong all regions on the basis of need;

5. The energies and capacities of the informal sector and nontraditionaldevelopers to produce housing stock shall be developed andstrengthened.

C. Government Housinf Structure

1. The key government housing agencies shall be: a) the National HousingAuthority, which shall be the sole government agency engaged in directshelter production; b) the National Home Mortgage Finance Corporation,which shall be the major government home mortgage institution; c) theHousing and Land Use Regulatory Board, which shall be the soleregulatory body for housing and land development; and d) the HomeInsurance and Guaranty Corporation, which shall encourage privatesector participation in housing development and finance through aviable system of guarantees, loan insurance and other incentives;

- 53 -AIR= IPage 5

2. The activities of these agencies shall be coordinated by the Housingand Urban Development Coordinating Council (HUDCC) whose Chairman shallalso serve as Chairman of the key housing agencies;

3. In addition to the key housing agencies, membership in HUDCC shallinclude: a) tea housing funding agencies (Social Security System,Government Service Insurance System and Home Development llutual Fund);b) support agencies (National Economic Development Authority,Department of Finance, Department of Budget and Management, Departmentof Public Vorks and Highways, and Development Bank of the Philippines;and c) representatives from the private sector.

HUDCC shall have the following functions: a) to formulate natLonalobjectives for housing and design strategies for accomplishing them; b)to determine the participation and coordinate activities of the keyhousing agencies; c) to monitor, review and evaluate activities ofthese agencies; d) to assist in the maximum participation of theprivate sector in housing; e) to recommend housing legislation; and f)to formulate guidelines for disposition of assets of housing agenciesnot required for their primary mandate.

D. Housina Finance

1. Long term home financing assistance shall be directed to low and middleincome groups who are unable to secure private mortgage loans;

2. Fund sources for home mortgage financing shall be widened to cover asignificant portion of need of members, both private and government, ofsocial insurance funds as well as non-members;

3. NMFC will develop its primary mortgage operations into a viable andself-sustaining business with provisions for annual increases in volumein proportion to need;

4. NHBMFC shall match borrowing and lending rates and terms for all itshome-lending programs to ensure viability;

5. NIMFC shall endeavor to equitably distribute its home financing amongall regions on the basis of need;

6. Land acquisition and development financing assistance shall bedeveloped for community self help projects;

7. The secondary mortgage market will be developed in order to increaseprivate funds for low cost housing mortgages.

E. Housina Production

1. Volume production of low-cost and economic housing units shall beundertaken by the private sector. Government shall

- 54 - AML 1Page 6

undertake housing production only when the private sector is unable orunwilling to do so;

2. The NHA shall be the sole government producer of housing and shallfocus its efforts in providing housing assistance to households withincomes below the poverty line who cannot be served by the privatesector;

3. The NHA shall endeavor to be self-sustaining by maximizing recovery ofcosts on all its projects;

4. Resettlement projects shall be undertaken for squatters occupyingendangered areas or areas for priority infrastructure projects. Theseprojects will be funded by the National Government and implemented bythe NRA;

5. The delivery of basic utilities and services to urban poorbeneficiaries will be undertaken where possible by the concernednational agency or local government;

6. The HA will give priority in the planning and implementation of itsprojects to blighted urban areas designated as Areas for PriorityDevelopment.

1. Land development and house construction standards shall be liberalizedto the maximu extent possible without sacrificing safety and health tomake housing more affordable to lower income households;

2. ELRB will continuously improve systems and procedures for processingof permits, clearances and licenses in order to facilitate new land andhousing development;

3. ILRB will continue to undertake the protection of buyers of subdivisionlots and housinL units through the regulation of the real estateindustry and the adjudication of relevant complaints;

4. HBL shall assist local authorities in town planning and zoning inorder to achieve optimum land utllization in dynamic balance with theenvironment.

- 55 -ANNEX 2Page 1

NIAL,kC.ANANGManlla

EXECUTIVE ORDER NO. 90

IDENTIFYING THE GOVERNMENT AGENCIES ESSENTIAL FOR THE NATIONALSHELTER PROGRAM AND DEFINING THEIR MANDATES, CREATINGTHE HOUSING AND URBAN DEVELOPMENT COORDINATING COUNCIL,RATIONALIZING FUNDING SOURCES AND LENDING MECHANISMS FORHOME MORTGAGES AND FOR OTHER PURPOSES

wHEREAs, Government recognizes that shelter is a basicneed for which low and middle income families, particularlyin urbanized areas, require assistance;

WHEREAS, Government has approved a six-year NationalShelter Program which aims at providing increased levels ofsuch assistance on a nation-wide basis;

WHEREAS, there is a need to define the mandates of govern-ment agnecies involved in housing and to better coordinateand monitor their activities;

WHEREAS, there is also a need to establish a system thatwill provide the funds required for long-term housing loanson continuous, self-sustaining basis;

WHEREAS, there is likewise a need to encourage privatesector participation in low-cost housing and finance;

NOW, THEREFORE, I, CORAZON C. AQUINO, President of thePhilippines, do hereby order:

Title I - HOUSING AGENCIES AND MANDATES

SECTION 1. Key Agencies. To ensure the accomplishmentof the National Shelter Program, the following primary govern-ment housing agencies, any provision of existing laws andtheir respective charters to the contrary notwithstanding,are hereby mandated to:

a) National Housing Authority - The National HousingAuthority shall be the sole government agency

- 56 -

ANNEX 2Page Z

engaged in direct shelter production. It shallfocus its efforts in providing housing assistanceto the lowest 302 of urban income-earners throughslum upgrading, squatter relocation, developmentof sites and services and construction of core-housing units. In addition, it shall undertakeprograms for the improvement of blighted urbanareas and provide technical assistance for privatedevelopers undertaking low-cost housing projects.Development of its existing properties for housingprojects for income-earners above the lowest 302may be continued provided that funds generatedthereon are utilized for the attainment of itsprimary mandate.

b) National Home Mortgage Finance Corporation - The NationalHome Mortgage Finance Corporation shall te the majorgovernment home mortgage institution. Its initialmain function is to operate a viable home mortgagemarket, utilizing long-term funds principally pro-vided by the Social Security System, the GovernmentService Insurance System and the Home DevelopmentMutual Fund to purchase mortgages originated by bothprivate and public institutions that are withingovernment-approved guidelines. It is also chargedwith the development of a system that will attractprivate institutional funds into long-Eerm housingmortgages.

c) Human Settlements Regulatory Commission - The HumanSettlements Regulatory Commission, renamed as theHousing and Land Use Regulatory Board, shall be thesole regulatory body for housing and land develop-ment. It is charged with encouraging greater privatesector participation in low-cost housing throughliberalization of development standards, simpli-fication of regulations and decentralization ofapprovals for permits and licenses.

d) Home Financing Corporation - The Home FinancingCorporation, renamed as the Home Insurance and GuarantyCorporation, shall assist private developers toundertake low and middle income mass housing pro-duction and encourage private institutional fundsand commercial lenders to finance such housingdevelopment and long-term mortgages through a viablesystem of guarantees, loan insurance and other incen-tives.

- 57 -ANNEX 2Page 3

SECTION 2. Support Agencies. To ensure that the fundsrequired for long-term housing loans are available on a con-tinuous and self-sustaining basis, the following supportagencies, any provision of existing laws and their respectivecharters to the contrary notwithstanding, are hereby mandated to:

a) Home Development Mutual Fund - The Home DevelopmentMutual Fund will continue to administer provident fundcontributions collected from member employees andemployers, utilizing funds not required for providentbenefits for housing loans for members, and, in addi-tion, will be charged with the development of savingschemes for home acquisition by private and governmentemployees.

b) Social Security System - The Social Security Systemshall be the primary provider of funds for long-termhousing mortgages for low and middle-income privatesector employees.

c) Government Service Insurance System - The GovernmentService Insurance System shall be the primary providerof funds for long-term housing mortgages for low andmiddle-income government employees.

Title II - THE HOUSING AND URBAN DEVELOPMENTCOORDINATING COUNCIL

SECTION 3. Creation; Main Function; Principal Office.There is hereby created a Housing and Urban DevelopmentCoordinating Council, hereinafter referred to as the Council,under the immediate control and supervision of the Presidentof the Philippines, charged with the main function of coordi-nating the activities of the government housing agencies toensure the accomplishment of the National Shelter Program.The Council shall have its principal office in MetropolitanManila.

SECTION 4. Composition. The Council shall be composedof the following:

a. A Chairman, who shall be appointed by the Presidentof the Philippines;

b. The Heads of the primary government agencies and thesupport agencies for funding for housing enumeratedabove;

c. One representative each from the National Economicand Development Authority, the Ministry of Finance,the Ministry of Budget and Management, the Ministry

- 58 -ANNEX 2Page 4

Public Works and Highways and the Development Bankof the Philippines; and

d. Two representatives from the private sector to beselected by the Council.

SECTION 5. Powers and Functions of the Council. TheCouncil shall have the following powers and functions:

a. To formulate national objectives for housing andurban development and to design broad strategiesfor the accomplishment of these objectives;

b. To determine the participation and coordinate theactivities of the key government housing agenciesin the national housing program;

Co To monitor, review and evaluate the effective exer-cise by these agencies of their assigned functions;

d. To assist in the maximum participation of the privatesector in all aspects of housing and urban development;

e. To recommend new legislation and amendments to exis-ing laws as may be necessary for the attainment ofgovernment's objectives in housing;

f. To formulate tne basic policies, guidelines and imple-menting mechanisms for the disposal or developmentof acquired or existing assets of the key housingagencies which are not required for the accomplish-ment of their basic mandates;

g. To exercise or perform such other powers and functionsas may be deemed necessary, proper or incidental tothe attainment of its purpose and objectives.

SECTION 6. Powers and Functions of the Chairman. TheChairman of the Council shall serve as ex officio Chairman ofthe governing Boards of the key housing agencies. To assisthim in the fulfillment of his duties, the Chairman is herebyauthorized to create a Council Secretariat with a staff ofqualified personnel.

SECTION 7. Council Secretariat. The Secretariat shallbe headed by a Secretary-General to be appointed by theChairman of the Council. The Secretary-General shall be anex officio member of the Council and shall be responsiblefor the execution and administration of its approved policiesand measures.

-59- ANNEX 2Page 5

SECTION 8. Appropriations. To cover initially theexpenses of the Council and the Secretariat, the unappropriatedfunds of the Ministry of Human Settlements for the ShelterSecretariat shall be utilized together with proportionatecontributions of the key government housing agencies whichis set at TEN MILLION PESOS (610,000,000.00). Thereafter,the necessary funds shall be appropriated every Fiscal Yearin the General Appropriations Act.

Title III - RATIONALIZING THE FUNDING SOURCESAND LENDING MECHANISMS FOR HOMEMORTGAGES

SECTION 9. Funding Sources. To enable the Social SecuritySystem, the Government Service Insurance System and the HomeDevelopment Mutual Fund to provide improved benefits to theirmembers and to generate the necessary long-term funds forhousing, a rationalization of all employer and employee contri-butions for all social insurance and provident fund benefits ishereby directed to include the following:

a. Raising the Social Security System maximum compen-sation, inclusive of the Cost of Living Allowance,as basis for contributions from P1,000.00 tot3,000.00;

b. Making contributions to the Home Development MutualFund voluntary on the parts of both employees andemployers;

C. Instituting a single mandatory contribution ratefor employees and employers for all social insuranceprograms.

SECTION 10. Home Development Mutual Fund as VoluntaryFund. In the implementation of the above rationalizationprogram, the following shall govern the operations of theHome Development Mutual Fund:

a. All existing contributions together with theiraccumulated earnings shall be retained in theHome Development Mutual Fund until their maturityin accordance with existing rules and regulations.

b. Membership in the fund for new private and govern-ment employees and their respective employers shallbe voluntary after December 31, 1986.

c. After December 31, 1986, existing members, bothemployees and employers, shall have the option tocon:inue or discontinue new Fund contributions.

- 60 -ANNEX 2Page 6

d. To encourage provident fund savings for home acqui-sition, all government instrume-ntalities, agenciesand corporations shall match the voluntary contri-butions made by government employees in accordancewith existing ratios. Private employers are urgedto match the contributions of their employers whoopt to continue their membership in the Fund.

SECTION 11. Implementing Rules. The Presidential Com-mission on Government Reorganization (PCGR) is hereby instruc-ted to draft implementing rules for the rationalization ofthe Home Mortgage Financing System and for the new Home Deve-lopment Mutual Fund guidelines to take effect on January 1,1987. The National Economic and Development Authorityis hereby instructed to coordinate the drafting of the imple-menting rules for the rationalization of all social insuranceprograms to take effect not later than March 31, 1987.

SECTION 12. Home Mortgage Financing System. Complementaryto the rationalization of the Funding Sources as above provided,an integrated home mortgage financing system is hereby adoptedwith the following features:

a. Lending Guidelines - Amounts financed, interest rates,and terms on home mortgages to be purchased by theNational Home Mortgage Finance Corporation shall bedetermined by the Council on recommendation by itstechnical staff which shall include representativesof the funding support institutions.

b. Allocation of Fund Contributions - For 1987, the totalamount to be made available for long-term mortgagesunder the National Shelter Program will be tA.2Billion. The Social Security System, the GovernmentService Insurance System and the Home DevelopmentMutual Fund will contribute a total of f3.4 Billion,to be allocated by the National Economic and Develop-ment Authority among the agencies in an equitablemanner. The National Government shall contributethe balance of funds required. Thereafter, eachinstitution, on recommendation of the Council, shallset a fixed percentage of their annual investiblefunds for long-term home mortgages. These fundsshall be made available to the National Home MortagageFinance Corporation under terms which ensure theirrepayment.

c. Lending Rates Chargeable to the National HomeMortgage Finance Corporation - Funds shall be used

-61 - ANNEX 2

Page 7

by the National Home Mortgage Finance Corporationprincipally to extend mortgage loans for the membersof the funding agencies. For this, the agencieswill charge the National Home Mortgage Finance Corpora-tion annual interest equivalent to the average interestrate charged to members under terms approved by theCouncil less a reasonable spread to cover the NationalHome Mortgage Finance Corporation's administrationcosts as well as adequate provisions for loan losses.The funding agencies may also make direct loans to orpurchase securities from the National Home MortgageFinance Corporation. In this event, interest ratesand terms shall be as agreed between the NationalHome Mortgage Finance Corporation and the fundinginstitution.

SECTION 13. Interim Arrangements. A phasing-in processfor the implementation of the Home Mortgage Financing Systemas above provided shall be determined and implemented by theCouncil over a period not to exceed six months. In the interim,the Social Security System, the Government Service Insurancesystem and the Home Development Mutual Fund shall continuewith their home mortgage lending activities provided that thebeneficiaries, lending packages, rates, terms and proceduresshall be made uniform and in accord with the National ShelterProgram not later than December 31, 1986. Such loans shallbe considered as partial compliance with each agency'sfunding commitments for the year.

Title IV - OTHER PROVISIONS

SECTION 14. Special Provisions. To further assist thehousing agencies in the fulfillment of their primary objec-tives, the following are directed to be undertaken:

a. Thk Metropolitan Waterworks and Sewerage System,within its area of jurisdiction, shall imme-diately take over water and sewerage systemscompleted by the National Housing Authority;

b. The direct housing develoiment activities of theHuman Settlements Development Corporation'shousing and construction materials subsidiariesas well as of the Land Investment Trust adminis-tered by the Home Financing Corporation shall bephased out within a period of three (3) yearsfrom the effectivity of this Executive Order.All concerned agencies shall, not later thanMarch 31, 1987, submit to the Council theirrespective phasing-out programs. Whatever net

-62- ANNEX 2

Page 8

proceeds realized therefrom shall be turnedover to the National Government.

C. The Social Security System and the GovernmentService Insurance System shall be allowed toengage in bridge development financing of lowand middle income mass housing projects;

d. The National Home Mortgage Finance Corporationshall be recapitalized so that its unimpairedcapital after realistic provisions for lossesamounts to W5OO million.

e. The Home Finance Corporation shall be recapi-talized to enable it to fulfill its objectives.

SECTION 15. Separability. The provisions of this Execu-tive Order are declared to be separable and if any provisionor the application thereof is held invalid or unconstitu-tional, the validity of other provisions s1hall not be affected.

SECTION 16. Repealing Clause. All laws, orders,issuances, corporate charters, rules and regulations or partsthereof inconsistent with this Executive Order are herebyrepealed or modified accordingly.

SECTION 17. Effectivity. This Executive Order shalltake effect immediately.

Done in the City of Manila, this 17th day of December,in the year of Our Lord, nineteen hundred and eighty-six.

By the President:

/A ,

.AOKER P. ARROYOExecutive Secretary

- 63 - ANNEX

Page 1

PHILIPPINES


HOUSING DENAND AND AFFORDABILITY

1. This Annex presents the key data and assumptions underlying theestimates of housing demand and affordability presented in Chapter I.

URBAN GROWTH AND HOUSING DEMAND

2. Table II-A presents estimated housing needs and affective demand byyear from 1970 through the year 2000, together with actual and projectedsupply through publicly assisted programs. Population figures and annualgrowth rates reflect NEDA estimates for national population, and missionestimates of urban growth, reflecting a blend of NEDA, EPD and USAIDprojections. Differences between mission estimates and Governmentprojections, however, are not significant.

3. Urban housing needs reflect new growth slone, and do not includeprovisions for replacement of unsatisfactory existing stock or deteriorationof stock in future. Upgrading activities are therefore excluded from "need"calculations per se and are similarly excluded from "supply" calculations.Needs have been translated to effective demand through elimination of thelowest income 15% of the urban population, who are assumed to be unable toafford a new unit. Considerations of current housing ownership, or thepotential demand for homeownership were not taken into consideration incalculations of effective demand, since such demand does not distinguishbetween rental and owner occupied units. Calculations of effective demandtherefore include both rental and owner-occupied units.

4. Effective demand and projected supply through public assistanceprograms by income group serv._d is presented in Table II-B and Figure II-C.Income data reflects the NCSO December 1985 Survey, increased by 6.3%reflecting inflation of 0.8% in 1986, and an estimated 5.5% for 1987.

AFFORDABILITY

5. Affordabilty calculations are shown in Table II-D. It has beenassumed that a family can afford about two times its annual income forshelter, resulting in mortgage amounts of about P48,700 (US$2,400) forfamilies at the 30th percentile, P72,000 (US$3,500) for those at the 50thpercentile, and P138,000 (US$6,700) for those at the 80th percentile. Thecommensurate unit sale prices, assuming a 10% downpayment, would be aboutP54,000, P80,000 and P153,000 respectively. On this basis, families wouldspend respectively not more than a maximum of 22%, 28% and 34% of theirmonthly income to service the mortgage. The differences reflect NHMFC'stiered interest rate structure for families at different income levels.Families choosing a lower cost unit would spend lower proportions of monthlyincome. These are considered acceptable as maximums in view of theprobability of additional income being obtained through subletting of rooms,and other informal sources.

m m-cTable MMn-A

URBAR GROW TS B, NOU SING NBBD AND SUPPLY

TOTAL ---- - ---- URBAN POPULATION --------- - aOU8 1OPOPULAT ION NBEDS SUPPLY

_ _- - PSTION IURU - ANAUAL IJZEASE A N 0 D_ _ _ _ _D B K A N D i8h Rstal"at Low Estimat

Total Arnal Urban Ammual M3 556 Urban No. 'mIt_TEaR Population Growth Populatlon Ggowth ppllba t Population EN 05.56 SNeeed" Effetive go. of I Deai go. of S De

'000 Rate '000 1t Rate '000 Urban '000 ppllhs Cl.02hhlu) D..u2 21 Unlts 31 MNt Unlte xMt

1970 36,648 2.71 12.160 2,187 33.02 514.000 92.446 90.633 77,038 NA Ka NA VA1971 37,828 2.71 12,674 4.2X 2,279 33.51 536,000 96,403 94.513 80.336 NA VA NA NA1972 38.834 2.7X 13,210 4.22 2,376 34.02 558,000 100.360 98.392 83,633 NA NA NA NA1973 39,847 2.71 13,768 4.22 2,476 34.51 582,000 104,676 102,624 87,230 NA NA NA NA1974 40,927 2.72 14.350 4.21 2,581 35.11 607,000 109,173 107,032 90,977 NA NA NA NA1975 42,015 2.81 14.957 3.81 2.690 35.61 568.000 102.158 100,155 65.132 Ka NA NA NA1976 43,203 2.82 15,525 3.91 2,792 35.92 590,000 106,115 104,034 88.429 11,000 122 11.000 1221977 44,424 2.82 16,115 3.82 2,898 36.32 612,000 110,072 107,914 91,727 12,000 132 12,000 1n198 45.680 2.81 16,727 3.92 3.008 36.62 635,000 114,209 111.969 95,174 13,000 141 13,000 1411979 46,972 2.92 17.362 3.82 3,123 37.02 659,756 118,661 116.334 98,884 13.000 131 13,000 132

I 1W0 DAT A Bt ISTIESM B1 IAl 011960 48,317 2.52 18,022 3.82 3,241 37.32 684,827 123,170 120.755 102.642 14,500 142 14,500 14 2 1981 49,525 2.5X 1t,707 3.82 3,364 37.82 710,850 127,851 125,344 106.542 14,500 142 14,500 142 11982 50,764 2.52 l9,.- 3.82 3,492 38.31 737,862 132.709 130.107 110.591 14,532 131 14.532 1i1963 52,033 2.52 20,155 3.82 3,625 38.71 765.901 137,752 135,051 114.793 27,624 243 27.624 2421964 53,334 2.52 20,921 3.81 3,763 39.21 795,005 142,967 140,183 119,155 29.186 241 29.186 2421965 54,668 2.42 21,716 3.81 3,906 39.72 825.216 148,420 145,510 123,683 13,700 112 13,700 in1986 55,967 2.52 22,541 3.82 4,054 40.32 856,574 154,060 151,039 128,383 4,000 31 4,000 32

PLON PDR20:1967 57.360 2.42 23,396 3.81 4,208 40.81 889,124 159,914 156,779 1S3.262 59,628 451 2,876 221968 58,720 2.4X 24,287 3.72 4,368 41.42 898,623 161,623 158,454 134.666 59.900 441 14,850 11u1969 60.100 2.3X 25.186 3.7X 4,530 41.92 "1.872 167,603 164.317 139,669 78.605 561 17,850 1321990 61,480 2.32 26,118 3.62 4,697 42.51 940,234 169,107 165,791 140,922 65.664 471 24,700 1i1991 62,870 2.22 27.058 3.62 4,867 43.02 974.082 175,195 171,759 145.996 73,717 502 22,875 1621992 64,260 2.22 28,032 3.62 5,042 43.62 1,009,149 181,502 177,943 151,251 85,780 572 33,*15 222

PLAN PIU3OD TOAL: 5,643,085 1,014,943 995,043 845,786 423.294 502 116,566 142:UWM1993 65,674 2.22 29.041 3.62 3,223 44.21 1,045,479 188,036 184,349 156,6961994 67.119 2.02 30.087 3.62 5,411 44.82 1,083,116 194,805 190,965 162.3381995 68,480 1.9X 31,170 3.6X 5,606 45.52 1,122,108 201,818 197.861 168.1821996 69.773 1.9X 32,292 3.52 5,808 46.32 1,130,212 203,276 199.290 169,396 X197 71,067 1.92 33,422 3.52 6,011 47.02 1.169,770 210,390 206,265 175,3251998 72,426 1.92 34,592 3.52 6,222 47.82 1,210,712 217,754 213.484 181,462199 73.812 1.9: 35,802 3.5X 6,439 48.52 1.253,087 225.375 220.956 187,8132000 75,224 37.056 3.52 6,665 49.31

------------------------------ __________----------------------

11 Urban pep etio fiusa baed on 3.8X growth rate oer 1979 urban Population. Other years also 4drived from an oth rate eakown population base.

21 Need Le" loest icome 15 of households. rem ef 'mits (rental or _d) required to _ea pa" with growth in af*fedable moes.3/ 1976-1961 t9tal production _, distribution by year estlated.

65 - ANNEX 3Page 3

PHILIPPtHESHOUSING SECTOR PROJECT

,.ia* 111-3STRUCTURE OF URBAN HOUSING DEMAND AND SUPPLY

ANNUAl NUSEHOLO DENAND SUPPLYINCUIE UNIT COST PLAN PERID (1987-1992) PLN PEMIOD (1967-1992)(ep ) ................... ..................................................................

X 1987 PAXIIM MAXINUN NO. OF EFFECTIVE DEKAND I/ -- TARGET -- -- LOW ES N--

INCONE at *-............. UNIT NORTGAGE UNITS X ................. .- X FF X 1FFDECILE POPULATION FROM TO SALE PRICE AMUNCT NEEDED AFFDSL NURSER X NURSER DEWN URSER DEND

O *- 3OTH 30X 0 22,463 54,111 48,700 298,513 50.0 149,56 17.6" 198,948 133l 54.76 37131ST-- 50tN 20X 22,463 33,191 80,000 72,000 199,009 1OO.O 199.009 235.5 60,4 401 22,147 11S1ST-- 80TH 301 33,191 63,665 153,333 138,000 298,513 100.0 296,513 35.3X 110,056 371 30,W 1011IST-- iOTN 201 63,465 AND UP AND UP AND UP 199,009 1OO.O 199,009 Z3.51 33,864 17X 9,325 5X

TOTAL: 99S,03 85.01 84S,787 100.01 423,294 50X 116,505 14195,0U3 84S,787

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

1J OKUHERSfIP NOT USED AS A CONTRAINT TO DOM SINC IT IS ELASTIC AND WILL RESPOID To1. 5/30/86

INCREASED SUPPLY, AND SINCE FIORES REPRESENT NEI STOCK REWIREMHETS (I.E. WHETHER OW ED GRAPE: DOWNUPR RET1 ).

Table III-C

HOUSING DEMAND AND PUBLICLY ASSISTED SUPPLYPhilippines Plan Pelod 1987-1992

350

EJ ffecfl Dsemand

m M 9UmSv4z>V rm nZe

50 i- 4 P O

MotoeAint PO-U8,000 48.000-n72,OOO 172,000-fl35,0'00 V0 1138,000

Affrdbleto % OibAf 30fhfx 5OI-01h%s BlOh%Is

Word Bari40591

- 6.6 -

ANNEX 3Page 4

PHILIPPINESHOUSING SECTOR PROJECT

Table III-D

INCOMES AND AFFORDABLE UNIT COSTS (1987)

A 1 N U A L I N C O E * AFFORDABLE MORTGAGE ANT M A X.................. C U N ---------------------------------------------- ,8 A L I

URBAN AREAS ONLY I MORTGME AOMW P R I C 1987 I/ 0 F EFFECTIVE PROPORTION 22.17 X FAMILY IC --------

N H INTEREST OF HH ............... ASSUMINGFROM TO RATE INCOmE FROM TO 10% DOWN

0 13,266 10% 9.08 22% 0 28,788 31,98613,266 17,948 20t 9.0% 22% 28.788 38,946 43,27417,948 22,463 30% 9.0% 22% 38,946 48,745 54,16222,463 27,489 40% 9.08 22% 48,745 59,652 66,27927,489 33,191 50% 12.0o 28% 59,652 72,025 80,02733,191 40,334 60% 12.08 28% 72,025 87,526 97,25140,334 49,430 70% 12.0% 28a 87,526 107,262 119,18049,430 63,665 80% 15.0% 28% 107,262 138,153 153,50463,665 93,973 90% 15.0% 34a 138,153 203,922 226,58093,973 AND UP 100% 15.0% 34% 203,922 AND UP AND UP

I/ NCSO 12/85 FINAL SURVEY DATA (REFLECTING CEILINGS OF INCOME BRACKETS ANXINCOKINCREASED BY INFLATION TO 12/87 (6.3% TOTAL, REPRESENTING 0.8% IN 1986AND 5.5% ESTIMATED FOR 1987).

Table III-4PHYSICAL DESCRIPTION OF UNITS

Mortgage AffordableAmount at __ilo Physical Description

P 20,000 1/ 15th 65)2 lot only. Serviced as noted below withindivldual water connection & commu-:il septic tank.No superstructure construction.

P 31,000 15th Upgrading of an existing dwelling with 8Mcarriageway paved road with dual curb, waterborneindividual sanitation, individual lot waterconnections, & electricity. Tenure to 40)1 plot.

P 35,000 1/ 20th 50)2 lot 5h frontage, 20.6 12 rowhouse design corehouse for self-help completion with 2 cement blockcoumunal walls.

P 66,000 1/ 50th 6512 lot, 6.5h frontage, 30)2 rowhouse design corefor self-help completion, with four walls andgalvanized iron roofing. Open interior nopartitions. Floor slab provided.

1/ All lots serviced with major road of 14.0) width, minor roads of 10.0width and footpath/alleyways of 3.0X width, deepwell water source, vithindividual water connections and communal septic tanks for every 2-3units.

PIILIPPINES

StCTORRL IN[STIIEli tUI 1987-19928ASED N LOU STTE f MEr f UNITS CMLfM/SW

I 60UERHttNl PLRK ~(LOU EStiMAit)iPLAN I

IHSTITUTI0N I 1 98? 1 98 8 1 98 9 I t 19 1 991 1 992 TOTRl :OUNT T PRC TOTL UIT TOTAL UNII TOTAL I UNIt T OTL UNIT TOTAL I UNIT TOTAL NO. TOTA L

INO.PRIE1/AUIULAR N.COST FM it.PRICEPI" O.. Pltlc F INO. PRICE Pl :NO. PRICE RI I TS COST PAI

1. DIRECT 0 T PrC1 ON (0 StOCK) 1,951 1 4,425 I 5,9W t 7,750 :,832 1 9,65 38,323

N NM PM (NET ffUW CI/S): 1,151 I 2,075 1 3,0O I 6,50 : 75O I 8,800 29,026 1TOTAL CtIETIONS i 3,651 1 5,575 " 8,500 : 12,500 1 15,200 t16,600 : 62,026 :

UPWtlRIN6 -- EIID : 0 33,150 33,450 0.0 1 0 35,123 0.0 I S0 36,879 18.4 1 1,SOO 39,723 58. I 4,58 40,659 183.0 5,500 42,692 234.8 12,000 494.3:-- EXISTS I 1,O 33,45 33,450 33.5 1 2,050 3S,123 70.2 1 3,500 36,879 129.1 2,500 39,723 96.8 1,000 40,659 40.7?1 0 42,692 0.0 I 10., 370.2:

RESETTLEtENT (S/S)(SIN) I,SOD 20,725 20,73 31.1 1 I,SOO 21,761 32.6 : 1,500 22,849 34.31 2,000 23,92 48.0 2,000 25,191 50.4 I 2,000 26,451 52.9 - 10,50 249.3:SiS aDD STOCK -- I : 0 37,200 37,200 0.0 I 033,100 0.0 1 100 35,700 3.6 1 1,D00 37,500 37.S 4,500 42,000 189.0 7,800 45,600 35S.7: 13,400 585.8:

-- EXISTS 1 1000 37,200 37,200 37.2 1 2,00D 33,100 66.2 1 2,900 35,700 103.5 1 5,500 37,500 206.3 , 3,000 42,00 126.0 1,000 45,600 45.6 1 15,400 584.8:COIIPLETER UIMTS T I 1 15 85,550 85,550 12.9 1 75 89,828 6.7 1 0 94,319 0.0 I 0 99,035 0.0 0103,987 0.0: 0109,186 0.0 226 19.7:CliJOCAl/JuNTRAl IE1 0 120,000 120,000 0.0 : 0126,000 0.0 i 0 132,300 0.0 I 0139,915 0.0 200 t45,861 29.2: 300 153,154 45.9 500 75.1 1

80C CtLTEt UNITS 500 1S0,000 58.0: 1,500105,000 157.5 , 2,000 110,250 220.5 1 700 115,763 81.0: 702 12,551 95.1: 0 127,628 0.01 S,482 60t.1 IPSW CORE UNIIS I 0 40,000 0.0 1 500 42,000 21.0 I SOO 44,100 22.1: 0 46,305 0.0 0 48.620 0.0 I 0 Sl,SI 0.0: 1,000 43.1 1WE CIOtPLETEO UNIS 1 300 150,000 45.0 1 350 157,500 55. 1 400 165,375 66.21 550 173,644 95.51 550 182,326 100.3 i 665 191,t42 127.31 2,815 409.4

ACOUIRE RSSEIS : 300 1 350 1400 1550 550 1 665LIT PRO6U I 0 1 0 1 0 1 0 1 0

I I I I O a ,II. mumT friO (1O6r ) 1 725 I 9.9 10,950 IS,450 : 12,043 120,tlO 69,02 1

WlrC PRIVATE IRIEWTS (a PRO) 26 90,000 2.3 1 725 94,500 68.5 1 1,750 99,225 173.6 I 6,250 104.186 651.2 :12,043109.396 1317.5 1 20,410114,865 23*.41 41,202 4,557.3:IOTAL TAKEOIS : 25 1 8,000 1 12,000 17,000 125,000 1 34,000 1 96,025 1LESS: (PULIC PRCIN) 1 0 1 7,276 110,251 10,750 12,957 13,590 1 54,823

lSIS COMPLE[E UNITS I 200 80,000 16.0 1 1,900 84,000 159.6 1 1,900 88,200 167.6 1,900 92,610 176.0 1 0 97,241 0.0 1 0 102,103 0.0 I 5,900 519.1 1SSS CIUIETE UIlTS I SO5 80,000 40.0 ,800 84,080 487.2 S,000 88,200 511.61 5,000 92,610 537.1 0 97,241 0.01 0102,103 0.01 17,900 1,575.91OF MIS 11 D I0 11,500o I,SOO1 : 0 I 0 :4,500OIIP COIUTE NTS OETE6SES)1 0 : 0 1 0 1 0 0 0 0

*~~~~ ~ ~~ ~~~~~ : : U I , : I

TOTE. PUIICLY-ASSTO 2/ 12,676.0 10,114 267.9 1I4,350 78,3001,124.7: 16,850 86,0751,450.3 1 23,200 85.665 1,987,.4 20,87S 101,658 2,131.0 1 29,075106.97 3,206 .1017,02.0 10,1610:_~~~~~~~ I 1 : 1 : I

I/ UI PIICES INCREASEO _LY N SS REESOTnh ESTMD uR IN I[MUES.2/ NTILY PRTELY WILI U URITELY rIUn UITS EXCLU. REIILY SUCH MIS NA KEN POC IN THE N SECTOR. IR IE1 SECTOR TLDOEUE L T[fa .

LClSTSUt. am. 11/04/87

NIBTISNS TO VW8803351 SOCK 1976-199Lo £STIMIUE

I C IU A L 600'? PLAN (LOU ESTIIIATE) I

IIBTIIIJTJII :~ loll I I : O IeR K. aui :-io VW cim.s-::s TOTAL 130. 3Do1196e:19812 1983 194 1985 1986 11982-06 I19v2411 103 TOTAL 13.9611! 1987 '988 9989 1950 I99 152 198-92 1198-92

I. STRU 600' P8011 (1101(E) 114,856 3,374 3,27 2,38 2,600 2,46 I114,107 1 2,821 it 29,163 1 2,560 11 1,951 4,425 5,900 7,7S0 8,032 9,465 38,3M31 6,37

MOI El P311 (NET1 Or MAIM/K) I 4,759 1 949 1,972 1,379 1,371 1,000 I6,671 I19,334 11 11,430 1 1,039 11 1,l51 2,075 3,000 6i,500 7,500 8,80 129,02611 4,838 11/Toil. WWL[1( I 64,9159 I118,730 22,713 16,334 20,013 5,27 82,997 16593147,956I 13,45I.1 31 3651 5,515 8,500 12.500 15,200 16,68001 62,026 3 18,338I9159801 I20,6191 8,354 5,694 3,213 4,41 7121 22,387 4,47711- 43,006 1 3,910 I1 1,000 2,1000 4,000 4,0100 5,508 5,500 I 22,000: 3,667 IIE5(TILDIO (5,5) 1 39,581 9.427 15,047 11,74 14,22 3.495 153,938 10,7880II 93,520 I 8,502 -11 1.500 f.r00 1.50 2,000 2,080 2,000 110,5001 1,750 1S,s rpeainwT& I 01 0 500 1,0111 1,0050 1,000 13,5001 701011 3.5001' 3181lo 1,000 .OSS 3,5 6500,00 8,8o ?o 0.0 1128.000 4,501CHIU'WEOTS/OT3.S I 4,759: 949 1,4fl 379 37 01 3,171 1 6341: II7,930 1 7211I Al9 75 a 0 0 03 2261 3 1-2/COWAIAIUIETRI3. IINII NC111. 19(1 991 IUCL 199(1 199( I NCLIIK 11 I.3 199(1. I 990.I 0 0 0 0 200 3001 5001 8333/

BBC CUIIIO MITS 1 9,297 1 2,425 1,306 65 97 01.4,4161 I 897~ 13,703: 1,253 11 500 1,500 2,130 700 78 01 5,4821 9141 4/PO CORE UITS I 01 0 0 103 926 259 11,200 1 25 111,2080I 11131. 0 5so 500 0 0 0II19,13101 167 15/11'c HITCDUNITS 1 I 0I 0 247 206 I. 1,91 1,6621 332I11 1,6621I 15111t 300 30 40 550 50 6651I 2,8151t 469 i6/ 0

RCSIKDKSES I Ol 0 0 is 92 19812971591 297:I 27 11 300350400550550O66 1 2,815 14691L11 POW6 I 01 0 0 232 II149,019 1,136S1 27311 91,365 1 124 11 0 0 0 0 0 01 DI 01

II. UUOhhiCT rITIC (IIENI) 1 63,878 311,159 24,346 26,799 11,180 1,532 I 74,935 114,9871130813 1 12,619 .13 725 9,925 10,90 I5,450 12,043 20,4101I 69,5OZ2311,5841

lOWE (PUT KSUO) I 427 12,M 13,8% 16,22 5,705 32 1 38,6371 7,72 1 3901641 3,5.51 :1 25 725 1,751) 6,250 12,043 20,410 141,20 I 6,867 37/1013. 191005S 2,427 1' 5,202 15,02 7,35 6,934 1,500 1 46,073 1 9,215:1 48,500 I 4,409 11- Zs 8,000 12,138 17,000 25,50 34,000 19.025:I.16,004 19/L[S (PIULC P35N9) 12,5:0 2,i2s 1,306 1,50 1,229 1,468 1I7,436I1I1,487 I 9,436 I 858 I1 0 7,27 10,251 10,750 1Z,957 13,59 1 54,8231I 9,137 :1/

GsIUU.IE N11 1 16,6421I 3.212 3,579 1,908 1,2M S00 30,49 1 2,0981 2- 7,133 11 2,467 111 200 1,50 1,900 1,900 0 01I 5,900 S83 110/555(3 .11 MIS 1t32.5 1 5,169 6,871 8,664 4,103 1,011 25,W I S15,61 1I 50,616 1 5,32 :1 500 5,5 5,800 5,900 0 01 17,900 12.983 lie/OF Nis 1 01 8 0 0 0 et 01 01 t 1D 01 0 1,5U1,5001,500 0 01I.4,5oo8I7501WIrAUsm I114,510 I 0 0 0 0 01 01 011 14.510 I'M31 0 0 0 0 0 01 0 01

III. I0oTEESt 1 01 0 0 0 0 01 01I 01 03 D 01 i 00 5so 1,56 1,500 2,130 3,541I 8,740 I,4571M I

TeILl PUBLICLY-RSSISTO I 77,93411I4,532 27,624 29.106 13JOO 4,000 1 99,0423I17,131 11 166,976I 15,1800I 2,87 94,8050 17,850 24,700 22.87 3.4115 1116,565 I19,420 ',IlI I I I :I , II I I I

I/ U MKITIS 0 ff 1(1 TR IF ffMM 601. 2515(MA3919(1132-86P0310 R IDN TO1 LII KEMOM 9/99r39176-11, MMC PEDLY 1909M CSRl5 INTES.M2/ M FU SNU3SM ffCftIT[DUNITS W3.M r3M11982-86 ION ff BB, PO I WC; uLn6. r1u11I8-1993/ 061115 Wms ci 1135(19 By 29129 909 P55. Ws a PRO ma im (109 ff tW ML NS-. 1If11U) MM4/ MC 1805( LWr 95 IS:1(150015 LUK PERIOD. K YEAR 53.15S L06 IDLYITO 011 9181(50f POUt C(8'ITIM3.SW.S/ PS515P LRW OET 0615. 10/ W15 55S TO 1(1331 ro fcl TENWI AISlES N00iCT6/ fEC'S I 091011 PLO8 IRK3 LffT IS IS; 3(13F0I 13 rJSfl. P935(00T0005ER (E I L 51691 CMfII9IIT 85 Or7/ PRI131113005(1131I1911.TO0MM001K31382-. a/8 91(1 P2,1 i0s 555, P700 I'L 6515 Um MM1 fER W1. 1073. ID8t MIt I013L11(031510591 DOUBE W S r391 82-56; IICLIK IIIIC P3UUCIUL P3.35 1 120,1coo3m COST 80(1161

Il1 1013111( 01. 11TCT V731(626,58 LESS M 116,560 US423.294).

mNNW SCTU mmscEITIN TO EU WmSI SToC 191992

low EST=3UT

ACTUAL ti 601ERNIICNT PLAN (TIRGET EST) I

116111111 I TOTaL I I TOMIN. 83.6 It TER Vt TSS 11 TOrI. 1111 006111976-811 1992 1903 1909 1956 1996 1 1982-861992-961 :10. OILANK IN11 1987 1ISO 1989 1990 I"9 1992 1, 97-9211987-92,1

- I~~~~~~~~~~

101 I POM NUT ff MK6S I 4,79 I 99 3,97 1,379 1,371 1,011 1 6,671 1 1,334 11 11,430 I 1,039 11 4,151 7,201 11,251 13,301 16,351 20.501- 272 G,75 112.1261TOTIL PIOOSTIE: 1 61,959 11t,738 22,733 16,334 20,013 5,207 I162,9971 16,599 1:.147,956 1. 13,151 :: 23,252 17,862 22,497 26,632 31,77 36,972 11150,9871 26,49911/

owl ~~1 20,619, 8,394 5,694 3,213 4,411 172 122,3W7 1,177 11 43,006 1 3,910 1112,500 7,500 0,030 30,011 12,100 133,0 I 63,031 -10.5181RESEIILEEI (S/S) 1 39,581 1 9,42 15,04 11,742 14,226 3.495 13,9391, 10,83?B111 93,520 1 0502 I I 6,501 3,111 3,111 3,0331 3,00 3,01 1121,506 1 3,5894S/S1O"I ESTOCK 11 0 1 0 511 1,110 1,03 1,0301 3,50 1 71111 3,50 1 3131:1 1,03 7,00011,0333,303816,0. 20,000 71,03111,833sCEULEIOUNIIS/ENTI .11759 1 999 1,472 379 37 0 13,171 1 634 111 7,930 1 721 11 151 213 253 301 351 501 1,756 1 2931CuiW ueIIJESTEII hEL AmIDCL JIlM IM IC NL 113. Ii C I hLlI INELII ICLl I INL I I 100 160 245 330 20 470I 1,725 1 2381

if e"E CI ULE INT 1 9,297 12.925 1,396 650 97 0 14,1561 997 it13,78331 1,2531:1 100 61 1,100 0 0 012,0oo11 3331is/PS? E0Ehmars I 0 1 0 0 103 926 259: 1,200 2511 1,211: 129- 1711 , 0 500 SOD 0 8 0 I 1.031 1671121WEC TOIRLCOIP.E OHIIS I 0 1 0 0 24 296 1,209: 1,662 1 33211t 1,662 1 1511I. 786 546 439 392 253 399 2,0151I 469:3/

IIU BIEDSCs I 013 0 0 15 92 191 2971 5911t 2971 2711o' 796 54643 392 253 3991 i ILit ROMI I 0 1 0 I232111 1019j11,3651 27311136m 12 111 0 0 0 0 0 01 I

I I I 1 01 11 Al 1t1U. hRhUTI INSE 01101RTES)II 63.8781 111,150 24,346 26,799 11,100 1,532 1 71,935 1 11,9871It 138,813 1 12,619 115S2,891 47,353 57,315 41,471 44,113 47.442 11290,5os 14,433 1

MMV (12111 8311S (NU) 11 427 1 Z,M 13,896 16,227 5,705 321- 30,637 I 7,72 It 39.0611 3,551 11 34,791 34,353 48,215, 36,471 39,113 42,4.2 11235,385 139,233 14/ToOIL TomUs 1 2,427 11 5,20 15,20 17,235 6.934 1,511 146,073 1 9,215111 43,511 1 4,409 II134.791 39.390 57,262 49,761 52,816 59,046 1293,056 1148.0931ILESS: (PUBLIC RiNIOCI 2,000 I 2,425 1,306 1,003 1,229 1,468 1 7,436 1 1,407 ii 9,136 1 OS 11 0 5,037 9,097 13,290 13.693 16,609 .1 57,671 1 9,612 1

ESIS COWE UNEITS -116,642 1 3,212 3,S79 3,966 1,29 511I110,491 1 2,098 11 27,133 11 2,46711t 2,100 1,31 4,311 0 0 01 30,500 1 1,75 -.S/555 EUULEE MIS1 132 ,809 1 5,169 6,973 9,661 4,103 1,.0001I2S,0011 5,161 11' 58,6161I 5,329 11 13,711 7,030 3,080 3,011 3.030 3,0 132,711 I 5,40 1.StOF 3018 I 0 1 8 0 0 0 0 1 0 1 0 11 01I 0 -11 2,301 1,.701 2,030 2,011 2.030 2,00012.0001 2,11015/WV CWILTEMIIIS IU6S) 114.0001 0 0 0 0 01 0 1 0 113,0381 1,2731: o 0 0 0 0 0 1 01 0I

I I I 1 Is it 1Is IL.SIORUUEWS. LWS) I 01 0 0 0 0 0 1 0 1 011! 0 1 011 .1,700 3,511 3,03010',51113,03011,138I154,13819,03I5/

TOFL PIUELY-855 177,934 1 11,532 27,624 29,166 1.3,711 4,030 1 09,0921 17,803 11.166,9761 15,100 11 59,623 59,980 78,605 65,664 73,737 O5.7OO11 1423,9 I 70,549 JI5/1 1 1 1 II 1 11 1 1 1~~~~~~~~~~~~~~~~~~~i

I/li 3/67 FMO OR 353,87 SiTis, mm0C 09 FIJI VW141,10o. 4/EWE'cS 3/9 kmO2/ PO1 BSIIIIIE. 4.255 RAM1 1,290 BMLT; UESU 2,968. lIU1lD1J6 NMSl 6/00(1 1,010) S/19C M /M FL u TROTLS SIll. HN605/L6uS UJ3STE roU OIIENEa IN NMl 93 WEC KMU3: Hrf r101 IlC'S 3/8 Kal CLUELy AESOSI WECS 7/36 P1.5. PRIEME SECIE S8II 1110 P"ILEY BUILT/Wtc NORISE 031511C (NEr,) DII EltILY

Pploff. MIWC loll. of 507A1ue, WUisTO By 10OCT1 63,011 18Sf 0321,516 WISFTLUDI

cmn swcrc Pa:r

USCTUAL ACTO PLAN

TIMING OF ACTIONACT ION AND O BJ E CT I VE INSTITWUION Wr STACE OF

arSPiDiS ItLEDAS ByCOMPLETED PtOCESSING DATEPART 1: ACTIONS BY HUDCC

SIGNATURE OF XVTT ORDERY9ouruining oroac seccoras gosis of vo1ume production, low President's Signed Dec. 17, 1986cost focus. establishingEhe new streamlined institutionsl Officestructure and madates Yor the sector and idntifying fouragencies to be divested/privatised (W.B,5N1C,SDC)

#2 PRE ARATIOa OF gecaR L asLCYisanc,pbl- HUDCC Completed May. 1988covetnstarget beneticlaries ror puDLiLc asesl nee pubilcvs. private sector roles, broad financial policies

#3 REP yNOF 8E 5L " I MT PItstabLinin t-ret i mettevels and unit production HUDCC Completed ov 1986goals as guIdelines for individual agencies MD Devel'pot Plan(Rev*s d annually)04 SECTORAL RATIONAIZATIO(

a. Appointment oz a Housing Council and Chairman to provide President's Completedsectoral coordination and leadership Office January. 1988b. Changes in HICC:

1. Development of a Policy Statemnt HICC Completed August, 19872. Termination of selected HICC Functions:- Materials Stockpiling Program BoCC Asset sales bgegn in Complete by

December. 1987. 80% December. 1989completed.- Sale of Maunlad S6L a) coP Approval HICC Approved Rav, 1987jb) biddint and Award Completed April/Way. 198Bc Complete sale August. 1988- Terminate Guarantees to Other Govt Corporations HICC Coopleted January. 1988

c. Liquidationdivestiture of a*nwies producing high costhousingAbuilding materials Ehus eliminating competititonbetween public aencies anA with the privat sector

BW4: - Preparation of SDC Liquidation Plan & Timetable NUDCC Completed August, 1987for completion of divestiture- Appointment of a Conservator, and legal ass*gnat SIDCORC1HlCC Signed March, 1988of DC to the appropriat, body for sale- Termination of Corporation December, 1988- Complete Liquidation oeceuber, 1991 ' IWCO: - Approval of Disposition Action Plan by COP SIDCOR Approved Dec 1987- Begn asset auctions Comipleted Fee, 1988Complet liquidation December, 1991551: - Term tnatio of Corporation (file wlth SIC) Completed Sept, 1987 December. 1991c: - etComplete lquidation

NR:Assi netto DSP/Asset Privati:atiot Trust for sade Completed October. 1986

TIMING OF ACTION

ACT IO N AND O BJ EC T IVE eitiuTIoN BY STACR OFRSPOnStBLE LOAN

CONPIZTED PROCEssl ; BY DATE

d. Clarification regardin the authority of the HUDOC Dept of Completed February 1988Chairman to chair the Boards of the Idividual agencls Justle bs y Dept Justice Opinion

e. Revised Board compositions: ( a rovalzfHUDCC UDCC Completed FebruarY 1988ja rio sorS r prtlnlzdFb 1988

fb approval by Leg!slature O tnig.9ure December, 1991f. Completion of studies:- Right of Redo*tion study to identify vays to reduce HUDCC TOR agreed by

the current redemption period and expedite resale of Dec 1989foreclosed real property collateral colete by

D:cc, 1990PART II: ACTIONS BY NATIONAL HOKE MORTGAGE FINANCE CORP

#1: Preparation of a POLICY STAT1E tT SUMMARY outlining key NoFC Business Plan in March,financial and operational llcles tOeLIIinate negatlve 1987. Policy Statementspread and ensure NHMFC's tinancial viability completed Way, 1988

#2: FINANCIAL RESTRUCTURING to write off past losses and verify NHKFC Balance sheet revisionsases8; ana recap ztaliation completed Dec 1986

DBK Initial P7790 1US$ 38m)released March, 1987 andRemaining P221 (US$10.8m)released July, 1987

#3: Preparation of an INSTITUTIONAL ACTION PLAN to coupleteinternal reorganization, computerizacion sys eems dvelop- NKFt Completed May, 1988 Various datesment, staff training and strengthening of internal controls for s iecificand performance indicators actions

#4: Establishment of TR NAHE mTAKO LNKASE ITLN NHA GC & NMASignature of the Itirtdmtratlon"1sale or Y mortgages Completed Februa 1988Signature of a Comitment Line Agreement with NHA Sigoed February, 1988

- Begin regular takeouts with NMA under UHLP for r250 million May, 1988

#5: EXPANSION OF FNIN- Signature or s/GSIS Loian Agreements to establish local NHDFC/SSS/GSIS Signed January, 1988

long-ters funding sources for NHMFC- Signature of HDMF Agreement N11MFC/HENF June, 1988

#6: Developement of an ARK POLICY and timetable to enable H1MP N!HMFC December 31, otto manage variable iSfIer irro-vings 1989 0

#7: Study of FUTURE FINANCIAL INSTRUMENTALITY NHmFC July, 1991 " X

#8: Study to strengthening ACCOUNTINC AND INTERNAL AUDIT NH1FC TOR agreed May, 1988 June. 1989 us

TIMING OF ACTIONACT ION AND OBJ EC T IV E INSTITOTION

RESPOUSIBZ by STAGE OFCOKPLETED LOAN PROCESSINC BY DATE

PART III: ACTIONS BY NATIONAL HOUSING AUTHORITY

#1: POLICY STATEEN to establish mandate as sole low cost NHA Completed Nay, 1988Producer. termination of high cost housing, rentaloperations, estate management small buslness lending.and mortgage administration functions; as well asfuture policies on profit, and land acquisition

#2: Revise PHYSICAL DHVEIMPENT STANDARDS to reflect new pricing NRA Completed Aug, 1987policy ana increased costs, yet retain affordability

#3: Development of INSTITUTIONAL ACTION PLAN to computerize NNA Completed May. 1988 Various datesoperations and accouncing, complete systems development, for specificand strengthen financial management and internal controls actions#4: FINANCIAL RESTRUCTURING to write off uncollectible loans. Partial cleanupestaoiisn a ioan loss reserve, transfer completed infra- achieved in 1956structure to SWSS and others, and convey mortgage assets to

another entitv- Government agreement to trsnsfer of NWSS/other assets

and the associated liabilities off NMA BS (GCECC) GOVT Board Presentation- Govt (COA) approval of other Phase II adjusments COA Effectiveness August, 1986Completion ot COA review of 1987 Financial Statements November 1988Phased asset sales (Phase III) under Liquidation Plan 1988-1992#5: Adoption of a PORFO10 IJgiDATION PALA to sell NmA Effectiveness Imylementationexisting inVentory anId tnaLe ortrgag douM entatlon 988-1992#6: BUDCETAR ASSlUNCES for NRA's future subsidies for resettle- DBI Telex assurance of P180m Annual budgetmenc ano a poron of upgrading, and future capital increases in 1956 P360. In 1989 allocations

r.ecive in October, 1987#7: Study to Strengthen INTERNAL ACCOUNTING/AUDIT a TORa "d 1988 June 19S9

PART IV: ACTIONS BY GOVERMENT

#I: PRIVRTIZITU of HICC (construction loan amd APr Areed under Public CorD completion byMns"uWance 'tunctloMns to redue contiln8ent liabilities of govt micter lam in may. 1988 Decenber, 1990#2: Governent statemnt regarding SE0 V C to ensuVe DOFI'KDA Received in tct, 1987prudent financial and rsu managemn tru c uorp Sector) Public Corp Sector Loian#3: CONSTRUTION INDUSTRY STUDY of problems faced by CIT" Study mfderway December, 1988s=0a9l(aleso spzea contractors

SAP.WKI. 5/30/88

75 - AhNNX 6Page 1

PHILIPPINES


DISBURSEMENT SCHEDULE(US$ million)

Amount Disbursed Profiles %WB Period Project --------------------- ----------------------

Piscal Ending Year Period Cumulative Phil PhilYear 1/ Project General IDF

FY88 Jun 30, 1988 --- 0 0 0 --- ---

FY89 Dec 31. 1988 1 19.2 19.2 12 0 1Jun 30, 1989 19.3 38.5 24 3 6

FY90 Dec 31, 1989 2 20.0 58.5 36 8 15Jun 30, 1990 22.4 80.9 50 13 25

FY91 Dec 31, 1990 3 3.0 83.9 52 20 36Jun 30, 1991 4.5 88.4 55 27 47

FY92 Dec 31, 1991 4 8.0 96.4 60 35 57Jun 30, 1992 14.3 110.7 69 44 67

FY93 Dec 31, 1992 5 14.0 124.7 78 52 76Jun 30, 1993 16.8 141.5 88 61 83

FY94 Dec 31, 1993 6 8.0 149.5 93 69 89* Jun 30, 1994 5.5 155.0 97 77 94

FY95 ** Dec 31, 1994 7 5.0 160.0 100 83 97Jun 30, 1995 --- --- --- 88 100

FY96 Dec 31, 1995 8 --- --- --- 93 ---Jun 30, 1996 --- ... --- 96 ---

FY97 Dec 31, 1996 9 --- --- --- 99Jun 30, 1997 --- --- --- 100

Completion date: June 30, 1993 it* Loan closing date: June 30, 1994

** Final disbursement: December 31, 1994

1/ Year of loan effectivness - Year 1.

ANNEX 6Page 2

DISBURSEMENTS

n aer + OWNA NM W P

PNILIPPINESNOUSING SECTOR PRCJECT

CONSTMUCTION MATERIALS IMPORTS 1979 -- 1989.... ___........... ...... _.......

(USS '000 FOB)

* t{_t* ---- P*JECTO ----SITC GATEGORT 1979 1960 1961 1982 1983 1984 1985 1986 1967 1988 1989

240 Cork and Wood 987 1,300 639 462 545 165 379 456 S02 552 607533 Pigments, Paints etc. 19,508 17,580 20,784 27,545 21,S17 18,236 17,461 27,679 30,447 33,492 36,841580 Resins and Plastics 125,866 122,869 140,014 144,601 172,638 105,422 94,220 142,187 156,406 172,046 189,251661 Lime, Cement etc. 2,561 4,770 2.102 1,663 1,665 361 358 891 980 1,078 1,186672 Ingots 156,781 127,276 91,364 153,548 155,688 73,576 43,968 7T,126 84,839 93,322 102,655 .4

673 tron, Steel and Bars 31,749 32,194 27,216 45,141 28,187 10,838 12,390 13,857 15,243 16,767 18,444674 Universats, Plates, Sheets 170,937 162,633 138,138 149,222 113,394 83,562 58,194 90,601 99,661 109,627 120,590678 Tubes, Pipes, Fittings 43,770 42,419 51,328 56,112 41,362 7,893 12,032 9,998 10,998 12,098 13,307722 Tractors etc. 27,499 16,168 18,063 8,057 5,954 1,217 398 694 763 840 924??? Etectrical Fittings 0 0 0723 Civil Eng. Plant & Equip. 79,492 99,782 75,459 83,207 66,924 14,781 13,300 9,664 10,630 11,693 12,863782 Notor Vehicles - Transport 65,197 55,768 68,650 51,077 51,320 17,052 5,703 5,655 6,221 6,843 7,527810 Sanitary/Pltubing Fittings 4,622 3,692 5,638 4,074 3,335 1,788 1,797 2,815 3,097 3,406 3,747

Total Bldg & Constr'n (A) 728,969 686,451 639,395 724 709 662,529 334,891 260 200 381,623 419j785 461,764 507,940Aruwet Growth 1 -s.8x -6.91 i3.3X -6.6" -49.51 42.3X 6.71 10.01 110.01 10.01

333 Petrolteu, Oils etc. 1,114,541 1,856,960 2,081.402 1,784,102 1,749,846 1,471,888 1,276,924 727 966 742,546 757 397 772,5456 1 of Category 333 (1) 66,872 111,478 124,884 107,046 104,991 88,313 76,615 43, 679 48,047 52,852 58,137

TOTAL UJALIFIED (A0) 795,641 797,869 764,279 831,755 767,520 423,204 336,815 425,302 467,832 514,616 566,077

PHILIPPINE TOTALS_ __ _ ..........

TOTAL ALL IMPORTS (C) 6,141,731 7726,912 7,945,679 7,666,918 7,486,626 6,069,612 5,110,673 5,043,597 N.A. N.A. N.A.TOTAL ALL EXPORTS (0) 4,572,170 5,750,882 5,712,114 5,012,030 4,971,412 4,588,757 5,265,886 4,841,780 N.A. N.A. N.A.

IMPORTS - EXPORTS (C-D) 1,569,561 1,976,030 2,233,565 2,654,888 2,515.214 1,480,855 (155,213) 201,817 N.A. N.A. N.A.

Sources: Foregon Trade Statisttes of the Philfppfnes, NEDA, for 1979-1986. Ba* stifetes for 1987-1989.

- 79 - ANNEx7

Page 1

M14UPPIHtS1nUSIt6 SECtOI PRIJECT

TECIIICRl ASSIStCE, TIRIINI, EWJINIENT U STUDIES

TE -S - ------- COSTS (US)sILE 0f coST s1ffrii

R6EICY ToS OIECCIUES 1IIHO6 WERERCHEE 191 M 111 TOTRl OTHER TOTAL

CIRP Construction Industry ReviAw of difficulties facing private July, 19" Draft TOR 12 1,500 lOC 18,000 7,000 ,OOOStudy cmstruction c ni"es, and deuelopnent through on

of recomwndatiou to oercone the Oec, 1988 Filepriwary bottlenecks obstructing nonic (6 nonths)recowery for sdl and ?nedi scalecwmnies,

.NOCC I1: SemInars on Reuised Dismintion of sectoral reforas, June, 1988 DetailedSectord Structure including overall policies, ne threugh schedl 10,000 10,000and htes institutionel mandates, and indi- Duc, 1989 to be

vidual agency policies. Seminars (18 nonths) preparedwod be targetted at three levels: by(a) disseination of individual "archncy policies to agency staff, (b) 1988

dissmination of sectoral policy tostaff of all agencies, and (c) build-ing understanding of interlinkapsbetween agencies.

12: Oevelopmnt of a Oevelopment of a lngent Intora Dec, 1988 TOR to be 36 850 lOC 30,600 10,000 10,600Sectoral hIS -tion System for the housing sector, through prepaed 12 12,000 FOR 141000 141,000

under UCC Technical Secretariat. Dec, 1991 by(equipment allocation: *5,000) (3 years) Sep, 1988 SubTot 181,600

13, Study of Lepl Review of the Right of Redemption and Jan, 1990 TOR to be 612,000 FOR 72,000 72,000Obstructions to Iaceda Laws wbich introduce significant through prepared 12 850 LOC 10,200 10,200Collateral delays and disincentives to foreclosure Dec, 1990 by ------foreclosure on real estate in the Philippines. (12 mnths) July, '89 SubTot 82,200

14: Ide lands Tax Study of the feasibility and nechanics Jan, 1990 SIR to be 12 1,500 UOC 18,000 10,000 28,000Study of a tax on ua2nt urban land to bring through prepared

idle lands into productive use. Dec, 1990 by(12 months) July, '89

15: II0II Land Titling Review of bottlenecks in land titling Jan, 1990 TOR to be 5 12,000 FOR 60,000 50,000 110,000and development of an operational plan to prepared 24 1,500 LOC 36,000 36,000to resolve major obstructions, TR July, 1991 by 10 850 SUP 8,500 8,500and equipment. (equipment: *25,000) (I8 "onths) July, '89

SubTot 154,500

- 80- ANNX 7

Page 2

IEllS ---- COStS (U) --IESOLE f COSt STAfTINSAmICY TIra OBJECTIUES I1N6 RfEERECE M PR M TOTA OTL H TOIlR

lIoC Privatizaion Study Reiw of thetumthdology for latch, 1988 hrft tN 2412,000 r 21S,W0 10,000 298,0privatiing construction Snd through on rileNOtp inurance. Ihroh, 1919

(12 wnths). ...... ......... . _._._..... . _ . _.... . _ ...... _.* .... _.__ .......... _._ .......... __ ................

HO I1: Strengthening of Technical assistance to strengthen July, 1988 T10 to be Lu 35,000Collections collections on folio I traftrd fron through prepare

NWIC to Of on July 1, 1987, including June, 1990 bya revisu of cotputeriation, Ausent (21 nonths) Ibrecof softwre, and staff training. 198

12: oluntary Ibeaship sistnce to dwelop an effectie Jan, 1989 tOf to be Luip so 30,0(Caign capaign to attract voluntary sAings through prepwd

for the Provident fund. he, 1989 by(12 nonths) July

198

IWC #: Technical assiste Strent ing of WC's internd audit arch, 1988 10t to be 30 1,000 lC 30,W0 10,000 40,003to strengthen intermul function, and prepWation of at leat through prepaed 12 12,000 fOR 14,o 14",oo

audit and accounting the first 'startup' war's acc ts June, 1909 by 30 50 SU 25,500 2S,50Swith the objective of obtaining an unr (15 months) februaryqualified external audit. (eqpat: $5,00) 1988 Sublot 209,5I

12: Autoution of the HIS Oevelopent of a suitable HIS 1 nortpgea Hlortga Rccounting accounting s t., capalwe of expansionSsts on the scae envisioned for WIIfC.

(a) anapte visit by 3 staff to two July, 19880 Is,00 1S,000other ae finance institutiowhich are already canpreheivelyautomated:

(b) Sinars on strategic planning and December TN to be 35 1I jO LOC 35,000 S,000 40,000preparation of a long-range (5-7 yr) 190 preparedHIS plan to include dit. bae, the to byproposed nix of hardeare, softwre, June 1989 Rug '88and tele ccationms (6 oneths)

(c) Iplmntation of the Plan. July, 1989 Tlo to be--Conversion of existing systmsfiles to prewed 7S,000 75,000--Systems software July, 1992 by 100,000 100I,0--Equipment (3 years) flarch,'89 480,000 480,0--Hicrocamputers 100,000 100,000--Preparation of cowputer cent"r 50,000 50,3--Development of software 200,000 200,O--Training 50,000 S0,000--Contingency for upgrades, etc. 20,000 200,000

Subtot 1,310,00O

ANNUE 7

Page 3

TElS ------- COSTS (US)RESPOISIUlE Of COST STuArINi

ASElNC TAISI OBJECIIUCS tlININ REfEREKCE t11 PER 11 TOTIAL OTIER TOTAL

3: stuy of future Review of vaious instrumentalities for July, 1990 TOR 24 1,500 LOC 36,000 1,000 40,000funding Hthhniens WIIlC to re-enter the apital market, to to be s12,000 fOR 60,500 60,000

and comensurate instrwments to age July, 1991 prepared -.-.-variable rate borroingp. (12 months) by Det Sublot 100,000

1989

N: Staff Training nwl training progra to be agreed toinclude finanial nagment, capital throughout NA 200,000 200,000Narkets, staff exchae progri, etc.

NM 1: Tedmical asistance Strengthening of NlM's internal audit lurch, 1986 TOR to be 30 1,000 LOC 30,000 10,000 10,.Oto strengthen internal fnction, and preperation of the first through prepared 12 12,000 fOR 1",000 111,000auoit and accouting 'startup' year's accounts vith the June, 1999 by 30 850 SUP 25,500 25,500

objective of obtaining an unqualified (15 nonths) februeryexternl audit. (qput: $5,000) 1988 SubTot 209,500

Engineering Audit. - 200,000 200,aoo

82: Corporate planning Institutionlizaion of NMl's Jan, 1989 TOR to be 612,000 rOE ?2,00 0 72,000conputerized sinultion nokl for through preparedphysical and financial corporate Jan, 1991 byplanning, including in-hWus staff (2 Vears) Septebertraining by a resident Wecialist. 1988

TR for finncial planning - 1212,000 fOR 1",000 0 11",000

83: Rutmation of HIS and Oeueloprent of an overall automtionAccounting Systems systen which will integrate the vwious

programs and equipeent being used indifferent dpartnents of W.(a) Preparation of the overall auto- Dec, 1987 tOR on FINAKO UNDER MRBAN III (LOAN 1821-PH)

nation plan/IS requirnets to July, 1988 File(b) Iptplntation of the plan. (6 nonths) TOR to be

--Conversion of existing systems/files prepared 30,000 30,000--Acquisition of systems softwre by 120,000 120,000--Equipment Sept, 1988 March, 550,000 $50,000--Preparation of a Corputer Center to 1908 SO,OO 50,000--Oevelopnent of application softure Dec, 1991 200,000 200,000--Training (3.25 -ears) 50,000 50,000-Microcomputers 100,000 100,O00.-Contingency for upgrades, etc. 200,000 200,000

Sublot 1,300,000

- 82 - ANNE 7Page 4

TEllS COSTS (a)RESPONSIBLE Of COST STRfrINSAREMCY TASK OBJECTIUES TIMING RfEERENCE 1 PER 11 TOTAL OTNEP TOtlA

34: Survey of POs Up4ted survey of Arm for Priority Sept, 196C INTERNALLY fINRICEO BY NIIOevelopent (Ah) (siwis and sutter throughsettleients) using 1986 aerial photos Oec, 1990of Ietro Ibntla. (2? months)

Rerial photography and equpipent for 50,000 50,000major regional cities' APO surveys.

15: Training Rnnual Trainino Progran to be agreed by July, 1908 200,000 200,000W, to include staff exchage prograis, throughseinars, inentory raent control, Dec, 1992etc.

IUl ruture Project Prewation 100,000

STOTL ....................a a.,.t... ., t..ttt . .t .a . .a .a . t. . .. . . .. . . .t.t.,942,300

215 LOC 1S6iMO TOTRL (INCLUDING 21 CONTINGENCY) . .. ,..... ............. ,, 36? NI 2 112 f M ..... 5,011,116

70 SUP 19

NOTES: Local NI US$1,50 0 P 30,600 297 NI Of LOCIL M fOlEI6N Tforeign NI I US$12,000 including travel 24.7 TOTAl STAff YEARSSupport I 9IS 1 P 17,3t0 6.8 FOREIGN STAFF YES 27.6U

17.9 LOCAL STAff YE1RS 72.41Equipment total: $1,320,000

- 83 - ANNEX 7

Page 5

msiu11 WCttOE P301(1LR ..l.egal RA nts bted Cem t

Tvtri re ItCUCAI MSSISIICE, 1901116 U StUK tOl ..lera of Atfern-. ftP.... mmally Arad Progra

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

a t a a I I .3 I I Iw19 1911 1 19 1990 1 1991 1 199t Status I3 ..-. -.-.-..-.-.-.. ---..--. -.-- .-- - . ........ _ ..

I IApr I Od I Ysr I I Ywr 2 Yar3 3 Year 4 I11 1 1 I I 3 I I

ClIP Study of Constraints of Contractors I tOI T 1uuu I Lo I I I I.I I I I II I I

WMJCC l: Sners aon Rsed Sectoral I I _ _ ws II I IUnder ww lStructure andllandates I I I I I I I I

I I I I I I 3 312: Oewloment of a Sector HIS I I TOE 1_aam 3 3

I I I I I I I13: StuW of Lept Obstructions to I I I I I 3 I I

Collateral Roreclosre I I I TOR 1 - 1 I 1

I I I I 3 3 1 9H4: Idle lands ta Study I I I tOI 1u .I I 3

I I I 3 3 3 I 335: IlORLUnd Titling I I O

3 I 3 I 3 3 3 3l16t Pnrtiation Study TOR I --. a LA I I I I Under ay I

1W I1: Strengthening of Collections m I 3 I I I3 I I 3 I

12: Uolmntr hbrship Camaign I I TOI 1-sa t 3 1 1 1

3 3 I . 3 3 3 3 3M33C 11: To to Strengthen Internl Audit I 3 o we- 3 1 3 3

o.~~ ~ ~ ~ ~ ~~ 3 , , ,3 I 8 I2: Rutoation of NIS RccIwnting I I 3 3 3 I I

(a) anaeent Uhsts I I w- I 3 3 3

(b) Autcmtion Plan/Sseinars I 3I to I I I I(c) plenentation I I I TOR .Z SU sS e* _ 3

I I I I 1 I 3 I13: all Policy I Twetable 3 I I.03 l I I I

3 I 3I I I I I14: future runding fhchasn Study 8 I I TOR LoaaseaSsa lR I I I

I 3 I t I I I IRHR 31: TR to Strengthen Internal Audit ttO Usds I I Inder ay I

h-*~~ ~ ~ ~ ~ ~~ I t I I I t I12: Corporate Planmng 1 I tOI1 s8 saIau sa a 3 1 1

I I 3 I I 3 I I13: Autoration of tHlIS Rccount;ng I 1 3 I 3 I I I

(a) Automation Plan I IOI :susa| 3 1 1 3 1 Under wat I(b) Ifpleentation I I t01 OR smu sinau s - s zaasats:su:ss:1 1 1

8 I 8 I 8 1 I I34: Suruey of POs I 3 hsa$ uasuawshshs1 1 I 3

* I I 3 I I' I I35: Training (Rnnul Program) afI I

t I I I I I . ................. 3. . . . . . . . .. ............... _ 3 8 .

-85 - ANNEX 8Page 1

PHILIPPINES


INFLATION AND INTEREST RATES

o.Ia GM POSSILE RBFBRENCE RATESN1am I DAItR 4MOVINO AVZRAOES FOR ADJUSTABLI MORTGAGES

-* ON Tag CPIM 11W 0 UIT m - __T rSMS D iT

WmR 1mm m 1969-? OR sWIS PWM M NDllt g (DI3 Gum19 SU9 5ThR 10T 20Th It a 61-90DY8 AILKAT 91DAS

NO UL 1fmm RAL 1I REAL 11am REAL

1955 -4.5 -4.52.0 2.02.0 2.0 -0.173.8 3.6 2.60

-1.3 -1.3 1.50 0.401960 4.4 4.4 2.50 2.18

1.8 1.8 1.65 2.145.3 5.3 3.83 2.805.6 5.6 4.23 3.168.5 8.5 6.47 5.12 2.76

965 2.4 3.9 2.4 5.50 4.72 3.455.2 5.6 5.2 5.37 5.40 3.77

*6.8 5.6 6.8 4.80 5.70 4.252.1 4.9 2.1 4.70 5.00 4.082.1 4.9 2.1 3.67 3.72 4.42

1970 15.4 14.3 15.0 15.4 6.53 6.32 5.52 6.0 -9.4 5.7 -9.721.2 14.7 12.7 21.2 12.90 9.52 7.46 6.0 -15.2 5.7 -15.58.4 10.3 6.7 8.4 15,00 9.84 7.77 6.0 -2.4 5.7 -2.7

16.4 1.0 18.0 16.4 15.33 12.70 8.85 6.0 -10.4 5.7 -10.734.1 34.5 31.0 34.1 19.63 19.10 1.41 7.1 6.0 -38.1 8.0 -26.1

1975 6.9 8.2 8.3 6.9 19.13 17.40 11.865 .7 6.0 -0.9 8.0 1.19.1 6.1 9.2 9.1 16.70 14.98 12.25 9.0 7.0 -2.1 8.5 -0.6 10.2 1.1

10.0 7.9 7.3 10.0 8.67 15.30 12.57 8.4 7.0 -3.0 8.5 -1.5 10.9 0.97.3 7.6 9.3 7.3 8.80 19.48 13.09 8.6 7.0 -0.3 8.5 1.2 10.9 3.6

17.5 17.6 15.2 17.5 11.60 10.16 14.65 9.5 7.0 -10.5 10.5 -7.0 12.3 -5.21960 18.2 18.2 15.6 18.2 14.33 12.42 14.91 10.2 9.0 -9.2 14.0 -4.2 12.1 -t.i

13.1 15.0 11.0 13.1 16.27 13.22 14.10 20.8 9.8 -3.3 13.7 0.6 17.1 4.0 12.5 -0.610.2 10.3 8.4 10.2 13.83 13.26 14.28 11.0 9.8 -0.4 15.7 3.5 15.2 5.0 19.8 3.610.0 10.0 11.6 10.0 11.10 15.80 13.64 1.2 9.7 -0.3 13.6 3.6 14.9 4.9 14.2 4.250.4 50.0 48.9 50.4 23.53 20.38 15.27 19.3 9.9 -40.5 23.5 -26.9 22.2 -28.2 28.5 -21.9

1985 23.1 23.1 17.9 23.1 27.83 21.36 16.89 14.4 10.8 -12.3 19.7 -S.4 21.1 -2.0 26.7 3.60.8 0.8 0.8 24..n 18.90 16.06 14.2 8.6 7.8 11.2 10.4 12.3 11.5 14.3 13.55.5 5.5 9.80 17.96 15.61 14.17.5 7.5 4.60 17.46 15.63 14.49.0 9.0 7.33 9.18 14.78 14.7

1990 9.0 9.0 8.50 6.36 13.66 14.48.0 8.0 8.67 7.80 13.35 13.78.0 8.0 8.33 8.30 13.13 13.78.0 8.0 8.00 8.40 12.93 13.38.0 8.0 8.00 8.20 6.69 12.0

190 8.0 8.0 8.00 8.00 7.18 12.0

AVRL4m: 16.00 Dr 0! 15is mm mm 1970-1986 S 15 YI ) fMIL. 1010918716.05 O (PI 15 WAL 1NM 1970-1966( aAS? 15 WAN)13.65 3 On 20 8WA MM 1966-19969.774 CB Q1 30 WA 3WM 1955-195

- 86 -

INFIATION ANNEX 8INFUTION Page 2

a K Om ) pa on i) * w m PA

I..I

so MVIN AV 1AGS ONTE1P

im im i m im i m i 1990 5

l TitNi + is 7) &to mML

4..

a~~~

- .

15

0o ,TN , IShi* UM

- 87 -ANNEX 8Page 3

REAL INTEREST RATES

-U.

ISS INS iNS iSI ionS IS iNs ion S

RhWI 4. WTM lap Q M-AL MM A T-INL D

- 89 -

ANNEX 9Pase 1

PHILIPPINES


NATIONAL HOME MORTGAGE FINANCE CORPORATION

Objectives and tunctions

1. The National Home Nortgage Finance Corporation (NHMFC) is apublic corporation established in 1979 under PD 1267 of December, 1977 forthe development and operation of a secondary market for residential mortgagesIn the Philippines. NHMFC makes forward purchase commitments to buy up to aspecified amount of mortgages from private and government banks accredited bythe Corporation in accordance with prescribed standards. Under its initialoperating plan, NHMFC was to act as trustee for funds of the Home DevelopmentMutual Fund (HDMF, also known as Pag-IBIG) which were not to be placed inmortgages, but in other investments to be used as an incentive and liquidityreserve for NHUFC borrowings -- initially six-year bonds (called BahayanMortgage Participation Certificates, BMPC) and later two-year bonds (BahayanCertificates, BC). More recent borrowings have been marketed as corporatedebentures and not as secured notes. These borrowings finance the mortgagepurchases. The Housing Finance Corporation (HFC), recently renamed theHousing Insurance Guaranty Corporation (HIGC), insured NHMFC's mortgagesagainst cash flow interruptions and/or default. Eventually mortgages were tobe securitized and sold in the Philippine capital market. Private andgovernment banks participate in the housing finance system th.-^gh mortgageloan origination, loan servicing, and provision of construation(developmental) loans. The NHMFC was intended to complement private bankingactivity in housing finance, providing a liquidity mechanb e whic.h was tomake long-term mortgage investment more attractive. Though ML,=F was me&at tobe eventually privatized, to date this has not occurred.

2. Government banks have dominated NHNMC loan originations, eccountingfor 45% of all units financed and 41% by volume of financi=g. TheDevelopment Bank of the Philippines (DBP) was by far the most active singlebank, representing 42% of all units funded and '8% of amounts lent. Thus,private banks originated and serviced only a .ittle over half of NHMFC'sportfolio. For loan origination, banks were pa14 3%.

3. Prior to the establishment of the MNS housing finance system theprincipal institutional sources of housing finance were the GovernmentService Insurance System (GSIS) and the Social Security System (SSS) whichprovided housing loans only for members. These organizations, however,devoted only a minor share of their investable funds t* housing, preferringhigher yielding or more prestigious investments snh as airlines and hotels.During the first half of the 1980s, sboeter investments by these agenciesdeclined sharply and were finally suspended in 1985. Insurance companiescontinued to play an insignificant role in housing finance.

- 90 -

Page 2

Organization. Management and Staffiun

4. The NHMFC functions under the guidance of a Board of Directors, thecomposition of vhich is given in Annex 10. The Corporation has recently beenreorganized and placed under the Office of the President. It is nowstructured around 13 Departments reporting to five Group managers: Finance,Mortgage Management, Credit and Collections, Treasury and Legal andAdministration. Three of these Groups (Mortgage Management,Credit/Collections, and Treasury) report to the Senior Vice President forOperations; the remaining two to the Senior Vice President for StaffServices. The NHMFC is managed on a day-to-day basis by an Executive VicePresident. Though a President has always existed, he has traditionally notbeen full time. Chart 31135 presents NHNFC's current organization.

5. NHMFC has some 470 staff, including 350 regular employees and 120temporary staff recruited to help clear a backlog of accounting work. Thisrepresented about 1 staff per 100 mortgages in 1986. To allow the Corporationto take on the new role envisioned for it in Government's rationalization ofthe housing sector, NHMFC plans considerable staff strengthening in a varietyof functions including corporate planning, computerized managementinformation systems, mortgage accounting, underwriting and financialmanagement.

Qgerational Performance

6. From the beginning of its operations in 1980 through mid-1986,NHMFC financed some 48,000 dwellings worth P6.2 billion (US$304 million) inmortgages. As indicated in Table IX-I, NMFC's operations expanded rapidlyfrom 973 units financed in 1980 for a mortgage value of P217 million to16,929 units in 1984 for a total mortgage value of P2,223 million.Thereafter, the Corporation's lending declined as the effects of the economiccrisis on housing construction began to be felt, until lending in mid-1986and half of 1987 was suspended. The primary cause of suspension was that theCorporation's major source of funds -- the Pag-IBIG Provident Fund -- wastemporarily discontinued.

Table IH-INFMC ANNUAL PERFORNANCE 1980-85

1980 1981 1982 1983 1984 1985 1986 Total

Annual Takeouts (MCRs) 217 124 545 1,887 2,193 529 737 6,232Annual Growth Rate NA (42%) 340% 246% 16% (76%) 39%

Houses Financed 973 1,454 5,174 15,229 16,929 3,648* 4,593* 48,000Annual Growth Rate NA 49% 255% 194% 11% (79%) 25%

Beneficiaries 991 1,668 7,905 27,504 33,002 6,931* 7,808* 85,809Borrowers per Unit 1.0 1.1 1.5 1.8 1.9 1.9 1.7Avg Unit Cost (P'000) 223 85 105 124 130 145* 160 130

* Estimated

- 91 -

A 9Page 3

7. The Corporation has not attempted to seek a geographical or income-based dispersion in its lending portfolio. Based on a sample taken in March1985, two thirds of its loans had gone to borrowers in Manila, about 16% toLuzon, 15% to the Visayas, 1.2% to Mindanao and 0.3% elsewhere.

8. Lending by NHMFC has been skewed towards upper-income borrowers,almost exclusively the top 15% -- 20%, as shown in Table It-II. Since fundswere sourced from the contributions of predominantly lower-income Pag-IBIGcontributors, the result was a regressive transfer of resources from poor torich. Figure IX-III presents the income profile of HD)F contributors and thatof NHMFC borrowers, in which a serious mismatch is evident. Due to growingpublic awareness of this issue, and consequent public protests stemming inpart from resistance to Pag-IBIG deductions as economic conditions worsened,provident fund contributions were made voluntary at the end of 1986.

Table IX-IlAVERAGE MORTGAGE AND AFFORDABILITY

Affordable to TopAverage Mortgage x % of Metro Manila

1980 223,000 5%1981 85,)00 20%1982 105,000 20%1983 124,000 15%1994 130,000 14%19bE 145,000 16%1986 160,000 15%

9. The average mortgag% size advanced by NHMFC In 1986 was P160,000,affordable to the top 15% of the urban population assuming affordability oftwo times annual household income. At the outset, most of the Corporation'smortgage purchases were from banks utilizing NIMFC's liquidity offer totransfer existing mortgagAs out of their portfolio. These were almostexclusively for higher-incoae groups, resulting in an initially high averagemortgage value of P 223,, 0 affordable to about the top 5% of the MetroManila population. Average unit costs of new construction financed In 1981dropped to P85,000, thereafter steadily rising along with inflation andremaining affordable only to the most affluent 15% -- 20% (Table IX-II).

10. Average loans per borrower are much lower than the averagemortgage, since most units are financed by the combined borrowing of two ormore Pag-IBIG members. In 1985, for example, the average mortgage per unitwas about P145,000 while the average loan per borrower was only P74,000,implying an average 1.9 borrowers per unit. Prior to 1984, NUMFC alsooffered an "open housing" program, under which It allowed non-Pag-IBIGmembers to borrow at a higher interest rate (para 17). The Corporation'sliberal "tack-on" policy enabled Pag-IBIG members to enter joint ventureswith nonmembers who might be entirely unrelated for the purpose of acquiring

- 92 -ANEX 9

Page 4

a house. Since most open housing loans were large, averaging P 322,OC in1984, this policy served to reduce the number of households benefiting fromUHMFC's limited resources, although it increased yields on the overallportfolio. As of mid-1986, 79% of the Corporation's loans were to Pag-IBIGmembers while 15% were open housing loans and 6% loans to others. The openhousing loan program was discontinued in 1984 owing to NNWC 's liquidityproblems.

Figure 1K-IIIINCOME PROFILE OF NIUDC BORROWERS AND RDW MEBERS

("aple June, 1984)

70

40-

j40 XBX gl

20-

01Below I m ,11!11111

F~~I ncFAl P*rj 1M=ell

II. Assetlouities Structure: As of the end of 1985, National Home'sassets were predoamInatly (88%) In mortgage contract receivables, of whiict-about 10% was current. Another 9% of assets were in deferred charges,representing operating losses since 1980 which had been capitalized and wereto be amortized against future earnings through the mid-1990s. The UDUF trustfunds totaling P3.9 billion at year end comprised the largest singleliability (57), followed 1Ly notes and bonds (P1.8 billion or 26%). CurrentLiabilities represented about 13%. with equity of about 4%, as shown in TableIX-IV. Though initially Lntended to be the Corpration's primary fundiugsource, capital market instrtments (notes and bonds) initially contributedonly about balf of UHIEC funds, and by end-1985 comprised about a quarter.The ratio of market borrowlngs to Pag-IBIG never exceeded about 1:1. The

- 93 -

Page 5

NHNIC's historical and projected financial statements from 1980-1993, Incomestatesents, balance sheets, and sources and applications of funds statemntsare presented In Annex 11.

Table Z-IVNMUNC CgNPARAIVK RALANCI sHnMs 1985 AnD 1936

ASSETS 1983 1986 EQUITIES 1985 1986

Current Asseets ................ 773 210 1,4 530 Current Llabllltles 864 120 1,467 43Current NCR* 83 10 22 1 Lona-Term Liabilltles.. ,772 830 1,165 34Cash, Securltles Other 146 20 976 290 'HOF Trust Fund 3,944 570 0 0Accounts Receiva6le 544 I0 8264 Notes/Bonds I,7393 260 1,059 31

nvesents .5..... ,,518 790 1,528 450 HNS Truse Fund 35 21 106 3Hortage Contr Reevbl 5,495 790 1,497 440 Other Lablllties ...... 62 10 60 MWS Trust Funds tPSSP) 23 0o 32 10 Undlstrb Coll 272 40 736 *2

FieSeJd Assets ./Oth 4 09 2 00 Less Aplied 216 30 648 ifDeferred Chares/O ..her . 658 90 6 20 Ne undIstrib: 56 10 883

Deerreo Charges (loses) 613 90 52 0 Other liabllltles 6 00 172 5Other 45 1 11 00 Equlty .255 40 525 15

Capital 195 30 500 15Retalnded Earnings 60 10 2S 1~~~~~~~~~~~~............................................................

TOTAL 6,953 1000 3,417 1000 TOTAL 6,953 1000 3,417 100

12. EIinaACiAL Position: At end-1985, 110C's financlal conditLon couldonly be characterised as Lusolvent In view of lts serious capital lmpairmentand liquldlty problems. The Corporatlon had been reporting small annualprofLts but had ln fact been Lncurring losses which reached P613 million byDecember 1985. At thli poLit, National Home was teohnLcally bankrupt wLth anegative net worth of P358 (US$17.5) million. The problems vbich led to theCorporations Insolvency were:

(a) lack of sound financial planLnig;(b) negative spread (due to fallure of cross-subsidLes);(C) liberal loan terms ln conjunctlon wlth weak credit appraisal

criteria;(d) poor collectlons; and(e) accounting backlogs.

ZiancLal kr M leas

13. (a) PLMancial Planning: Over the last few years lack of fundsto mest lts oblIgatlons was UOC's most pressing problem. The Corporation'scurrent ratlo was 11.5 ln 1982, but 'clined sharply thereafter to 0.9 In1985. However, lts primary problem was not reflected In Lts balance sheet.The Corporation lssued Lines of Commltment to orLgiLating banks wLthoutarranging the requLsite flnancing, assuming the capital market would provideadequate coverage at reasonable prlces as and when needed. The banks, inturn, Issued constructlon loans and commLtments to bullders for theassociated mortgage flnancLng. Unusually hIgh inflation drove interest ratesto 20%-40% In 1984 when bullders had completod constructlon and thesecommItments fell due, and forced 1101C to suppiement its Pag-IBI0 borrowingswLth market borrowings costtng up to 33% to meet even a portlon of Itscomitment obligations. At year-end 1985 the CorporatIon's portfollo of P5.5billion was financed with about P3.9 billlon of 3D14 funds (70%), with thebalance covered by 11.6 billion In high cost IC's, 11C1' and debentures. In

94ANNEX 9Page 6

December, facing heavy pressures from bankers and builders to clear upcommitments which had been awaiting payment longer than 8 months, thecorporation "sold" P278 million in existing mortgages to local banks,promising to repurchase this paper by mid-1986. The repurchase agreementswere on a verbal, "good faith" basis and were not reflected in NHWFC'sbalance sheet. Despite this effort, as of year end a balance of P1.0 billion(US$49 million) overhang of contractual takeout obligations remained, themajority of which were not yet paid as of August, 1987. During 1986 and1987, NHMFC's funding requirements to meet bonds falling due, repurchaseagreements, the takeout backlog, and subsidy needs due to the negative spreadon its portfolio were estimated at over 3.0 billion, substantially in excessof anticipated inflows from mortgage repayments and new Pag-IBIG borrowingsof about P1.7 blllion.

14. As ?MFC's liquidity needs grew, funds available from HDMF forhousing shrank. Facing mounting pressures for the Fund's termination aseconomic conditions worsened, HDMF intensified efforts to provide more of itscontributors with benefits through small provident loans, consequentlyreducing its housing investments as shown in Table IX-V. Though probablyessential to HDNF's survival, this move exacerbated NHNFC's liqiuidityproblem. With interest rates an unprecedented levels and Pag-IBIGretrenching, the Corporation faced a severe liquidity crisis.

Table IX-VSHARE OF HDNF COLLECTIONS INVESTED IN HOUSING

1980 1981 1982 1983 1984 1985

Cumulative Collections (Pm) 10 124 769 1,874 3,194 6,000Cumulative Investmentin Housing (NHNFC) 1 121 754 1,852 3,095 3,944

% Invested in Housing 10% 98% 98% 99% 97% 66%% Invested in ProvidentLoans/Other 90% 2% 2% 1i 3% 33%

15. The primary cause of NHMFC's liquidity problems was its lack offinancial planning, the consequences of which were compounded by unusualeconomic conditions. As noted above, mortgage purchase commitments were madeto originating banks, but without simultaneous arrangement for the requisitefinancing, leaving NHMFC vulnerable to market forces and the decisions ofother agencies (e.g. HDMF) to meet its contractual obligations. It was thushighly exposed when the 1983 crisis emerged.

16. (b) Negatis& Spread: The Corporation's initial Business Plan calledfor a cross-subsidized interest rate structure: yields on open housing loansto upper income groups and earnings on other high-yielding investments wereexpected to cover the proposed 9.5% subsidized fixed rate on Pab-IBIG

- 95 -ANNEX 9Page 7

mortgages. Average costs were expected to be 12.5% and average yields13.85%, leaving a positive spread of 1.35% to cover NHMFC's administrativecosts, as shown in Table IX-VI.

Table IX-VISPREAD IN NHMYC INITIAL BUSINESS PLAN

REVENUES COSTS

Asset Volume Yield Rate Fund Source Volume Rate

NCR-Open Housing 10% 15.5% BMPC's - Series A 25%10.0%Pab-IBIG 40% 9.5% - Series B 25% 16.0%Other Investments 50% 17.0% HDMF Trust Fund 50% 12.0%

Weighted Average: 100% 13.85% 100% 12.5%

17. In actuality the spread turned negative. The NHMFC originated loansat 9% fixed interest rate over 25 years to Pag-IBIG members, just below theplanned level. "Open Housing" loans to non-members were also extended up toP200,000 per borrower, at just above the expected rate -- 16% over 15 years.Pag-IBIG borrowings, on which the Corporation paid HDMF 12.75% over a term of20 years, were not placed in mortgages, but in other higher yieldingInvestments as intended. However, while profitable, these investments did notproduce the expected surplus to be used for cross-subsidy. Series A (taxfree) bonds also proved unattractive to the market, forcing NUNYC to utilizethe higher-cost series B. These events unsettled MUYC's delicate cross-subsidy formula from the outset. Meanwhile, by purchasing fixed ratemortgages yielding 9% (with fees, points and charges, 10.2%), withoutadjusting for changes in its cost of funds the Corporation locked itself fromthe beginning into both a negative spread and term mismatch on member loans,counting on anticipated profits to cover the assured losses.

18. As rates fluctuated and then sharply rose following the 1983/84crisis, NHMWC was forced to liquidate its other investments and utilize HDHFfunds to meet its mortgage commitments. Interest rates on governmentsecurities soared to 41% by year-end 1984. As noted above, NHHEC was forcedto discount its two-year bonds to yield as much as 33% to remain competitiveand attract the funds it iequired to meet even a portion of its mortgagetakeout commitments. Since it was not marketing mortgages per so, butinstead floating its own bonds and debentures, NHMFC faced the typicalproblem of savings and loan institutions world-wide -- of fixed-rate, low-yield assets and floating-rate, high-cost liabilities. Actual spreadsreached negative 4% in 1985 as shown in Table IV-VII.

19. As a result, the Corporation began incurring losses in 1983 whichwere capitalized and included under "deferred charges" to be amortized fromfuture Housing Contributory Fund (HCF) earnings, under which an additional

- 96 -ANNEXL9Page 8

10% is collected after the third year of the mortgage. This practice ofcapitalizing losses vas approved by the Board, justified on the grounds thatthe 1983-84 crisis and inflationary spiral led to an unusual interest ratestructure which represented abnormal business conditions and should beamortized over a period of years. However, even without the crisis, theweighted yield on Pag-IBIG mortgages would have been 10.9%, still well belowNHNFC's cost of funds, and V.NFC's losses would have continued. As ofDecember 31, 1985, deferred charges totaled P6L3 (US$30) million. Offsetagainst NHNPC's equity of P255 (US$ 13) million, a negative net worthremained of P358 (US$17.5) million.

Table It-VIINIMFC ACTUAL SPREADS. 1981-85 Source: UNHYC

Weighted Weighted EstablishmentYear Return Cost Spread Costs Profit/Loss

1981 12.43% 10.07% 2.36% 1.32% 1.04%1982 12.59% 10.90% 1.69% 0.71% 0.98%1983 12.60% 13.86% (1.26%) 0.92% (2.18%)1984 12.41% 13.95% (1.54%) 0.78% (2.32%)1985 14.00% 18.00% (4.00%) 0.96% (4.96%)

20. (c) Lending Terms/Credit ApMraisal: NMIMC's lending terms wereinfluenced by EDNI's desire to service its membership and therefore quiteliberal. The Corporation offered 90% financing plus originating fees andpoints totaling 7% (four points to NRMYC and three points to the originatinginstitution) which were capitalized and added to the loan amount, bringingthe effective loan-to-value ratio to about 97%. The commensurate downpaymentwas therefore only about 3%. Loan amounts of four times annual salary wereallowed, regardless of other debt obligations. The multiplier was appliedblindly without a proper credit evaluation. The Corporations "tacking"policy was equally liberal. While individual loans could not exceedP100,000, up to three members could tack into a single property with amaximum mortgage of P300,000. No special conditionality applied if two wageearners combined borrowings -- as they typically did. Though loan servicingpayments were limited to 30% of "gross family income," this included not onlythe spouse, but relatives to the fourth degree removed. Open housing loansto non members could be combined with member loans. The combined effect ofthese liberal policies allowed eztended families, members and total strangersto pool their incomes, and thus qualify for a much larger loan than thehomeowner himself could afford. Under such liberal terms, many borrowersoverextended themselves and experienced payment difficulties during thedepressed 1983-84 period. At that point NmMIC began to encounter seriouscollection problems. However, as the mortgages were Insured by HICC, NHKFCfelt no compulsion to tighten its credit terms.

21. (d) Collectio: NMIC collections performance has been seriouslydeficient, having substantially deteriorated since 1984, and is presently amajor concern. Collections against current amounts due net of arrearsaveraged 681 over the last five years. Thus arrears have mounted each year.

'.97 ^ ANNEX 9Page 9

Improvement was evident from 1982 to 1984, when collections rose from 60% to83%, but declined sharply thereafter to 67% in 1986. Collections includingarrears averaged 60% over the last five years with no discernible trend. (Bycomparison, NHA's collection rate including arrears for a much lower incomeclientele was reported at 57% in 1985 and 52% in 1986 including resettlementproperties.) Cumulative performance including all payments due and made, butnet of any compounding of interest on arrears was 71% in 1986. Average numberof months receivable stood at 6.5 months. Tables IX-VIII to Il-X presentNHWMC collections data.

Table IX-VIIIANNUAL COLLECTIONS NET OF ARUAP.S

(P million)

Period Current Amt Amount Collected % Net Arrear. Averg No.Due (Gross) Efficiency PA Cum Mo. Recvbls

1980 2.7 0.9 33% 1.8 1.8 8.01981 25.1 20.0 M% 5.1 6.9 3.31982 88.9 53.3 60% 35.6 42.5 5.71983 186.3 111.8 60% 74.5 117.0 7.5 177.7BS1984 465.3 385.9 83% 79.4 196.4 5.11985 760.8 524.9 70% 235.9 432.3 6.8 510.4BS1986 NCH 233.6 156.9 67% 76.7 509.0 6.5

Table Il-IlANNUAL COLLECTIONS INCLUDING ARREARS

(P million)

Period Total Amount Amount Collected % Efficiency ArrearsDue with Arr. (Gross) Carrd. Fwd

1980 2.7 0.9 42% 1.81981 26.9 20.0 74% 6.91982 95.8 53.3 56% 42.51983 228.8 111.8 49% 117.01984 582.3 385.9 66% 196.41985 957.2 524.9 55% 432.31986 (Mch) 665.9 156.9 NA 509.0

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Page 10

Table IX-IXCUMULaTIVE COLLECTIONS

Not of Compounding on Arrears(P million)

Period Amount Due (Cu) Amount Collected (Cum) % Efficiency

1980 2.7 0.9 33%1981 27.8 20.0 75%1982 116.7 74.2 64%1983 303.0 186.0 61%1984 768.3 571.9 74%1985 1,529.1 1,096.8 72%1986 (Mch) 1,762.7 1,253.7 71%

22. The low rate of collections on NEMFC's portfolio is due to (a) thepoor performance QZ NHMFC's collecting banks in combination with (b) theHousing Finance Company's (HFC) lengthy delays in enforcing sanctions(foreclosures) and (c) NHIFC's own accounting backlog and consequent lack ofcollection management and follow-up. National Home collects throughservicing banks which are responsible for issuing delinquency notices on anagreed schedule. The banks must make up the first three installments ofpayment arrears from their own funds -- a requirement that NHMFC has notalways enforced. The servicing bank maintains accounting records and issupposed to remit copies to NHMFC monthly. The HIGC insures the loans and issupposed to cover any remaining difference between the amount collected andthe amount due. These mechanisms initially worked satisfactorily, and in itsearly years NHMFC reported collection efficiency of 100% including paymentsagainst the bank's and HIGC's guarantees. Collections were therefore aneglected area of the Corporation's adminisuration.

23. Collections became a pressing issue following the banking shakedownwhich accompanied the 1983/84 economic crisis. Some 30% of NHMIC's servicingbanks were closed and banks controlling nearly 60% of the Corporation'slending volume were either closed or were being restructured. The DBP'sprolonged and grave financial difficulties have had a particularly severeeffect on the Corporation's perforcmance since it originated 42% of NHMFC'smnrtgages. The DBP accounts now represent half of NMIFC's total arrears.Since accounting records of the closed and restructured banks are incomplete,NHHFC sought in some cases to transfer the collections function to otherbanks and in others took over the task itself.

24. Follow-up on collections has also been poor. Part of the problem isthat responsibility is administratively split betwee:. three agencies: NWHMC,its servicing banks, and HIOC. Most servicing banks have not followed upwith delinquent borrowers. Some may send a single follow-up letter, but fewmake personal visits to delinqueat borrowers to collect arrears or makearrangements for payment. The HIGC is actually responsible for follow-up andforeclosure of NHMFC accounts and, since its inception, has been assigned 783delinquent accounts worth P86.7 million. However, this represents only a

- 99 -

ANE 9Page 11.

small proportion of accounts with serious arrears. Of these, 297 or 38% verereturned to NHMFC, 190 having settled their accounts and the rest fortechnical and othar reasons. HIGC has foreclosed on only a few of theseacc . nts, but none have completed the period of redemption and beenrepossessed, sold and the account cleared. Foreclosure in the Philippines isdifficult, politically volatile, and prolonged, usually taking more thanthree or four years. The NHMFC, for its part, has been preoccupied with itsliquidity problems and has paid little attention to collections untilrecently. Thus borrowers have been allowed to fall into lax payment habits.

25. A further complicating factor constraining foltow up ondelinquencies and the reason that so few accounts have been turned over toHIGC for foreclosure is NHMFC's 13 month backl;.g of postings. As of December31, 1985 P272 (US$13) million of undistributed collections had not beenposted to individual accounts. The Corporation had tentatively applied P216or 79% of this amount, based on estimates, leaving a balance of P56 million.Posting was slow both because it is still being done manually, and becausemanpower for this work was diverted to complete the Corporation'scomputerization effort. In September, 1986 the Bank approved funding forsupplementary contractual assistance under Loan 1821-PH to expedite postingsand clear up the backlog. The Corporation, hovever, did not utilize thesefunds. As of December 31, 1986 the total amount undistributed had grown toP736 (US$36) million of which P648 or 88% was tentatively applied, leaving arising balance of P88 million.

26. In early 1987, P4.7 billion of NHMHC's P6.2 billion mortgageportfolio was transferred back to HDMF, back-dated to mid-1986. The HDMF,which has a large, now somewhat underutilized staff since it becamevoluntary, has assumed responsibility for computerizing the records andposting back-payments. Since collections henceforth will fall to HDMF, theFund can offset amonnts due against Pag-IBIG members current savingsbalances, thus collecting by fiat a portion of arrears. Future payments canbe deducted at source together with now volvutary Pag-IBIG payments. However,as of July 1987, a substantial balance of P70 (US$35) million in interestreceivables plus P87 (US$4) million in HIGC receivables still remained onNHMFC's balance sheet. Discussions are underway as to the treatment of thesearrears.

Accounting

27. NHMFC's accounting functions have been fragmented among severaldepartments and involve detailed recording of information which is onlymarginally useful. As noted above, there is a large backlog of postings, withthe result that information on delinquent accounts is inaccurate, hamperingfollow-up and foreclosure efforts. Annual income statements are alsoinaccurate with respect to interest earnings since they are based onestimates of interest and principal components of the unposted collections.

28. NHMFC's Treasury Group maintaitns the accounts for bonds, HDMF trustfunds, interest payable and notes payable. Its Accounting ServicesDepartment under the Finance Group keeps accounts of all operatingexpenditures, fixed assets and liabilities for expenditure and preparesentries and keeps control accounts on the basis of daily transaction reports

- 100 - AM 9

Page 12

of the other departments. It also maintains subsidiary ledgers for cash,loat accounting by originating institution and by lending program -- ineffect duplicating the record-keeping of existing departmental sourc-documents, from which it then prepares a daily trial balance.

29. NHMFC's accounting procedures also show certain discrepancies. In1984, for example, the Corporation took a credit for P 25 million as asubsidy which it claimed from Government but which has not yet been receivedand is still reflected as "other receivables." Further, while it amortizesdiscounts on BMPCs and BCs over the life of these certificates, it recognizescommitment charges on loans as income on receipt and does not take credit forthem over the life of the loan.

30. The Corporation's recent reorganization is intended to streamlinefinancial functions and eliminate duplication or extraneous work whereverpossible, and should help address the preceding problems. In addition, underthe associated technical assistance, training and studies component,technical assistance is planned to strengthen NHMFC's accounting and internalauditing functions.

31. Work on computerization of NHNFC's accounts began in 1982-83 andproceeded slowly until 1985 -ztan the program came to a standstill due to achange in Corporation leadership. In 1986, after another management change, acrash program for computerization was launched and by June, 1987, two of thesix major computer programs needed were completed and tested: the CommitmentLine Monitoring Module, and the Take-Out Module. The Accounting and theAutomated Billing & Collections Modules were completed in early 1988.Acquired Assets Management and Foreclosure Modules will be undertaken during1988. Details of NHMFC's computerization program are presented in Annex 10.

.onclusiou

32. NHMFC has thus far functioned as a member-oriented lendinginstitution although its lending has, in fact, been skewed towards the mostaffluent members and some non-members. It has not developed a secondarymortgage market per se, but has been operating as a retail housing financeagency. The nature of NHMFC's primary business is obscured by the use oforiginating banks through which it has operated. The mechanisms of its"secondary" operations, e.g. collecting banks and HIGC insurance have notserved the Corporation well, and have, in fact, contributed to its problems.The fact that NHNFC's business is primarily retail housing finance must berecognized, and its operations and staffing revised to better serve thisfunction. Since, itt reality, there is very little reteil housing financeactivity in the Philippines, MWiMC will first develop this business andaddress secondary market development thereafter. Government has endorsedNHMFC's continuance as a mortgage finance institution, and the Corporationhas prepared a Policy Statement and an institutional Action Plan (Annex 10)to correct the problems outlined herein.

ANNEX 10Page 1

NATIONAL WRE MORTGAGE FINANCE CORPORATION

may 19, 1908

Xnternatlona :ank for leconstructLonand Development1818 a street .V.washlngton. D.C.

Centleson

This serves as a letter of clarification on the enclosed PolilyStatement and Operatitg Guidelines of this institution approved by theBoard on March 1, 1988.

I* Credit 1valuation

I ,;ould like to reaffirm NHDYC's intention as set out In theabove PolLcy Statement to function as a viable and prudently mnagedfinancial Institution. To this end, it is fuxther our Intention toinstitute within the next 12 months, credit evaluation proceduresapproprlate to the low income cllentelle we serve and to the size ofthe loans affordable by this clientelle. soeer, due to the presentlack of an acceptable and adequate system to implkaent suchevaluation, we propose first to review approprlate evaluation methods,utllizing In the interim, simpler procedures.

As a first step, we shall seek from each of our applicants astatement of their respectlve long-term loan liabilities, to determinethe extent of such liabilities, In cases whore an aff davit of theborrower is used to determine his lncome, as under UDWC' s non-memberprogram, the amount of any long-term debt outstanding will be utilizedto arrive at the allowable loan limlt of the borrower.

Re: Ceilint on mn Aammt

It is our intention to enforce a lilmt on acceptance of loansfrom P180,000 to P250,000 of PS00 million or December 31, 1989,whichever cones sooner. Our goal, however, is to serve lower incomegroups and we view thls temporary measure as necessary to launch thenew program and Oprimo the pump".

Re: Terms on Bank-AsiLsted Loans

Please find attached the terms and conditions agreed for WorldBank assLsted loans applicable to the first year of operations.

Yours uincerel

Authorized RepresentativeNattonal Rome Mortgage finance Corporatlon

-102 - ANNEX 1C

Page 2

National Home Mortgage Finance Corporatlon

AGRED =TERMS AND CONDITIONS ON NMDEC SUBLOANSAPPLICALE TO WORLD BANK FINANCED LOANS

may 19. 1988

The terms and conditions set out below have been agreea upon asapplicable to the first year of the Project, and may be supplementedas necessary.

a. Refinancing of Existing Unts: Bank funds vill not be utilizedfor refinancing existing units

b. Borrower Eligibility: as set out in NMDFC's Circular No. ULP-011

c. Interest rates: 9% for loans up to P60,00012% for loans from P60,000 to P108,00C

d. Ceiling: 70th percentile of the urban Income curve, presentlycalculated at P108,000 (December, 1987 incone curve)

e. Average to be Maintained on Income Distribution: to be developed

f. Loan Amount/Tacking: as proposed in the NMIMC CorporateClrcular No. ULP-Oll of May 4, 1988 provided that a study beundertaken within the 12 amonth period on (a) the extent oftackitg under the new and previous portfolios, and (b) therelationship of tcking provisions and payment performance;

S. Loan Period: up to 25 years

h. Grace Period: a grace perLod on principal not exceeding 3 yearsmay 'e allowed

i. Loan to Value Ratio: not to exceed respectively 90% and 80% forloans of up to P60,000 and P60,000-P120,000 respectively, unlessaccompanied by a varranty by the originating entity or a creditinsurance fee as set out in NEIfC's May 4, 1988 Circular No.ULP-011

j. mortgages subject to graduated payments will not be eligible forBank financing

k. Collateral: first real estate mortgage or equlvalent

The foregoing is premised upon onlending terms from GOP to NHMFC of8.5%, 20 years, 5 years grace period, vith the foreign exchange riskborne by GOP.

-103 - ANEX 10Page 3

PHILIPPINESHOUSING SECTOR LOAN

SUMMARYNHMFC POLICY AND OPERATING GUIDELINES

This Annex comprises two parts: (a) NHMFC's PolicyStatement, and (b) Operating Guidelines.

Part INHMFC POLICY STATEMENT

A. MANDATE/OBJECTIVES

1. Urban focus. Concentration on urban areas where housingneeds are most critical;

2. Volume purchases. Mortgage purchase will be made inlarge volumes;

3. Geographic Spread. The program will have geographicspread in order to ensure that program benefits arenot overconcentrated in Metro Manila;

4. Lower Income Focus. The program will serve the lowerincome groups which are not adeuquately covered byprivate sector financing;

5. Sustained viability of the program will be ensured;6. Full cost recovery mechanism shall be an integral com-

ponent of the program;7. Development and operation of a secondary mortgage mar-

KET SYSTEM.

B. ORGANIZATION POLICIES

1. Effectiveness. An effective and streamlined organiza-tion shall be established and maintained;

2. Delegation. A flexible organizational structure shallbe developed and adopted in order to sufficiently dele-gate duties, responsibilities and authorities, groupkey activities related functions and provide levelsof adequate span of control;

3. The organization shall continue to be strengthened,especially in areas of mortgage management operatiorns,credit and collection operations and treasury operations.

104 - ANNEX 10

C. FINANCIAL POLICIES

1. Retuzn on Equity. The Corporation shall adopt a profitpolicy of maintaining no less than breakeven.

2. Viable investment policies, procedures and strategiesshall be developed to improve NHMFC's return on investment.

3. Spread/Cross Subsidies. A positive spread on the totalportfolio of the Corporation shall be maintained.

4. Term and Interest Rate Match. Lending terms/rates shallbe matched with costs of borrowing.

5. Asset/Liability Management. By instituting asset-liabi-lity management policies, developing pricing mechanismsfor assets and liabilities to reflect the true corporateyields and costs, and as appropriate, liquidating non-performing assets, NHMFC's interest rate exposure andrisks shall be reduced in the case of Folio I and subs-tantively eliminated in the case of Folio II. An adjus-table rate mortgage instrument shall be used wheneverthe corresponding funding is on a variable rate bases.

6. Long-Term Private Funding. A system and attendant programsshall be developed to attract a continuing flow of long-term funds for housing and mortgage finance both f*romthe public and private sectors;

7. Financial Manaaement. Financial management processes andprocedures shall be developed in order to avoid futurefinancial crises and backlogs by (a) institutionalizing aformal corporate planning process, (b) developing andusing effective management tools for monitoring, timelyreaction and control, and (c) developing a Management Infor-mation System for appropriate management level decisiOn-making;

8. Accounting. Generally accepted accounting principles (GAAP)shall be the basis of accounting.

D. CREDIT POLICIES

1. Forward Coverage of Commitment Line. There shall be afull matching between purchase commitment lines (PCL's)issued to originating financial institutions and developersand the commensurate sources of finance;

2. Approval of Purchase Commitment Lines* PCLs amounting toP50 million shall be approved by the Credit Committee ofNHMFC while those over P50 million shall be anproved bythe NHMFC Board of Directors.

Credit Committee. The Credit Committee shall be composed ofthe Officer in Charge/Exec. Vice President, the SeniorVice President and the Vice President of the Treasury Group.

-105 - ANNEX 10

Page 5

3. Authority for Loan ADproval. Borrower's credit is ap-proved by NHMFC accredited originating financial insti-tutiions ar- Aevelopers in accordance with the creditappraisal criteria established by NHMFC.

E. MORTGAGE MANAGEMENT POLICIES

1. Processing Period. The Corporation shall implement atarget processing period of ten (10) business days fromdate of delivery of mortgages to NHMFC to check releasefor mortgages with warranties. For mortgages withoutwarranties, the target processing period shall be thirty(30) business days.

2. Regional Operations. The Corporatior shall initiallyestablish its regional presence through its network ofaccredited OFIs and visits by the central office staffin regiional urban centers and will review the need forregional offices as warranted.

3. Home loan origination and purchasing programs shall bedeveloped and expanded through developer/OFI accreditationguidelines, improved delinquency and foreclosure proce-dures, and expansion and improvement of servicing andcollection operations.

4. Marketina. Efficient marketing strategies shall bedeveloped by (a) establishirg a regional program topromote NHMFC's new shelter program(s), (b) solidifyingdeveloper/OFI customer base through efficient accredi-tation procedures, commitment and purchasing guidelinesand support services, and (c) generating new customersthrough marketing program development and training andother awareness programs;

5. Graduated Amor-tization Payments. May be allowed oncondition that initial monthly amortizations should notbe less than 75% of level amortization payment.

F. COLLECTIONS ADMINISTRATION POLICIES

I.Collections Manacement. The Corporation shall manage itsown loan processing, account posting, deliquency moni-toring and foreclosures;

2. Collection Efficiency. Target collection efficiencylevels shall be 80% with 3 months or less receivables,90% with 8 months or less and not less than 95% includingrealizations from foreclosure. A loan loss reserve ofat least 5% will be maintained In addition to amountsreceived as credit insurance.

3. Collecting Banks. Mortgage servicing shall no longer be

-106 - ANNEX 10Page 6

a mandatory function of originating financial institu-tions. A sufficient number of financial institutionsshall be selected as collecting banks. Weak performanceby collecting banks will reeult in their disqualificationand replacement. Neighborhood/non-government organiza-tions may also be employed as collecting agents.

4. Collection Servicing Fee. Collecting banks will be paida fee o 2% of the amount collected (P&I) and may retainpayments for a float period of 22 days (between 15-30days, averaging 22). Full payments shall not be subjectto the 2% fee;

5. Salary deduction. Collection of amortizations through thesalary deduction scheme shall be implemented wheneverpossible. Only in cases when the employer is not willingto deduct the amortization payment will the borrower beexempted from the salary deduction scheme.

6. Subcontracting. Once the procedures are well establishedand control systems in operation, the Corporation shallsubcontract eleuents of the collection system (e.g. fore-closures), provided that overall management of mortgageservicing remains at all times under NHMFC's own tightcontrol;

7. Foreclosure. The foreclosujesproeedures shall be streng-thened and improved in accordance with the followingguidelines: (a) an account with previous payment fromtake-out date shall be foreclosed when it becomes six (6)months in arrears; (b) an account with no payments atall is foreclosed on its third (3rd) month in arrears;When a property is forecloed the Corporation shall deductall payments due it (loan p+i, penalties. interest duringredemption period, legal costs, publicity and other costs)from the sale price.

8. Collection') Administratiovi. An ipproved collection ser-vicing operation shall be formulated and implementedthrough:a. Computerization of the collection system for loan

amortization bookkeeping and accounting;b. Development of standardized systems and p'ocedures

for CABs of NHMPC for collecting and accountiLxgfunctions;

c. Development of standards for monitoring and evalua-ting performance of CABs;

d. Issuance of annual statements of accounts to borrowers;9. An improved delinquency procedure including an organized

educational program for borrowers (on their responsibi-lities) and an organized reporting system for early de-tection of delinquent accounts shall be established..

107 1 AM= 10

Page 7

G. ADMINISTRATION STRATEGIES

1. Management by Objective. An Administrative/HumanResource Management by Objective (MBO) system shallbe developed.

2. Job duties, responsibilities and &athorities shall bedefined in order to clarify management and staff rolesconsistent with key activities and related functionsand operations;

3. Measurable management and staff standards of performanceand evaluation criteria in line with MBO program shallbe developed.

4. Human Resource Function to coordinate hiring, stafftraining and development, salary and benefits adminis-tration and other personnel functions shall be developed;

5. Reviews. The salary administration and benefits programshall be periodically reviewed and updated to reflectcbanges in duties and respponsibilities and changes inthe local job market;

6. Physical Facilities. Present facilities including head-quarters and regional offices shall be rationalized todetermine physical facility requirements consistent withgrowth targets, staffing increases and projected supply,maintenance and procurement levels;

7. The administrative and operating budget shall be reviewedthrough monthly performance analysis to ensure that ex-penses are consistent with growth patterns, stated profitand operation objectives and organizational viability.

108ANNEX 10

OPERATING POLICIES Page 8

A. Definition of borrower eligibility criteria

1. Does not own residential unit as sole or co-owner;2. Legally able to do so.

B. Loan Uses

As may be estublished by Board ofDirectors from timeto time.

C. Loanamounts/Proportion to household income

1. Proportion of Income/Loan amount. For loans of up toP60,000, not to exceed 22%; for loans of over P60,000to P120,000, not to exceed 28%; for loans of over P120,000to P180,000, not to exceed 34%; and for loans of overP180,000, not to exceed 36%.

2. Tacking. No more than three individuals may be tacked:.into a single loan, provided the borrowers are relateawithin the second civil degree of affinity or consanguinity.Number can exceed three if these are living within thesame household.

D. Credit Appraisal

1. Downpayments/Loan-to-value Ratio. The amiount of loanwhich may be granted shall not exceed 90% of the appraisedvalue of the collateral but can go to as much as 100%on condition that the same is accompanied by a warrantyor credit insurance.

2. Credit evaluatior./Underwriting. A thorough evaluationof all documents presented for take-out will be under-taken to ensure that these conform with obtaininglending guidelines.

3. Origination Fee. Originators will be paid a fee of 2%.

E. Loan Period

1. Loan Period. Shall not exceed 25 years or the differencebetween present age and 70th year of the principal bor-rower.

2. Term Match. NHMFC will maintain a reasonable degree ofterm atching between its assets and liabilities.

-109- ANNUl1

Page 9

F. Credit Insurance

In lLeu of an accompanying warranty, a one-time creditinsurance fee of 2% of the loan amount may be accepted.

G. Fees and Penalties

1. Commitment Fee. 1% of approved credit line, refunded uponexpiration of line except for portion committed but notdelivered; exceptions may, however, be authorized by theBoard of Directors.

2. Penalties. 1/15th of 1% on the unpaid amount per day forborrowers; .001% per day for collecting banks.

H. Geographic Targets

In order to realizi- its regionalization objective, NHMFC hasset the follouing ideal targets in terms of number of unitsand investment amount per regior. Marketing efforts will begeared to achieve the same.

Region No. of Units (%) % Investment Amount

1, Ilocos 4.2 3.82. Cagayan 1.7 1.63. C. Luzon 9.3 10.84. S. Tagalog 11.9 10.65. Bicol 3.9 2.86. W. Visayas 6.0 4247. C. Visayas 6.4 4.38. E. Visayas 2.8 1.79. W. Mindanao 2.1 1.610. N. Mindanac 4.5 3.211. S. Mindanao 5.6 4.612. C. Mindanao 2.6 2.113. NCR 38.9 48.5

I. Income Distribution Targets

NHMFC sets the following targets of number of units andinvestment volume per income decile in accordance with itsmandate of serving the lower income group.

Income Decile No. of Units (%) Investment Volume (%)

1st - 3rd 45 25 %4th - 5th 30 25 %6th - 7th 15 25 %8th - 9th 10 25 %

- 110 -

AN - 10Page 10

J.Lon1 s

Current intere3t rates sball be: 9% for loans of up toP60,000, 12% for over P60,000 to P120,000, 15% for over P120,000 toP180,000, and 16% for over P180,000 to P250,000.

is-- - ---- q--- ---- ---- ----- - - - -1. 1 - - 1.

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=9

U ~~ 4a 1 4n S 1 ]' *, o|S} ]|F

S -; ;sS

- 112 -ANNEX 10Page 12

IweC IlMtITUtIIR vtIm u (CMIII)

TWILU

I I I I I I IiWl * 198 I 191" 1 1989 t 1990 I 1991 1 199Z I

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I ARpr Ildi I Yerwl I YearZ I Ywv 3 I Year IS. cWred lsu tsflhigm t ldule I I I I I I I 1 I I I I I

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6. teluromiowe 1Al I I I I I I I I I I I I I-DOetelop &Wi testirg I I - i I I I I l II I-Reladi 1 1 I I I _ I I I I I

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2A41

113 -

Page I

PHILIPPINES


m INMM STATEMENT

(P fIltfon In Current Prfce.)

TABLE I

INCOME STATEMENT N I S t 0 0 I C A L PR Oa J E C T ED......................................... .........................................................................................

RE V E N UE S 1960 1981 lq82 1983 '0484 1965 1966 1987 1988 1969 1990 1991 1992 1993

intrest 19 42 67 181 44 586 421 226 ' 198 258 394 641 1014C*mdtment Fene 0 1 14 4 82 0 0 0 4 10 19 30 39Nsetltaneous 0 4 10 22 66 88 53 0 1 1 1 1 2 3

,...... .... ...... .... ...... .... .... . ..... ...... .... ...... .... ...... .... ...... ... ........ ... .........

TOTAL REVENUES 19 47 91 248 S62 674 474 226 198 203 269 415 673 1056

EXPEND I TURES.......................

Perseml Senices 7 9 11 12 16 29 31 25 25 26 29 36 47 60Other Operatin%it*ots 5 5 7 6 12 21 18 16 16 17 20 24 31 40Interest nd BBeM: Chare 2 19 55 210 500 596 648 173 127 122 173 287 482 759Nisctllaneous 0 1 2 9 13 0 1 2 5 11 24 42 66 85

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

TOTAL EXPENDITURES 14 34 75 237 541 646 698 216 173 176 245 390 626 944.... ...... .... ...... .... ...... .... ...... .... ...... .... ...... .... ..... ............ ............ ........ ..

NET INCOME 5 13 16 11 21 28 -224 10 25 27 24 5 47 112Incoem Tax 0 1 0 4 4 lu 3 4 9 9 8 9 16 39

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

NET AFTER TAX INCONE 12 16 7 17 16 -227 7 16 17 15 16 30 73+ Prior Ye.r AdJustments 0 0 -3 -1 -6 -5 192 80 5 5 5 5 5 5

RETAINED EARNINGS FOR YEAR 5 12 13 6 11 13 .35 -73 11 12 10 11 25 67

21-Apr-88

- 114 -ANNEX1APage 2

NATIONAL HONE MORTGAGE FINANCE CORPORATION - FINANCIAL PERFORMANCEtABLE 2 ............................... ........................----------------------

(Structural Analyses in Percentages)

INCOSE STATENENT H N S T O R I C A L P R O J E C T E D

R E V E N U E S 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993

Interest 100 89 74 73 74 87 89 100 9998 96 95 95 96Comnitment Fees 0 2 15 18 15 0 0 0 1 2 4 5 4 4

lIscellaneous 0 9 11 9 12 13 11 0 0 0 0 0 0 0.... ...... .... ...... .... ...... .... ...... .... ...... .... ...... .... ..... ............ ............ ....... ... ..

TOTAL REVENUES 100 100 100 100 100 100 100 100 100 100 100 100 100 100

E X P E N DI t U R E S.......................

Personnel crvices 37 19 12 5 3 4 7 11 12 13 11 9 7 6Other Operatng Costs 26 11 8 2 2 3 4 7 8 8 7 6 5 4interest and Bank Charges 11 40 60 8S 89 88 137 76 64 60 64 69 72 2Nfcellaneous 0 2 2 4 2 0 0 1 3 5 9 10 10 8

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

TOTAL EXPENDITURES 74 72 82 96 96 96 147 95 87 87 91 94 93 89.... ...... .... ...... .... ...... .... ...... .... ...... .... ...... .... ..... ;... ... ........ ... ........ ... .......

NET INOME 26 28 18 4 4 4 -47 5 13 13 9 6 7 11- Incoe Tax 0 2 0 2 1 1 1 2 4 5 3 2 2 4

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

NET AFTER TAX INCONE 26 26 18 3 3 3 -48 3 8 9 6 4 5 7+ Prior Year Adjustmsnts 0 0 -3 0 -1 -1 41 35 3 3 2 1 1 0

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

RETAINED EARNINGS FOR YEAR 26 26 14 2 2 2 -7 -32 6 6 4 3 4 633s 3 J 3l 3333 3 3 33 3 333

21-Apr-88

TABLE 3 hJANMIIPage 3

NATIONAL NME MORTGAE FINANCE CORPORTION - FINANCIAL PERFORMANCE

INCOME STATEMENT RATIOS (Amotmts In Pesos Mitlion at Current Prices)

198 1961 1982 198 1984 1965 1986 1987 1988 1989 1990 1991 199 1993….. .. . . .. . . .. . ... . . . . . . . . .. . .

RETURN ON TOTAL ASSETS:Net Incm 5 13 1611I 21 28 -224 10 25 27 24 2547 112

Investment at Jan 1 0 419 682 2039 4024 6623 6953 3417 2360 2275 2558 3353 4971 7499Investment at Doec 31 419 682 2039 4024 6623 6953 31417 2360 2275 2558 3353 4971 7499 10853

Ave. Investment in Assets 210 551 1361 3032 5324 678 5185 -I888 2317 2416 2955 4162 6235 9176R A T I 0 :2.4 2.4 1.2 0.4 0.4 0.4 -4.3 0.4 1.1 1.1 0.8 0.6 0.7 1.2

3333333 3333 333 3333 Z333 3333 3333 33333 3333 333n 3333 333 333333

RETURN ON EQUJITY:NetIncm 5 13 16 11 21 28 -224 10 25 27 214 25 47 112

Equity at Jan 1 0 155 192 225 231 242 255 525 451 463 475 485 496 521Equity at Doc 31 155 192 225 231 242 255 525 451 463 475 485 496 521 589

Averape Equity 78 174 209 228 237 249 390 488 457 469 480 491 509 555R A T I 0 :6.5 7.5 7.7 4.8 8.9 11.3 -57.4 2.1 5.5 5.7 4.9 5.1 9.2 20.1

RETURN ON CAPITAL EMPLOYED:Net Ineomeafter taxas 5 12 16 7 17 18 -227 7 16 17 15 16 30 73

Equity.+ Lltrm Debt Jan 1 292 391 642 1943 3836 473 6089 1690 1666 1613 1917 2732 4366 6916Equity.+ L'trm Debt Dec 31 391 642 1927 3746 4648 6027 1690 1666 1613 1917 2732 4366 6916 10274

Average Equity LT Debt 342 517 1285 2845 4242 5380 3890 1678 1640 1765 2325 3549 5641 8595R A T I 0 :1.5 2.3 1.2 0.2 0.4 0.3 -5.8 0.4 1.0 1.0 0.7 0.5 0.5 0.8

3333333333 .t3Z 333 3333 3333 3333 33333 a33 3333 3333 3w 333333

RATE OF RETLUR ON NET FIXED ASSETS AND INVESTMENTS:Net Inm 5 13 16 11 21 28 -224 10 25 27 24 25 47 112

Short Tem Investments 0 0 647 330 428 105 170 299 117 106 88 78 80 81Accounts Receivabte (net) 107 49 98 239 434 627 848 748 661 58 520 481 468 46?Mortggesn 217 341 886 277 4966 5495 1497 1151 1290 1648 2523 4165 6756 10106Securities MHS 0 0 0 5 II 23 31 0 0 0 0 0 0 0Other Investments 80 233 6 0 0 0 0 0 0 0 0 0 0 0Fixed Assets 0 3 5 5 5 4 2 0 1 2 4 5 7 8

Tota FAand nvesment 40 626. 1642 3352 5844 6254 2548 2198 2069 2339 3135 4730 7311 10661Total NFA and Investments 0 404 626 1642 3352 5844 6254 2548 219 6 2069 2339 3135 4730 7311106

Average UFA and Investment 202 515 1134 2497 4598 6049 4401 2373 2133 2204 2737 393 6021 898ft A T I 0 : 2.5 2.5 1.4 0.4 0.5 0.5 -5.1 0.4 1.2 1.2 0.9 0.6 0.8 1.2

33zz=3333333333 33333 3333 3333 33-33= 333 3333

DEBT SERVICE COVERAGE:Net Cash from Operations 7 31 71 217 517 614 421 137 263 291 414 643 1005 1472Debt servicing Requirement 2 19 55 210 500 56 648 288 158 153 230 391 661 1021

Surptus Cash 5 12 16 7 17 18-227 -150 105 138 184 252 344450Rt A T I 0 : 3.5 1.6 1.3 1.0 1.0 1.0 0.6 0.5 1.7 1.9 1.8 1.6 1.5 1.4

21-Apr-88

116 -

Page 4

PHILIPPINES


NHMFC BAIANCE SHEET

(p million in Current Prices)

TAtIL 4

BALANCE SHEET H IS T O P I C AL P R O J E C T E D.... ..... ......................................................... .........................................

A S S E T S 1960 1981 1982 1963 1984 1965 1986 196 1988 1909 1990 1991 1992 1993............. ...... .... ...... .... ...... .... .... . ..... ...... .... ...... .... ...... .... ......... ............ ............ ..

CURRENT ASSETS:Cosh 1 14 358 549 60 39 60 102 148 162 164 189 139 143

Short Term Investmsnts 0 0 647 330 428 105 170 299 117 106 88 78 80 81Accounts Reeivable (net) 107 49 96 239 434 627 848 748 661 583 520 481 468 467Inventories 0 0 0 1 2 2 1 1 2 4 6 9 11 16

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

TOTAL CURENT ASSETS 108 63 1103 1119 1424 m 1824 1150 929 855 778 757 6Y8 707

INVSTMENTS:Mortae Contracts 217 341 866 2773 4966 S495 1497 11S1 1290 1648 2523 4165 6756 10106Securities M S 0 0 0 S 11 23 31 0 0 0 0 0 0 0Other Iwestmints 80 233 6 0 0 0 0 0 0 0 0 0 0 0

i .. ........ ... ........ ... ........ ..... .... ...... .... ...... .... ...... .... ...... .... ...... .... ...... ....

TOTAL INESTMNS 297 574 892 2M8 4977 SS18 1S28 1151 1290 164 2523 416S 6756 10106

PROPERTY AND E WIPHENT:Land, Iprovements, Equipm 0 S 7 7 9 9 8 8 10 14 19 2S 32 40- Prov'n for Depreciation 0 2 2 2 4 5 6 8 9 12 15 20 25 32

UIlTTEN NW VALUE P a E 0 3 5 5 5 4 2 0 1 2 4 S 7 8

OTHER ASSETS:Deferred Chargs 3 9 33 79 174 613 52 47 42 36 31 26 21 16Niscellaneous 11 33 6 43 43 45 11 12 14 16 17 17 17 17

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

TOTAL OTHER ASSETS 14 42 39 122 217 658 63 59 56 52 48 43 38 33... .... .... ....... .... ...... .... ...... ... .... ..... ...... ..... ....... .......... ..... .....

TOTAL ASSETS 419 682 2039 4024 663 6953 3417 2360 227S 2SS8 3353 4971 7499 10653

21-Apr-88

- 117-

TAB3LE 4 NATIONAL HOWNEMRTGAGE FINANCE CORPORAION - FINANCIAL PERFORMNCE

(P mitlion In Current Prices)

EALANCE SHEET HISTORICAL P ROJ E C TED

L I ABIL IT I ES 1960 1961 1982 1963 1964 1965 1966 1967 1988 1969 199 1991 1992 1993

CURENT LIABILITIES:AccowtetsPayabto 0 0 0 8 10 1830 202224 25 2830 33interest & Other Payabtes 28 40 96 160 1881 846 1437 S82 556 544 532 520 507 503

Totat Current LIabitities 28 40 96 188 1891 864 1467 602 5S0 566 557 546 537 536

LONG-TERN LIABILITIES:Notes Payabte 83 5637 19 02M5295 0 0 0 .0 0 0 0Bond. Payable 152 256 699 1622 1276 1496 764 1101 901 651 776 737 587 1337TrustHDNF 1 121 754 1852 3095 3944 0 0 0 0 0 0 0 0TrustMNNS 0 1712 2233 35 106 ~ 106 106 106 106106 106Loam 0 0 0 0 0 0 0 814 4486 1365 3026570268242

Totat Long Term Liability 236 450 170 3515 4406 577 1165 1215 1151 1443 2247 3869 6395 9665

OTHER LIABILITIES:Def.rr'd Credits 0 012 766450237 60 7361 51 45 30 29other 0 0 4 14 20 12 23 12 9 II 13 12 16 15

Total Other Lfabflftfes 0 0 16908462 260 926827264 574 4

Total LiabiLities 264 490 1814 379 6361 6698 269 1908 1812 2083 2866 4475 6977 10264

GOERMENT EQUITY:Paid-in Capital 150 175 195 195 195 195 500 500 500 500 500 500 500 500Retainad Earnings 5 17 30 36 47 60 25 -49 -37 -25 -15 -4 21 89

T.OTAL EWIITY 155 192 225 231 242 255 525 451 463 475 465 496 521 569

TOTAL LIABILITIES/EQUITY 4.19 682 2039 4024 6623 69M 3417 2360 2275 2558 3353 4971 7499 10853

21-Apr-U

- 118 ANNEX llBPage 6

TABLE S NATIONAL NONE MORTGAGE FINANCE CORPORATION FINANCIAL PERFORMANCETABLE 5~~~~.................... .............................................................................


BALANCE SHEET H I S T O R I C A L P R O J E C T E D

A S S E T S 1980 1981 1982 1983 1984 1985 1966 1987 1988 1989 1990 1991 1992 1993........... ............. .... ...... .... ...... .... .... . ..... ...... .... ...... .... ...... .... ......... ............ ............ .. ...

CURRENT ASSETS:Cash 0 2 18 14 8 1 24 4 7 6 5 4 2 1

Short Ter Inwstments 0 0 32 8 6 2 5 13 5 4 3 2 1 1

Accounts Receivabte (net) 26 7 5 6 7 9 25 32 29 23 16 10 6 4

Inventories 0 0 0 0 0 0 0 0 0 0 0 0 0 0,...... ............ ............ ..... .... ...... .... ...... .... ...... .... ...... .... ...... .... .... ....

TOTAL CURRENT ASSETS 26 9 54 28 22 11 53 49 41 33 23 15 9 7

INVESTMENTS:Nortgage Contracts 52 50 43 69 75 79 49 57 64 75 84 90 93

Securities MHS 0 0 0 0 0 0 1 0 0 0 0 0 0 0

Other imestsents 19 34 0 0 0 0 0 19 19 19 19 19 19 19,...... .... ...... .... ...... .... .... . ..... ...... .... ...... .... .... ... . ... ... ........ .......

TOTAL INVSTENTS 71 84 69 75 79 45 49 57 64 75 84 90 93

PROPERTY AND EQUIPNENT:Land, lprovements, Equipm 0 1 0 0 0 0 0 0 0 1 1 1 0 0

* Prov'n for Depreciatton 0 0 0 0 0 0 0 0 0 0 0 0 0 0

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

WRITTEN DOWN VALUE P a E 0 0 0 0 0 0 0 0 0 0 0 0 0 0

OTHER ASSETS:Deferrsd Charges 1 1 2 2 3 9 2 2 2 1 1 0 0

Niscel lanous 3 5 0 1 1 1 0 1 1 1 1 0 0 0.... ..... .... ...... .... ..... .... ...... .... ...... .... ...... .... ..... ........ ............ ............ ..

TOTAL OTHER ASSETS 3 6 2 3 3 9 2 2 2 2 1 1 1 0...... ........ ... ^...... ... .......... ...... .... .... ...... .... ...... .... ...... .... ...... .... ...... ....

TOTAL ASSETS 100 100 100 100 100 100 100 100 100 100 100 100 100 100

21-Apr-88

- 119 -

AhEI1IPage 7

TABLE 5 NATIONAL HONE MORTGAGE FINNCE CORPORATIN - FINANCIAL PERFORMANCE................................ ....................................................

(Struct.ural nsalyses in Percentages)

BALANCE SHEET HISTORICAL P R 0 J E C T E D.. ...................... .............................................................. .........................................

L I A 8 I L I Y I E S 1980 1981 1982 1983 1964 1985 1986 1967 1968 19 1990 1991 1992 199..................... .... ...... .... ...... .... ...... .... ...... .... ...... .... ...... .... ..... ............ ............ ............ ..

CURRENT LIABILITIES:AccountsPaYable 0 0 0 0 0 0 1 1 1 1 1 1 0 0Accrued Expenses 7 6 5 4 26 12 42 25 25 21 16 10 7 5

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

Total Currnt Lfablftfes 7 6 5 5 29 12 43 26 25 22 17 11 7 5

LONG-TERN LIABILITIES:Notes Payable 20 6 2 0 0 4 9 0 0 0 0 0 0 0Bonds Payable 36 38 44 40 19 22 22 47 40 33 23 15 6 12Tt HDMF 0 18 37 U 47 57 0 0 0 0 0 0 0 0Trust NHS 0 2 1 1 0 1 3 4 5 4 3 2 1 1Loans 0 0 0 0 0 0 0 0 6 19 41 61 76 76

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

Totat Lono Term Labfltty 56 66 83 87 67 83 34 51 51 56 67 76 85 89

OTHER LIABILITIES:Guarantee Deposlts 0 0 1 2 1 1 7 3 3 2 2 1 0 0MIsce(laneous 0 0 0 0 0 0 1 1 0 0 0 0 0 0

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

Total Other Liablltites 0 0 1 2 1 1 a 4 4 3 2 1 1 0.... .......... ..... .... ...... .... ...... .... .... . ..... .... ... .... . ..... .... ...... ....

Totat Liabititles 63 72 89 94 96 96 85 81 80 81 86 90 93 95

GOVEWRNENT EUJITY:Paid-ln Capital 36 26 10 5 3 3 15 21 22 20 15 10 7 5Retained EarnIngs 1 2 1 1 1 1 1 -2 -2 -1 0 0 0 1

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

TOTAL EQUITY 37 26 11 6 4 4 15 19 20 19 14 10 7 5

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

TOTAL LIABILITIES/EQUITY 100 100 100 100 100 100 100 100 100 100 100 100 100 100

21-Apr-88

120-ANNEX 11BPage 8

TABLES 4 ATIONAL NONE NORTGAGE FINANCE CORPORE ON - FINANCIAL PERFOURANCE................................................... ..................................

BALANCE SHEET RAT6OS (AmoLmts In Pesos illion at Current Prices)

1980 1981 1962 1963 1964 1905 1966 1987 1988 1969 1990 1991 1992 1993.... ..... .... ...... .... ...... .... ...... .... ...... .... ...... .... ...... ........ ... ........ ... .............

CURRENT RATIO:Current Assets 108 63 1103 1119 1424 m 1824 1150 929 8S5 m 757 698 707Current Liabilities 28 40 96 188 1891 864 1467 602 S80 568 S57 548 537 536

R A T I 0 : 3.9 1.6 11.5 6.0 0.8 0.9 1.2 1.9 1.6 1.5 1.4 i.4 1.3 1.3333333 a33 3333= 3* us33 e = _

QUICK (ASSET TEST) RATIO:Current Assets 108 63 1103 1119 1424 m 1824 1150 929 855 778 757 698 707Les Inventories 0 0 0 1 2 2 1 1 2 4 6 9 11 16

,......., ...... ........... ..... .... ...... .... ...... .. .. , ..... .... ..... .... ...... .... ...... ....

Liquid Assets 108 63 1103 1118 1422 771 1823 1149 927 851 772 748 68? 691Current Liabilities 28 40 96 188 1891 864 1467 602 580 568 557 548 537 536

R A T I 0 : 3.9 1.6 11.5 5.9 0.8 0.9 1.2 1.9 1.6 1.5 1.4 1.4 1.3 1.3_3 33 m 3 3 3 3 3 3

LONG-TERM DEBT TO CAPITALIZATION:Lon-term Debt 236 450 1702 3515 4406 57M 1165 1215 1151 1443 2247 3869 6395 9685Long-term Debt + Equity 391 642 1927 3746 4648 6027 1690 1666 1613 1917 2732 4366 6916 10274

R A T I 0 : 0.6 0.7 0.9 0.9 0.9 1.0 0.7 0.7 0.7 0.8 0.8 0.9 0.9 0.9

LONG-TERN DEBT TO EQUITY:Lon-term Debt 236 450 1702 3515 4406 57M 1165 1215 11S1 1443 2247 3869 6395 9685Equity 15S 192 225 231 242 25S S25 451 463 475 485 496 521 9

R A T I 0 : 1.5 2.3 7.6 15.2 18.2 22.6 2.2 2.7 2.5 3.0 4.6 7.8 12.3 16.4_ _ m _ = 3333 333333333333

DEBT TO EQUITY:Total NDbt 264 490 1814 3793 6381 6698 2892 1908 1812 2083 2868 4475 6977 10264Equity 155 192 225 231 24 2555 25 451 463 475 485 496 521 589

R A T I 0: 1.7 2.6 8.1 16.4 26.4 26.3 5.5 4.2 3.9 4.4 5.9 9.0 13.4 17.4

EQUITY:Equity 155 192 225 231 242 255 525 451 463 475 485 496 521 589Tofta Assets 419 682 2039 4024 6623 6953 3417 2360 2275 2558 3353 4971 7499 10853

* A T I 0: 0.4 0.3 0.1 0.1 0.0 0.0 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1_ 3 333 no3 = _ = 3 _ =3 333_ 333 =3 3 _

DEOT RATIO:Total Liabfitties 264 490 1814 3793 6381 6698 2892 1908 1812 2083 2868 4475 6977 10264Total Assets 419 682 2039 4024 6623 6953 3417 2360 2275 2558 3353 4971 7499 10853

R A T I 0 : 0.6 0.7 0.9 0.9 1.0 1.0 0.8 0.8 0.8 0.6 0.9 0.9 0.9 0.9

21-Apr-88

- 121 -

Page 9

PHILIPPINES


MMKF CH FLOW STkTMIENT

(P mliton in currant Prfes)

TAJ! 7 CAS FLOW STATENEOT P R O JiE C T E D................... ....................................... ............. ......................... ........

RECEIPTS 1967 1968 1989 1990 1991 1992 1993............... ......... ..... ... .... ..... .... ..... .... ........ ..... ..... .....

ncme from operatfs:NCR Cottection 181 311 336 460 692 1068 1566Otherlnccme 1 2 S 11 20 32 42

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

$PA total 182 313 343 471 713 1100 1610-operat1ng Costs 41 41 43 49 60 79 100-Income Tax 4 9 9 8 9 16 39

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

Net from operattoas 137 263 291 414 643 1005 1472

Mu Sourcing:Bonds -250 -200 -50 -75 -39 -150 750Notes -m 0 0 0 0 0 0Trusts 0 0 0 0 0 0 0Loon I 0 42 105 255 477 754 0Loon 2 8 101 254 671 1230 2088 2802Oovrunt Subsidy 0 0 0 0 0 0 0Govrnsuent Equity 0 0 0 0 0 0 0

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

TOTAL RECEIPTS -400 206 600 1265 2361 3697 5024

PAYNENTS...............

Debt Servicfng:Bonds 287 14S 104 9S 87 80 96Notes 0 0 0 0 0 0 0Trusts 0 0 0 0 0 0 0Loon I 0 2 9 25 S8 113 161Loon 2 1 12 39 110 246 468 764

Investments:Takeouts Nortgages *298 167 420 1017 1900 3004 3904Goernvmnt Scuritfie 0 -170 0 0 0 0 0

Current Lfab. Reductfonr 313 -2 -1 -10 -3 13 3

TOTAL PAYMTS 303 153 572 1237 22J8 3678 4928

CHE IN CASH AT BANK -702 52 28 29 72 19 95

21-Apr-88

- 122 -

ANNiEX llDPage 10

PHILIPPINES


NHMFC KEY ASSUMPTIONS

1968 1989 1990 1991 1992 Tr.AL

1. TAKEOUTS at the following levels: P an P un Pm Po n Pumn

(A) United Lending Program - ewbers 51 130 488 988 1758 3415(C) United Lending Program - Non-membere 1? 43 163 329 586 1138(C) Natonal Housing Authority- Ongoing Program 83 192 250 328 176 1029(C) National Housing Authority - few Program 16 55 116 25S 484 926

167 420 101? 1900 3004 65082. FUNDING from the following sources:

(A) GSIS/SSS/HDMF 101 254 671 1280 2088 4393(B) IBRD 42 105 255 477 754 1634CC) NHNFC Intermnlly generated funds 25 61 91 144 162 482

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

167 420 1017 1900 3004 6508

3. RETIREMENTS of Bonds at the following rates: 200 50 75 39 1S0 514

198 1989 1990 1991 1992 AVER

4. COLLECTION EFFICIENCIES as follows: X X X X 2 X

CA) nCR Folio I (Current portion) 90.0 95.0 95.0 95.0 95.0 95.0C8) NCR Folio 2 (ULP 1) 85.0 87.5 90.0 92.5 95.0(C) NCR Folio 3 (NHA) 85.0 87.5 90.0 92.5 95.0'D) NCR Folio 4 (ULP 2) 85.0 87.5 90.0 92.5 95.0

5. INCONE YIELDS and RATES as follows:

(A) Average Yield on Nortgages 13.0(B) On Short Term Investments 4.8(C) Comitment Fees 1.0(D) Insurance Commissions 0.2

6. EXPENDITURE RATES and TAXATION as follows:

(A) Interest on UNP Certificates (average) 11.0(8) Interest on B Certificetes (average) 9.0(C) Interest 'n GSSISSSS/IDAF (average) 9.4(D) Interest on tBiD Loan 9.0(E) Orgirntion Fees 2.0(F) Provision for Doubtful Debts 5.0(B) Income Tax Rate 35.0

7. OTHER ASSUNPTIONS:

(A) NHNFC will roll-over oeturing 8DPC ard BCs wmen due at Interest rates of 10 2 and 9 , respectively.(B) NHNFC will be able to collect on the overdue accounts of P 730 mn, at the rate of about P 100 mn p.e.CC) NHNFC wilt not receive any further infusion of Equity capital or Stbsidies from the Government.

21-Apr-88

- 123 - aMEg 1LPage 1

PHILIPPINES


NATIONAL HOUSING AUTlROITY

Backsround

1. The National Housing Authority (NHA) is a public corporationestablished in mid-1975 by amalgamating six public housing agencies. Underits charter, NHA was mandated to (a) provide and maintain low-cost housingfor the urban poor, (b) undertake housing and land development andresettlement, and (c) promote private enterprise participation in the housingsector. In practice, however, it is involved in diverse programs and servicesincluding high-cost completed units intended to cross-subsidize shelter forthe lowest-income groups; construction of high-cost units in joint venturewith private builders, rental housing operations; provision of small businessand workshop construction loans; and special construction projects forGovernment, in addition to its primary functions of slum upgrading, squatterresettlement, development oi serviced sites, and the production of commercialand industrial (CI) properties. The Authority provides mortgage financing forall the above, and services its own portfolio, thus functioning as a non-depository financial institution.

Organization. Nanagement and Staffing

2. The NHA is assigned to the Office of the President and operatesunder a Board the composition of which is presented in Annex 13. Although thenew Board is operational, Congressional approval must be obtained for itsconfirmation. The Authority's Chief Executive Officer, the General Manager,is appointed by the President, and confirmed by Congress.

3. The NHA's organizational structure reflects its diverse functionsand "end-product" focus. Eight operational groups report directly to theGeneral Manager (see Chart 40053), who is aided by an Assistant GeneralManager. Besides its headquarters in Manila, the Authority has small regionaloffices In Cebu, Davao, Cagayan de Oro, Bacalod and Iloilo. Almost 80% of theAuthority's 2,400 staff members are deployed on operational work, with 18% incentral administration and 5% in central technical units. NHA projectmanagers have high levels of responsibility and accountability for activitieson their sites, and are generally experienced and competent. Staff isgenerally competent and well motivated, partly a result of careful selectionand a good junior professional staff training program. Turnover is rodest inrelation to other public corporations. However, partly in response to ahostile external environment and partly as a result of management style, NHAevolved a tightly controlled, centralized style of management with restricteddelegation. Project management often reports directly to the General Manager.Several areas, particularly financial management and estates management, needstrengthening.

- 124 - ANEX 12Page 2

,Xeratlomal Performance

4, As summarised In Table XI-I, shelter output by NUA during 1976-86totaled about 148,000 units. Together with the 41,000 units Inherited fromits predecessors, the Authority bas handled 189,000 accounts. From NUA'sbeginnings in 1975, annual output rose to a peak of about 26,000 units In1981, declining thereafter as economic conditlons worsened. Productlon isheavily concentrated In Manila, though regional programs began to expand inthe early 1980s. Of NHA's total production, resettlement dominated with overhalf of all units, followed by slum upgrading (29%), serviced sites (14%) anda few completed, higher-cost units (5%). The NA manages 3,500 rental unitsin 12 estates.

Table XII-INHA SHELTER PRODUCTXON 1976-1986

1976 1977 1978 1979 1900 1901 1982 193 1981 198 1906 TOTAL

Serviced Sits 0 0 0 0 121 5,061 1,706 3,60? 3,851 5,57? 532 20,451Ih ul Prod 0X O0 OX OX 1X 19X 9s 162 212 282 102 1:X

RuettUemnt 2,665 1,357 4.185 6,781 1,450 11,961 7,721 11,910 8,888 9,651 3,963 76,562X &nml Prod 982 832 612 472 492 45 412 531 Sit 482 762 522

SlipwUpgradIng 60 500 1,867 6,868 3,523 7,801 8,354 5,694 3,213 4,414 712 43,006IfinnulProd 2X 92 272 482 382 29X la 252 202 222 14X 29

C*pleted Units 0 421 831 638 1,059 1,810 949 1,472 379 371 0 7,330I nnui Prod 0I 8X 12S i2 122 72 S2 62 22 22 OX 5X

TOTIL PlOD 2,725 5,278 6,883 14,287 9,153 26,633 18,730 22,713 16,334 20,013 5,207 147,9562 RM1 6rth MR 912 302 108 -362 1912 -302 212 -282 232 -741IHRITtO INU W IlOIY.. .............. . . . . . . . . . . . .. . . . ... ..41,011D

mmt. .U.IIS.. .,............. ,, 8..... .188956

S. Capital investments made by NRA during 1975-84 totaled some P3.1billion, about a third of which went to slum upgrading, 42% to resettlementand serviced sites, 14% to completed units, 6% to joint ventures, 5% for CZproperties and 0.04 % for small business loans, as shown In Table XII-II.

6. Though impressive in absolute terms, NUA's output remains marginalin relation to needs. The Authority's contribution to new housing stock forlower-income groups was negligible over this period, comprising at best a fewthousand units since nearly all the now serviced sites it provided wereutilized for resettlement. Of the 257,000 dwellings identified in 1978 asneeding upgrading in Metro Manila alone, NRA has service,. only about 43,000or 17%. At this pace, four decades would be required to complete the currentbacklog. NRA recognizes that the pace of upgrading will have to beaccelerated and will begin to address this problem by carrying out a resurveyof irnformal settlements in major urban areas, starting in Nanila under theproposed project to determine the current backlog. More rapid approaches toupgrading will also be explored, although wide popularity of titleacquisition as part of the upgrading process will obstruct the use ofapproaches not involving land acquisition.

-125 - APage 3

PHILIPPINES

BOUSING SECTOR PROJECT

Table XUI - xiHRA'S CAPITAL INVSTMEMNTS

(in iZLtion n)

Residential Units-UervlcedSites & Foretqn-Assigted SAainst

Slum Up- Resettle- Economic Joint Commerclal/ Livelihood Project Totalgrading moot Rousing Venture Industrial (SOL, U ) Total Investment Level Investment

975rount 16.827 17.189 5.707 0 0 0 58.723 15.827 61.012 61.01 29*27 9.72 - - - - -

976*Twunt 77.141 16.829 2.535 0 0 0 06.505 76.375 74.14X 79.93 17.44 2.63 - - - -- -

'771ou.,nt 27.305 40.766 24.666 1) 0 0.010 92.767 27.180 29.30

* 29.43 43.94 26.59 - - 0.03 - - -

978XIount 24.870 21.440 72.236 2.041 0 0.068 120.655 19.049 15.792 20.61 17.77 59.89 1.69 - 0.06 - - -

979X-munt 59.524 17.444 39.nn6 3.200 0 0.027 119.241 40.689 34.112 49.9 14.62 32.70 2.76 - 0.02 - - -

980iowunt 24l.896 29.818 2S.446 42.882 0 0.090 340.132 185.noo 54.392 71.12 8.77 7.48 12.61 - 0.03 - - -

P8tount 185.34 288.372 43.099 46.228 0 t.ll4 564.t47 361.000 64.14

2 32.82 51.12 7.64 8.19 - 0.23 - - -

982Aount 133.613 290.132 75.440 57.871 0 3.565 S60.621 276.W00 49.23S 23.85 51.79 13.47 10.33 - 0.64 - - -

983iunt 151.713 407.890 111.047 33.721 16.179 5.354 725.904 328.000 45.19

S 20.9o 56.19 15.30 4.65 2.23 0.74 - - -

984dEount 93.275 169.541 16.835 0 133.490 1.368 414.509 238.884 57.632 22.50 40.90 4.06 - 12.20 0.33 - - -

Total 1.030.298 1.299.421 416.017 186.033 149.669 11.816 3.092.400/a

Total No. UnitsProdueed /c 37.880 77.207 7.559 /b 122.736

Average cost 27.200 16.810 79.650 /b 23.900 /a

-Shelter portion only P 2.931 m expenditure which resulted in 122.736 units. Average a P 21.900.b Total for both Economic Rousing and Joint Venture.

F Prom 1975-1984.

- 126 -ANNF 12

Page 4

7. The sale price of units built by NHA during 1975-85 averaged aboutP11,800, affordable to roughly 85% of the urban population. Affordabilitywas achieved, however, by subsidizing half of the real cost of production.Most infrastructure costs were not directly charged to buyers, but insteadwere to be covered by budgetary transfers from other agencies, chieflyManila's Metropolitan Water and Sewerage System (MWSS) and the Ministry ofPublic Works and Housing (MPWH). These transfers largely have not occurred.NHA's average unit costs and sale prices are shown in Table XII-I11.

Table XII-IIIUNIT COSTS AND SALE PRICES

Type Unit Est Production No. of Average Sale Trice as %Cost Units Price of Cost

Uparading: 27.200 avg 37.880 1.885 40%Tondo NA 12,676 3,300ZIP NA 13,757 16,200Rural/Regional NA 11,447 12,900

S/S & Resettlement 16.810 av 77297 6.384Metro Manila SS NA 11,745 17,300Regional Cities SS NA 2,604 10,000Resettlement NA 62,948 4,200

Completed Units 79.650 7.559 71.700 90i

Avera&e 23.900 122,73i 11.800 49%

8. The NHA's involvement in projects has also been leungthy, suppressingvolume delivery. This is primarily due to protracted land acquisition, slowsales, and to lengthy delays in turning over completed infrastructure to theresponsible municipalities and ministries for maintenance. For the most part,NUA has been unable to extract itself from Infrastructure maintenance andoperating responsibilities which have become burdensome given the size andphysical dispersion of its portfolio. These duties divert an increasingproportion of the Authority's attention from its priority tasks.


9. NHA's financial performance has significantly lagged its physicalperformance, suffering from a combination of ineffective or inappropriatepolicies, some of which have been mandated by Government, and weaknesses init's own financial management. Until the early 1980's, NUA functioned in mostrespects like a Government department, relying on budgetary infusions tosupplement external borrowings and devoting only marginal efforts toimproving internal cash generation. Enforcement of pricing and otherfinancial policies was weak. The Authority's unwritten financial objectivewas to realize a marginal profit in nominal terms. The financial statementsshow that this has been achieved over the last seven years, with a return onequity averaging 0.25%. However, inflation over this period averaged 20%annually, leaving NHA with only about 29% of its original 1979 capital inreal terms. The Authority's consequent Lzadual decapitalization is a fate

- 127 - MU_1Page 5

shared by many public corporations in the Philippines. Direct governmentbudgetary infusions have been necessary to fund operations. During 1976-1985, Government support to NHA totals some P2.7 billion while peso loanssourced mainly from the World Bank and KFW contributed an additional P1.9billion.

10. Asset Structure. The NHA's financial statements (including incomestatements and balance sheets) for 1980-1993 are shown in Annex 14. As ofDecember 31, 1985, NHA's balance sheet as summarized in Table XII-IV showedabout 65% of total assets (P2.7 billion or US$132 million) in works inprogress (project development) and properties held for sale or transfer toother government agencies. Mortgt.ge contract receivables, completed rentalproperties and loans to municipalities -- representing the main thrust ofNHA's operations -- comprised only P691 (US$34) million or a modest 17% oftotal assets. The amount in productive investments is strikingly lowfolloving a decade of operations. The remainder was distributed among currentassets (13%), miscellaneous investments (4%) and fixed assets (1%). However,inventory figures for 1985 showed 75% of all units completed had been sold.Thus a substantially larger proportion of NHA's assets should have appearedin contract receivables. This discrepancy, which was noted by the Commissionon Audit (COA) in its 1985 audit of NHA's accounts, was partially addressedin 1986, when P778 million of works in progress was shifted into completedrental properties, mortgage contract receivables and works held for transfer,reducing works in progress to P799 million. Further adjustments are proposedin 1987. The problem of the overstated works in progress account arose inpart, because of the lack of iUttegration among the Authority's variousoperational and financlal activities (see para. 15).

Table XlI-IVNA CONPARATIVE BALANCE SHEETS

December 31, 1985 and December 31, 1986

AS L W TAITX

Mo-t 2 AWmt 2 Awm= 2 AmW2t I

ztmnt A ........................ 3 0 132 656 142 Ormut LAnblIitles ............ 250 6X 407 91

Nn-podtuwstJs ............. 2,68 652 2,635 572 Lwri T1- TAblIities Total .... 1,279 312 1,465 322

- In Prop.11 ......... 1,52 3sx (WS and VW loan., 'am

- Pn e ties hold for S&.alsmfr... 1,U1 272 1,835 402 fran Treasucy for debt w)

Pa&wtive 1nwsmts (ruial mita, Otb0 Id bil ities (deferd

Liatl'mt antr rsvbl, 1X and Prfit)..................... 89 22 195 4X

MbL bimirAw bm)............. 691 172 969 212 Total Ilities: 1,618 S9X 2,067 452

Otber aaaets/Iimes .............. 195 52 331 72 Ity .2,529 61X 2,576 552

WAsse t ..........................AS 43 12 52 12

1UAL 4,147 1002 4,643 1002 L 4,147 1OO2 4,643 1002

11. NHA's borrowings were relatively low for a public corporation, withgovernment equity and retained earnings representing 55% of total fundsemployed, reflecting a gradual de^line from 81% in 1980. This level of debtwas comparatively modest for a housing finance institution, with a total debtto equity ratio in 1986 of only 0.80. During this period, however, NHA,s

- 128 - ANNEX 12Page 6

long-term liabilities -- primarily World Bank loans on-lent by Government --almost doubled from only P95 (US$4.7) million in 1980 to P1,465 (US$72)million at end-1986. As a proportion of total liabilities, long-term debtrose from 6% in 1980 to 32% in 1986. At the same time, NHA was able toobtain new infusions of capital which, with its expanded borrowings, causedtotal assets to grow by about 25% per annum in nominal terms from P1.5billion (US$74 million) in 1980 to P4.6 billion (US$228 million) in 1986. Inreal terms, however, as noted above, NRA has steadily decapitalized.

12. NHA's liquidity has declined from an initially high level as worksin progress claimed an increasing proportion of assets. Current assetsdeclined from 24% of total assets in 1980 to 14% in 1986. At the same time,the current ratio has steadily declined, from nearly 6 in the late 1970's to1.6 in 1986, but generally remained within a satisfactory range.

13. Cost Recovery. Cost recovery has been the weakest aspect of NHA'sperformance. Though internal cash generation was sufficient to cover NHA'sdebt service obligations during 1980-84, this ratio dropped precipitously toabout 30% in 1985 when principal repayments on World Bank borrowings camedue, and debt service obligations increased five-fold from P 27 million toP142 million. There was no improvement in 1986 as a result of the electionsand subsequent change of Government.

14. A combination of essentially three factors were responsible forNHA's poor cost recovery performance: ineffective pricing, poor salesperformance, and low collection rates.

(a) Pricing: Prior to 1985, NH;'s pricing policy was based on three keyprinciples: (1) significant cross subsidies involving losses incurredon below-market pricing of residential units for the low-incomepopulation to be offset from anticipated profits generated from thesale of commercial and industrial (CI) properties at market prices, (2)repayment by the relevant municipalities and ministries ofinfrastructure costs incurred by NRA, and (3) non-recovery of overheadsand interest during construction. The Authority was also not allowed byCOA to set aside provisions for loan losses. However, with highinflation and a deteriorating economy, demand for CI units fell,forcing prices down and severely limiting the profits intended forcross subsidies. This, plus the inability to recover infrastructurecosts from other agencies, forced NRA to revise it pricing policies andlending terms in mid-1985.

First, cross subsidies from commercial/industrial properties wereeliminated and the prices of all residential units were set to reflectthe real cost of development and construction. A wide array ofindividually small but cumulatively significant costs previouslyomitted from cost recovery were identified for inclusion in futureprices. Administration costs were to be recovered, along with interiminterest during construction. A markup designed to preserve NHA'scapital in real terms was added. The objective was to charge at least abreak-even price for all units. Thus, cross-subsidies were dropped.Differential pricing continues, with the more attractively locatedresidential units and all CI properties sold at market prices. Second,


land acquisition is to be completed prior to start-up of civil works,allowing accurate land pricing and prompt sale upon completion.

Land costs had previously been set too low, since they were often notsettled until long after sales were finalized due to protracted courtprocedures for expropriation. The change in land pricing means thatprices closer to market will have to be paid to expedite landacquisition. It may also slow the pace of construction while a "landbank" is acquired. Third, the cost of all infrastructure not explicitlycovered under a contract with another agency is to be included in thesale price, thus eliminating the need for interagency transfers andspeeding the pace of development by freeing NBA from lengthynegotiations with these agencies. This policy parallels that of privatedevelopers, but could increase lot costs by as much as 50%. Fourth, NHAcredit policies were changed. Dovnpayments were introduced of 10% forserviced sites, and S% for upgraded units, and CI units were to be soldfor cash rather than credit. Most fundamentally, NHA acknowledged thatin future, the Institutions purchasing the mortgage will determinecredit terms.

The net effect of the changes in pricing policy was a sizable increasein unit sale prices. The resulting prices however, are stillaffordable to about 85% of the urban population. To check thisimportant assumption, a market test was conducted in January, 1985 in a770 lot site included in the Bank-assisted Pasig Karangalan VillageProject (Ln. 1821-PH), which resulted in over 20,000 applicants of whom17,000 were financially qualified. Effective demand was therefore over20:1. The NBA speculates that the price could have been doubled andstill would have met with strong demand, a fact which would indicateample latitude for private sector participation in lower marketsegments.

Unfortunately, the effect of the new policies will take time to be feltin terms of increased cash generation. Currently a major proportion ofNHA's assets is tied up in unsold properties (many are occupied butunsigned) governed by the old pricing policy. Two or three years willbe required before new developments translate into sales. Moreover,several of the sites recently completed have been exempted from the newpolicy. Such political intrusions into NHA's financial decision-makinghave recurred periodically. Thus the Authority's will to rigorouslyimplement improved policies remains the crucial and final test ofwhether it can become a financially viable entity.

(b) Sales Performance: Poor sales have also affected NBA's cash inflows.Much of this problem has been in the regional cities and in CIproperties, only 37% of which have been sold. CI sales in regionalcities were particularly depressed with only 4% sold two years aftercompletion. NHA plans a renewed effort during 1988 to market existingCI units. Meanwhile development of new CI properties, particularly inregional cities, has been deferred. The Authority is aware of theproblem and is conducting an analysis of its causes, which is expectedto be completed by mid-1988. Table XII-V summarizes NHA's inventoryposition as of Narch 1987.

- 130 - hANEX- 12Page 8

Table XII-VNRA INVENTORY. MARCH 31. 1987

Number of Units

Sales/Alloc Collections

Allo- Not Under Coll NoCompleted cated Alloc. or Fully Pd Collection

Residential ProgertiesWB assisted 55,422 41,258 14,164 34,682 20,740

% of Completed: 100% 74% 26% 63% 37%NMA in-house 138,223 117,461 20,762 104,755 33,468

% of Completed: 100% 85% 15% 76% 24%

Total 193,645 158,719 34,926 139,437 54,208% of Completed 3/87: 100% 82% 18% 72% 28%% of Completed 1/86: 75% 25% 63% 37%

Commercial/IndustrialWB assisted (12 m) 1.047 0.410 0.637 0.236 0.811

% of Completed: 100% 39% 61% 22% 78%NRA in-house (K2 m) 0.668 0.223 0.445 0.169 0.499

% of Completed: 100% 33% 67% 25% 75%

Total (M2 m) 1.715 0.633 1.082 0.405 1.310% of Completed 3/87: 100% 37% 63% 24% 76%- of Completed 1/86: 38% 62% 20% 80%

(c) Cgollections Performance: Poor collections are in part due todifficulties in initiating regular payment habits among squatterpopulations who have no previous payment history and who are accustomedto free occupancy, in part to the mixed nature of NRA's portfolio,which includes resettlement functions, and in part to NHA's politicalsensitivity which erodes its will to enforce sanctions against nonpayment. In addition, until 1983 when the financial and economic crisiscurtailed the availability of government investment funds, NRA was ableto rely on government budgetary inflows and peso loans sourcedexternally to continue its mainstream construction activities and hadlittle real need to enforce collections. Since that time, NHA hasattempted to increase its collection effort, but with mixed results.Collections in World Bank-assisted sites were reported at 85% ofcurrent amounts due in 1985, a significant improvement over the 1984level of 67%. Average receivables dropped to 4.2 from 6.8 months due toa major loan restructuring effort. Improvement was achieved throughtightened collection administration, since NRA rarely enforcessanctions on residential properties and had repossessed only about 60units as of end-1985 and resold only 3. The collections rate on theoverall portfolio was only 71%, with arrears averaging 6.4 months.

- 131 - Page 9

Loans for small businesses, home materials, municipalities andresettlement had the highest arrearage levels. Resettlement accounts,which represent half of all units built by NRA and 27% of totalreceivables, were a particular problem, with a repayment rate of only46% in 1985 and average arrears of about 12 months. Resettlementmortgages have proven incollectible since no real sanctions can beenforced in the event of default. In 1986 changes were introduced torecognize the problems inherent in resettlement. Collection on smallbusiness loans, representing only about 6% of NRA's collectionportfolio, totaled only 38% of current amounts due in 1986 and 4%including arrears, with average arrearages of over 100 months. Homematerial loans, representing another 6% of receivables, returned only36% and arrearages averaged 24 months. Both the small business andhome materials loans are uncollateralized. Net collections on loans toregional cities, another problem portfolio, were only 67%. Despite itsneed for revenue, NRA failed to repossess units in default or, formunicipal loans, to deduct payments at source from Treasury. In 1986,trends and performance reportedly improved with overall collections atreported at 77% vs. 71% end-1985, due to reduction in amounts due fromresettlement areas. Total payments including advance payments droppedbelow the 1975 level. Table XII-VI summarizes NRA's collectionperformance from 1982-86.

Table XII-VINRA COLLECTION PERFORXANCE. 1982-1986

Amount (Pm) Net Collections Average==-------------- aas of Amount No. of MonthsTotal % Due That Year Receivables

Year Amount Incr (Net of Arrears at year-endCollected (Decr) & Advances)

WB Assisted: 1982 NA NA NA NA1983 NL NA NA NA1984 36.7 NA 67% 6.81985 83.9 129% 85% 4.21986 80.1 -5% 77% 7.1

NRA Overall: 1982 47.8 47% NA NA1983 67.1 40% NA NA1984 101.0 51% 74% 9.01985 158.1 57% 71% 6.41986 154.6 -2% 77% 7.9

The combined (cumulative) impact of the previous pricing policies, weaksales performance and low collections on portfolio segments erodedoverall cost recovery to about 36% of NHA's expenditures on residentialsite development, and 18% of CI properties as shown in Figure XII-VII.The Authority's inability to service its debts is the direct result ofthis combination of factors.

- 132 - ANNEX 12Page 10

Pigure XII-VIICONPOUNDED COST REcovERY

200

180

160

! *N L N -w-^----------------- ---------- 1

80 -_ RESD84T-EXPECTED_____ 7S%

140

20 orcOSm PRCONG SAS COUECTIONS

15. Accounting System/Audits: UAI's manually operated accountingsystem has proven inadequate to keep pace with the inc.:easing growth anddiversity of its operations and does not provide information in a manner toenable "profit center" analysis. In 1984 and 1985, COA qualifiLed NR'sfinancial statements for inconsLstencies between its accounting and otherrecords. While NRA has partially computerized its operations, it still lacksan internally-linked and integrated information system. Reports generated bydifferent departments frequently present significantly different figures.The Authority has recently emrloyed consultants for the design, procuromentand installation of a fully computerized accounting and collection system.Phase I of this task will be completed by mid-1988 financed under Loan 1821-PH. Implementation will require several more years.

16. Administrativs Costs. NRA's administration costs as reflected in itsincome statements have been 2% to 2.5% of total assets managed over the lastseven years. As a percent of operating assets (works in progress and loanassets) administration costs have steadily declined as UHA's liquidity wastranslated into operations from 4.8% in 1979 to an average 2.6% over the lastthree years. However, these administration costs are managed by NRA and asizable proportion of administrative costs are not reflected in the incomestatement, but are instead capitalized under works In progress for eventualinclusion in the unit sale price of units. Since administrative overheadswere not actually charged into final sale prices under Urban I and II, it isprobable that major sums are being carried under works in construction whichare now uncollectible and should be wrLtten off. A study should be undertakenof NRA's administrative overheads to determine the appropriate markup tocover these costs.

- 133 - ANNEX 12Page 11

17. In summary, NHA's financial performance has been the weakest aspectof its operations, and virtually threatens the Authority's survival as anindependent corporation. The Authority's initially quite liquid position hasbeen gradually translated into works in progress, but due to protractedconstruction periods, inattention to marketing, weak accounting proceduresand time lags In information flows, and low collections levels due to non-enforcement of sanctions, these works have not yet been translated intosales, mortgage assets and income. It's mixed mandate including government'sresettlement functions is the cause of some of these problems. As a result,NaU is unable to service its mounting debt, and increasingly relies ongovernment budgetary infusions and asset sales to meet its obligations. TheAuthority's decapitalization is essentially due to its policy of "marginal,nominal profit" which has made it dependent upon continued infusions ofgovernment equity which cannot be relied upon in future. Financially, it isin no position to sustain further borrowings. In an attempt to address theseproblems and thus to enable the Authority to carry out its important role,INRiA has developed a Statement of Policies and an Action Plan forInstitutional Strengthening outlined in Annex 13. Other actions being takenby NHA are discussed in the text of t.his report.

- 135 - ANNEK 13Page 1

PHILIPPINES


NHA POLICY STATEMKTMay, 1988

This Annex comprises (a) NRA's Board structure, (b) NHA's May 19, 1988Letter of Clarification on aspects of its Policy Statement, (c) NRA's PolicyStatement approved by the Board on 19 February, 1988, and (d) the Authority'sInstitutional Action Plan.

BOARD COMPOSITION

The National Housing Authority was created under Presidential Decree757 on July 31, 1975 as modified under EO 90 of December 17, 1986. TheCorporation is governed by a Board of Directors which approves all majoractivities and policies of NHA in accordance with the provisions establishedby the GOP under PD757. The Board is presently composed of the memberslisted below with a "**". Proposals have been approved by RUDCC forrevisions to the Board membership; new members are also listed below andpresently act in an advisory capacity. Congressional ratification isrequired before the new Board is formally appointed.

** #1... BUDCC Chairman (Chairman of the Board)#2.. .NUFC Representative (President of NHUPC)

** #3...NHA General Manager** ... NEDA (Undersecretary)i* #5... DOF (Undersecretary)

#6... DBN (Undersecretary)** #7...DPVH (Secretary)

#8... DOLG (Undersecretary)

136 ANNEX 13Page 2, OFFICE OF THE PRESIDENT

NATIONAL HOUSING AUTHORITY

may 19, 1988

International Bank forReconstruction and Development1818 H Street N.V.Washington D.C. 20433United States of Amerlca

Gentlemen,

This letter is to clarLfy aspects of the NUH Policy Statementapproved by the NHA Board of Directors on February 19, 1988 which wasdiscussed ln Washington, D.C. in the course of Negotiations on theWorld Bank assisted HousLig Sector Project.

Rs.Sjection 11-1 on Policy FormulatlonThe "housing polLcLes" referred to in this section are in

relatLon to shelter productLon in accordance with NBA's new mandateunder Executive Order 90, and do not cover financlal or otherpolicLes;

Re: Sectlon II-1 and III-2 on Income and Geograhic DistributionAttachments 1 and 2 to this letter present NHA's present targets

with regard to the income and geographic dlstribution of unitsdeveloped by this Authority. We anticipate these targets will berevised annually.

Re: Section 11-4 on Assistance to Develogers/OthersThe NHA is committed to limiting its role to assisting other

entities obtain development financing for low income housing project,and will not engage ln direct lending to such entities. This shouldnot, however, be read to preclude joint ventures in which NRA eltherowns the land or develops the infrastructure.

Re: Sectlon III on ResettlementIt is NRA's intention to contrlbute significantly to development

of new houslng stock, as reflected in our five year investment plan lnwhich over 70% of total output represents additions to stock and lessthan 30% resettlement.

Re: Section VI-4 on Aver^ge ReceivablesThe Authority's goal is to reduce average receivables (now at

about 8 months) to 3 months within a period of 3 years.

Re: Section VI-$ on Provisions for Doubtful AccountsThe NHA shall make approprlate provisions for doubtful accounts

including mortgages and conditional contracts of sale. The level ofsuch provisions will be established through the study/technical

- 137 - ANNEX 13

Page 3

assistance provided under the proposed loan for assisting NRAstrengthen its internal accountlig and audit functions. Thlscommitment is preiised upon COA's acceptance of the principle of NHA'sestablishing provisionis for loans backed by real property collateral.The NUA accepts the principle and will exert all efforts to convinceCOA of the rationale behind these provisions.

Re: Section VI-9 on Financial Ratios(a) Current ratio is defined as current assets/current liabilities

and will be set at 2.0; and(b) debt to equity ratio of not more than 15:1;

Yours sincerely,

thorizet Xepresentalv

Mr. Teodoro Katigbak

Chairman of the Board

- 138 - AM 13

Page 4

ATTAC)UEUT I.

NHA INCOME DISTRIBUTION 2ARGETS

PEILIPPIN NIDI TERM DIELOPRT D&a

Percentile sale Price Percentage of Percentage ofAffordable of Unit No. of Units Investment

to: (1987).- - - - - -- - -- - - -- - -- - - -- - -- - - -- - - _- -

O - 15th NA 0% --- 0%15th - 30th up to 45,000 42% @35,000 32%30th - 40th 45 to 55,000 29% @5O,OOO 31%40th - 50th 55 to 66,000 29% @60,000 37%over 50th NA 0% --- 0%

- 139 - ANNEX 13

Page 5

ATTACHMENT 2

NiL GEOGRAPHIC DISTRIBUTION TARGETSFOR THE

PHILIPPINE NEDIUM TERM DEVELOPMENT PLAN

Region % Total Percentage of Percentage ofPop. No. of Units Investment

1 Ilocos 7.1% 4.2% 3.8%2 Cagayan 4.6% 1.7% 1.6%3 C. Luzon 10.3% 9.3% 10.8%4 S. Tagalog 13.1% 11.9% 10.6%5 Bicol 7.1% 3.9% 1.8%6-8 Visayas 22.5% 15.2% 10.4%9-12 Mindanao 22.8% 14.8% 11.5%13 NCR 12.8% 38.9% 48.5%

- 140 - ANNU 13Page 6

NUA POLICY STATEMENT

I. NRA MANDATE

The National Housing Authority, a public corporation wholly owned by theGovernment of the Republic of the Philippines, is the government agencytasked to evolve and implement the national program In accordance with themedium term Philippine Development Plan (1987-1992) to meet the housing needsof marginal and low income families principally in urban areas;

The NHA shall be the lead agency for the ihelter component of the urban landreform program of Government, with authority to proclaim Areas for PriorityDevelopment (APDs) or Urban Land Reform Zones (ULRZ);

The NHA is likewise responsible for development of "economic" housing forlow income earners whose housing need is not served by the private sector;

II. GENERAL POLICIES (AND ACTIVITIES)

1. Policy for Low Income. NUA shall formulate housing policies andprograms for the low and marginal income group; (see Letter ofclarification re applicability to production activities);

2. Sole Producer?Developer Role.The NHA shall be the sole public agencyengaged in direct shelter production and shall function as a realestate developer to acquire land, develop the same, and sellprincipally to marginal and low income families;

3. Private Sector Joint Ventures. NHA shall encourage and promote jointventures with the formal and informal private sector, particularlywith the landowners of identified properties for development, andadopt measures which shall attract their participation in sites andservices and slum improvement programs;

4. NRA shall facilitate and assist the local governments, NGOs, privatedevelopers, and the communities in initiating and implementing lowincome housing projects through the provision of design, managementand technical services, and if necessary, extend assistance to secureshort term development finance (see Letter of Clarification forstatement that NHA will not engage in direct lending to theseentities);

5. Sales. Lots shall be sold for cash or through credit under mortgagesoriginated by NHA. These and existing mortgages shall be sold toappropriate financial entities.

6. Decentralization. The NHA shall, in the implementation of its nationalhousing program for marginal and low income families, decentralize itsoperations to expand the coverage of the program to regional centers.(See Section III-2 for geographic distribution targets);

- 141 - ANNE 13Page 7

7. Annual Corporate Plan. The NHA shall prepare a Corporate Planannually to assess the implementation of corporate policies andobjectives, and prescribe a program of production with thecorresponding requirements in terms of funds and cash, including suchamounts to be requested from the national government as trust funds orsubsidies. The plan shall review and update existing policystatements, outline a rolling 5 year program of capital investments,and include financial projections.

III. PROGRAMS AND PROJECT DEmLVPHMNT

1. In the implementation of the Medium Term Philippine Development Plan1987-1992, the NHA, by itself or in joint venture with the privatesector, shall undertake the following programs:

(a) Sites and Services Program. The NHA shall purchase raw land,develop and sell as residential subdivisions of which at least70% of the lots shall be priced so that they can be afforded byfamilies whose incomes fall below the 50th percentile;

Income Distribution. In principle, the NEA shall target an evendistribution of lots to serve families between the 15th and 50thpercentiles. House construction for families above the 50thpercentile will not be undertaken. (See Attachment 1 of NHA'sLetter of Clarification for income distribution targets for theNTDP.)

(b) Program for the Inmrovement of Slums and Other DepressedvWammitiesK. The NHA shall undertake by itself or assist thecommunity through self help in, the acquisition, development anddisposition of slum sites and other depressed communities whichare suitable for upgrading;

Alternative Arrangements. Lots shall be sold to the occupants, butNHA shall offer alternative arrangements to those occupants whocannot afford to purchase under installment terms;

APD Prioxit%. NRA shall concentrate on Areas for PriorityDevelopment, but the willingness of the occupants to participatefinancially in advance and to commit to a provisional price shallbe a prime determinant for site prioritization. Priority shall begiven to government-owned APDs where there is no fundingrequirement for land acquisition. (See V-6 for majority commitmentof community);

Technical Assistance. Under the Community Self-Help Program NUAwill provide technical assistance to the communities. Thisassistance will be funded through Government subsidy and will notbe directly recoverable from the beneficiaries;

(c) Relocation and Resettlement Proaram. The NUA shall undertake forthe government, the relocation and resettlement program asnecessary. In support of such program, the development ofresettlement sites shall be undertaken only when the agencies


implementing projects that call for the removal of squatters, orthe national government, release trust funds directly to NRA forimplementation. Future resettlement sltes shall be sought in moreviable locations closer to the urban core. NHA shall develop andturn over these completed projects to the concerned localgovernment or agency (see Letter of Clarification for commitmentto development of new stock and limit on extent of resettlement);

(d) Community Socioeconomic Development Program. The NRA shallevolve a program to improve the socioeconomic conditions of thecommunities in its projects particularly those in the lowest 15thpercentile of the income structure, and shall coordinate theimplementation of such programs with the concerned agencies of thegovernment. NHA will dispose its existing small business loansportfolio and will cease further lending once Governmentidentifies a lead agency for the lending program.

2. Geographic Distribution. NHA shall adopt a program which allocatesavailable resources between Metro Manila and the regional cities inproportion to actual demand. For this purpose, the NHA shall estimatethe actual demand in each region and allocate investments inproportion to such demand. Such estimates of actual demand shallperiodically be updated through the systematic collection of relevantnational housing data on the needs of marginal and low incomefamilies. (See Attachment 2 of Letter of Clarification for thegeographic distribution targets for the MTDP.);

3. Infrastructure Provision. Social and physical infrastructure normallyimplemented by other agencies shall be constructed by NHA only whentrust funds are released by government specifically for that purpose.Where funds are not forthcoming, but such infrastructure is essentialto enable disposition of lots, any cost incurred by NHA shall beconsidered as an. investment to be recovered directly from thebeneficiaries. NHA will turn over all completed infrastructure andfacilities including ownership of the land thereof to the concernedagencies for maintenance and operation;

4. Design Standards. Design standards shall be determined by theaffordable limits of the target beneficiaries. Flexibility in theprovision of services will be maintained according to land costs andbeneficiary income levels;

5. Procurement. Civil works contracts shall be awarded through publiccompetitive bidding and implemented in accordance with the provisionsof P.D. 1594 as amended;

IV. LAND ASSEMBLY

1. Title Before Construction. The NHA shall evolve and implement aprogram of land assembly which, among other things, shall ensure theacquisition of land before the scheduled implementation of projects;

(4.) The physical development (civil works) of any project site shall notbe started until the title to the land has been transferred or

- 143 - ANNEX-13Page 9

mortgaged to the NHA;

2. Expropriation. NHA shall acquire privately owned land through directpurchase by negotiating with its owner. Expropriation shall be pursuedonly when such negotiations have failed. For slum improvementprojects, such negotiations shall consider the limited marketpotential of the land because of the presence of squatter families;

3. Site Selection. Site selection for new development will be based onsize, location, accessibility, and price. An area of at least 10hectares with minimal requirement for off site works, near existingcommunity facilities, within easy reach of public transport, and theprice of which can be afforded by low and marginal income groupsshould be preferred; (See separate policy on site selection);

V. ESTATE MANAGEMENT. MARKETING AND SALES

1. Estate Management. Estate management operations shall be terminatedwith the disposal of the rented properties, the turnover ofresettlement sites, the transfer of completed physical and socialinfrastructure, and the disposal of the mortgage portfolio;

2. Recovery of Interim Estate Management Costs. Estate managementoperations shall be undertaken in the interim only within projectsthat have not been disposed or turned over to other agencies. Whenundertaken by the NHA, the full cost of estate management servicesshall be recovered directly from the beneficiaries;

3. Clredit gal. Credit sales shall be covered by documents which areacceptable to the NHNFC and other purchasing institutions;

4. RgMa1mMs. Downpayments shall be required for all lots sold on aninstallment basis;

5. Voluntary Savings. A voluntary savings program for lot purchase shallbe introduced under which beneficiaries who accumulate a stipulatedamount within a specified time period will be given priority for lotaward;

6. MaJoritX Acceptance for Upgrading. A specific commitment from themajority of beneficiaries of candidate slum upgrading sites, includingsigned acceptance of the pricing and payment schemes, shall be aprerequisite for project implementation;

MI. FINANCIAL POLICIES

1. Return on Equity. NHA shall become a financially viable corporationwith real capital growth achieved through the attainment of surplus.Within the next five years, NHA shall at the very minimum, sustain itsexisting capital in real terms. New equity infusions will be neededduring this period to provide growth capital for program expansion.Thereafter, government infusions will be reduced and eventuallyeliminated as NUA generates more growth capital itself and the needfor program expansion stabilizes. As a general rule, the Rate of

- 144 - ANNEX 13Page 10

Return on Equity targeted for each yeer shall be greater than themoving average of tbe anmwul rate of inflation computed for the lastten years less the lowest and highesF annual rates experienced.

2. Priclng. Pricing shall be market related and based upon a cost plusformula, such that aggregate sales prices of properties sold in anyfinancial year shall exceed the cost of development (includinginterest expense) by an amount sufficient to cover all:

- non capitalized operating expenses,- inflation,- provisions for income tax on profits,- and to generate a surplus.

Cross-Subsidies. For each project, full cost recovery is the minimumunder which the cheapest lot will be priced so that it is afforded bythe target beneficiaries and at least recovers all development costs(including design and supervision, project management, and interestexpenses) and permits capital preservation. The reliance on crosssubsidies from commercial industrial development shall be terminated.

(7.) Subsidies. NHA shall no longer incorporate subsidies into its programsnor undertake governmental functions unless they are to be financeddirectly by government budgetary allocations specifically enumeratedfor these purposes and released to NRA as trust funds.

3. Portfolio Sale: NHA's role as a mortgage and loan administrator shallbe phased out as other agencies assume this role. NHA shall sell ortransfer the existing interest bearing residential mortgage portfolioto the financial sector, and the small business loans to the TIC. Thenon interest bearing resettlement mortgage portfolio shall betransferred at no cost to the local governments or non governmentalorganizations. All outstanding houslng materials loans shall beIntegrated into the residential mortgages. Mortgage loan sales shallbe made at prices which reflect their potential for recovery, and anylosses associated with them shall be assumed by the nationalgovernment.

4. CollectionsgArrearslForeclosures. It shall be corporate policy toincrease the existing collection rate in order to reduce averagezeceivables to three months potential "at the end of the programperiod". NHA shall initiate an arrears management program which shallset annual targets for the reduction of arrearages. Foreclosure andtermination proceedings shall be initiated against all beneficiaries,particularly those of economic and commercial industrialmortgag6s/loan, whose accounts become delinquent (see Letter ofClarification for arrears policy of three months, to be achievedwithin 3 years);

5. Treatment of Existinm Loans to Local Governments. Ezisting loans tolocal governments shall be reviewed and those that are deemedcollectible shall remain in force until maturity. The uncollectibleloans shall be written off during the financial restructuring of NRA,and all losses assumsd by the national govt.

- 145 - A= 13Page 11

6. Termination of Direct Lending. No further direct "long term" lendingwill be undertaken by NHA, except at times vhen adverse financialmarket conditions make it impossible for NHA to sell unless credit isprovided. In general, mortgages will be originated once a loancommitment has been made by the NHMFC or any other financialinstitution to purchase the mortgages. The interest rates and terms ofthese mortgages shall be those acceptable to the purchasinginstitution.

7. (Moved up with #VI-2 above)

8. Accounting. NHA shall maintain its books .ccording to generallyaccepted commercial accounting principles, under a full accrual systemwith provisions made for doubtful accounts. The accounts will becompleted within two months following year-end;

9. Ka Ratios. The NHA will monitor financial performance according tothe following ratios, computed from entries in the commercial bookswhich exclude the trust accounts set up for subsidized projects:

(a) Current ratio of at least 2 to 1 to measure short termliquidity, and ability to pay short term debts (see Letterof Clarification for definition);

(b) Long term debt to equity ratio of not more than 15:1 tomeasure capital structure and degree of indebtedness;

(c) Debt ratio of not more than 0.9 to measure the proportion ofassets financed through borrowings and the extent of tradingon equity (leveraging);

(d) Number of times interest earned ratio to measure the extentthat income earned is sufficient to cover interestexpenditures. Initially this shall not be less than 1.0 buta more acceptable ratio of not less than 2.0 will betargetted over the longer term;

(e) Profitability ratios measuring net income after tax against:- total assets initially at least 0.5% but a return of atleast 6.0% shall be targetted over the longer term;

- equity initially at least 1.0% but a return of at least12.0% shall be targetted over the longer term;

(f) (Debt service ratio covered in the NHA Project Agreement ofat least 1.1 to measure the extent to which internal cashgeneration is sufficlent to cover debt servicing);

VII. APPROVAL. REVIEW AND AMENDMENT OF POLICIES

These policies will be subject to the approval of NRA Board of Directors andshall be reviewed annually during the regular corporate planning process. Anymajor amendments will be subject to Board approval.

* * *

Approved by the Board of Directors underResolution No. 1276 dated 14 September, 1987

Amended under Resolution No. 1390 dated19 February, 1988

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- 151 -

ANNEX 14APAGE 1

PHILIPPINES


NlEA INCOME STATEMENT

MATIMKL NWU8IN AUTNORITY - FINANCIAL PERFORNANCE................................ ..............................................

I(Ewft. In Pow Nillion at Current Prices)

INCW STATINT N I 8 I h S I C A L P R O J E C T E D

* a V I I U E 8 0 19s 1 192 1903 198 1964 1965 1966 97 1966 1989 1990 1991 1992 1993......... .... .... .... .... .... .... .... .... .... .... .... .... .... ....

siet of Nwrtgws 0 0 0 0 0 0 0 14 101 252 379 624 7S1 719-Pr.detfmn Comt 0 0 0 0 0 0 0 12 99 247 366 583 660 604

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

Gros ProfIt 0 0 0 0 0 1 2 5 12 41 91 115Nisctlltisus 47 61 71 J5 111 116 132 144 159 170 181 191 217 235

hnAL RYEVENI 47 61 71 85 111 116 132 145 161 175 193 232 308 349

EXPEND ITURIS....................... 0

P" uwl S imom n 25 30 35 50 50 49 60 63 66 70 72 70 67otberw retiqs Cte 10 16 21 19 29 23 23 20 21 22 23 24 23 22Interest id lnk Chmrs 1 6 9 14 19 30 36 79 92 94 85 62 44 27LcsaesiD. zpr .ltion 10 9 911 11 6 15 26 27 27 28 27 28 28

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

TOTAL PITUI 43 55 69 79 109 11 123 18S 202 210 206 186 165 145.. ..... .... ...... .... ...... .... ...... .... ..... . .. . ...... .. ...... .... ....

NOT INOS 4 6 2 6 3 5 9 -40 -41 -35 -12 47 143 205-Ineoe To 1 1 0 0 0 0 0 0 0 0 0 16 50 72

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

ET AFTERTAXTM 1 2 5 2 6 3 S 9 -40 -41 -35 -12 31 93 133_--- - m_ m_ _u _ m_ _ _

- 152 -

TAKLE 2ANiNEX 14APAGE 2

NATIONAL ROUSING AUTHORITY - FINANCIAL PERFOR NCE....................................................

(Structural Analyse. in Percentafg)

INCOhE STATENENT N I S T O R I C A L P R O J E C T E D

R E V E N U E S 1980 1981 1962 1963 1984 1985 1966 1967 1988 1989 1990 1991 1992 1993.._...................... .... ...... .... ...... .... ...... .... ...... .... ...... .... ...... .... ...... . ... --

Sale af Nortgae 0 0 0 0 0 0 0 9 63 144 196 269 244 206-Production Cost 0 0 0 0 0 0 0 8 61 142 189 251 21S 1

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

Gross Proftt 0 0 0 0 0 0 0 1 1 3 6 18 30 33seollaneous 100 100 100 100 100 100 100 99 99 7 94 82 70 67

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

TOTAL EVENUES 100 100 100 100 100 100 100 100 100 100 100 100 100 100

EXPEND I TURES=......................

Perso,el Servam 48 40 42 41 45 43 37 41 39 38 36 31 23 19Other Operating Costs 21 26 30 22 26 20 17 14 13 13 12 10 8 6Interet and ank Charges 2 10 13 16 17 26 27 55 57 54 44 27 14 8Losses/Depreclatfon 21 15 13 13 10 7 11 18 17 16 14 12 9 8

.... ...... .... ...... .... ...... .... ...... .... ...... .... ...... .... ..... ;... ... ........ ... ........ .. ....

TOTAL EXPENDITURES 92 90 97 93 9 98 98 127 125 120 106 b 54 41.... ...... .... ...... .... ...... .... ...... .... ...... .... ...... .... ..... ............ ............ ...........

NET INCOME 8 10 3 7 2 2 2 -2 -25 -20 -6 20 46 59- Income Tex 2 1 0 0 0 0 0 0 0 0 0 7 16 21

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

NET AFTER TAX INCOWE 5 8 3 7 3 4 7 27 -25 -20 -6 13 30 38

10/25/87

- 153 -

TAKE. 3 NATIONAL hOUSING AUTHORITY - FINANCIAL PEFORMACE....................................... ANNEX 14A

INCONE STATEMENT RATIOS (Amnow~ts In Psos Million at Current Prices) PA`GE3 3

196 1961 1982 1963 1964 196 1966 196? 196 1989 199 19".i 199 199

RETURN ON TOTAL ASSETS:Mot Income 4 6 2 6 3 5 9 -40 -41 -35 -12 47 143 205

trwestment at Jan 1 1194 1518 1943 2635 3276 3648 414? 4643 3589 3605 3566 3296 3294 3372investment at Dec 31 1518 1943 2635 3276 3648 4147 4643 3589 3605 3566 3296 3294 3372 3500

Ave. Investment in Asstet 1356 1731 228 2956 3462 389 4395 4116 3597 358 3431 3295 3333 3436R A T I 0 0.3 0.3 0.1 0.2 0.1 0.1 0.2 -1.0 -1.1 -1.0 -0.4 1.4 4.3 6.0

RETURN ON EQUITY:NetIncme4 6 2 6 3 5 9 -40 -41 -35 -12 47 143 205

Equity at Jan 1 97 1236 1514 1940 2149 2336 2529 2576 178 1730 1713 1458 1479 1600Equity at Dec 31 1236 1514 1940 2149 2336 2529 2576 1780 173 1713 1458 1479 1600 177

Average Equfty 1106 1375 1727 2045 2243 2433 2553 2178 1755 172 1566 1469 1539 1667R A T t 0 0.3 0.4 0.1 0.3 0.1 0.2 0.4 -1.8 -2.3 -2.0 -0.8 3.2 9.3 12.1

=amaamm mama ---- -- -

RETURN ON CAPiTAL EMPLOYED:NotlnIomafter taxes 2 5 2 6 3 5 9 -40 -41 -35 -12 31 93 133

Equfty + L*tmi Debt Jan 1 1122 1331 1685 2352 2918 3220 3808 4041 3111 3127 3064 2802 279 269Equity.+ L't'm Debt Dec31 1331 1685, 2352 2918 3220 3808 4041 3111 3127 3084 2802 279 2893 3043

Avergep Equity LT Debt 1227 1508 2019 2635 3069 3514 3925 3576 3119 3106 2943 2800 2846 2968R A T I 0 0.2 0.3 0.1 0.2 0.1 0.1 0.2 -1.1 -1.3 -1.1 -0.4 1.1 3.3 4.5manmamaamm mm aamaamm mm mama axa mama mama - Us= aa

RATE OF RETMUR ON INCME EARNING INVESTMNTS:Not lrwestmnent ncome 4 6 2 6 3 5 9 -41 -43 -40 -25 6 5290

Short Term investments 109 71 232 115 68 105 127 280 294 386 225 185 174 80RentatlProperty 91 87 82 70 65 97 189 152 139 126 113 100 88 75Instatlmt Contract Robte 21 108 141 164 215 220 435 721 738 784 844 678 862 840Other lrwestments 183 211 311 417 467 464 600 125 166 189 207 216 209 203

TotalInvesmentDec1 40 477- 7--6 766- 815- 886- 1351 1278 1336 1.85 1390. 1380 1333 119?Totat Investments Jan 3138 404 477 766 766 815 8 86 1351 1278 1336 1485 1390 1380 1333 19

Average NFA & Investments 392 441 622 766 791 851 1119 1314 1307 1411 1438 1385 1356 1265N A T I 0 0.9 1.3 0.4 0.6 0.4 0.6 0.8 -3.1 -3.3 -2.9 -1.7 0.5 3.8 7.1

DEDT SERVICE COVERAGE:Not After TaXtinc 2 5 2 6 3 5 9 -40 -41 -35 -12 31 93 133interet ndlai* Charons 1 6 9 14 19 30 36 79 92 94 85 62 44 27Losses/Depreciatfon 10 9 9 11 II 815s 26 27 2728 2728 28

intenmLtCash Geeratfon 13 20 20 31 33 43 60 66 77 87 100 120 165 188Debt Servicing 8 10 16 18 27 142 177 183 164 1710 168 164 161 158

R A T I 0 1.7 2.0 1.3 1.7 1.2 0.3 0.3 0.4 0.5 0.5 0.6 0.7 1.0 1.2mamamamma maaaa==aamm aa aamm mm - mm

10/25/87

-154 -

TABLE 4 PHILIPPINESANNEX 14B

HOUSING SECTR PRJECT N

NHA BALACE SUET

(Amounts In Peos NiLtian at Current Priess)

BALANCE SHEET H IS8TORAI CA L P aOJ IC TEaD.................... *....................................

ASS E TS9 1960 1961 1962 1963 1964 196 19686 196 1939 196 19O lo1 10 1993.......... ... .... ... ........ ... .... .... ....... .. .... ..

CMRRENT ASSETS:Cah ~~109 73 60 113 220292339 141w V 3283463 62

Shoirt Term Invetmsnts 109 71 232 115 66 10512? a 294 386 235185 174 soAccounts Receivabte (net) 140 112 113 155 124 125 183 2M9 M 439 494 554 M2Inventories 4 6 6 7 5 8 7 4 5 7 9 1315s19

TOTAL CURREN ASSETS 362 262 431 390 417 530 656 04 67? S1T 70 75 06 784

INVESTNENTS:Rental Properties 106 107 107 96 97 124 22 US US US6 U58 6as 258-Prov'n for Deprecfation 17 20 25 28 32 27 32 106 119 13 145 1IN 170 183

Written dwAnvatue 91 87 82 70 65 97 189 152 13 126 113 100 so 75Irstatlut Contract Rcbte 21 106 141 16" 215 220 435 73 M3 78 84 87 862 840Other Investments 183 211 311 417 467 464 60 15 146 189 20 216 20 203

........ .. .. .. ... 6...... .. ... .... ...

TOTAL INVESTMETS 295 406 534 idd 747 781 122 956 10U 1100 1145 1194 1159 1117

PROPERTY AND ESUIPEENT:Landendlnprovaments 5 5 7 7 7 7 7 9 9 9 9 9 9 9suitdinpmwd Structures 2728 33 35 374152 at973is7381el8487Eqaipmsnt 26 2930 35424651 57 67 7787 97107 117

subtoteL 58 62 707?8694 110 13514 161n1847W200 213- Provtn for Depmistion 14 20 24 30 37 51 5e 67 e1 95 110 125 140 155

... ... .. ... ...... ... ... .. ....... a ... a.. ...WRITTENDMM VALUE PE 44 42 46 47 49 43 52 48 47 46 6 62 40 58

OTHERt ASSETS:Vorks In Progress 678 1126 1505 1915 1471 1577 80 399 w 37 370 5 346 75 830SaLe/Transfer Properties 94 65 60 233 859 MIi 1835 133 14 1174 TR7 636 552 671Miscellaneou 4542 5940 105105 76 40 4040 404040 40

.. ... ... . 0. ....... ....a .... .....

TOTAL OTNER ASSETS 817 1233 16'24, 2'18'8 2'43'5 2793' 2'7'11 103 181 158 13 1312 1347 1541.0 0 ........ .... ....

TOTAL ASSETS 1518 19-43 2'63'5 32'7'6 36-48, 4,14,7 46-43, 35 36W 3566 529 32 3372 30

10/25/87

- 155 -

TABLE 4 ContinuedAMNNE 14BPAGE 5

NATIONAL HOUSING AUTHORITY - FINANCIAL PERFORMANCE....................................................

(Amomts In Pesos Nitlion at Current Prices)

ALaNcE SHEET H S 8 T O R I C A L I P R OJ E C T E D- ~~~~~~......................................... .........................................

L I A 8 I L I T I E 8 1980 1981 1982 1983 1984 1965 1986 1987 1988 1989 1990 1991 1992 199

CURENT LIABILITIES:Accoint Payable. 37 20 40 139 158 159 2?5 194 206 211 215 221 226 23Other Current Liabftities 100 132 108 53 105 91 132 66 66 6 6 6S 66 66

.... .... .... .... .... .... .... .... .... .... .. _ .... .... .... _

Total Current Liabitities 137 152 148 192 263 250 407 260 m 27? 281 287 294 302

LONG-TERN LIABILITIESsPublti Debts 95 171 412 769 884 1279 1465 1331 1397 1370 1344 1319 129 1269

OTHER LIABILITIES:Deferred Profit on Sales 12 66 95 111 114 85 188 217 205 206 211 208 184 155iscellaneous 38 40 40 55 51 4 7 0 0 0 0 0 0 0

.... ...... .... ...... .... ...... .... ...... .... ...... .... ...... .... ..... ............ ............._...... ..

Total Other Liabilities 50 106 135 166 165 89 195 217 205 206 211 208 1864 155.. ..... .... ...... .... ...... .... .... . . .... ...... .... ...... .... ...... .... ..... ..

Total Liabilities Z82 429 695 1127 1312 1618 2067 1808 1874 1853 1837 1814 1M 172

GOVERNMENT EQUITY:Paid-in Capital 590 866 1265 1435 1669 1835 1835 1067 119? 1467 167 147 1467 1467Saubediesd Surplusses 651 646 671 701 620 607 39 753 614 362 119 93 71 40Retairned Earnings 5 2 4 13 47 87 702 -40 -81 -116 -128 -81 62 266

,...... ............ .............. ...... .... ...... .... ...... .... .... ...... .... .... ...... ._... ... .... _

TOTAL EWITY 1236 1514 1940 2149 2336 2529 2576 1780 1730 1713 1458 1479 1600 1M.... ...... .... ...... .... ...... .... ...... .... ...... .... ...... .... ..... ................... _...... ..

TOTAL LIABILITIES/EQUITY 1518 1943 2635 3276 3648 4147 4643 3589 3604 3566 3295 3293 3372 3S00mu urn mu - ur - 3333 - mmnu no=- urn==aurn..

10/25/87

-156 -

TABLE 5 AIUX14B

PAGE 6

NATIONAL HOUING AUTHORITY - FINANCIAL MEFORNANCE

(Structural Analyse In Percentaes)

BALANCE SHEET giH TORICAL P ROJ E CTIED

A S S E T S 196 1961 1962 IM5 1964 196 1966 190719 191969 1990 1991 199 199

CURRENT ASSETS3Cash 71 & 3 6 7 7 4 1 1 1 1 2 2Short TormInvestmmnts 9 6 4 5 3 3 4 7 911I 13 15 16 18Accounts Roceivabte (net) 0 0 0 0 0 0 0 0 0 0 0 0 0 1Inventories ') 0 0 0 0 0 0 0 0 0 0 0 0 1

TOTAL CURRENT ASSETS M4 13 16 12 11 13 14 19 19 23 21 22 24 22

INVESTMENTS:Rentat Propertles 6 4 3 3 3 5 7 7 7 8 a a 7- Prov*n for bepreclatlcn I I I I I I 1 3 3 4 4 5 5 5

Written down vatue 6 4 3 2 2 2 4 4 4 4 3 3 3 2Instutlmt Contract Rcbte 1 6 5 5 6 5 9 20 20 22 26 2V 26 24other lwestmsnt 12 11 12 1313 11 13 3 5 5 6 7 6 6

TOTAL tMVESTNENTS 19 21 20 202019 26 28 29 31 35 36 3432

PROPERT AND EWIPNENT:L&WandastIuprvemsnts 0 0 0 0 0 0 0 0 0 0 0 0 0 0u,tldlrgs andStructume 2 1 1 1 1 1 1 2 2 2 2 2 2 2

Equilpmnt 2 1 1 1 1 1 1 2 2 2 3 3 3 3

SubtotaL 4 3 3 2 2 2 2 4 4 5 5 6 6 6- Prov'n for Depreeftatln 1 1 1 1 1 1 1 2 2 3 3 4 4 4

WIRITTEN OM IVALUE P 9E 3 2 2 1 1 1 12 2 2 2 2 2 2

OTHER ASSETS:WorksIn Prors. 45 585758O4038 17 11 10 10 16 19 2224Sate/Trnmfer Properties 6 3 2 7 24 27 40 39 39 33 24 19 16 19Nlsoettansou 3 2 2 1 3 3 2 1 1 1 1 1 1 1

TOTAL OTHER ASETS 54 6362 6767 6756B 51 50 4 41 40 40~

TOtAL ASSETS 100 100 100 100 100 100 100 100 100 100 100 100 100 100mu mu ur~n" on"uu - mu---

10/25/87

- 157 -

ANNEX 14BPAGE 7

NATIONAL NUSING AUTHORITY - FINANCIAL PERFORNANCE....................................................


BALANCE HEET 1 8 T ToR I CA L P R O J E C T E D~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.............. ............ ............................. .............................. ........

L I A B I L I t I 8 190 1961 196 16 1964 95 1986 1987 1968 1989 1990 1991 1 1993..................... .... .... .... .... .................................................

CURRENT LIABILITIES:Accounts Paysble 2 1 2 4 4 4 6 5 6 6 7 7 7 7Other Current Ltabtltties 7 7 4 2 3 2 3 2 2 2 2 2 2 2

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

Total Current Liab1tlt1es 9 8 6 6 7 6 9 7 8 8 9 9 9 9

LONG-TERN LIABILITIES:Pubtic Debts 6 9 16 23 24 31 32 37 39 38 41 40 38 36

OTHER LIABILITIES:Deferred Profit an Sales 1 3 4 3 3 2 4 6 6 6 6 6 5 4Nseetltneous 3 2 2 2 1 0 0 0 0 0 0 0 0 0

o .. ........ ... ........ ... ........ ..... .... ...... .... ...... .... ...... .... ...... .... ...... .... ...... ....

Total Other LiabilIttes 3 5 5 5 5 2 4 6 6 6 6 6 5 4.. ......... ... ........ ... ........ ..... .... ...... .... ...... .... ...... .... ...... .... ...... .... ...... ....

Totat Liabilitfes 19 22 26 34 36 39 45 50 52 52 56 55 53 49

GOVERNMENT EMJITY:Paid-1n CapitalSubsidies/Surplusses 39 45 48 6444 40 30 33 41 45 45 44 42Retained Earnins 0 0 0 0 1 2 15 .1 -2 -3 -4 -2 2 8

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

TOTAL EUITY 81 78 74 664 61 55 50 48 48 444 47 51.... ..... .... ...... .... ...... .... ...... .... ...... .... ...... .... ..... ............ ............ ............ ..

TOTAL LIABILITIES/EWJITY 100 100 100 100 100 100 100 100 100 100 100 100 100 100

10/25/87

- 158 -

TABLE 6 NATIONAL HOUSING AUTHORITY - FINANCIAL PERFORMANCE.................................................... ANNEX 14B

BALANCE SHEET RATIOS (Amoumts In Pesos Million at Current Prices) PAGE 8

1980 1981 1982 1983 1984 1965 1966 1987 1988 1989 1990 1991 1992 1993.... ..... .... ...... .... ...... .... ...... .... ...... .... ...... .... ...... ... ........ ... ........ ... ........

CURRENT RATIO:Current Assets 36. 262 431 390 417 530 656 694 67 817 702 725 606 784Current LiabiLities 137 152 148 192 263 250 407 260 272 277 281 287 294 302

R A T I 0 2.6 1.7 2.9 2.0 1.6 2.1 1.6 2.7 2.5 3.0 2.5 2.5 2.7 2.6_333 = _ = 3 3 _ - = =3= __

WICK (ASSET TEST) RATIO:Current Assets 362 262 431 390 417 530 656 694 677 817 702 725 806 784Less Inventories 4 6 6 7 5 8 7 4 5 7 9 12 15 19

.... .... .... .... .... .... .... .... .... .... .... .... .... ....Liquid Assets 358 256 425 383 412 522 649 690 672 810 693 713 791 765Current Liabilities 137 152 148 192 263 250 407 260 272 277 281 287 294 302

R A T I 0 2.6 1.7 2.9 2.0 1.6 2.1 1.6 2.6 2.5 2.9 2.5 2.5 2.7 2.5333=3=3 333 3o 3 3 =33 3 3333 333 3=3 =33 3= 3

LONG-TERM DEBT TO CAPITALIZATION:Long-term Debt 95 171 412 769 884 1279 1465 1331 1397 1370 1344 1319 1294 1269Long-term Debt + Equfty 1331 1685 2352 2918 3220 3808 4041 3111 3127 3084 2802 2798 2893 3043

R A T I 0 0.1 0.1 0.2 0.3 0.3 0.3 0.4 0.4 0.4 0.4 0.5 0.5 0.4 0.4_=333333 33= 33= 33= 3= 33= _=3 =33 *3= =_3 _33 _3 =33

LONG-TERN DEBT TO EQWITY:Low-term Debt 95 171 412 769 884 1279 1465 1331 1397 1370 1344 1319 1294 1269Equity 1236 1514 1940 2149 2336 2529 2576 1780 1730 1713 1458 1479 1600 1773

R A T I 0 0.1 0.1 0.2 0.4 0.4 0.5 0.6 0.7 0.8 0.8 0.9 0.9 0.8 0.7= = 3= 3 = = 3 = =

DEBT TO EQUITY:Total Debt 282 429 695 1127 1312 1618 2067 1808 1874 1853 1837 1814 177? 1727Equity 1236 1514 1940 2149 2336 2529 2576 178 1730 1713 1458 1479 160) 1M3

A A T I 0 0.2 0.3 0.4 0.5 0.6 0.6 0.8 1.0 1.1 1.1 1.3 1.2 1.1 1.03333333=33 3_33 a33 -3 3 a333 3333 3333 33 3 = =33 =333 =3

EQUITY:Equity 1236 1514 1940 2149 2336 2529 2576 1780 1730 1713 1458 1479 1600 1MTotal Assets 1518 1943 2635 3276 3648 4147 4643 3589 3605 3566 3296 3294 3372 3500

R A T I d 0.8 0.8 0.7 0.7 0.6 0.6 0.6 0.5 0.5 0.5 0.4 0.4 0.5 0.5=333333 33=33 =3 =33 333 333 3_3 333 333 3 3=3 =3 333

DEBT RATIO:Total LiabiLities 282 429 695 1127 1312 1618 2067 1808 1874 1853 1837 1814 17 1727Total Assts 1518 1943 2635 3216 3648 4147 4643 3589 3605 3566 3296 3294 3372 3500

R A T I 0 0.2 0.2 0.3 0.3 0.4 0.4 0.4 0.5 0.5 0.5 0.6 0.6 0.5 0.5_- 3=3= 3=3~3333 _333 ~ _ _3_38 8 =33 =333 =33 =333s-

10/25/87

- 159 -

TASE 7 PHILIPPINESANNEX 14C

HOUSING SECTOR PROJECT PACE 9

NHA CASH FLOW STATEMENT

(Amounts in Pesos Million at Current Prices)

CAN FLOU STATENT H 1 T OR I C A L P R O J E C T E D......................................... ......................................................................

R E C E I P T 8 1980 1981 1982 1983 1964 196M 1986 1987 1988 1989 1990 1991 1992 1993

In omn from Operations 47 61 71 85 111 116 95 158 260 422 559 815 967 953- Cash OperatIng Costs 34 41 51 54 79 73 80 92 182 335 459 695 803 765

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

et from operations 13 20 20 31 32 43 15 66 77 87 100 120 165 188Loan Collections 0 5 67 37 68 88 18 57 79 108 127 139 143 145Reautn of Investments 0 66 0 0 0 90 0 0 0 0 0 0 0 0New Sorrowing 92 86 233 287 144 451 204 200 97 0 0 0 0 0covornomnt: Equity 184 275 400 170 234 166 0 200 130 270 0 0 0 0

Soafl Progr. 95 0 28 34 15 26 64 50 50 50 50 50 60 60ftumds rom contractors 2 0 0 0 0 0 6 0 0 0 0 0 0 0

Chwen in Misc. Assets 0 73 -175 125 196 -82 42 -286 -103 -24 340 450 525 653= ... ........ ... ........ ... ........ ..... .... ...... .... ...... .... ...... .... ...... .... ...... .... ...... ....

TOTAL RECEIPTS 386 525 573 684 689 782 349 287 330 491 617 758 893 1046

PAYNENTS~...............Development Costs 316 447 433 -1 305 46 117 266 255 322 453 585 699 786Loan Rleases 50 49 69 55 78 28 12 0 0 0 0 0 0 0Lend ad Buildngs 4 1 7 2 3 a 0 0 0 0 0 0 0 0Aoufsitfon of Equfpment 1 3 17 4 7 5 2 12 13 13 13 13 13 13Investmentuleposfts 7 51 14 15 15 I8 71 -161 -52 -110 145 31 20 100LOn Repeyents 8 10 16 18 27 142 70 183 164 170 168 164 161 158Other Deposits 19 0 10 1 87 31 29 156 46 103 -153 -40 -30 -11

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

TOTAL PAYMENTS 405 561 566 651 582 710 301 456 426 498 625 753 863 1046

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

CMAGEN CASH AT ANK -19 -36 7 33 107 72 47 -169 -97 -7 -8 5 29 -110/25/87= =

10/25/87

- 160 -

.14PAU 10

PHILIPPINES


NHA KEY ASSUMPTIONS

1. During 1986 and 1967 IRA In cooperation with the Couaisuonm on Audit (COA), wdertook a mejor review of Itsffnancial position. Todate about P 1.1 billifon of write-offs and other adjustments hav been fdentfffed. Itis estimstod that a further P 700 mitlion of adjustments will be required In order for NHA to secure an untqualified audit. The projection assums that all neceosary adjustments will be lncluded In the Audited Finanr-cial Statements for 1988.

1988 1989 1990 1991 1992 TOTAL-.-....... .... ...... ...... ......... .....

P n P mn P mn P sn P mn P m

2. INVESTNENT PROGRAM Is estimated of the following megnitude: 266 255 322 453 585 1801

3. MORTGAGE SALES to NHNFC as follows: 14 101 252 379 624 1370

4. BORROVING from existing sources for completfon of the current program 200 97 0 0 0 297

S. GOVERNENT EQUITY infusion to prime the new deveLopmen program: 200 130 270 0 0 600

6. GOVERNMENT SUBSIDIES for funding of SOCIAL (Resettlement) PROGRANS: 50 SC 50 50 50 250

TOTAL OVERMET FUNDING: 250 180 320 50 50 850

7. COLLECTION EFFICIENCIES as foltows:

CA) Loans to Local Goverrnmnt X 60.0 70.0 80.0 90.0 92.5(3) Loans to Private Individuals X 60.0 70.0 80.0 90.0 92.5tC) Loans for HML & IBL X 60.0 70.0 80.0 90.0 92.5

CD) Instalment Contracts Receivable X 70.0 90.0 95.0 95.0 95.0

8. INCONE YIELDS AND RATES as follows:

(A) Loans to Local Goverrment X 10.0 10.0 10.0 10.0 10.0(B) Loans to Private Individuals X 10.0 10.0 10.0 10.0 10.0(C) Loans for HNL & IBL X 14.0 14.0 14.0 14.0 14.0tD) Instalment Contracts Receivable X 9.5 10.0 10.5 11.0 11.5(E) Rental Nousing Income X 5.5 6.0 6.5 7.0 7.5(F) Interest on Short Term Investments X 5.0 5.0 5.0 5.0 5.0

9. EXPENDITURE RATE and TAXATON as follows:

(A) Adifnistratfon Costs Personnel X 6.0 6.0 6.0 6.0 6.0(3) Adcinistrative Costs - Other Overheads X 2.0 2.0 2.0 2.0 2.0(C) Depreciation Rental Nousing X 5.0 5.0 5.0 5.0 5.0(D) Income Tax Rate X 35.0 35.0 35.0 35.0 35.0

10. OTHER ASSUIPTIUSCA) Inflation rates included in the projections are based on Bank estimates of 5 X p.a.(B) Interest capitalifed as part of construction cost has been set at 9 X p.a.CC) NRA will not seek or requfre to raise local or external loans.

0I/am

- 161 - ANNEX 15

Page 1

PHILIPPINES


ECONOMIC RATE OF RETURN

1. An economic rate of return was calculated on a typical housingunit to be built under the project, utilizing the Bank's standard imputedrental value methodology. The rate of return therefore reflects the returnexpected on the mortgage investment component of the project, and excludesthe materials import component per se.

2. Costs are mid-1987 and include land, design/engineering,administration, survey and site preparation, civil works, labor forcompleting dwellings and infrastructure and dwelling maintenance at 3%.Labor was shadow priced at a local wage rate for informal labor which did notexceed the official minimum wage. Land was priced at its highest opportunitycost, which generally represented market value. Costs excluded taxes andinflation. Benefits were based on imputed rental values as reflected in amid-1987 survey. For upgrading, communities with and without the proposedservice levels were surveyed to determing the incremental difference in rentsattributable to the improved services. These communities were selected withreasonably comparable locational advantages to neutralize the impact oflocation on rent levels. Land was treated as a benefit in the last year ofthe project (terminal value) at the same value as the original cost,reflecting no real increase or decrease in value. Separate calculations weremade for Metro Manila and regional cities.

3. The resulting rate of return would range from about 27% onserviced sites to 31%-37% on slum upgrading depending upon whether the sitewas located in Metro Manila or the regions, as shown in Table 15-I.Sensitivity runs were made to test the effects of a 20% increase in costswhich might arise from delays in construction or inflation, or a 20% decreasein benefits which might occur from lower-than-expected rental levels. Bothcases still result in a satisfactory return. These relatively high returnsreflect the scarcity of suitable accomodation and utility services. Ifsupply were to come into better balance with demand by the time of projectcompletion, these rates of return would drop, since they are based uponmarket rent levels.

4. In addition to the economic rate of return, sales prices werechecked to determine the immediate financial return on a typical unit builtunder the project. Table 15-I shows the expected return based on cash saleimmediately upon completion of the unit. Returns range from 35%-41% forserviced sites, and from 33%-48% for slum upgrading. Sensitivity analysis onthis basis, again assuming 20% increase in price or 20% decline in benefit,would lower the expected return, which would, however, still remain withinacceptable limits.

- 162 - ANN 15Page 2

Table 15-IEConomic Rate of Return

Using Imputed Rental Value Using Sales PricesComponent Metro Manila Reg. Cities Metro Manila Reg. Cities

A. Rate of Return on:Serviced Sites 27% 28% 35% 41%Slum Upgrading 31% 37% 33% 48%

B. Assuming 20% CostIncrease:

Serviced Sites 24% 24% 22% 28%Slum Upgrading 27% 32% 20% 34%

C. Assuming 20% Decreasein Benefits:

Serviced Sites 23% 24% 19% 26%Slum Upgrading 26% 31% 18% 31%

5. Cost and benefit streams have been prepared utilizing acomputerized model, and are available on file.

- 163 - ANNEX 16

Page 1

PHILIPPINES


SELECTED DOCUNENTS AVAILABLE IN THE PROJECT FILE

SECTORAL ACTIONSExecutive Order #90Sectoral Policy StatementSectoral Investment Plan

NHMFC ACTIONSPolicy StatementBusiness PlanInstitutional Action PlanHDNF Transfer AgreementGSIS/SSS Loan AgreementsMortgage Sale Terms Agreement with NBAFirst S/S/Upgr Sale Agreement Signed

NUA ACTIONSPolicy StatementPricing Policy SummaryInstitutional Action PlanRevised Development StandardsBalance Sheet CleanupPortfolio Liquidation PlanCriteria for Selection of Subprojects

HIGCInterim Policy StatementAgreement of the COP and PO on Sale of Maunlad S&L

DIVESTITURESSIDCOR/HIGC Trust Agreement for BDC LiquidationBDC Liquidation Plan

STUDIES TERMS OF REFERENCEConstraints to Recovery for Small/Medium ContractorsNBA Auditing/Accounting AssistanceNHMFC Auditing/Accounting Assistance

PFILIPPINESHOUSING SECTOR PROJECT

SECIOR ORGANIZATION CHART

A. FORMER ORGANIZATION

| inistry of Human Settlements

. ~~~~~~~~~~~~~~~~Finance

Production Regulation FinancialFunmtion Function Sourcing Mortgage Insurance

Function Function Function t

N.A HSDC HSRC DF C IIFCNational Human Settlements Development Human Settlements Housing Development National Rome Housing FinanceHousing Corporation Regulatory Mutual Fund Mortgage CorporationAuthority , (Holding Company) Comnission (PAG-IBIG Provident Finance Corp.

Fund)

BDC VW BB NHC SSS OriginatingBliss Develop- Woodwaste Builder's National Social Security (and Collecting)ment Company Company Bricks Housing System BankAs

Company Corporation , _.

¢SISGov't Social

InsuranceSystem

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Housing and Urban Development Coordinating CouncilOrganization Chart

(HUDCC)

HUDCC MEMBERSHIPChairman: appointed by President

NHA General Manager HDMF General ManagerNHMFC President SSS General ManagerHLURB Commissioner GSIS General ManagerHI3C General Manager National Economic and Development Authority (NEDA)Dept. of Budget and Management (DBM) Department of Finance (DOF)Development Bank of the Philippines (DBP) Department of Public Works and Highways (DPWH)

Private Sector Representatives (2)

COUNCL SECRETARIATl H~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-

OFFICE OF THESECRETARY GENERAL(COUNCL CHARMAN)

OFFICE OF THEASSISTANT

SECRETARY GENERAL

OFFICE OF THEDEPUTY SECRETARY

GENERAL

POLICY AND RESEARCH AND FINANCIAL MANAGEMENTPLANNNG DEVELOPMENT MONITORING INFORMATION SYSTEM

World Bank 40054

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- 173 -PHILIPPINES

HOUSING SECTOR PROJECt

National Housing AuthorityOrganization Chart

I.6-ENER MAMGER OCFRC OF l

GftOUP j ~~~UG GRO *RA __K

Corporote _....PlonntnJ Otfice _

Cotporate Opeatan 1g lrooes C cll I

Sytems andic 1aSkForES o

Servces jStter ReatnROUP

Otitce of the Corporote Accutn_

rNC rM F POC' NICA PrO, -: -OrT | COROATESPOTlGP" ouP g X SERUCIC 6 . SGROU G EIC O g

I Pncol rnning& Developrnent Staff

_ Mtonogement Development_ & Intormnolion _ -ma Geeol emcesDeportment Deposettprmenttion Depornt Deprment

TrIy Lselitooo l W Humon Resorces_ Troc#ury | > ~~~Engineering I Developmnent l l Development |Deportrent Deporftient | Depa"rtmn | Depamortne

Deportment Adminsto'on | Deportmtent

rIN-NCJSE RJECTS LOA CvVrN*|rwMEW RVT SECtORI ZESEGROllp P § ROJECT GROUP G ROUP ESAE G ROUP

TondooForeshore § r Mefto-Monilo t l JointVenture Esoengret|

Development Proj Dpttet 1pect Pr epOrhtn Deportmnent

IrDegat-Degoton Reioa | | §| [ Commeriobl & |Ll Development 1 > Rgoo Fqcs| L ndustnal Estate |

Pfolect I |L Deportrnnt Departrnent

L] Special Projects ResettlernentDepartrnent Deportmnent

Sites ond 7 ask ForceeoServices Squatter Rehflts

| Department & Resettlement

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I.Al Zq -7 - Documents &...

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