MIDDLE EAST & NORTH AFRICA

REGIONAL AFFORDABLE HOUSING PROJECT

CONCEPT NOTE- OCTOBER 2013

THE WORLD BANKFINANCIAL AND PRIVATE SECTOR DEVELOPMENT VICE PRESIDENCYSUSTAINABLE DEVELOPMENT NETWORK VICE PRESIDENCYMIDDLE EAST & NORTH AFRICA REGION VICE PRESIDENCY

Contents

I. STRATEGIC CONTEXT...............................................................................................................6A. Regional and sector context............................................................................................................6

B. Specific sector background.............................................................................................................7C. Alignment with Transition Fund objectives....................................................................................8

II. PROJECT DESCRIPTION...........................................................................................................11A. Project Objective...........................................................................................................................11

B. Project Components......................................................................................................................12C. Key Indicators Linked to Objectives.............................................................................................15

III. IMPLEMENTATION...................................................................................................................16A. Partnership Arrangements.............................................................................................................16

B. Institutional and Implementation Arrangements...........................................................................17C. Project Budget and Financials.......................................................................................................18

D. Results Framework and Monitoring..............................................................................................20ANNEX 1 – DETAILED COUNTRY ACTIVITIES...................................................................................20

RegionalAffordable Housing Project

Proposal Summary

Proposal Outline

The proposal aims to support the Transition Fund objectives for the countries of Egypt, Jordan, Libya, Morocco and Tunisia in the field of affordable housing and housing finance. With a booming population, growing urbanization and calls for social reforms in the wake of the Arab Spring, the region needs to provide enough affordable housing options for its inhabitants. The project will provide technical assistance to advance country-led policy and institutional reforms to support (i) a scaling up in the supply of affordable housing,(ii) an expansion of affordable housing finance;and (iii) knowledge building and sharing across the region in the field of affordable housing. The program would run over a fiveyear period and be implemented at a country level, with some overarching regional initiatives.

Project Phasing

The participation of Transition Fund countries in the Project will be phased in accordance with the willingness and ability of individual target countries to join, and the availability of funding. The Programmatic Technical Assistance format is used for this purpose where a framework for the program has been developed to identify a set of pillars and list of countries to be covered by the program, which is approved at the outset. The framework is applied once a targetcountry is engaged to identify a subset of priorities for each government based on discussions during field missions and the review of their ongoing programs.

Target countries are selected in stages, the initial participating countries will be Tunisia and Morocco. Other Transition Fund countries will be added as conditions allow and as requested by them.

Implementation Arrangements

The Project will be run as an Arab Monetary Fund - World Bank managed and implemented Trust Fund. The WB team implementing the project will cut across sectors covering urban development (SDN) and financial sector development (FPD). There will also be strong

collaboration with a number of counterparts aside from the national governments of participating countries. In particular, the Wharton School of the University of Pennsylvania will be a key partner in implementing some of the Technical Assistance and capacity building work.

Program Objective

The objective of the proposed project is to support the recipient Governments in designing reforms of programs and policies to promote access to affordable housing for the low to middle income households. The objective will be achieved by (i) supporting the governments in the evaluation of their existing programs for affordable housing, (ii) designing the key policies that will be catalytic and transformational in improving the supply of affordable housing and the availability of affordable housing finance, and (iii) supporting cross-regional knowledge sharing and expertise strengthening in the area of affordable housing and housing finance.The project will ultimately contribute to improving the living conditions of the populations through integrating housing development with access to better social and economic prospects, and generating opportunities for growth and employment in the context of post Arab Spring upheavals.

Fit with transition Fund Objectives

The proposal delivers on the Transition Fund's objectives of(i) fostering inclusive economic growth by promoting housing production and access to housing finance to underserved and young households; (ii) job creationthrough the expansion of housing production which has a proven record as a generator of employment and (iii)enhancing economic governance and supporting sustainable growth through a more efficient deployment of fiscal resources in support of growing a sustainable market-based affordable housing system.

Timeframe The project is expected to run for a 5 year period, allowing sufficient time to engage in significant change and to have meaningful impact.

Overall Budget

The amount initially requested is approximately USD 4.2million over the 5year program period. This will be split across the 3 program

components and 2 target countries.

Summary Program Components

Component 1: Scaling up Production of Affordable Housing, from the supply side (approx. USD 900,000 per country)

This component will provide technical and policy support for the development of affordable housing solutions and aims to remove blockages constraining supply of low cost housing

Regional Themes: (i) tackling restrictive urban planning and building regulations, including streamlining land subdivision and construction permissions; (ii) strengthening coordination of housing policyand urban planning to achieve sustainable urbanization objectives; (iii) addressing upgrading policies to regularize and improve squatter/informal settlements; (iv) exploring Public Private Partnerships to expand affordable housing delivery market; (v) developer capacity building and financing to service the lower income groups; (vi) support to owner driven construction.

Component 2: - Expanding Access to Affordable Housing Finance, from the demand side (approx. USD 900,000 per country)

This component will provide support for policy reforms of the legal, regulatory and institutional framework to promote affordable housing finance.

Regional Themes: (i) reform credit risk sharing guarantee schemes or contractual savings schemes for low and informal income households;(ii) support to targeted and market efficient systems of subsidies; (iii) supporting availability of long term finance for affordable housing, (iv) addressing regulatory environment and product development for Islamic housing finance, in countries where demand is growing; (v) efficiency of security/mortgage rights; (vi) developing prudential frameworks for housing finance;

Component 3: Regional Knowledge Building and Sharing in Affordable Housing and Housing Finance (approx. USD 200,000 per country)

This component would aim to share best practices and create some

regional dialogue across the program countries in relation to the above stated regional themes- mainly through the delivery of regional training programs, workshops and seminars. In particular, an annual housing finance training program will be developed and anchoredinthe region in partnership with the Wharton School of the University of Pennsylvania. The program will be embedded within a MENA-based academic institution and will provide executive intensive education in policy innovations and institutional, financial and managerial aspects of affordable housing finance, with a MENA focus. It is intended to become a permanent fixture and self-sustaining program, after initial technical and financial support is provided during the start-up and establishment period. This course will be complemented by local workshops, regional conferences, and creation of an e-platform for knowledge consolidation and exchange. Translation into local languages will also be an important aspect that will enable outreach and engagement by stakeholders. This component will be launched early in the program to assist with the identification and assessment of existing initiatives in the region.Regional Themes: (i) Regional workshops and knowledge sharing.

I. STRATEGIC CONTEXT

A. Regional and sector context1. With a booming population, growing urbanization and calls for social reforms in the wake of the Arab Spring, the region needs to provide enough affordable housing options for its inhabitants. Population growth is around twice the world's average and the age profile is young. Rural populations are migrating rapidly to expanding cities, increasing the demand for new homes and public infrastructure. Given that housing demand is driven primarily by the two key factors of population growth and age structure, this means the demand for more homes, in particular at the lower segment of the market, is increasing rapidly in the region.

2. The chronic shortage of affordable and quality housing was one of the underlying causes of the social unrest and the resulting political turmoil that has spread across the region during the Arab Spring of 2011. Recent regional studies indicate that while there is an oversupply of upscale or luxury housing in many countries, there remains a shortage of more than 3.5 million affordable dwellings across the major markets within MENA. The largest current shortfall is concentrated in few countries such as Egypt (1.5 million) and Morocco (800,000). There are also notable shortages of formal and good quality housing for low income households in Libya, Jordan and Tunisia. The scale of the housing shortage in the region may have contributed to mounting frustration, especially among the region's youth, which pushed them to revolt.

3. Egypt, Jordan, Libya, Morocco and Tunisia have been making major strides to address the substantial housing needs, however in recent years, these policies stagnated, and housing became increasingly inaccessible, squeezing out the poor as well as the middle class. Governments pursued ambitious social housing agendas to address demand for housing, often through incentive programs for developers providing free or low cost land and tax breaks. They also made available a range of housing subsidies, which, in some countries, imposed a heavy burden on public finances, making such efforts unsustainable, while satisfying only a small part of the demand and not reaching targeted income groups. Finally, with the exception of Morocco, the experience of Public Private Partnerships has not been encouraging to date and there is a need to rethink these agreements to attract more private developers into affordable housing.

4. Housing – both delivery and financing – would be a visible proof to citizens that governments are moving actively to aid them in their lives. If the new Governments can deliver results on these fronts, this will transform the social and political landscape of these countries. The industry’s importance lies also in its potentialfor economic development through job creation, and addressing unemployment and underemployment, particularly for people who are poor, low-skilled and otherwise have limited job prospects. Furthermore, with government increasingly financially constrained, more efficient use of scarce government resources and more active private sector involvement is an essential part of their strategy to provide additional affordable housing investments. This requires a housing finance system to be functional for home buyers and real estate developers as well as to have efficiently designed public incentive mechanisms to promote affordable housing production and acquisition by households.

B. Specific sector background5. Egypt, Jordan, Libya, Morocco and Tunisia’s affordable housing markets are at different stages of development but face many common challenges. The missing housing market for low income earners is often a result of both inadequate supply and ineffective demand. Depending on the country, strong obstacles often prevent the development of affordable housing, including certain land policies, markets, construction costs and developer strategies. Public finance is often used to offset high price-levels of housing units, which is unsustainable if the increase in price is driven by demand-supply structural inefficiencies Not only does such a policy result in inefficient fiscal expenditures, but also perpetuates imbalances if the factors causing high prices remain un-remedied because of the purchasing power injected by governments.

6. Effective demand is constrained by low incomes and difficulty to reach target groups. Poverty levels in the region are high as more than 40 percent of the MENA population lives under $2 a day and 20 percent lives under $1.25 per day. The region has also some of the least affordable housing prices in the world, with the average house price for a low income household requiring from 25 to 18 times the annual salary. This is in contrast to the accepted affordability limitof between 3 to 5 times annual salary, which makes housing inaccessible to the local MENA population. Even households that may have capacity to take on credit to pay for housing are difficult to identify due to informal incomes and lack of recorded financial histories, so that it is costly for financial institutions to undertake the due diligence required to ensure that these households are credit worthy.

7. Obstructions in the housing supply chain, such as land acquisition, urban zoning, building permits, access to low-cost and appropriate construction materials, and developer financing, are preventing an integrated approach to the formal production of affordable housing. In all countries,

access to serviced urban land with the required titles, permits and registration is a costly and prolonged process. In Tunisia, Libya and Egypt, construction materials have increased in cost substantially since the Arab Spring. Apart from Morocco, formal private developers are almost exclusively building units for high-income households, where their rising costs of construction can be covered and profit margins are greatest. Inadequate supply of affordable housing has left low-income families little option but to build incrementally on illegal and unserviced subdivisions. Addressing access to urban land, minimum plot size, the supply of construction materials, security of purchasers’ advances and developer finance will allow governments to create an enabling environment for private investment into increasingthe production of formal affordable housing to respond to effective demand.

8. Affordable housing delivery will need to be complemented by strengthening of urban management practices to ensure sustainable urbanization. Coordination of housing delivery with strategic urban planning and greater capacity for urban management is critical to ensure that new residential developments are integrated with the delivery of infrastructure, connectivity to social services and economic opportunities to promote the development of sustainable communities. Sustainable urban development is achieved through integrated approaches to urban management that consider environmental, social, economic and institutional factors. This may involve connecting housing policy to participatory planning with communities, procedures for on-going maintenance, economic development activities, energy efficient and ‘green’ buildings, mixed-use zoning, density considerations, linkages to existing urban areas, and the accessibility for residents to public transport options, schools, healthcare, sports and community services, as well as to employment.

9. Affordable rental is another tenure option, yet has been traditionally neglected from national housing policies of most countries in the region and has significant potential in expanding access to housing to the lower income. Rental housing has remained a neglected area of national housing policy which has instead focused, often exclusively, on promoting home ownership. Consequently, rental housing has been overlooked with very few governments implementing any kind of policy to help develop or regulate this form of housing and there is a lack of equity options that will encourage the growth of a rental market. Yet, rental housing is a key component ofa well-functioning housing market. An adequate supply of reasonablypriced rental accommodation is likelyto reduce the temptation for poor familiesto mount land invasions or to buy plots inillegal subdivisions.In addition, housing tenants increasepopulation densities, reducing urbansprawl and cutting some of the demandfor expensive infrastructure in peri-urbanareas. Finally, renting is sometimes a more suitable tenure option for the youth who are becoming more mobile in order to find employment.While renting is not the panacea to solving the housing challenge in the region, it does constitute a significant and vital housing tenure option that should be promoted alongside homeownership.

10. Overall the region’s housing finance markets are undeveloped with significant impact on affordability. Figure 1 below sets out the most recent data in terms of the size of the residential mortgage markets in the countries being covered as part of the proposal. Even within the region there are marked disparities, but all countries have far lower levels of penetration than developed economies where on average across EU the mortgage debt/GDP is over 50 per cent and reaches over 70 per cent in US and UK. The reasons for the lack of development are many and varied, ranging from issues with land titling and property registration, credit risk management, foreclosure, as well as scarcity of capital andaccess to long-term funds.

Figure 1–Residential Mortgage debt to GDP - (most recent data available)

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Source: World Bank mortgage database collated from Central Banks and other national sources.

11. The availability of suitable housing finance for low and middle income groups is an important driver of affordability and a condition for transforming the population's housing needs into effective demand.Specifically, the region lacks appropriate financial products for lower income groups – such as housing microfinance, and appropriate mortgages for new housing, as well as upgrading to bring substandard housing up to par and improve living conditions. The availability oflong-term housing financemakes housing more affordable by spreading large investment costs overtime, and limits exposure to volatile payments by the use of fixed interest rates. Without such a system lending remains short term and translates into prohibitive terms for lower and middle income groups.

C. Alignment with the Transition Fund objectives12. This project is a timely response to the increased priority placed on improving living conditions as well as generating opportunities for growth and employment by the targeted transition governments following the Arab Spring upheavals. The project supports the key pillars of the Transition Fund as follows:

13. The project supports the objective of the Transition Fund of fostering inclusive economic growth by promoting access to affordable housing to underserved and young households. With approximately 60 percent of the population under 25 years of age, the availability of affordable housing will help meet the basic needs of citizens in this stage of life. Young households and low and middle income households are the most limited in financing options, both because of their inability to afford down payment and also their limited ability to access finance from banks for long term loans. At the same time, housing is often their biggest expense, which can account for up to 50 of their budgets. If housing products and housing finance can be made more affordable, that will free-up resources that they can use for other opportunities, such as starting small businesses. For example, the rental market can be a smart solution for young households, single or family, to give them time to save for a future housing investment or to focus on other projects. An increase of the housing production on the lower segments should also help balance

the price creating more affordable housing opportunities to the low-income households. Mortgage availability for low-and middle-income groups encourages investment in both residential property and other real estate (such as retail shops and other small businesses). Additionally, structured mortgage market asserts legal and financial accountability to individuals and families who might remain in the informal sector. This, in turn, encourages medium to long term growth and new jobs for low and middle income workers. Finally, international experience also suggests that living standards increase when there is widespread availability of home mortgages because mortgages have a positive impact on the quality of housing, infrastructure, and urbanization.

14. The project is also in line with the Transition Fund objective of supporting job creation . Activities supported by the project are expected to promote more efficient use of government resources and better leverage of private sector capital which will translate into more housing investments. Increased investment in housinginduces the creation of jobs in housing construction and related sectors through horizontal and vertical supply chains in the economy. The arguments around the job multiplier effect from housing construction have been well made. Temporary and permanent employmentis created at a scale of approximated 3 jobs per home built, this includes jobs in upstream areas such as raw material production, cement production, timber and aggregates. In addition, there are also impacts on local economies where the construction jobs are created, and in the service industries linked to housing, such a mortgage lending, real estate agents and retailers of furniture and appliances.

15. The project will also contribute to the Transition Fund objective of enhancing economic governance and supporting sustainable growth. The project will support the reform of public service delivery in a social sector such as housing by promoting the efficiency and targeting of government implemented housing subsidy and guarantee mechanisms and ensuring a more efficient use of government funds to combine with private sector investment and free up fiscal resources. The project will also contribute to the promotion of a sound housing finance system by the development of long term liquidity and fixed-rate funding for housing finance and improving prudential norms for managing mortgage credit risk and asset and liability mismatches within the banking sector. This ensures that the financing of the households that are currently underserved does not follow a sub-prime lending pattern.

D. Alignment with national strategies16. In post Arab Spring context, governments of the region have focused on preserving stability and making rapid progress toward social and economic inclusion. Public interventions that will alleviate the civil unrest that has resulted from precarious living conditions and limited economic opportunity have been prioritized. These programmes necessarily have brought housing to the forefront of the political agenda.

17. Egypt.The Ministry of Housing and Urban Development is currently finalizing a National Housing Policy Strategy, which intends to stimulate participation by the private developer and finance sectors, for both low-income rental housing and lower to middle income ownership programs. Urgent stimulation of the housing sector, through the proposed project and other programs planned by the government, would greatly benefit the economy in the face of continued weaknesses in other sectors, such as tourism.

18. Morocco.A comprehensive strategy for the housing sector (2012-2016) based on three pillars, namely increased supply of affordable housing, diversification of the offer, and improved governance of the sector. Within the first pillar, affordable housing production will be stimulated by new incentives to

promote low-cost housing (lower requirement for beneficiaries’ revenues, simplification of administrative procedures and increased support to developers). In addition, the Department of Housing is in the process of preparing specifications to ensure production quality, including a new framework for quality control of self-construction and new measures relating to the aesthetics of the production for this segment. Under the diversification pillar, the government also stated in its objective the development of new affordable housing units towards the middle classes as well as specific measures to promote the social rental segment. In addition, the new strategy also lays the ground for a strategy for the development of cities that would assist cities and local governments to improve planning and financing of service delivery, strengthening governance and enabling the core elements of the city system to function effectively, in conjunction with housing delivery. The Project will contribute to various elements of this strategy specifically pillar one and pillar two. The government has also made concrete steps on the rental sector, with two bills (yet to be passed into law. The two bills deal respectively with the setting and revision of rents, and the establishment of a pre-litigation device required for commercial disputes to decongest the courts.

19. Jordan.The government recognizes the need for new approaches to promote affordable housing, including measures to deepen the financial system, promote the private sector, and reduce the role of the public sector. The Government's housing strategy intends to implement measures to mobilize and increase mortgage financing by the banking sector, and also to shift responsibility to the private sector for developing land and housing for lower income households. The strategy is structured around four pillars: (i) developingcomprehensive housing policies; (ii) activating Public Private Partnerships; (iii) enablinglimited income groups to access adequate housing; (iv) providinghigh quality services to target groups. The Project would support components of this program, to expand the housing finance system and to reform the production sector.

20. Libya. Initial consultations suggest that housing is one of the Libyan government’s main concerns and a government priority. The government reportedly wants to move against the phenomenon of unauthorised dwellings and the occupation of public property, a symptom of Libya’s persistent housing crisis. In order to tackle the problem quickly, the Ministry of Housing and Utilities plans to set up 6,500 prefabricated housing units as a temporary solution. Such measures will give the government some more time to decide on the resumption of larger-scale construction projects that have been on hold since before the Revolution. The government would also like to develop a comprehensive framework for the government’s housing policy, taking into account both present needs and recent demographic changes and the sustainable development imperatives.

21. Tunisia.The Tunisian government is already taking steps to review the current set of policies and develop a long-term strategy for the housing sector. Part of this initiative is a strategic review, and implementation of new initiatives to stimulate the sector. The government has identified housing as a key priority and has taken immediate action to address the qualitative housing deficit by launching two new programs in 2012, one on the construction of 20 000 units of social housing and the other, on eradication or renovation of rudimentary housing in rural areas or small towns.These programs, targeted at households earning between one and five times the minimum wage, (approximately between 300 and 1500 DT / month), will benefit from budgetary and land resources from the State to deliver assistance to target groups according to their income. The state is also investigating the use of tax advantages in order to attract private developers and in both programs, the businesses that are engaged in construction are local, in order to maximize job creation and employment for Tunisians.

II. PROJECT DESCRIPTION

A. Project Objective22. The objective of the proposed project is to support the recipient Governments in designing reforms of programs and policies to promote access to affordable housing for the low to middle income households. The objective will be achieved by (i) supporting the governments in the evaluation of their existing programs for affordable housing, (ii) designing the key policies that will be catalytic and transformational in improving the supply of affordable housing and the availability of affordable housing finance, and (iii) supporting cross-regional knowledge sharing and expertise strengthening in the area of affordable housing and housing finance. The project will ultimately contribute to improving the living conditions of the populations through integrating housing development with access to better social and economic prospects, and generating opportunities for growth and employment in the context of post Arab Spring upheavals.

23. The project will help the government build up a comprehensive national policy framework for affordable housing, which will be achieved through a program of technical assistanceactivities. These programs are designed according to the specific context of each targetcountry, yet developed using a common assessment framework that helps to guide the prioritization and selection of activities in collaboration with the local government. This ‘programmatic approach’ creates a common structure for the technical assistance components in each country to maximize opportunities for synergies and cross-pollination of expertise and experiences across countries. The project will also encompass regional knowledge sharing and training activities that introduce innovation and best practice from around the world in the delivery of affordable housing and housing finance products, risk management, policy making, and increased accessibility to housing finance for lower income groups while ensuring responsible lending practices.

24. The project will support country level interventions through technical assistance and advisory work, but will also aim to build a regional dimension to affordable housing and housing finance.Each component will include a number of country level deliverables, but there will also be over-arching themes which represent areas of commonality across the client countries. For instance, all five countries need to improve mechanisms for owner-driven construction, bring developers down-market, or reform their affordable housing subsidy systems. They are each adopting a range of international best practice solutions which need to be tailored to local contexts, and would also benefit from sharing their experiences with each other.Other examplesinclude the need to develop sufficient long term funds to grow their housing finance sectors or Islamic housing finance where consistent standards and best practice could help integration of the sector across the region. These common themes will form a framework for the regional work but would also be subject to adjustment in emphasis and content for the specific circumstances of each of the selected countries. Component 3 in particular will help provide the means and tools for knowledge sharing through training, events and workshops.

B. Project Components25. The proposal focuses on five priority Transition Fund countries: Egypt, Jordan, Libya, Morocco and Tunisia. The project will seek engagement with both the private and public sectors. It will work at a policy level to help foster the right environment for a project while also working with the private sector towards creating very tangible and concrete results through the delivery of housing and housing finance. The project will be structured around three main components:

Component 1: Scaling up the Supply of Affordable Housing

26. This component would support advisory services to governments for removal of supply side barriers to affordable housing. Key challenges and constraints faced by selected countries in the provision of affordable housing will be investigated under a comprehensive diagnostic framework, which brings together various inter-related influential factors, including policy, institutions, legal and regulatory setting, urban planning, infrastructure, land supply, subsidies and construction industry, etc. Also under the framework, current government policies will be assessed and benchmarked against international best practices, based on which policy recommendations will be provided. Specific activities may include:

Housing demand analyses.Carrying out housing demand analyses by building income distributions databases and disaggregating demand by price segments, geographical areas, etc.Meanwhile, since World experience suggests that home ownership is not a good or feasible solution for all, particularly for the poorest, these analyses would also look at the potential of rental solutions for lower income households where appropriate as an alternative to home ownership as well as constraints that depress the demand for rental housing

Improvement of land management and urban planning practices. Targeted policy measures may address improving the efficiency of land markets through reform of land tenure regulations, registration, subdivision and transaction procedures. Introduction of value capture mechanisms for government investments and improving the setting for private sector participation in land and housing development will be a way to establish sustainable strategies to increase supply of serviced urban land for affordable housing.

Strengthening coordination and integration of urban planning andhousing institutions. This sub-component will work to facilitate better coordination amongst public institutions that play a role in the housing supply chain. Coordination of land supply, planning infrastructure and housing provision is a key measure to support the building of cities that are efficient and sustainable. Issues that will be taken into account include: avoidance of systematically building social housing on the cheapest land and far way from locations of employment opportunities ; promotion of social mix in the newly produced neighbourhoods; equipping these neighbourhoods with socio-economic facilities and to attract businesses; and to provide the residents with satisfying public transportation, etc.

PPPs for affordable housing delivery. Technical assistance to select governments will be provided to initiate or improve PPP frameworks for affordable housing delivery. Housing supply value chains – which start with land acquisition, zoning, infrastructure, site layout, housing design, construction, and end with the long-term off take financing for households to pay the sales price – are hard to connect, take time to build, and require a specialized strategy to engage the private sector via PPPs. This sub-component may include development of simple model procurement documents, such as bid documents, contract forms, and simple standard “energy efficient” and environmentally sustainable designs, which could be directly put to use.

Support to developers. These programs will aim to increase developer capacity and knowledge that they can deliver high quality products that appeal to home buyers at lower costs. Low-cost home design, new building technologies and energy efficiency will contribute to these solutions. The sub-component would also work on developer finance issues and the efficiency and effectiveness of government incentives, for both built-to sell and rental tenure models,to address affordability on the supply side, and balance the contribution and risks taken on by the state and

private partner.

Support to owner-driven construction. This component would cover twomain areas: (i) developing customized housing loans– in terms of amounts, maturity, security,etc. to self-construction and consideration of other financing mechanisms, for example, community financing (where soft loans are provided to enable communities to purchase land that they occupy or new land and to construct and facilitate home improvement); (ii) ensuring minimum quality standards – including access to infrastructure, in particular through enhancing the capacity of local builders and artisans and proposing and testing business models (e.g. partnerships with lenders, certification of builders, borrowers’ training and protection).

Upgrading policies to regularize informal settlements and rehabilitate old quarters. Technical assistance will be provided to selected governments to create the necessary incentives to integrate the informal into the formal market and regularize this dynamic sector to formally contribute to housing deliver. Approaches in this aspect of the program will be determined by the local legal, economic and social characteristics that explicitly keep squatter and informal communities out of the formal sector. Policy measures to improve tenure security, housing quality and access to basic services are usually adopted but they prove to be more effective in the long term. Rapid growth of the informal sector requires more practical planning, which could copeinstantly with issues caused the large inflow of population into cites every day. Technical assistance will be provided to find suitable policy tools in this respect, such aslaying out the street grids and street rights of way, keeping people out of the hazardous slopes and flood plains, and making sure some public green space is set aside. Solutions may also include the regularization and rehabilitation of dilapidated housing in historic urban centers, where mechanisms for sustainable maintenance and home upgrading are required to regenerate these areas, and promote their potential for tourism and local economic development.

Component 2: Expanding Access to Affordable Housing Finance

27. Housing supply cannot increase if adequate financial resources are not available to make potential demand effective, which is not the case even when prices are commensurate with incomes if investment relies entirely on self-financing. This component will provide support for policy reforms of the legal, regulatory and institutional framework to promote affordable housing finance. The Project will strive to design and implement the activities of this component with a view to maximize multi-country efficiencies, as appropriate. In this regard, the areas of the regulatory and prudential framework modernization, of the mechanisms for long term funding access and of the subsidy design and implementation are all likely to present opportunities for regional collaboration. For example, global best practices in regulatory and analytical data disclosure and capital allocation policies and principles should be implemented in all of the participating countries with substantial uniformity; thus the Project support to the regulators and other market stakeholders may be methodologically and operationally structured to take advantage of this, e.g. by utilizing a single group of consultants, or by drafting a single pool of materials. Specific activities may include:

Strengthen publicly-funded mechanisms for affordable housing finance: This sub-component will support governments in reforming operational mechanisms put in place such as demand subsidies and income based guarantee mechanisms to bring the financial system down market.

Existing subsidy mechanisms will be assessed from the perspectives of fiscal efficiency and sustainability, appropriate targeting, transparency and impact; appropriate modifications will be proposed and their implementation will be supported. For example, the project would support interested governments to moving towards more inclusive, transparent and efficient subsidy programs for the low and middle income households. It would also support improvements in the targeting and efficiency of housing finance guarantee programs with the aim to induce sustainable lending to lower income categories and informal sector households.

Promoting access to long term finance. Increased access to long term finance is a critical component to providing affordable housing. This sub-component will provide technical assistance to relevant mortgage lenders and mortgage refinancing facilities to expand their access to bond markets in terms of breadth (investor universe) and depth (range of investment instruments including covered bonds and securitization).

Strengthen prudential frameworks for housing finance.This sub-component would support: (i) as a first step, improving statistical information available to supervisors by distinguishing mortgage loans between real estate and other (SME finance) purposes, and classifying mortgages as residential, developer, or commercial; (ii) improving capacity for real estate lending monitoring, by annual cohorts, LTVs, debt repayment-to-income ratios and NPLs; (iii) strengthening prudential framework for managing asset-liability mismatches; (iv) mandating stress tests particularly for floating rate loans; and (iv) developing and enforcing prudent lending and servicing standards for lower income households.

Strengthen the efficiency of mortgage rights.Enhancing the credibility of property collateralizationis of utmost importance for developing the supply of housing finance. The efficiency of mortgage rights is not only a matter of expedient processes and operational capacities of judges and enforcers of judicial decisions; it also implies the ability of lenders to distinguish between good faith and wilful defaulters and to develop loss mitigation policies, as well as a consumer protection framework aiming at borrower awareness and including safeguards against abusive claims.Strengthening efficiency of mortgage rights could include a wide range of actions. These would range from establishment of mortgage register, to specialized commercial courts for processing foreclosure cases, developing specialized underwriting procedures, amending laws or regulations relating to mortgages and property rights, or other institutional reforms to help speed up the process and reduce the cost.This sub-component would work with policy makers and lenders on these areas.

Support to housing microfinance, as appropriate. The project would support the introduction of housing microfinance for lower income households building a system that can be sustained, scaled up, and oriented to the private sector.

Support to Islamic housing finance, as appropriate. Technical assistance would be provided for the development of the legal and regulatory framework for Shariah-compliant housing finance including sukuk based long term funding mechanisms. This will diversify the offering of housing finance products to respond to particular local demand.

Component 3: Affordable Housing and Housing Finance Knowledge Building andSharing

28. This component would aim to share best practices and create some regional dialogue across the

program countries in relation to the above stated regional themes- mainly through the delivery of regional training programs, workshops and seminars for knowledge building and knowledge sharing.

29. An annual housing training program will be developed and anchoredin the region in partnership with the Wharton School of the University of Pennsylvania and relevant regional academic institutions, for example, discussions to host the training have began with Abu Dhabi University. The program will provide executive intensive education in policy innovations and institutional, financial and managerial aspects of affordable housing and housing finance, with a MENA focus. One of the key objectives of the project would be assist with the initial start-up costs, training of lecturers and technical inputs required to establish this training program on a sustainable basis, where it will continue to be delivered in the region and by the region and to be held annually beyond the closing of the project.

30. This component will also include local training workshops and regional conferences that will be organised regularly and in direct response to beneficiary country requests and needs that are identified via the implementation of Component 1 and Component 2 of the program. These initiatives will enable technical capacity-building as well as institutional strengthening and further promote policy integration at the regional level.

31. Finally, an e-platform to be set up as part of this component will consolidate relevant resources and documents. The e-platform will leverage the existing Housing Finance Information Network- (HOFINET) a non-profit organization affiliated with the Wharton School of the University of Pennsylvania. HOFINET consolidates global housing sector information, standardized data, news and legal documents and makes it available in the public domain on a web portal. It covers more than 125 countries and works with regional and country partners to collect and update the information (http://hofinet.org ) .This platform will provide the space to better identify and assess the various (and numerous) pre-existing initiatives implemented in the region to promote affordable housing and can act as a starting point for the establishment of a Regional Housing Network, which brings together policy-makers and practitioners to learn from each other on an ongoing basis.

C. Key Indicators Linked to Objectives32. Section B (Results Framework and Monitoring) identifies some of the projects’ key output, outcome and impact indicators.

III. IMPLEMENTATION

A. Partnership Arrangements33. The Project is being prepared and will be implemented jointly by the World Bank and Arab Monetary Fund. The World Bank (WB) and Arab Monetary Fund (AMF) intend to scale-up technical assistance and capacity building activities in support of housing and housing finance already initiated through Arab Housing Finance Initiative (AHFI)1through this proposed joint project. The Arab Housing Finance Initiative Secretariat (“AHFI Secretariat”), which was established within the AMF, will coordinate

1On April 2012, the AMF and the World Bank signed an MOU for the Arab Housing Finance Initiative (AHFI) to expand cooperation between the two organizations in the sphere of housing finance. AHFI was established as a central source of knowledge and best practice on housing finance for the Arab World, as well as for dissemination of such knowledge and practices, in part by way of provision of housing finance technical assistance in the region. The first joint World Bank and Arab Monetary Fund undertaking under the AHFI took place in Jordan at the end of 2012 with a technical assistance mission for the Central Bank of Jordan to undertake a strategic assessment of the Jordan Mortgage Refinance Company (JMRC).

work between the WB and the AMF under this project and offer a platform of public and private stakeholder participation and dissemination of best practices. This cooperation builds on the success and experience of other cooperation projects between the WB and AMF such as the Arab Payment Settlement Initiative (API) and Arab Credit Reporting Initiative (ACRI).

34. The project will be implemented in partnership with the MENA Urban team. The group provides advisory services formulationof housing and urban policies and operationalapproaches to urban development, institutionalstrengthening of urban and land planning capability. Over the years, the urban strategy has gradually moved towards interventions to extend accessof underserved groups through (a) improving the design of subsidies and using public finance to leverage greater private sector involvement in affordable housing; (b) promoting the development and improvement of the basic infrastructure that supports housing; and (c) supporting the policy and institutional framework for housing production, including land titling and urban planning. The group also has rich experience in urban upgrading and regularization of informal settlements.

35. The project will be implemented in coordination and collaboration with IFC’s housing finance advisory services and housing investment groups. IFC’s housing finance advisory services promotes lending standards geared to sound and best international practices through its tools and capacity building expertise. IFC has developed and implemented the Global Mortgage Toolkit and the Housing Microfinance Mortgage Toolkit to help lenders hone current operations or establish new operations in housing finance. IFC’s Financial Markets group provides debt and equity to banks, microfinance institutions, specialized mortgage companies and liquidity facilities including the Egyptian Mortgage Refinance Company (EMRC). IFC is also currently looking at investments in greenfield Islamic housing finance companies in Morocco, Tunisia and Egypt. IFC’s Manufacturing, Agriculture and Services (MAS) investment team is responsible for investments in affordable housing developers. In recent years IFC have developed an initiative for a 1,260 unit affordable green housing project in Upper Egypt, which is now in the project development stage.

36. The project will partner with the International Housing Finance Program of the Zell/Lurie Real Estate Centre of the Wharton School for the delivery of the annual regional Housing Finance Executive training program. The Zell/Lurie Real Estate Centre of the Wharton School is the world’s leading international educational institution in providing high level training to policy makers on housing and housing finance issues. The Program was established in 1985 to foster excellence in housing policy and housing finance education, research, and technical advisory services, with a specific focus on developing and emerging market economies. The WB together with the Wharton School will build on the successes and experience in holding numerous training courses and knowledge events including a now firmly established African Housing Finance course hosted by the University of Cape Town, and a highly successful course held in Uzbekistan for the Central Asian region. The course helps support ongoing work in a number of client countries looking to implement policy reform and expand housing finance markets further down-market.

37. The project will be implemented in coordination with complementary donor projects to take advantage of synergies between different donor-funded activities. During project preparation for a target country, the team undertakes consultations with donors active in the housing and housing finance sector in the target countries to coordinate efforts and better identify the Project's value-add. Opportunities to leverage results between this project and other initiatives will be sought. Possible partners may includeAFD, AfDB, Islamic Development Bank, USAID, DFID, EBRD and GIZ, as well as the World

Bank Institute that has been active in South-to-South knowledge exchange. For example, in Egypt, the Development Partners Group, which is a thematic group on Urban Development (DPG-UD) has been working to coordinate, harmonize and integrate all urban development projects and initiatives supported by donor organizations. Similar groups working on housing finance and affordable housing initiatives can also be formed within the target countries. Where the Bank lacks expertise, it will recruit consultants or form new partnerships to address these gaps and ensure strong implementation.

B. Institutional and Implementation Arrangements38. Project scope. The specific scope of the program in each target country is determined through consultation with local governments and in response to their specific priorities and requests for technical assistance in each component. This refocuses the concept around fewer activities;more clearly articulated with each other, in direct relation to each country’s interests and clarifies the implementation approach and methodology for each sub-component. Initial missions are carried out for each participating countryprior to submission to the Transition Fund to ensure that recipient countries are indeedrequesting the technical assistanceand studies that will be provided, that there is clear appetite to support the reform recommendations selected by the government and formal ownership and vetting mechanisms by countries are designed and established. By developing the detailed activities of the technical assistance program for the Transition Fund proposal in coordination with the governments of each country and formalizing country consultation mechanisms throughout the implementation stage, the World Bank will ensure country support, ownership and leadership throughout the initiative.

39. Project processing track.It is proposed that the project follows the Bank’s Non-Lending Technical Assistance processing track, with a Programmatic Approach (PA). The PApresents the most adequate fit to the structure of the proposed project. Consistent with the PA, the project will be developed as an umbrella program allowing for the combination of more than one knowledge activity (e.g. Economic and Sector Work, non-lending Technical Assistance) supporting a common development objective, as well as project phasing, so that countries are able to join the program over time.

40. Project execution. This project would be World Bank and AMF executed. The World Bank component will follow World Bank’s standard operational policies and procedures, including procurement and resource management policies. A team with an appropriate mix of specialists will be responsible for the day-to-day running of activities. It will draft the Terms of References (TORs) to commission consultants to deliver the technical assistance and capacity building activities. It will coordinate monitoring and evaluation for the project. Budget will be allocated to monitoring and evaluation of activities to ensure indicators are established and verified and the outputs and outcomes are attained.

41. Advisory committee. An advisory committee consisting of the AMF’s Financial Markets department, World Bank’s MENA FPD team, capital market global practice and Urban Team will provide strategic guidance to the team throughout the project

42. Rationale for World Bank’s role. World Bank implementation of the proposed project is sought on the following rationale: (i) the World Bank Group‘s ability to provide an array of in-house and external global expertise in the urban, housing finance development area; (ii) the World Bank Group‘s knowledge and unique expertise in delivering similar affordable housing sector development and housing finance programs around the world and specific knowledge and involvement in the region; (iii) the World Bank is perceived as a credible honest broker able to facilitate efforts by the public and private sectors to mobilize resources and technical assistance needs for housing finance;and (iv) the World Bank’s experience

facilitating country-led reforms and policy initiatives.

43. Rationale for Regional Approach.The ISA-executed regional approach to the Project has been selected as it allows common themes in affordable housing to be used to form a framework for engagement with each country. This Programmatic Technical Assistance format acts as a common methodology to evaluate each country’schallenges in affordable housing. Benefits of the regional approach include common trainings and the use of the same pool of experts, which enables synergies between independent country activities, mutual learning, knowledge exchange and better regional integration, Certain activities and frameworks for implementation, supervision and evaluation, which are designedfora target country may be sequenced or directly coordinated with those of other participating countries. This will be investigated in project preparation and considered on a case-by-case basis.The project does not aspire to create regional standardization, but instead to work in close cooperation with target countries in order to cater a specific mix of activities that will be driven by specific country needs and priorities, and then to facilitate region-level exchange and capacity building for sustained program impact.

C. Project Budget and Financials

This project budget is the total amount requested for the initial target countries, Morocco and Tunisia.

Cost by Component Transition Fund

-World Bank(USD)

Transition Fund

-AMF(USD)

Country Co-

Financing (USD)

Total(USD)

Component 1: Increasing production of affordable housing, from the supply side

$1,800,000 $1,800,000

Component 2: Expanding access to affordable housing finance, from the demand side

$1,800,000 $1,800,000

Component 3: Regional knowledge building and sharing. $400,000 $400,000

Total Project Cost $3,600,000 $400,000 $4,000,000

Grant Preparation grant administration

Staff Time Travel Consultants

$160,920 $60,000 $220,920

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A. Results Framework and Monitoring

*Intermediate Outcome(s) *Indicator(s)

Policy/strategy informed Government policy/strategy informed

Client capacity increased Design capacity strengthened Implementation capacity strengthened

Innovative approaches & solutions generated New innovative approach fostered,

New innovative approach developed

Knowledge deepenedFacilitated exchange of best practice with clients, Facilitated exchange of best practice with partners, Disseminated best practices

Development financing informed Mobilization of non-Bank resources informedGovernment expenditure informed

Custom Intermediate Outcome(s) and Indicator(s)

Custom Monitoring and Evaluation framework are provided in the detailed country proposals.

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ANNEX1- RISKS AND MITIGATION MEASURES

There are a number of potential risks that require mitigating factors to ensure the success of the implementation of activities covered by the proposed program. The table below summarizes these risks and their mitigating factors:

Risk Rating MitigantMany countries in the MENA region are marked with some political and social unrest or are in post-conflict situations. Volatile macroeconomic and political contexts may jeopardize and/or slow down project implementation activities.

Substantial The World Bank and AMF team will build strong relationships with clients and will monitor ongoing political and economic situations closely.

Inadequate capacity of some implementingentities and the bureaucratic hurdles especially in countries where there are fluid environments and continuous changes in government officials may affect the speed and quality of implementation of activities under the trust fund.

Substantial This risk is mitigated by the assurances / endorsement which will be obtained from country counterparts that they are committed to implementation of project deliverables. The Project will also work on providing capacity to the implementing entities, and develop a clear institutional framework for execution.

Shortage and inexperience of internal staff resources or poor performance of external consultants engaged by the team could result low quality work. This might result in reputational risk for the World bank and AMF.

Low The team will leverage internal resources within the World Bank’s Urban Team, World Bank’s Global Capital Market Practice – Housing finance Group- and AMF Financial Markets Division. The procurement of external parties would be carried out through an open competitive process to attract the best available resources, which would then be closely monitored by the World Bank and AMF team to ensure high quality deliverables.

There is risk that counterpart public and private institutions may not have the capacity to absorb technical assistance.

Moderate The project will provide hands-on advisory services to clients by providing resident advisors, training programs, capacity building programs, toolkits, and other tools.

Some of sectoral constraints will not be addressed by the trust funded activities such as macroeconomic and regulating policy uncertainties, access to land, and corruption.

Substantial The five focus Governments have demonstrated their commitment to macroeconomic stability, as well as, governance and transparency reforms. Authorities are expected to mitigate these risks with further reforms.

The need for coordination between World Bank and AMF can affect speed of delivery of technical assistance.

Low The World Bank and AMF plan to maintain strong working relationship on the ground level through using joint WB-AMF work plans. The Arab Housing Finance Initiative Secretariat should facilitate the coordination effort.

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