Document of The World Bank FOR OFFICIAL USE ONLY Repot No. P-5476-KO MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$100.0 MILLION TO THE REPUBLIC OF KOREA FOR A HOUSING PROJECT MAY 3, 1991 This document has a resticted distribution and way be used by redipiets only In the performawc of their official duties. Its contenb may not otherwise be dislosed without Wold Bank authorizatin. CURRENCY EOUIYALNS (as of December 31, 1990) Won 1 - US$0.00140 Won 716 - US$1.00 GOVERNMENT OF KOREA FISCAL, YEA January 1 to December 31 WEIGHTS AND MEASURES m - Meter (3.2808 feet) km - Kilometer (0.62 mile) me - Square meter (10.76 square feet) k2 - Square kilometer (0.3861 square mile) ha - Hectare (2.47 acres) py - Pyong (3.3 square meters) PRINCIPAL ABBREVIATIONS AND ACRONYMS USED EIA - Environmental Impact Assessment EPB - Economic Planning Board RHB - Korea Housing Bank KNHC - Korea National Housing Corporation KLDC - Korea Land Development Corporation NOC - Ministry of Construction MOE - Ministry of Environment MOp - Ministry of Finance NHF - National Housing Fund OSROK - Office of Supply, Republic of Korea PDS - Policy Development Statement FOR OFFICIL UK ONLY HOUSING PROJC Loan and Project Summary Borrower: Republic of Korea Amotmnt: US$100.0 million equivalent Tlgrms: Repayable in 15 years including 5 years of grace at the Bank's standard variable interest rate. On-lending Terms: Through the National Housing Fund (NHF) to low- income households at 108 (variable) for home purchase repayable over 20 years including a 5 year grace period. Financing Plan: IBRD US$100.0 million mOC USS400.0 million TOTAL USS500.0 million Economic Rate of Returb: Ranges from 10% to 16% Staff Anpraisal Renort: Report No. 9340-KO, dated Kay 3, 1991 IBRD No. 20170 This document has a nstriced disutibution and may be used by reclrpents oy .n the p tormane of their official duties. Its contents may not otherwise be disclosed without Wor* Bank Authoritlon. MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF KOREA FOR A HOUSING PROJECT 1. The following memorandum and recoumendation on a proposed loan to the Republic of Korea for an amount of US$100.0 million is submitted for approval. The proposed loan would be at the Bank's standard variable interest rate with a 15 year maturity including a grace period of five years. The proceeds of the loan would be onlent through the National Housing Fund at 10% (variable) to low- income households for home purchase. 2. )aWc1g n. In less than a generation, Korea has become a middle- income industrialized country with many of the obvious signs of economic success. However, in the area of social needs, and housing in particular, the situation has not improved in line with the rapidly increasing incomes. In fact, much of the growing investment in housing has been taken up by escalating prices rather than greater output. Since 1985, housing prices have been risig about a third faster than consumer prices and urban land prices have escalated almost three times as quickly. The result is that Koreans now live in houses more than six times their average annual income, which is among the highest ratio observed in any market economy. The high level of prices for housing and land and the perceived resulting impact on wealth and income distribution are viewed as serious social and economic problems. The Government has sought to address housing sector problems by intervening specifically on behalf of lower income families with targeted programs and policies and with direct measures to restrain price increases throughout the market. The direct interventions have not worked well and some m-%sures may actually have inadvertently pushed prices higher. The Government has . :4 somewhat greater success in targeting the main social housing program, the National Housing Fund (NHF), which has led to a broader rethinking of housing policies and public programs at this time. 3. The Ministry of Construction (MOC) through its Housing Bureau has the main responsibility for the formulation of national housing policy and plans. 40C prepares the section of the Five Year Plan pertaining to housing as well as the anrual targets and goals for the sector. NOC staff, with the assistance of a ministry-sponsored research institute, formulate all key policies and provide most of the day-to-day regulations that govern the housing and land markets. They exercise the policy implementation and regulatc.y functions directly as a line ministry and indirectly through the activities of several ministry controlled agencies such as the land and housing corporations. One important instrument for implementing social housing policy is the HF, described more fully in the following paragraph. 4. HOC directly executes a portion of its low-income houslng program through the NHF, which is the intended conduit for funds under the proposed project. Since the establishment of the NHF in 1981, MOC has used this mechanism to make loans for the purchase of small units and for the construction of rental property, both for lower income households. In the case of the rental units the benefit of low-cost financing is passed on to the tenant. For house purchase, NHF loans carry positive interest rates. NHF made about 70,000 loans for purchase in 1989. It also assisted in the construction of 40,000 units of rental housing of which there is a special shortage. Funds for NHF are primarily raised -2 - from tax-like instruments which are levied in a progressive manner on sales of land and large houses. Under the Housing Finance Project (Loan No. 2853-K0) the Government successfully improved the targeting of NHF programs by, inter alia, reducing the maximum and average size of unit funded by more than 30%. Benefits are progressive within its programs and NHF constitutes the most successful element among the Government's policy instruments for aiding lower income households. 5. Central to preparation of the proposed project has been a dialogue with MOC on further reform of its social housing programs as well as sector-wide housing policies and regulations. The proposed strategy for such a policy and program review is described in the Policy Development Statement (PDS) wherein the Government sets new policy directions, including a hierarchy of monitorable goals, and adopts a methodology for analyzing public sector interventions in the housing sector and for developing detailed reform measures within that framework. Agreement has been reached on the content of the policy and program review to address several important sector problems, namely, high land and house prices; high rents and levels of crowding; uncompetitive conditions resulting in high returns to land development; and ineffective subsidies. Preliminary analysis has identified four priority areas for reform, namely, Government housing programs, housing sector regulation, the land supply system and ot-.her housing related polices, such as capital gains taxation. Broad reforms are needed in all these areas to restore efficiency and equity to the housing sector. Progress in carrying out the sector reform program will be monitored against five key sector performance indicators; reductions in the ratio of average housing prices to household income; the level of rents relative to incomes; the ratio of the price of adjacent raw and residentially zoned land (to reflect a more elastic land market); the ratio of market price to factor cost of new housing (to measure the general competitiveness of the housing industry); and the rate of progress in ssisting target households in the bottom half of the income distribution. 6. Rtionale for Bank Inmolvement. The Bank has played a catalytic role in promoting ever more general approaches to issues and problems in the housing sector. This project marks the next logical step in a series of operations progressing from speciflc technical interventions on low-income housing types to the development of individual institutions and now to addressing broader market and sector topics. The Government's request for assistance reflects the perception that a distorted housing market is a serious economic and social policy issue at this time where the Bank's independent advice and analytical approaches on the basis of its cross-country experience may help improve Government housing policy and the sector's performance. 7. Proiect Objegtiveg. The project would support the Government's objectives in the sector by providing additional resources to the Government through NHF for lower income housing and by assisting the Government in formulating a framework for housing policy development and an agenda for policy reform in the sector. The Government's broad objectives for program and policy reform are: (a) to better target public housing assistance to the poor in terms of the needs of the recipients and to minimize the cost of providing the assistance, and (b) to improve regulation of the sector in order to increase the efficiency with which the market provides housing services to the entire population. - 3 - 8. Proiegt Deacri2ti The project would, over four years, provide (a) support for an ongoing program of targeted landing through NHF for low-income housing; and (b) technical assistance and training for institutional building in the sector. The proceeds of the Bank loan would be channeled through lHF and would provide end-user financing for approximately 15,000 lower-income households who are participating in NHF's program for owner-occupied housing. The Bank loan would finance a portion of UHF mortgages equal to the estimated Indirect forein exchange which is valued at approximately 25% of the total value of the new housing constructed. ill of NHF's programs are targeted to households in the bottom half of the income distribution and the bias within that range is toward the lower end. The onlending interest rate for NHF's owner-occupied housing loan program is 10% p.a. at present which is now slightly positive in real tenus and is well above NHF's cost of funds. It is, however, well above the last threo year's consumer price average of 5.3% (1987-89) and approximately 1-2% lower than mortgages for higher income households and loans for major comercial borrowers under the prevailing interest rate regime in Korea. NHF's mortgage is a variable rate instrument which can be changed at the option of the lender. During the project period (mid-1991 - mid-1995) NHF intends to lend about US$15 billion equivalent for about 880,00 new housing units. New low-income housing, financed through NHF, would be procured under LCB procedures which are acceFtable to the Bank. ICB is not proposed for the present project because the civil works under Government housing programs are of a dispersed nature located throughout the country and, therefore, are not attractive nor lend themselves to international contracting. Foreign bidders are free to participate under LCB in Korea. Public sector developers procure under LCB procedures which are acceptable to the Bank. Private developers participating in public programs follaw standard cocercial practices, which are acceptable to the Bank. 9. The technical assistance is to the Ministry of Construction and is designed to establish a reform program for housing policies and programs. As described above, the Government has already set now policy directions in the PDS which would be developed into reform programs and specific measures through the studies undertaken as part of this project. The Bank would participate in key aspects of the implementation of the PDS and would also provide technical assistance, in the course of project supervision, on housing and land policy for the Seventh Five Year Plan and the Third National Pbysical Land Development Plan. A program of overseas training and participation in international research projects will be undertaken by MOC during the project. 10. ra&dUActosrz. The Government has adopted the PDS, and agreed to: (a) annually review, with the Bank, progress in implementing the PDS; (b) select subprojects for which Bank loan funds would be disbursed according to criteria acceptable to the Bank; and (c) under TORs for studies identified in the PDS, to select consultants satisfactory to the Bank and make results of the studies available to the Bank by December 30, 1993, for comment. 11. Proiject BeeIts. The main benefits of the project would be: (a) the 15,000 additional housing units financed, (b) improvements in the effectiveness of public housing programs as a result of retcrms, (c) reduction in the relative price of housing due to policy changes which improve the efficiency of the housing market, and (d) institutional strengthening in NOC and Its institutes. -4- The proceeds of the Bank loan would only benefit families in the bottom half of the Income distribution and most beneficiaries will be toward the lower end of that income group. 12. Proiect Risks. There are no specific risks associated with the project. Agreement on the basic directions for policy reform as set out in the PDS has been obtained. 13. IZ OMnMnl Aspects. Environmental Impaet Assessmeuts are mandatory tor the housing schemes to be constructed under the project in conformity with established procedures, which are satisfactory. Where resettlement is required, adequate compensation and facilities for relocation are provided and funds are budgeted for these purposes under acceptable procedures. 14. Recommondation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and rocommend that the Executive Directors approve the proposed loarn. Barber B. Conable President Attachments May 3, 1991 Washington, D.C. -S. RsT~LmCOSTS AND PRNIOPA tjJuMd : Za a1 X" Tal --------------- (US$ sillion) ------ IBRD supported units in NHF Housing Program 399.5 100.0 499.5 Training and Studies 0.5 0 0.5 Total Project Cost 400.0 100.0 500.0 Flnanc&L Plan: leZml Foreig Toal --------------- (US$ million) ---------- Government 400.0 0 400.0 World Bank 0 100.0 100.0 2a 400.0 100.0 500.0 a/ Includes taxes estimated at US$25 million equivalent. MMDSD, P methods: This loan vould finance procure t of nov housing construction under LCB procedures which are acceptable to the Sank. FaZe1i Disbursana: Disbursements would be for 40% of 111 subloans. SankFY F2 122m 1 --------- (US$ million) --------- Anal 8.0 36.0 38.0 18.0 Cumulative 8.0 44.0 82.0 100.0 cRaue of Return: Ranges from l0t to 168 KOR HOUSING PROJECT Timetable of Key Project Processing Events (a) Time taken to prepare: One year (b) Prepared by: Government and Bank (c) First Bank mission: December 1989 (d) Appraisal mission: December 1990 (e) Negotiations: April 1991 (f) Planned date of effectiveness: July 1991 (g) List of relevant PCRs and PPARs: Loan 1980-KO PCR No.8689 May 1990 Loan 2216-KO PCR No.8689 May 1990 Loan 2704-KO PCR under preparation Loan 2853-KO PCR under preparation Page 1 of 2 THE 8TAlJS QE BAK GROUP OPERATIONS IN THE REPUBUC OF KOREA A. SWmnt of ao Loans and IDA Credits /a (As of March 1, 1991) LOn or Amount (USS mOll) *&dIt Fc s canoellatons) Number Year Borower PWpose ank IDA Undbburod Eylrs loans and nine credits fully dbbused 5,827.39 115.58 Of whbih SECALS, SAL and Pram LOas 2071 1982 RPpubI of Korea Strucrl Adjustment Loan 250.00 2354 1984 PpubSic of Koa Stuctural Adjusmet Loan II 300.00 25710+ 1S85 Ikpublic of Korea Second IndusOW Fnane 173.06 723.06 2491 1965 RepublI of Komea wawsuppy m 90.00 .93 2614 1965 SMO Seoul Urban Transporan 28.76 5.87 *2571.2 1985 RepubxI of Korea Second nural Fnance 4.00 1.46 2600 1988 PepublIc of Korea Seout-ua Co4ridor 34.60 3.59 2726 1966 Republic of Korea Ports 111 134.50 6.80 2905 1988 Republic of Koea KyunW Rega Transport 116.00 25.90 2908 1966 Taegu Ciy Government Taegu Uran Trasport 30.00 17.49 2913 1968 Korea Technology Corp. Third Technology Devopnt 50.00 4.52 3037 199 RePublc of Korea TechnolW Ada ment 16.40 12.15 3061 196 Repubc of Komea Road Imrovement 200.00 182.59 3178 10 Republc of Korea Juam Water Supply 34.00 34.00 3202 1990 PRpublk of Koea Technology AdvM nemn a 31.60 30.50 3203 1990 PepublI of Korea Scence Technology Research 45.00 45.00 3314 1991 PRpublIc of Koea Vocatnl Education Pro,ect 30.00 30.00 3315 1991 RPepubl Koea Technol Admvnment m 60.00 60.00 TOM 6,73224 115.58 4S0.80 of which has been repaid 318,. Tol now hold by Bak and IDA 2,94.45 97.25 Amono sold 131.51 of which repaid 86O5 Tolal uodbumed 400.80 460.80 la The stju of d proj w ed In Pat IB descbed In a separat repot on all Baw*A4anced prjet In excuon. which I updated W.ceay and hulated to t Execut D s on Apri 30 and October 3. SML, 8ELor Progmn Loan ScheduleD0 Pe20 f 2 S. State_ ent of WC ivsmet (As of March 31, 1991) Total Undlsae Held ildhig 41 o001nal eon,w, l,,, by IFC Patcpan' Lan 6quy Tot (at cos) Poron Pbicl Yew Oblip Typ of iusines 1961 76K77 Koea Log Term Delope Fiance 16.6 24.8 41.4 22.0 78/88180 Credit Bank /a 1970 Alas Paper Go. Pulp & pap 4.5 .5 5.0 1969 Horam Silk Ind. Co. Tedis 1.4 .3 1.7 1971/74rMM Ka Inestment & Capit Markets 6.5 8.5 6.9 - F8han CroOoation i975/7W/77m7S0 Gold Star Co., Ltd. Elctic & ElectroIcs 26.0 24.9 50.9 168.9 64/80W/w W97S/807 4 Kea Sec. Fin. Corp. Capital Markets 5.0 3.4 8.4 2.0 1976190 Hae Un Dae Devopme TouAm 2.8 1.2 4.0 1.2 - 1975/889 Tong Yag Nylon Co. Ltd. Tke Cod Fablx 6.9 6.2 13.0 5.6 1976148 Chonju Paper Mfg. Co. Ltd. Paper 5.0 .9 5.9 1976188 Korea Zinc Co. Lid. Zinc ReIng 21.0 5.6 26.6 9.7 19779/87 Krea Dev. Leasing Corp. Leasn 15.0 1.8 16.8 1.2 1981 Taihn Bulk Terminal Grain Bulk Teminal 7.0 Z5 9.5 2.5 1982 Korea Tech. Adv. Corp. Research & Dev. .6 .6 1963 Krea Dev. hivt Corp Money & Capi Madts - 6.0 6.0 6.0 2.4 1984 Halla Cement COent & Consir. Materil 4.2 3.9 8.1 8a88 loa Fund Mon" & Cpta Market 12.8 128- 187 KBI Money1CapytaMarkets - .2 .2 - l988 Anam indust Co. Ectonks 15.7 15.7 15.7 988 Oriet Chenlcal Chemical 15.2 15.2 115.4 135.0 250. 89.8 2.4 dred but not vet ndS 1960 Koa Oev. Inst. Corp. Mon & Capita Mkets - .9 .9 .9 .9 TotIl oss mCommns 115.4 138.9 93 Formely known as Korea Developnmet Finance COrporat.on IBRO 20170 I9ZUSSR 171s A1 X / __ -DEMOCRATIC PEOPLE'S REPUBLIC 1 CHINA OF KOREA .2 ~~~rNl ~~~ ~ . / X~ \'S. ULL(JNGoO if)^'o IwJ(l % -t g _ KOE JAPANA3r itS. _26' 37.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~7 4 CHU w/t JCHOLABUK I to,,,4 ~~~~~~~~~~~~~ '4 Ra(lroads N~~~~~~~A - /.--- -.-- Railro-dsREPUBLIC OF KOREA. .o -- ' ' + 9.Airports CI _J Special Cities __ -- Province Boundaries ,WobAoftftd- Cl*er--tl Boundari _-_ _ -C HEJUy o, ax jtp, ~ososo, Itoo, 41, 140 140 0 20 40 49 so 100 13? 1t6' ITA' 1? 196 AUGUST 1986