The World Bank Pakistan Housing Finance: Additional Financing (P172581) Environmental and Social Review Summary Appraisal Stage (ESRS Appraisal Stage) For Official Use Only World Bank Performance Standards (OP 4.03) Date Prepared/Updated: 10 December 2021 Date Prepared/Updated: | Report No: ESRSXXXXXX DATE Page 1 of 17 The World Bank BASIC INFORMATION A. Basic Project Data Country Region Project ID Parent Project ID (if any) Pakistan South Asia P172581 P162095 Project Name Pakistan Housing Finance: Additional Financing Practice Area (Lead) Financing Instrument Estimated Appraisal Date Estimated Board Date Finance, Competitiveness Investment Project 3rd January 2022 28th February, 2022 and Innovation Financing Borrower(s) Implementing Agency(ies) Ministry of Finance Pakistan Mortgage Rrefinance Company (PMRC) For Official Use Only Proposed Development Objective(s) The Project Development Objective is to increase access to housing finance for households, and support capital market development in Pakistan. Environmental Assessment Category FI-2 Financing (in USD Million) Amount International Bank for Reconstruction and Development (IBRD) 85.00 B. Is the project being prepared in a Situation of Urgent Need of Assistance or Capacity Constraints, as per Bank IPF Policy, para. 12? No. C. Project Abstract [including Project structure, components, activities, technical design, flow of funds, etc.] The WBGs integrated interventions in Pakistan’s land and housing sectors address constraints on both the demand and supply side. The Government of Pakistan’s (GoP) policies focus on unlocking binding constraints across the housing value chain, crowding in private capital when possible and introducing public sector interventions where necessary. World Bank’s engagement in the housing sector began in 2018 with the Pakistan Housing Finance Project (PHFP- DATE Page 2 of 17 The World Bank P172581), which sought to improve access to housing finance for low- and middle-income households. The WBG will deliver three complementary projects in 2022 which further build on what has already been accomplished. First, the Punjab Urban Land Systems Enhancement (PULSE, P172945) project will support the digitization of land records in urban and rural areas and create a province-wide parcel-based cadaster. Access to land is a key bottleneck in housing supply and secure land records are essential for housing finance. PULSE will create more secure land rights records and help developers quickly identify developable land in urban areas through a comprehensive public land inventory. Second, the Punjab Affordable Housing Program (PAHP, P173663) will help strengthen housing institutions and systems and enhance housing supply, including affordable housing, in Punjab for lower-income households. It will also raise awareness of housing finance options among eligible beneficiaries and help access them. Third, the Additional Financing for PHFP (AF, P172581) will support a significant scale-up of the credit risk sharing facility under the parent project to promote access to mortgage loans for low- and informal-income households. While PULSE and PHAP will support the Government in its efforts to increase housing supply for lower-income households (where the housing deficit is at its most acute), the AF will ensure that households of this profile have access to finance to benefit from the increasing supply of affordable housing. The Additional Financing (AF) is being proposed to increase access to housing finance for low- and middle-income households and to support the development of capital markets in Pakistan. This is fully aligned with GoP’s increased policy focus on this area. The proposed AF will be channeled through the existing implementation agency, does not entail changes to the Project Development Objective (PDO), and no new safeguard policies are triggered. The AF does include a level-2 restructuring entailing the cancellation of one component and revisions to the results framework, including the revision of one PDO indicator, the addition of an intermediate indicator, and revision of end targets. The For Official Use Only proposed restructuring also includes dropping one implementing agency (Planning Commission) and cancelling unallocated funds (SDR 419,627) due the proposed cancellation of one component. The Housing Finance Project (parent project) was conceived and designed to address structural gaps in Pakistan’s financial system that had impeded the growth of affordable housing finance. The GoP and the State Bank of Pakistan (SBP) began to take active steps to unlock the housing finance eco-system in 2014. Relevant prudential frameworks were developed, amendments to the mortgage recovery law were made, and, in 2016, the Pakistan Mortgage Refinance Company (PMRC) was established. PMRC’s objective is to address several market failures to improve mortgage affordability. It was in this context that the GoP and SBP sought World Bank (WB) support to operationalize PMRC and further their efforts to promote access to affordable housing finance. The Housing Finance Project was approved by the International Development Association (IDA) Board of Executive Directors in March 2018 and became effective in June 2018. The project, funded at US$145 million, was comprised of three synergistic and mutually reinforcing components. Component 1 (US$60 million) entailed the establishment and operationalization of PMRC. The project supported the injection of US$60 million in long-term subordinated debt to help strengthen PMRC’s capital base and support it in meeting the SBP’s minimum capital requirements for Development Finance Institutions (DFIs).1 Component 2 (US$80 million) of the project entailed extension of US$70 million in concessional, long-term finance to Primary Mortgage Lenders (PMLs) through PMRC, along with the establishment and operationalization of a US$10 million Risk Sharing Facility (RSF) to provide partial credit risk cover for lenders to spur mortgage financing for low- and informal-income groups. Component 3 (US$5 million) entailed capacity building for housing policy and analytics. 1 PMRC could commence operations with paid up capital of PKR 3.8 billion (US$22.4 million) rather than the prescribed PKR 6 billion (US$35.3 million) due to an exemption allowed by SBP. SBP gave PMRC five years to build up its capital; they have until June 2023 to meet the minimum capital requirements. DATE Page 3 of 17 The World Bank The parent project stands fully disbursed (US$138.04 million) and has a closing date of June 30, 2023. All major PDO level indicators are on track to being achieved before the Project closing date. Under Component 1 the US$60 million Tier II injection was leveraged by PMRC to undertake a series of capital market transactions. PMRC has successfully executed seven capital market transactions till date, raising PKR 11.8 billion (US$69.4 million) in the process and directly supporting the development of Pakistan’s capital markets, which is also a key element of the PDO for this operation. Under Component 2, the project sought to expand the size of Pakistan’s mortgage market, specifically by enhancing access to housing finance for those traditionally excluded. This component of the project has also achieved quick results. PMRC has fully disbursed the US$70 million Line of Credit (LoC) to 17 PMLs as of October 2021, including micro finance providers. PMRC’s total portfolio stands at PKR 23.9. billion (US$ 140 million) as of October 2021 and represents 10 percent of Pakistan’s mortgage market. Component 3 aimed to build technical capacity within the Planning Commission for coordinated and evidence-based housing policy. However, due to exchange rate fluctuations, project funds were fully committed before these activities could be initiated. At the same time, the government launched a new housing program and created a new housing authority, which was a more appropriate recipient of technical assistance (more details below). The project Mid-term Review in June 2021 concluded that the PDO and project design remain relevant, with a high level of commitment from the GoP (from SBP and Ministry of Finance as key stakeholders). According to the latest Implementation Status and Results (ISR) (September 2021), the PDO rating is Moderately Satisfactory, and the Implementation Progress rating is Satisfactory. The Financial Management (FM) and Procurement performance of the Project are Satisfactory. The overall rating for Environmental and Social safeguards compliance is also Moderately For Official Use Only Satisfactory. PMRC has put in place an ESMS that specifically focuses on their core business (mortgage refinancing), with proper due diligence, monitoring, and reporting requirements for their clients, the participating financial institutions. At the start of the Parent Project, PMRC was faced with low E&S awareness and capacity of the PMLs operating in the mortgage sector. An assessment of the E&S risks, market awareness, existing systems, and capacity was conducted during Parent Project preparation to help inform the approach, followed by a series of awareness events and actions were taken early on during Parent Project preparation to sensitize the PMLs about the E&S risks for their mortgage portfolios, and the reasons PMRC needed to address them. This was followed by assistance to PMLs in establishing their own screening processes and more in-depth training. The challenges remain in the housing microfinance sector where capacity is still low, and this shall be addressed during the AF implementation. The project remains compliant with all legal covenants. The Parent Project has had a significant developmental impact on the housing finance market in Pakistan. Availability of the longer-term, fixed rate wholesale funding which PMRC brought to the market created an enabling environment for new PMLs to enter the market; four housing finance companies (HFCs) have been registered in Pakistan since PMRC began its operations (there were no HFCs at the time the project become effective); and 12 micro-finance banks now actively lend in this space (there has been a 180 percent increase in the number of housing loan clients in the micro- finance sector since July 2019). 42 percent of PMRC’s portfolio is for low- and middle-income borrowers and 26 percent of the loans are to females (as sole mortgagers or with a female as a joint mortgager). Much like the LoC, the advent of the RSF in the market has also supported the development of the mortgage market. The RSF is designed to share partial credit risk with PMLs and provides a 40 percent first loss risk cover for eligible mortgage portfolios at a risk-based premium. It has been designed to be leveraged tenfold (up to US$100 million) and has the potential to give risk cover to 7,700 mortgages. At present, 11 banks have signed agreements for coverage under the RSF; six banks have portfolios ready for coverage. DATE Page 4 of 17 The World Bank The improved policy environment and revitalized market conditions around the supply of housing and demand for housing finance have resulted in unprecedented growth of the sector . The current administration came into office two months after the parent project became effective and launched an ambitious affordable housing program in early 2019 (i.e. the Naya Pakistan Housing Program – NPHP). The Naya Pakistan Housing & Development Authority (NAPHDA) was established in 2019 under the Prime Minister’s Office to implement the NPHP. The Authority has wide ranging powers to promote and foster growth in affordable housing. It can execute housing projects directly on public land, enter public–private partnerships, or help streamline the regulatory environment for housing investments on private land. The proposed AF has been conceived to complement and support the government’s ambitious housing program and will entail an injection of an additional US$85 million into the RSF under Component 2 of the parent project. Since mandatory lending targets for housing finance catering to lower and informal income households have now been imposed on banks (not the traditional client base of banks), the RSF becomes very critical. The SBP has imposed lending targets on banks based on the tacit understanding that through the RSF the GoP will share some of the risk of this rapid expansion into an untested market segment. This market segment will be the beneficiaries of the Mera Pakistan, Mera Ghar program (My Pakistan, My Home – MPMG); a tier-based structure that aims to enhance the affordability of housing loans down to households in the 2nd quintile and offers highly subsidized loans to beneficiaries for the first 10 years of their mortgage loan. The RSF will only provide risk cover to mortgages being originated under the MPMG. While banks have made steady progress in meeting their broader targets, their progress on MPMG targets has been somewhat muted. Since its inception 10 months ago, there have been 42,956 applications (of value PKR 200 billion – US$1.18 billion) under MPMG and only 17,129 of these applications (of value PKR 78 billion – US$458 million) have been approved (indicating only a 40 percent approval rate). Meanwhile disbursements under the program only stand PKR 17 For Official Use Only billion (US$100 million). The proposed additional funding into the RSF will give banks comfort as they move towards lending to an untested market segment and will have a direct impact on the rate of approvals and disbursements going forward. The RSF in the parent project has also been realigned to meet the needs of the MPMG program (i.e. only loans under this scheme qualify for coverage). The premium structure, investment policy and coverage model of the RSF is designed to ensure it remains a sustainable fund that will remain part of the housing finance market infrastructure well beyond the life of the project. The topped up RSF will provide a 50 percent credit risk cover (as opposed to 40 percent in the existing structure). The primary project beneficiaries will be low- and middle-income households in Pakistan, (specifically 2nd, 3rd, and 4th quintile income households reliant on informal incomes). A household, as defined by the Pakistan Bureau of Statistics, may be either a single�person or multi�person household. In a single�person household, the individual makes provision for his/her own food and other essentials of living without combining it with any other person and without any usual place of residence elsewhere. A multi-person household is a group of two or more people who make some common provision for food or other essentials. The national average household size is 6.35 members. The AF will make it possible for financial institutions to move down�market. The project will enable PMLs to move from the very upper end of the households in the 5th quintile to lower quintile income groups. The financial sector at large will also benefit greatly as the project will help deepen the primary mortgage market. A Master Trust Agreement, which is grounded in local Trust Laws, will continue to underpin the operation of the RSF. This Trust Agreement has been signed by the Government of Pakistan, as the owner of the Trust and by PMRC, as the designated Trustee (to manage the RSF). The Trust Agreement lays out clear guidelines for the operation of the Trust; it includes details of the reporting requirements, financial management protocols, the investment policy of the RSF, liability of the Trust and Trustee, auditing requirements, etc. The AF into the RSF will be channeled into the existing implementation structure and like the pilot RSF coverage will be on a portfolio basis. The notable difference is that the DATE Page 5 of 17 The World Bank US$85 million allocated under the AF will be the GoP’s equity injection into the RSF; the funds will not be on-lent to PMRC as was the case in the parent project. The additional funding will flow into the Trust Account as the GoP’s equity investment into the fund. PMRC will continue to administer the fund on behalf of the GoP under the existing Trust Agreement. To ensure the RSF funds are deployed in line with the dictates of the Trust Agreement, PMRC has developed an operational and governance structure to administer the RSF as part of the parent project; this structure will remain in place (with additional resources to implement given the increase in the scale of the RSF with the AF). A RSF Committee under the PMRC Board will continue to monitor implementation progress and five designated staff will manage the day-to-day operations of the facility. This staffing may increase as the portfolio under coverage increases. Additionally, a multi-stakeholder RSF Implementation Oversight Committee will also be established. Its main objective will be to ensure the RSF’s salient features, and that coverage remains aligned to the GoP’s priorities and market realities. It will also ensure that the contingent liabilities of the RSF are monitored closely and remain within the Government’s fiscal limits. Women constitute only 15 percent of borrowers, and account for a mere 10 percent of the gross loan portfolio, in Pakistan’s overall housing finance market. Compared to men, women in Pakistan earn less and have fewer formal income sources as well as limited access to credit services and property titles, making it more difficult for them to meet standard loan approval requirements. Even when in work, women’s wages are on average 34 percent lower than men’s wages, in large part due to their concentration in low-paid informal work as well as workplace discrimination. Compared to men, women are also 30 percent less likely to have an account at a financial institution or with a mobile money provider, and almost 6 percent less likely to save through formal or informal channels. Combined with the massive gender gap in immovable asset ownership, women’s poor financial inclusion puts them at a disadvantage compared to men in terms of accessing most formal sources of credit or housing/construction finance For Official Use Only (except certain kinds of micro-finance). The proposed AF entails a scale up of a guarantee facility with higher coverage for women to improve women’s access to housing finance in Pakistan. Coverage accorded by the RSF to mortgages taken out by women will be higher at 60 percent, against standard coverage of 50 percent. The revised project results framework also includes an indicator to measure progress on portfolio under coverage disaggregated by gender. The AF is also designed to promote climate friendly housing by incentivizing banks to give more mortgage loans to lower income households who transition to formal housing that demonstrates greater energy and resource efficiency. Pakistan is one of the most urbanized countries in the South Asian Region – one third of the population lives in urban centers. This urbanization has resulted in increasing urban sprawls – with growing concerns about air pollution, waste generation, lack of housing etc. Informal settlements are mushrooming across urban centers. This AF is designed specifically to give access to housing finance to lower income households so that they can transition to formal housing – without the credit guarantee this AF offers, these households would be ineligible for formal housing finance. The lowest income households are the most vulnerable to climate change, as they are unable to secure housing units that would adapt to the increasing climate risks in Pakistan. Emissions. Therefore, it becomes increasingly critical for energy and resource efficient solutions to be promoted in urban housing. Like the incentive to promote greater gender equity, the RSF will increase the risk cover (i.e. from 50 percent to 60 percent) for mortgages that quality (for Tier 0 and 1 loans). Therefore, this incentive structure will increase the demand for climate resilient housing since it will be easier to get loans for such housing. Tier 0 and Tier 1 loans will be to households in the bottom 2 income quintiles. These households are the ones that live in the growing informal settlements across Pakistan - they have historically not been able to move to more formal housing due to a lack of access to housing finance. The 60 percent credit risk cover this AF will offer will make these households bankable. For loans to qualify based on energy efficiency and on-site renewable energy, very stringent screening criteria will be developed and the PML will have to provide sufficient evidence that that the underlying loan qualifies. DATE Page 6 of 17 The World Bank D. Scope of application of Performance Standards (PSs) [and Environmental and Social Standards (ESSs), if relevant] OP/BP 4.03 (“Performance Standards for Private Sector Activities�) will be applicable to the project in lieu of the World Bank’s safeguard policies. OP/BP4.03 is better suited for this project given that it will constitute private sector activities and is executed through PMLs, which are commercial private sector financial institutions. The project will, therefore, apply the World Bank’s / IFC Performance Standards (PSs), including relevant WBG Environment, Health, and Safety (EHS) Guidelines, to all the activities implemented by PMRC in its role as the Trustee administering the RSF. The PSs are considered more suitable for PMRC since its Environmental and Social Management System (ESMS) is based on the IFC Performance Standards. Application of OP/BP4.03 provides an advantage for this project, as OP/BP4.03 offers comparatively more clarity and guidance in these circumstances than safeguards policies. In addition, as IFC has provided equity financing to PMRC, and this OP/BP 4.03 is now fully embedded in PMRC’s operations, resulting in a more harmonized approach– specifically the approach to environmental and social categorization of FI projects. The use of the “Environmental and Social Management System� concept – are similar to those outlined in IFC’s Policy on Environmental and Social Sustainability and associated guidance. The eight World Bank Performance Standards2 will be referred to as per OP/BP 4.03 and applicable standards for the AF will be used to manage risk exposure through mortgages that are presented for credit risk cover from the RSF.3 E. Environmental and Social Overview E.1. Project location(s) and salient characteristics relevant to the ES assessment [geographic, environmental, social] For Official Use Only Component 2 of the parent project consists of a Line of Credit (LoC) to provide mortgage loans to lower-income households and a Mortgage Guarantee scheme respectively, both designed using wholesale-retail Financial Intermediation model with PMRC as a wholesale FI and PMLs as participating financial institutions . The Additional Financing will complement and support the government’s housing program and will entail an injection of an additional US$85 million into the Risk-Sharing Facility (RSF) under Component 2b of the Parent Project, which sought to expand the size of Pakistan’s mortgage market, specifically by enhancing access to housing finance for those traditionally excluded. Mortgages will be extended nation-wide in Pakistan, with both rural and urban housing eligible for financing. Given the housing shortage in Pakistan and the AF focus on supporting the expansion of the affordable housing availability, it is expected that most mortgages will be originated on newly constructed properties, or on upgrades to properties, although existing housing is also eligible. It is, therefore, expected that the project’s indirect positive contributions will spearhead increased growth on the supply side of the market. Thus, it would be important for the project to ensure that such financing does not support environmentally and socially unsustainable supply-side activities. The AF will only inject additional capital into the RSF with no change to E&S risk profile. The topped up RSF will provide a 50 percent credit risk cover (as opposed to 40 percent in the existing structure). The increase in component amount is based on extensive consultations with the regulator, PMLs, and other key stakeholders. A premium will be charged; 2 “World Bank Performance Standards� are, in effect, IFC Performance Standards on Environmental and Social Sustainability adopted as the “World Bank Performance Standards� in 2013 pursuant WB Operational Policy 4.03. IFC Performance Standards were first intr oduced in 2006 and updated in 2012. IFC Performance Standards can be found here: http://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/ifc+sustainability/our+approach/risk+management/performance+standards/ environmental+and+social+performance+standards+and+guidance+notes 3 As the Performance Standards are primarily designed as an E&S risk management instrument for medium to large project financing, their relevant principles, definitions, and other technical parameters will guide the design of the E&S risk management instruments (such as exclusion lists), systems, and approaches best suited for the nature and types of the financial products utilized for financing this project. DATE Page 7 of 17 The World Bank however, going forward the premium will be priced higher for the higher income groups (i.e. the premium will be higher for tiers catering to 4th and 5th quintile income households under MPMG). The premium structure, like the coverage, will be reevaluated as more empirical data becomes available to inform the operations and sustainability of the RSF. While the discounted premium structure for tiers 0 and 1 is designed to incentivize PMLs to originate more mortgages for these segments, this incentive will be supplemented with indicative targets (tier wise allocation of the number of loans covered) to ensure that the RSF predominantly benefits lower- and middle-income. The AF is, therefore, categorized same as the Parent Project, i.e. FI-2 in accordance with OP/BP4.03 based on the review of the prospective project activities and an expectation that, in accordance with OP/BP4.03, potential adverse environmental and social risks or impacts will be few, generally site-specific, largely reversible, and readily addressed through mitigation measures. E. 2. Client’s Organizational Capacity/Borrower’s Institutional Capacity Per the requirements of OP/BP 4.03 (Section C), for projects involving Financial Intermediaries, the wholesale FI as well as participating retail FIs are required to develop and operate an Environmental and Social Management System (ESMS) that is commensurate with the level of risk in exiting and/or prospective business activities. PMRC plays the role of the wholesale FI in the project. PMRC was set up in 2016 as a company which has a majority private sector ownership and registered with the Security and Exchange Commission of Pakistan (SECP) to aid financial institutions extend housing loans in much more quantum by addressing their liquidity issues through refinancing facilities. Through For Official Use Only the parent project, PMRC has set up an ESMS guided by their E&S Policy which follows the IFC Performance Standards4 (in line with OP4.03) and sets our procedures for E&S risk management. Head of Risk at PMRC is supervising E&S aspects, while Head of Products supports as E&S coordinator for customer interaction. Likewise, PMLs are required to have an ESMS that allows them to screen and monitor their lending for which they seek financing from PMRC. As a part of originating mortgage loans all PMLs have an ESMS by way of process such as property appraisal/valuation, legal review of property documents by lawyer and through other verifications and internal processes. To that extent, PMRC E&S policy and procedures set out the requirements for the PMLs, including a List of Excluded Activities they must abide by and represent to PMRC that they have appropriately screened all transactions. PMRC, therefore, obtains E&S compliance and review on every transaction from PMLs and regularly updates them about PMRC E&S requirements while discussing refinance products. PMRC obtains E&S representation forms from PMLs for each transaction. PMLs are currently at different levels of E&S compliance, however they are complying to minimum standards for mortgage finance. As reported by PMRC, Commercial and Microfinance Banks such as JS Bank, HBL, Bank Alfalah, Soneri, First Microfinance Bank, Bank Islami, Faysal Bank, Khushali Bank, U Microfinance and Thardeep have E&S Policies and dedicated staff for E&S. PMRC has processes to assist PMLs in building their E&S capacity through training and counseling. PMLs lacking adequate ESMS are required to prepare and implement Action Plans. First training session for PMLs was held in September 2019 at SBP with 26 participants from 13 banks. A second virtual training session was conducted in June 2021 with 20 participants from 14 PMLs. 4 https://pmrc.com.pk/wp-content/uploads/2021/04/PMRC_Environmental_and_Social_Policy.pdf DATE Page 8 of 17 The World Bank Mechanisms for consultation and disclosure, with an emphasis on potentially affected people The ESRS has been prepared and disclosed by the Bank as the source of summary information on the Bank’s findings regarding environmental and social issues and mitigation measures to be taken. ESRS also reflects lessons from E&S compliance in the parent project, and for the basis of AF E&S compliance. The Bank will continue to assist the Borrower in carrying out consultations with relevant stakeholder groups. At least two such sessions (which included training on safeguards) have already been conducted by the PMRC together with Bank, for its participating institutions. Also, beneficiary feedback was attained, and a short film has also been prepared. Additionally, the Project Paper for the AF contains details on the environmental and social risks for the project, measures to be put in place to identify and manage them, and adequate plan and budget for capacity building. In accordance with BP4.03, disclosure requirements for projects involving FIs are as follows: The FI to disclose through the FI’s website, if a website exists, and to permit, in writing, the Bank to disclose at the Bank’s InfoShop and local PIC, the following elements of the FI’s ESMS: a) The FI’s policy statement which describes specific objectives, metrics, and aspirations that the FI has set with regard to its environmental and social performance; b) The FI’s procedures for screening and assessing risks and impacts of subprojects or individual transactions; and c) After Bank review, the summary of the environmental and social assessment that is required for any subproject considered high risk in accordance with the ESMS (for Subcomponents 2(a) and 2(b)). For Official Use Only PMRC has in place a Grievance Redress Policy and Mechanism, which is also present on their website.5 The GRM and policy put in place and maintain a procedure for external communications to receive any concerns and feedback from the public regarding any aspects of their operations, for example, concerns related to their investment activities and/or a borrower/investee in portfolio. Grievances may be submitted via telephone, fax, in writing via mail or through a dedicated email address ‘complaint@pmrc.com.pk’. The policy includes information on how to submit grievances, and the process in place to address grievances. To date, no grievances have been received by PMRC. I. SCREENING OF POTENTIAL ENVIRONMENTAL AND SOCIAL (ES) RISKS AND IMPACTS A. Environmental and Social Categorization FI-2 The Additional Financing will increase access to housing finance for low- and middle-income households and will support the development of capital markets in Pakistan. The RSF will help banks in Pakistan extend mortgage lending by lowering their exposure to non-performing loans and is being scaled-up without any changes to the original project design that would have a bearing on E&S risks and impacts considerations. Similar to the Parent Project, the AF will support refinancing of eligible loans originated by PMLs for purposes of acquisition of residential housing. E&S risks arise when refinancing is supported / guaranteed by mortgage portfolios 5 https://pmrc.com.pk/reports/complaint-management/ DATE Page 9 of 17 The World Bank where they were originated for properties constructed in an environmentally and socially unsustainable way that translates into either credit or reputational risks to PMLs and PMRC. It should be noted that PMRC and PMLs have limited leverage over the supply side of the market and risk management approach is, therefore, focused on an exclusion-based model as well as screening for key risks as presented below. This approach has worked well during Parent Project implementation, with PMLs providing detailed representation of each mortgage screening results with their requests for refinancing. The following important characteristic relevant to E&S risk analysis are taken into consideration for the AF, consistent with the E&S risks of the parent project. If not managed properly, these are likely to have adverse impacts on credit and reputational risk for the PMLs and to a lesser extent PMRC6. This is primarily associated with (i) the quality of the collateral (properties to be refinanced) and (ii) the ability of the mortgage borrowers to repay loans. Therefore, screening for these factors can help reduce such risk exposure and, ultimately benefit PMRC and PMLs. As such, all mortgages that are presented for credit risk cover from the RSF must be screened for the below: i) Building safety. Key risks involve health and safety issues linked to improper techniques during construction of mortgaged properties (e.g. use of hazardous materials, inadequate life and fire safety, weak structural integrity etc.). This can affect both quality of collateral and personal health and safety of end borrowers. Compliance with national building codes/ regulations can reasonably mitigate these risks for formal housing7, which is the primary target borrower group for this RSF. ii) Locations of the housing/ properties to be refinanced. The locations are expected to be predominantly in urban areas that can be often densely populated. Locational characteristics may include sites in poorly For Official Use Only managed areas with limited or no basic services such as water supply and sanitation, which could sometimes lead to health risks and impacts for end borrowers or impact property values. Risks should also be minimized by avoiding locations which are prone to disasters and/or cause adverse impact on natural environment and/or human health (e.g. locations near waste dump sites, high tension cables, canals etc.). Such locations have a potential to reduce value of the properties, thus leading to deterioration in the value of the collateral. iii) Household activities hazardous to the environment and / or human health and safety.8 Household activities of end borrowers, such as those related to livelihood earning, may pose risk in terms of fire safety and/or health hazards that may put the collateral at risk. Examples include storage and use of hazardous fuels and chemicals. While it is difficult to screen for these activities, PMLs have adopted a practice of having a mortgage beneficiary sign a representation form that such activities will not be performed on mortgaged properties. II. APPLICABLE STANDARDS A. Performance Standards 6 In line with this Financial Intermediation structure, PMRC will provide refinancing with full recourse, i.e. delinquent loans are transferred back to the PMLs who have to replace them. Thus, credit risk and thus any E&S risks that may affect credit risk are predominantly borne by the PMLs. 7 Relevant national regulations / codes in Pakistan and their enforcement will be further evaluated during project appraisal. 8 This factor cannot normally be checked ex ante by the financial institutions so in practice PMLs would require end borrowers to represent that they would not undertake such activities. DATE Page 10 of 17 The World Bank PS1 Assessment and Management of Environmental and Social Risks and Impacts PMRC’s current E&S Policy is based on the IFC Performance Standards for Environmental and Social Sustainability (which are also the World Bank’s Performance Standards for Private Sector Activities). PMRC subjects its E&S Policy to an annual review, to ensure it remains relevant and aligns with national and international good practices. The E&S Policy sets out procedures and processes to be followed by PMRC, provides the Exclusion List specific to housing finance as this asset class constitutes the entirely of PMRC business, sets our ESMS requirements for PMRC customers/ borrowers (the PMLs) and E&S screening criteria for mortgaged properties. PMRC ESMS included the following key features: (1) PMRC E&S Policy that states PMRC commitment to E&S risk management and to providing support to the PMLs in their endeavor to manage E&S risks adequately in their portfolios; the E&S Policy has been mainstreamed throughout PMRC activities and is an integral part of its lending activities. The ESMS covers the entirety of PMRC operations. PMRC espoused the same ESMS and E&S standards in its role as Trustee of the RSF. PMRC E&S policy and procedures set out the requirements for the PMLs, including a List of Excluded Activities they must abide by and represent to PMRC that they have appropriately screened all transactions. (2) E&S Procedure that includes protocols and procedures to carry out E&S risk management functions and screening: PMRC ESMS includes clear process flow and procedures that are linked to credit and investment cycles. PMRC’s E&S For Official Use Only procedures provide steps for E&S screening of transactions which includes initial assessment of a transaction against the exclusion list. The E&S Policy provides E&S screening criteria for mortgaged policies which screens against the E&S risks identified in this document. These screening criteria are to be used by PMLs during the mortgage assessment process. The criteria include screening questions and recommends documents to be reviewed for the screening. The criteria screen for: i) Building safety ii) Locations prone to natural disasters iii) Locations hazardous to human habitation iv) Access to basic services v) Properties built in locations or in a manner that may have adverse impacts on the lands, natural resources, or critical cultural heritage that are used as livelihoods by vulnerable local communities vi) Properties built in locations or in a manner that may have adverse impacts on Indigenous Peoples vii) Household activities hazardous to the environment and/or human health and safety (3) List of Excluded Activities: To limit the level of environmental and social risk exposure to the portfolio under coverage by the RSF, World Bank and PRMC have agreed a list of excluded activities for eligible mortgages which is included in the PMRC E&S Policy. The Exclusion List was diligently applied by PMLs during Parent Project implementation, with representation forms submitted to PMRC with refinancing applications, as required by PMRC ESMS. The Exclusion List was also incorporated in the Master Refinancing Agreement with PMLs. Some PMLs have reported that they had to deny mortgages that fell under Exclusion List as those cannot be refinanced by PMRC. The List of Excluded Activities is as follows: 1. Real estate construction deemed illegal or non-compliant according to applicable national and local DATE Page 11 of 17 The World Bank laws and regulations.1 2. Properties or land associated with illegal forced evictions of previous owners or occupants.2 3. Properties built on land from which government agencies or builders have removed / involuntarily resettled local communities, including squatters or encroachers, without proper compensation.3 4. Properties involving outstanding land disputes 5. Properties built in locations and / or in a manner that involves significant degradation or conversion of critical habitats4 and/or legally protected areas.5 6. Properties built in locations and / or in a manner that involves significant adverse impacts on critical cultural heritage.6,7 Footnotes 1. Examples include unauthorized construction; housing construction in zones not designated as residential; encroachment on public / government land or private land etc. 2. Permanent or temporary removal against their will of individuals, families and/or communities from the homes and/or land which they occupy, without the provision of, and access to, appropriate forms of legal or other protection. Prohibition on forced evictions does not, however, apply to evictions carried out by force in accordance with national law and is conducted in a manner consistent with basic principles of due process, including provision of adequate advance notice, meaningful opportunities to lodge grievances and appeals, and avoidance of the use of For Official Use Only unnecessary, disproportionate or excessive force. These criteria will apply where land associated with such evictions was subsequently used for construction of housing developments in which Participating Banks and Non-Bank Financial Institutions are seeking to originate mortgages. 3. Resettlement activities should follow the process through which adverse social and economic impacts are minimized through (i) providing compensation for loss of assets at replacement cost defined as the market value of the assets plus transaction costs and (ii) ensuring that resettlement activities are implemented with appropriate disclosure of information, consultation, and the informed participation of those affected. These criteria will apply where land associated with such resettlement / displacement was subsequently used for construction of housing developments in which Participating Banks and Non-Bank Financial Institutions are seeking to originate mortgages. 4. Critical habitat is a subset of both natural and modified habitat that deserves particular attention. Critical habitat includes areas with high biodiversity value that meet the criteria of the World Conservation Union (IUCN) classification, including habitats of significant importance for critically endangered or endangered species as defined by the IUCN Red List of Threatened Species; habitats of significant importance for endemic or restricted-range species; habitats supporting globally significant concentrations of migratory species and /or congregatory species; areas with unique assemblages of species or which are associated with key evolutionary processes. Primary Forests or forests of High Conservation Value (HCV) shall be considered Critical Habitats. HCV areas do not directly correspond with definitions for modified, natural and critical habitat. The HCV Resource Network, an internationallyrecognized group, provides information and support on the evolving usage of HCV to ensure a consistent approach. https://www.hcvnetwork.org/ 5. These criteria will apply where land associated with such degradation or conversion was subsequently used for construction of housing developments in which Participating Banks and Non-Bank Financial Institutions are seeking to originate mortgages and/or these impacts are likely to occur or continue post-construction. 6. Critical cultural heritage consists of one or both of the following types of cultural heritage: (i) the internationally recognized heritage of communities who use, or have used within living memory the cultural heritage for long-standing cultural purposes; or (ii) legally protected cultural heritage areas, including those proposed by host governments for such designation. 7. These criteria will apply where land associated with such impacts was subsequently used for construction of housing developments in which Participating Banks and Non-Bank Financial Institutions are seeking to originate mortgages and/or these impacts are likely to occur or continue post-construction. (4) Organizational capacity and competency: PMRC is a small organization with only 33 staff total. Head of Risk at PMRC is supervising E&S aspects, while Head of Products supports as E&S coordinator for customer interaction. DATE Page 12 of 17 The World Bank To date, ESMS has been well implemented. PMLs are currently at different levels of E&S compliance, however they are complying to minimum standards for mortgage finance. As reported by PMRC, Commercial and Microfinance Banks such as JS Bank, HBL, Bank Alfalah, Soneri, First Microfinance Bank, Bank Islami, Faysal Bank, Khushali Bank, U Microfinance and Thardeep have E&S Policies and dedicated staff for E&S. Unlike with commercial banks that are PMRC customers/ borrowers and have been in good compliance with PMRC ESMS provisions, compliance with the ESMS at Microfinance Banks/Institutions level remains a challenge due to their customer base and category of loans. While PMRC has encouraged MFIs to develop their product based on mortgage finance, there is room for PMRC to further capacitate them. Further, given that the AF will target mortgage for low income groups, there is need for the PMRC ESMS during its annual review to include specific procedures and requirements to scale up E&S compliance, due diligence and oversight during the project appraisal and implementation in MFIs. An Environmental and Social Action Plan (ESAP) as listed under section III has been prepared collaboratively with PMRC for the improvement of gaps and weaknesses identified in the ESMS. (5) Grievance Redressal Mechanism: PMRC has in place a GRM Policy, which is also present on their website.9 The GRM and policy put in place and maintain a procedure for external communications to receive any concerns and feedback from the public regarding any aspects of their operations, for example, concerns related to their investment activities and/or a borrower/investee in portfolio. Grievances may be submitted via telephone, fax, in writing via mail or through a dedicated email address ‘complaint@pmrc.com.pk’. The policy includes information on how to submit grievances, and the process in place to address grievances. To date, no grievances have been received by PMRC. For Official Use Only PS 2 Labor and Working Conditions PS2 will apply to PMRC’s own workforce and that of its customers. PMRC is expected to have in place and maintain appropriate labor management policy and procedures, including procedures relating to working conditions and terms of employment, nondiscrimination and equal opportunity, grievance mechanisms and occupational health and safety. The current PMRC E&S Policy does not cover labor and working conditions as a cross cutting risk across its portfolio. PMRC shall add requirements for labor and working conditions for its operations and for PMLs to ensure activities do not use harmful or exploitative forms of forced labor/harmful child labor. PMRC and customers shall: • Have an HR policy • Ensure processes for No Discrimination, and Equal Opportunities • Ensure processes within the borrowers for No Child and Forced Labor • Ensure Grievance Mechanisms • Have an OHS policy and procedures PS 3 Resource Efficiency and Pollution Prevention This PS is not relevant. 9 https://pmrc.com.pk/reports/complaint-management/ DATE Page 13 of 17 The World Bank PS 4 Community Health, Safety and Security This PS is not relevant, however related screening measures are included in PMRC ESMS. PS 5 Land Acquisition and Involuntary Resettlement This PS is not relevant, however related screening measures are included in PMRC ESMS. PS 6 Biodiversity Conservation and Sustainable Management of Living Natural Resources This PS is not relevant, however related screening measures are included in PMRC ESMS. PS 7 Indigenous Peoples This PS is not relevant. PS 8 Cultural Heritage For Official Use Only This PS is not relevant however related screening measures are included in PMRC ESMS. B. Other Relevant Project Risks None identified at this stage. C. Reliance on Borrower’s policy, legal and institutional framework, relevant to the Project’s specific ES risks and impacts. This is relevant only for components that apply the ESSs. D. Common Approach (yes/no). This is relevant only for components that apply the ESSs. No. E. Legal Operational Policies that Apply (to the Project) OP 7.50 Projects on International Waterways No This policy will not apply as no project activities involving international waterways are expected. OP 7.60 Projects in Disputed Areas No DATE Page 14 of 17 The World Bank Use of this policy will depend on the exact nature of activities to be financed, and their locations. If potential activities involving disputed areas are identified, they will be excluded from financing under relevant components of the project. III. CLIENT’s ENVIRONMENTAL AND SOCIAL ACTION PLAN (ESAP) Action Timeframe 1. PMRC will enhance its current E&S capacity building plan with a focus on Within three month of AF activities for MFI PMLs for the introduction of environmental and social risk effectiveness screening of mortgage loans in their lending structures 2. PMRC will conduct a refresher E&S training for MFI PMLs Within six month of AF effectiveness 3. PMRC as part of regular monitoring of MFI PMLs will carry-out E&S Before first disbursement to new compliance assessment of ESMS and E&S compliance by MFI PMLs and MFIs or next disbursement to each prepare plan to fill gaps and weaknesses identified in their respective ESMS existing MFI PMLs (including dedicated internal E&S staff on board); E&S Action Plan to be For Official Use Only included in financing agreements for new MFIs or signed separately for existing MFIs before next disbursement 4. PMRC will conduct a structured review of all PMLs internal staffing and Within six month of AF effectiveness capacity to implement the PMRC ESMS requirements Should gaps in staffing be found require a PML to strengthen its capacity by Before first disbursement to new putting in place an E&S Action Plan before PMLs or next disbursement to each existing PMLs 5. PMRC to conduct annual E&S audit (can be done as part of the overall Annually, starting one year after AF financial audit) to ensure that all PMLs – MFIs and commercial banks – are effectiveness accurately representing the outcomes of their E&S transaction screening to PMRC; the audit may include sample review of documentation and site visits, as feasible IV. BORROWER’S ENVIRONMENTAL AND SOCIAL COMMITMENT PLAN (ESCP) N/A DATE Page 15 of 17 The World Bank V. WORLD BANK E&S OVERSIGHT Corporate advice/oversight will be provided by an Environmental and Social No Standards Adviser (ESSA) during project preparation VI. CONTACT POINTS World Bank Contact: Namoos Title: Senior Financial Zaheer, Sector Specialist Anne Treylane Gapihan Telephone No: Email: +92519090190 Nzaheer@worldbank.org For Official Use Only Borrower/Client/Recipient Ministry of Finance Implementing Agency(ies) Pakistan Mortgage Refinance company (PMRC) Mudassir Khan Chief Executive Officer ceo@pmrc.com.pk VII. FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects DATE Page 16 of 17 The World Bank VIII. APPROVAL Task Team Leader(s): Namoos Zaheer, Senior Financial Sector Specialist Anne Treylane Gapihan, Senior Urban Specialist Approved by: Environmental and Social Standards Advisor (ESSA): Pablo Cardinale, December 21, 2021 Practice Manager: Gabi Afram, Decemebr 21, 2021 Country Director: Najy Benhassine, January 7, 2021 For Official Use Only DATE Page 17 of 17