. 44613 MOROCCO-Housing Sector Development Policy Loan (Loan 7314-MA) Release of the Second Tranche and Request of One Waiver Tranche Release Document 1. The Board ofDirectors ofthe Bank approved the Housing Sector Development Policy Loan o f US$l50 million equivalent on June 30,2005 (report No. 32345-MA o f June 1,2005). The LoanAgreement was signed on July 18,2005 and declared effective on August 24,2005, when the front endfee of Euro 580,500 was applied. The first tranche ofEuro 69,660,000 was disbursedon September2,2005. The Loan's original Closing Date of December 31st, 2007 was extendedby six months to June 30,2008. 2. The development objectives ofthe Loanare to: (i) strengthenthe institutional, regulatory and fiscal environment for a well-functioning housing market and for the emergence o f market- based solutions to the country's housing sector constraints and needs; and (ii) increase the access o f low income and severely disadvantaged households to more affordable and higher quality housing. 3. Two Ministrieshave beensubstantially involved with the implementation o fthe reforms supported by the Loan: the Ministry o f Finance and of the Economy (MF) and the Ministry o f Housing, UrbanPlanning, and Territorial Development (MHUAE).The Ministryo f Finance has beendirectly responsible for the design and implementationof the reforms inthe realm of housing finance and o f fiscal policies, while the Ministry o f Housinghas beenincharge o f those reforms that were related to the legislative and regulatory framework o f the sector and for the social housingprograms. 4. Three years after the approval of the Loan, the housing sector inMorocco has gone through profoundtransformations and is now considered one o f the most dynamic sectors o f the national economy. All indicators seem to confirm that the policy implementedby the Government as o f early 2003, and which has beensupported by the Bank's technical assistance at first, and by the present Loan for the past three years, has beensuccessful inaddressing some o fthe fundamental sector issues and inreaching the above development objectives. 5. Inadditionto normal supervision practices andreporting, the Loanwas subject to specific monitoring and evaluation to track the indicators which were selected at appraisal and agreed upon with the Borrower (section V1.C o f the Project Appraisal Document). Consequently, a Monitoring and Evaluation Report on the impact o f the reforms under the first tranche o f the loan, comparing end of 2004 to end o f 2006 indicators, was issued by the Bank inJune 2007. In addition, a Policy Note on the housing sector was issued by the Bank at the same time, and revisedand updated inMay 2008 under the title "The challenges of social housing inMorocco". It is now part ofthe overall report "Conditions for a higher and inclusive growth" which was issuedinMay 2008 (Report n40197-MA). The Bank also carried out the "Poverty and Social Impact Assessment o f the national slum upgrading program", which was supported under the Loan, and publishedand disseminated it inJune 2006 (Report No. 36545-MOR). 1 6. This Tranche Release Document certifies that (i) progress achieved bythe Borrower the inthe carryingout ofthe program ofreforms supportedbythe Loanis satisfactory; (ii) the macroeconomic framework o f the Borrower is satisfactory, and inline with the program, as measured on the basis o f indicators agreeduponbetweenthe Borrower and the Bank; and (iii) the actions agreedupon for the disbursement ofthe secondtranche have beentaken, withthe exception o f one action, for which a waiver is sought, as per below. Progressachievedby the Borrowerin carryingout of the programof reforms 7. Inearly 2003 the Housing Solidarity Fund(HSF) was established, inorder to channel revenues for the social housing programs into a dedicated fund which i s replenishedvia a tax on the sale ofcement, currently inthe order of 0.10 MADper kilo. Giventhe considerable increase inconstruction activities, the yearly replenishmentofthe HSFhas increased steadily, reaching MAD 1.4billion in2008 from MAD400 million in2004, andproviding areliable source of financing for the expansion o f the social housing programs. During 2003-2007, the Government has also mobilized approximately 10,000 ha o f public land to boost urban development and primarily residential activities. This has allowed for the implementation o f the social housing programs, for the creation o f newtowns, and for the formal urbanization o f peri-urban areas of major cities. While the on-site infrastructure i s provided by the publicly owned Holding A1 Omrane, the vast majority o f the construction of residential units i s now performedby private contractors, some o f which have gone through spectacular financial growth. 8. The reorganization ofthe parastatal housing companies got under way in2004 withthe creation o f Holding A1Omrane (HAO), which consolidated the land and financial capital, as well as the human and technical resources, previously managed by the National Shelter Upgrading Agency (ANHI), the National Equipmentand Construction Corporation (SNEC), and Attacharouk, createdto carry out a housingprogram inGreater Casablanca. The mission o f the HA0was refocusedonprovidingon-site infrastructure and urbanizinglandto facilitate the implementation o f residential projects by private developers and on implementing the social housing programs financed via the FSH. Several measureswere also taken to capitalize and rehabilitate the financial standing o f the regional parastatal development and construction establishments (ERACs). Inlate 2004 the total outstanding debts o f these establishments vis-a- vis CIH, a property development public bank, were fully repaid inthe amount o f MAD 800 million; these organizations were also re-capitalized for MAD 900 million, thus makingthem again financially viable. 9. The "Cities Without Slums" program, designed and launched inJuly 2004, targets the upgrading o f all slums inthe country by the end o f the decade. Its strategy is basedon the city as the programmingunit for a comprehensive and integrated intervention, on a contractual framework betweenthe State, local governments, and operators to ensurejoint respect o f commitments and responsibilities, and on better targeting o f the operations inorder to optimize the resourcesat play interms ofthe landtenure, financial, institutional, and social issues. From a quantitative standpoint, the results o f program implementationremain encouraging. As o f late March 2008, the number o f slum units treated by the program, since its launch, amounted to 82,000, out of total o f 293,000 slum households targeted. However, four years after the program launch, 19 cities with nearly 30 percent o f the slum populationstill have not signed "city contracts" with MHUAE (Casablanca and TCmara having signed only partial contracts), and the 2 apartment units and serviced plots produced but not yet transferred to the target households numbered21,000 at end of March2008, indicatinglimitedadaptation ofthe products to the demand and the financial capacity o fthe households. Moreover, it i s important to highlight the fact that the number o f households targeted by the program has beenincreasing during the last years from 212,000 in2004 to 293,000 in2008. 10. Thanks to the release o f large tracts of public land, to the ability o f HA0 to provide on- site infrastructure, to the simplificationof the urbanplanning regulations and on account o f the expanded access to credit, there was a substantial increase inthe production o f low-cost and social housing between2004 and 2006. The productiono f lots intendedfor the construction of social housing almost doubled between2004 and 2006, increasing from 22,000 units in2004 to 45,000 units in2006. This increase i s primarily due to productionby the parastatal companies, which nearly tripledover the 2004-2006 period. Similarly, the production o f low-costs housing unitsincreasedsubstantially, by 30 percent, rising from 54,000 unitsin2004 to 70,000 unitsin 2006. This growth is essentially due to the increased interest shown by private developers, alongside a gradual withdrawal o f public operators which are focusing more on the urbanization of public lands. 11. FOGARIM (Guarantee Fundfor households with low and/or irregular incomes), was created under the 2004 Budget Law, and replaced the system o f across-the-board interest rebates on mortgages previously subsidized by the State. FOGARIMconstitutes a complete innovation inMorocco, inthat it finally enables access to housing credit by households ofthe informal sector, which represent a very large share o f the population(nearly 40 percent o f the labor force inurbanareas in2000, accordingto estimatesbythe Statistics Directorate). FOGARIMis directly supported through the FSH: during 2003-2007, MAD400 million drawn from the FSH was transferred to the Central GuaranteeFundas the endowment o f FOGARIM, to cover the risksborne by bankingestablishments ingranting suchloans. After a slow launch period, the efforts made by the public authorities to improve the operation o f this fund, combined with a targeted communicationand informationpolicy, made it possible to increase activity from 2,600 loans guaranteedin2005 to 10,500 in2006, to 15,600 in2007, for a cumulative total o f 28,700 with an overall balance increasing from MAD 255 million in2005 to MAD 1.5 billion in2006, to MAD4.76 billion in2007. 12. The real estate sector has benefited over the past several years from a diversified offer of financial products and is witnessing serious competitionamong commercial banks, marked by a significant drop inrates and the lengthening o f maturities. These favorable market conditions are the indirect consequence ofa reductioninthe national debt and ofthe resultingincreaseinthe liquidity ofthe nationalbanking system. The efforts made bythe Government to facilitate access to property by the disadvantaged social groups, the production o f low-cost housing, as well as the emergence ofmajor developer and contractor groups all contributed to the takeoff ofthe sector. Inthis context, real estate lending rose in2007 to MAD 76 billion, representing 22 percent of credits to the economy, as compared to15 percent in 1998. Inaddition to the loans benefitingfrom State support (representing one-third o f all housing lending in2005), participationby banks improved by over 50 percent involume terms, corresponding to a twofold increase inthe number o f lending operations, while the average commitment decreased from MAD284,000 to MAD218,000, thus underscoring the diversificationofthe portfolio and the targeting o f new categories o f customers. 3 13. Foreigndirect investment inMoroccanreal estate experienced a sizable boom in2006, drawing innearly DH4 billion ina single year, that is, over 15 percent o fthe total flow o f FDI, causing this sector to rank third after industry and tourism. This increasedprominence since 2003 i s explained by several factors: (i) the global dynamics ofthe real estate sector; (ii) the dynamism o f the Moroccan economy, which grew at a record rate o f 8.2 percent in2006; and (iii) launchingofthemassiveprogramstobuildnewcities,aswellasresidential, the commercial, and tourist property development. These investments, flowing inboth from the Gulf States (the UnitedArab Emirates account for nearly 10 percent) and from Europe (primarily France, Spain, and the UnitedKingdom), allow for sizable concentrations of capital inthe sector, the consolidationofmajornational groups, technology transfers from international groups, and the achievement ofeconomies of scale. Actions taken to fulfill the second tranche conditions 14. For thepurpose of modernizing urbanplanning standardsand regulations,the Borrower's Conseil de Gouvernementhas adopteda new urbanplanning code, satisfactory to theBank. InMay2005 the Government startedaprocess ofconsultation andtechnical work to completely overhaul the current legislationregulating urbanplanning, which dates back to 1990. MHUAE set out the principles and objectives of the reform in a policy document publishedinOctober 2005 which received the official endorsement o f His Majesty. MHUAEthen carried out a national survey o f perceivedrequirementsfor the replacement legislationand a first-hand investigationo f international best practices. In2006 and 2007 it prepared the full text of the new UrbanPlanning Code which, if adopted by Parliament, would greatly simplify and modernize urban planningpractices, and hence accelerate the production o f formal residential units. Consultations were heldwith professional groups, at the regional level, and with other key Ministries, so as to ensure a shared commitment to the goals ofthe new legislation. The draft law was approved on June 12,2008 by the Council o f Government, This condition has beenmet. 15. For thepurpose of restructuringitspublic sector housing companies,the Borrower has implemented a restructuringplan, satisfactory to the Bank. The Holding A1Omrane has continued its process o f internal organization and strengthening. The key financial ratios o fthe group (assets, profitability ratios, upfront payments by buyers, etc.) at end o f 2004 were compared to end o f 2006, and were found by the Bank to have all considerably improved. Inaddition, during 2007 the seven regional parastatal development and construction establishments (ERAC) were officially dissolved as state subsidiaries, re-established as publicly owned companies, and thentransferred to HA0 by the Government. Two more regional companies were also created with the purpose o f completing a balanced coverage o f the regions. HA0 has become a powerful tool for the implementationo f the public policies inthe realm o f social housing, but is also facilitating the investmento f private companies into the housing sector. This conditionhas beenmet. 16. For thepurpose of rationalizing and simplifving real estate taxes and subsidies, the Borrower has introducedreforms to the real estate tax system in the draft Budget Law of 2007. 4 Pursuant to the Bank funded study on the impact o f real estate taxation carried out in2006-2007, the related sector taxes have beenrevised as follows inthe 2008 Budget Law: a) application of the normal VAT rate (20 percent, instead ofthe reducedrate of 14percent) to all realestate operations, with the exception o f social housing, whichremains exempt; b) elimination o f the provision of the 3 percent tax break on corporate taxes if applied to the construction o f employee housing; and c) unification of registration fees (2.5% on the amount o f the real estate transaction) withthe notary public fee (0.5%). The newregistration fees will be subject to a cumulative rate o f 3%, with the exception o f social housing that will benefit from the special cumulative rate o f 1.5%; d) with regards to the fiscal incentives for the productionof low-cost housing (Article 19), real estate companies producing low-cost residential units (value of MAD 200,000) will have to pay 50 percent o f the corporate tax (while they were previously totally exempt), and the quantitative threshold to benefit from these fiscal incentives has beenloweredto 1,500 units. The construction o f low-cost units with a value up to MAD 140,000 will be entirely tax exempt, with a quantitative threshold o f 500 units inurbanareas and o f 100 units inrural areas. This condition has beenmet. 17. For thepurpose of expanding urban slum upgrading and social housingprograms, the Borrower has implementedthe Cities without Slums (Villes sans Bidonvilles, VSB)program, according to an implementationplan prepared in May 2005, which shall have been evaluated on the basis of reports of the National Monitoring Committee of the VSBprogram. Based on cautious projections o f the likely rate o f implementation o f the program, the target of 30,000 slum-dwellerhouseholds to obtain resettlement on a serviced plot, inan apartment unit, or to benefit from on-site restructuring by end of 2006 had beenagreedto. The monitoring and evaluation exercise conducted inpartnership with MHUAEon the basis o f their internal reportingdata ascertainedthat 62,000 households had infact benefitedfrom the program by end o f 2006. Inaddition, 19,000 units had beenproduced but had not beenassigned to the beneficiary households yet. Therefore the results more than doubled the quantitative targets. As for its qualitative aspects, while some areas for improvement persist, inparticular with regard to its responsivenessto the active participation o f the beneficiaries and the affordability o f some of the products, the program is considered satisfactory. This conditionhas beenmet. 18. For thepurpose of improving the efficiency of the residential rental market, the Borrower's Conseil de Gouvernement has adopted new draft legislation to regulate the residential rental sector. InMay 2005 the Government launched a study ofthe residential rental sector, to identifyways for this segment of the housing market to perform better and to contribute to the satisfaction o f the pent-uphousing demand, primarily inthe largest urbanareas. The study was presentedat a stakeholder workshop inApril 2006. The recommendations o f the study were to reviewupwards the current rental ceilings andto overhaul the corresponding legislationinorder to better balance and regulate the rights o f the landlords with the ones o f the tenants. Their implementationwould mobilize investments and ensure that some of the 800,000 residential units currently vacant would be put on the rental market. On this basis new draft legislationwas prepared by MHUAE in2007 withthe collaboration ofthe MinistryofJustice. The latter was keenonparticipatingin order to minimize the number o f civil suits resulting from rental-related conflicts, which i s 5 currently very high. The draft law was approved on June 12,2008 by the Council o f Government. This condition has been met. 19. For thepurpose of providing increased access to housingfinance to the low-income households, the Borrower: a) has introduced modijications in the Convention between the Borrower and the Caisse Centrale de Garantie, governing FOGARIM; and b) has made decision on thepossibility of introducing an insurancepremium systemfor FOGARIM. The FOGARIM Steering Committee met regularly to reviewthe performance ofthe guarantee fund and in2006 made the agreed adjustments neededto facilitate access: a) the maximum monthly repayment amount was increased; b) the certification o f informal revenues by the local delegate o f the Ministry o f Interior was replaced by an auto-certification; c) the guarantee was extendedto the acquisition ofhousing units by multiple family members;d) the age limit of60 for the final repayment o f the mortgage was eliminated; and e) the guarantee was extendedto the self-help construction o f housing and acquisition o f residential plots. During 2007 inview o f the lengthy procedures requiredfor the issuanceoftitle deeds it was agreedto accept a guaranteeby the housing operator instead. In2007 the Steering Committee agreedto introduce insurance premiumsto increasethe financial coverage ofthe guarantee: a) a premiumof 0,65% will be applied to the guaranteed amount (70% of the mortgage), which corresponds to an additional interest rate o f 0,46% for beneficiaries; and b) a deduction on the premium corresponding to the cashcontribution by the beneficiaries will be applied: for a contribution o f 20%, a deduction of 20% is applied to the premium(premium of 0,36% instead of 0,46%). This condition has been @. Request of waiver of one condition 20. For thepurpose of providing increasedaccess to housingfinance to low-income households,the Borrower has introduced, in the draft 2006 Budget Law, an adequate financial incentive systemfor housing saving schemes. The purpose ofthis housing finance measurewas to encourage low-income households to open savings accounts incommercialbanks inorder to accumulate the amount requiredfor a down- payment for a mortgage, and to internalize the ability to make monthly savings inview of future mortgage payments. Such saving accounts would have received either a fiscal incentive, or a cash contributionby the Government. Two main factors made the introductiono f this measure not required:a) the lower interest rates, lower percentageso f down-payment requiredby the banks, and greater maturities applied to mortgages since mid-2006, making access to credit further accessible; and b) the price escalation ofthe housing products, often indouble digits, that the Moroccan housing market has beenexperiencing over the past years. Such price increases are sufficiently highto entirely erode the advantage of saving as opposed to initiating a mortgage, despite the public incentive. The Government and the management o f the Bank therefore agreed that the benefits o f the housing schemes as identifiedduring appraisal would not have been obtained, and the technical work around its design was stopped. A waiver is requested, so that this measuremay benot considered any more a conditionfor the disbursementofthe second tranche. P:\MOROCCO\IF\83746\SPN\Trancherelease document.doc 6