Document of The World Bank HOUSING PROJECT

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank STAFF APPRAISAL REPORT UKRAINE HOUSING PROJECT FEBRUARY 13, 1996 Report No UA Municipal and Social Services Division Country Department IV Europe and Central Asia Region

2 CURRENCY EQUIVALENTS (as of September, 1995) Currency Unit = Karbovanets US$1 = 180,000 Kbn. AVERAGE EXCHANGE RATES Kbn per US$1 YEAR - RATE , , ,224 Sep ,000 ABBREVIATIONS AND ACRONYMS CEU - City Executing Unit EU - European Union FSU - Former Soviet Union GDP - Gross Domestic Product ICB - International Competitive Bidding NCB - National Competitive Bidding PSC - Project Steering Committee SA - Special Accounts SCHME - State Committee For Housing and Municipal Economy SCUDA - State Committee for Urban Development and Architecture SOE - Statement of Expenditure TG - Technical Group USAID - United States Agency for International Development UKRAINE - FISCAL YEAR January 1 - December 31

3 STAFF APPRAISAL REPORT UKRAINE HOUSING PROJECT CONTENTS Loan and Project Summary... i I. SECTORAL BACKGROUND... 1 A The Housing Sector in Ukraine B. Government Housing Policy C. Project Cities... 4 D. Bank Housing Sector Strategy and Project Rationale... 4 E. Bank Experience... 8 II. THE PROJECT... 9 A. Project Genesis... 9 B. Project Objectives... 9 C. Project Description m. PROJECT COSTS AND FINANCIAL ASPECTS A. Project Costs B. Financing Plan C. Onlending Arrangements D. Pricing and Cost Recovery IV. PROJECT IMPLEMENTATION A. Project Implementation Plan B. Quality Control C. Procurement D. Disbursement E. Accounting and Auditing F. Supervision, Monitoring and Evaluation V. PROJECT BENEFITS AND RISKS A. Economic and Social Benefits B. Environmental Impact C. Participatory Approach D. Risks VI. AGREEMENTS AND RECOMMENDATIONS Tbis report is based on the findings of an appraisal mission in July 1995 consisting of Y. Uchimura (Task Manager), B. Inadze, EC4MS, 1. Harasymiak and K. Villani (consultants) and a post-appraisal mission in September 1995 consisting of Y. Uchimura, B. Imnadze, EC4MS, 1. Harasymiak and 0. Cherniahivsky (consultants). The peer reviewers are L. Hannah, TWURD, and A. Nassau, EC31V. The Division Chief is T. Blinkhorn, EC4MS. The Department Director is B. Kavalsky, EC4.

4 ANNEXES A. Housing Policy Concept Paper B. Summary of Housing Policy Measures C. Outline Terms of Reference for Technical Assistance D. Detailed Project Costs E. Project Cash Flows F. Detailed Procurement Arrangements G. Estimated Disbursement Schedule H. Supervision Plan 1. Economnic Analysis Summary J. Environmental Analysis MAP IBRD No TABLES Table Project Costs Table Financing Plan Table Procurement Arrangements Table Disbursement Categories

5 UKRAINE Housing Project Loan and Project Summary Borrower: Implementing Agency: Beneficiaries: Poverty Category: Amount: Terms: Conmitment Fee: Onlending Terms: Project Objectives: Project Description: Ukraine The City Administrations of Kharkiv, Lviv and Odesa. The State Committee on Housing and Municipal Economy and the State Committee on Urban Development and Architecture Households and private developers in Kharkiv, Lviv and Odesa. Not Applicable US$17.0 million equivalent Payable in seventeen years, including five years of grace at the Bank's standard variable interest rate % on undisbursed credit balances, beginning 60 days after signing, less any waiver. The Bank loan funds will be onlent by the National Government to the Project City Administrations in US dollars at the standard Bank terms and conditions with a surcharge of I %. The overall objective of the proposed Housing Project is to support the development of a housing market to meet the housing needs of the people of Ukraine. Specifically, the proposed project will aim to: (a) further private ownership of housing and fully privatized apartment buildings by selling all apartments financed by the loan to city residents; (b) promote resident take over of the management and maintenance of their buildings through formation of homeowners' (condominium) associations; (c) encourage the growth of private housing developers by providing access to land with infrastructure for housing construction and simplifying building regulations; (d) pilot competitive bidding in selection of contractors; and (e) further housing reform through policy studies. The project will consist of completion of selected unfinished municipal housing for sale to city residents in Lviv and Odesa, development of land sites for sale to private developers for further residential construction in Kharkiv and Lviv, housing policy studies and technical assistance for project implementation and capacity building. The total project cost is estimated to be US$27.9 million equivalent.

6 - ii - Financing Plan: A Bank loan of US$17.0 million will finance 61 % of total project cost net of taxes (55% of costs including taxes) or 93% of the foreign costs and 42% of local costs. The loan will finance: (a) 80% of the housing completion component incremental costs; (b) 80% of the land development component incremental costs; and (c) 27% of the technical assistance component. US$16.7 million, will be onlent to the project cities; US$0.3 million, will be made available to the national government for policy studies and technical assistance. Counterpart funds will be provided by the national government and the project city administrations. ERR: 25% Map: IBRD Project ID Number: UA-PA-34581

7 UKRAINE HOUSING PROJECT STAFF APPRAISAL REPORT 1. SECTORAL BACKGROUND A.The Housing Sector in Ukraine 1.1 The housing sector in Ukraine is going through a gradual process of transformation as government control of the sector decreases and a market based housing system begins to slowly emerge. These changes are the result of initial housing policy reforms aimed at development of private markets and the gradual collapse of government control due to lack of funds. 1.2 Prior to 1993, the government dominated the housing sector. In 1992, local governments owned 36% and other government agencies (primarily state enterprises) owned 25% of housing in urban areas; the remaining urban housing was owned by housing cooperatives (6%) and private individuals (33%)'. While the people have been provided with small plots for gardens and second homes 2, local governments exercised strict controls on the allocation of land and its use. Maintenance of local government, enterprise and cooperative housing was carried out by municipal housing maintenance organizations. Rents (along with water, heat and other municipal services) were highly subsidized: rents and utilities were estimated to account for less than I % of household monthly incomes in State construction enterprises built new housing or reconstructed old housing using standard designs and norms. 1.3 The state allocation system has not been able to provide adequate housing for its citizens. Space is limited: a Ukrainian citizen living in an urban area has an average of about 18 sq. m. of housing space or about one-third that found in Western European countries (e.g. 32 sq. m. per capita in London and Paris). High standardization leads to limited choice of housing types. Energy efficiency was not a consideration given low Soviet energy prices, and buildings were constructed with poor insulation of exterior walls and roofs, exposed metal joints and poor quality windows. Construction quality was poor so that residents had to spend their time and resources reworking doors, window frames, finishing and other interior work to compensate for the poor workmanship. 1.4 Under the Communist system, families with less than 5 sq. m. of housing space per person or who were considered priority (e.g. the handicapped, war veterans) became eligible for new housing free of charge from the government and were registered on the wait list. In 1992, there were 2.1 million families (or approximately 18% of total urban households) on the government housing wait list in urban areas. Families with less than 9 sq. m. per person became eligible for cooperative housing and were put on a separate cooperative housing wait list. Instead of obtaining free housing, families on the cooperative wait list were grouped together and required to make a down payment of 25 % of construction cost with the govermment providing a loan through state banks for the remaining 75% at 1.5% to 2.0% interest per annum to be repaid over 50 years. The completed building was owned by the cooperative who contracted with the municipal housing maintenance organization for management and maintenance at subsidized govermnent rates. In 1992, there were over 500,000 families on the cooperative wait list for urban areas. 1/. The level of private ownership is higher in the rural areas where 91 % of the housing is reported to be owred by individual families. 2/ hectare per person in urban areas and 0.25 hectares per person in rural areas.

8 1.5 The system of government controlled housing is breaking down. The economic recession reduced the amount of government funds allocated to housing construction. As a result, construction of most municipal, state enterprise and cooperative housing has come to a stand still. Unfinished housing sites, with partially erected buildings and cranes standing idle, can be seen in the major urban areas of Ukraine. 1.6 A market for real estate in the urban areas, although limited, is slowly emerging. Following the start of housing privatization in 19933, people began to privatize their apartments and exchange or sell them to adjust housing to their current needs. Initially, direct exchanges were predominant but increasingly more apartments are being sold. Real estate brokers are emerging to link potential sellers with buyers. In Kharkiv, transactions of privatized apartments increased from 4,970 (approximately 1 % of the estimated number of residential units in the city) in 1993 to 15,727 (approximately 3 %) in In Kiev, 24,931 real estate transactions (approximately 1 % of the estimated number of residential units) were recorded during the first nine months of Apartments in better locations, such as the city center or with good access to transportation, are commanding higher prices: e.g. apartments in downtown Kiev sell for around US$400 per sq. m. compared to US$270 per sq. m. in less attractive locations. Most real estate transactions are carried out in US dollars with the entire payment made in cash at the time of sale. 1.7 Housing developers are beginning to emerge in the construction industry. Some construction enterprises are now building housing for sale to individual households in response to major cutbacks in government sponsored construction. Many groups are beginning to operate as developers, displaying an entrepreneurial spirit. These include builders from the former state building "complex", construction "brigades" from both state and enterprise construction groups and individuals from other professions seeking to enter the building (housing) industry. As a result, there is increasing competition among housing construction enterprises and a market for new housing is developing, primarily for larger, more luxurious apartments targeted at the higher incomes. However, financing is a constraint. Construction is carried out on a "pay as you go" basis. In most cases, financing is provided by the potential buyers who are asked to make a down payment and additional payments in line with progress on construction. 1.8 The housing market in Ukraine still remains limited and faces several constraints. First, lack of financing (for both households for home purchases and developers for housing construction) remains an obstacle to growth of the housing market. Given the high price to income ratios for housing, many families cannot afford to pay all cash, as is the current practice, and will need access to long term loans to purchase an apartment. Second, land in the urban areas remains under the control of local governments who allocate development rights to enterprises and other groups interested in utilizing specific sites. Third, excessive local government land and building regulations act as a disincentive to real estate development. Developers have to go through multiple reviews of their investment proposals before permits are issued allowing them to start construction. While regulation is required to protect the public interest (e.g. building safety, environmental impact and cultural preservation), some of these reviews are duplicative and not necessarily transparent; they create uncertainty and undue delays. 3/ Housing reform is discussed in Section B below.

9 -3 - B. Government Housing Policy 1.9 Housing privatization was one of the earlier reforms started by the Government. The Law on the Privatization of State Owned Housing in Ukraine was passed in June 1992 and became operational in early Under the law, a Ukrainian citizen is entitled to receive free of charge 21 sq. m. of floor space per person within the apartment they currently rent from the government. In addition, each family is entitled to another 10 sq. m. of floor space free 4. Housing privatization has proceeded at a slow but relatively steady pace. As of September 1, 1995, approximately two million apartments had been privatized, or about 32% of all apartments targeted for privatization. Privatization of individual apartments has resulted in both state owned and private apartments mixed together in the same building. Municipal housing and maintenance companies continue to be responsible for the management and maintenance of the building and common areas In 1994, the Government of President Kuchma embarked upon a program of economic reform which includes elements which impact on the housing sector. A critical reform is the phasing out of subsidies for housing, heating, hot water, water and sewerage and gas 5. The increase in cost recovery for state housing will reduce one of the disincentives to housing privatization. The Government is also preparing a draft Law on Land and Property Registration setting out procedures for registering rural and urban land and property which would address some of the shortcomings of the Land Code of 1992 which permitted private ownership of land. The Bank is supporting these and other structural reforms through the Rehabilitation Loan (Loan 3831, approved by the Board on December 22, 1994) In April 1995, the Government issued a Housing Policy Paper ("the Concept of the State Housing Policy for Ukraine") which advocates a market based approach to housing development. The paper acknowledges the limitations of the previous central planning approach to housing provision and states the need to move towards a market oriented housing system. One of the principal objectives of the new policy is to "create conditions for every citizen to build, purchase or rent housing according to his or her choice, needs and opportunities". The government's role will be transformed from that of the primary builder and owner of housing to an indirect role of developing housing finance systems, providing assistance to low income households and promoting energy conservation measures in buildings, encouraging private investment in the construction industry, promoting housing privatization and expanding homeowner management and maintenance of housing. The paper lays out the overall direction of housing policy, forms part of the Government's economic reform program and will be used as a reference to revise existing housing legislation and issue new legislation. The paper was approved by the Supreme Rada on June 30, An English translation of the Housing Policy Paper is attached as Annex A At the local level, reform oriented city administrations have been undertaking pilot demonstration activities to promote housing reform within their cities with assistance from USAID. Kharkiv and Odesa Cities have piloted privatization of whole buildings and are experimenting with the 4/ If their apartment is larger than the free allocation, the family can pay for the extra space or apply for a smaller apartmnent. If the apartment is smaller than the free allocation, the family is entitled to be compensated by the government for the difference. 5/ In October 1994, the Government issued Cabinet of Ministers Decree No. 733 which provided for increased cost recovery of housing, heating, hot water, water and sewerage and gas to 20% of production costs in October 1994 and to 60% by July Actual implementation has been delayed: cost recovery was increased to 40% of production costs at end June 1995 and is now scheduled to reach 60% in January 1996.

10 - 4 - organization of condominium associations to allow residents to take over management and maintenance of their building. In Kharkiv, a pilot project to contract out building management and maintenance was carried out in order to introduce competition in the provision of management services. The International Finance Corporation has also been working with the State Property Fund in developing condominiums as part of its small scale privatization efforts because many shops are located in mixed residential-commercial buildings. The Government is following up on these activities and is mainstreaming condominium formation by issuing Cabinet of Ministers Decree No in July 1995 mandating the formation of condominium associations. Efforts to organize condominium associations will continue in these cities. Land auctions were carried out in Kharkiv, Odesa, Lviv and Chernihiv in 1994 which provided buyers with 50 year leases (with the priority to renew for another 50 years) to commercial and residential lots and gasoline stations. The Government is expanding the land auction program to other cities in Ukraine and issued Presidential Decree No. 608/95 "On Privatization and Lease of Non-Agricultural Land Sites for the Purpose of Economic Activity" in July Project preparation was carried out in the cities of Kharkiv, Lviv and Odesa which were targeted for inclusion in the Bank project because of their commitment to housing sector reformn and the willingness of the city administrations to carry out alternatives to central planning and state allocation of housing. C. The Project Cities 1.14 The project will be implemented in the cities of Kharkiv, Odesa and Lviv. Kharkiv, with a population of 1.6 million in 1994, is the second largest city in Ukraine. It is located in the eastern part of the country, close to the border with Russia. It was one of the major military industrial centers in the former Soviet Union and is home to heavy industrial enterprises as well as several research institutes. Odesa, with a population of 1.1 million in 1994, is the fifth largest city in Ukraine. Located on the Black Sea, it is a mnajor port as well as a regional industrial center; during the sunmmer months, it is a popular resort for local tourists and vacationers. Lviv, with a population of 0.8 million in 1994, is the seventh largest city in Ukraine. It is located in the western part of Ukraine, close to Poland. Both Odesa and Lviv have international airports; Lviv with a direct comection to Poland and Odesa with a direct connection to Austria, Germany and Russia. All three cities have been hit by economic decline, but, as major regional economic centers, are expected to recover once economic growth resumes in Ukraine. The location of the cities are shown in Map No. IBRD 27170, attached to this report. D. Bank Housing Sector Strategv and Proiect Rationale 1.15 The housing sector is a critical element in the transition to a market economy and will play an important role in the development of the Ukrainian economy. Reducing government housing construction and maintenance subsidies will have a positive impact on the government budgetary deficit and overall macro economic stabilization. One study estimated that government assistance for 6/ Cabinet of Ministers Decree No. 588 "On the Approval of Regulations on the Organization and Operation of Associations Set Up by the Owners for Management and Maintenance and Use of Common Property in Residential Buildings", July 31, 1995.

11 housing, water, heat and other utilities accounted for around 20% of GDP in 1993'. Policy reform will require, among other things, increased household involvement in selection, management and maintenance of housing. Housing reform will support growth of industrial and commercial enterprises. Improved access to housing facilitates labor mobility and encourages industrial adjustment as people move in search of better economic opportunities during the transition period. Household takeover of management responsibility will support the privatization of state enterprises by relieving them of the obligation to construct and maintain enterprise housing. Growth of a real estate market will allow for greater flexibility in constructing offices and other commercial buildings in urban areas and will, in turn, allow them to function as dynamic service and information centers. Housing can provide an attractive investment for households and provide motivation for savings. Finally, cramped quarters and poor quality of housing are seen by the people as one of the more visible shortcomings of the central planning system. Better housing will provide tangible results of the alternatives to central planning and will help to sustain momentum for economic reform The basic objective of the Bank's housing sector strategy in Ukraine is to support and accelerate the development of the newly emerging housing market. A housing market will require: (a) development of a housing finance system to provide long term loans for the purchase, construction and rehabilitation of apartments and homes; (b) growth of builders, housing management and maintenance companies, real estate firms and agents to service the needs of the households; and (c) establishment of a policy and legal framework which will establish and protect property rights, safeguard contracts, provide for the timely provision of infrastructure and municipal services, and assist the poor in meeting their basic shelter needs. The role of the government will shift from being an owner and direct supplier of housing to creating a regulatory environment that will allow households, builders, real estate firms and other actors to interact, and protecting the poor and other socially vulnerable groups and assisting them in meeting their basic shelter needs. The sectoral objectives, actions taken to date and further actions required are presented in tabular form in Annex B Development of a housing market is an integral part of the transformation of the economy as a whole and the sequencing of housing reform measures will depend on progress on the overall reform program and stabilization of the economy. While provision of housing finance is essential to enhance the affordability and generate demand for housing, local financial institutions are reluctant to make long term housing loans to households when inflation and nominal interest rates are high and there is legal uncertainty over their ability to use housing as collateral for their loans. Measures to promote housing lending to households are contingent upon economic stabilization and development of banking laws, collateral laws and the pace of financial sector development so, despite its importance, housing finance development will emerge only after these essential preconditions are established and this will occur at a later stage in Ukraine's economic transformation. Similarly, the growth of construction and buildings materials companies will be addressed as part of the Government's enterprise privatization and development program. Efforts to promote the housing market will be coordinated with other Government economic reforms supported by the Bank, 7/ Ira Lowry, 'Housing Reform in Ukraine: Moving From a Socialist System to a Market System", USAID/Padco, February 1994.

12 - 6 - specifically those in economic stabilization, enterprise privatization, financial sector development, land reform and social safety net through a series of ongoing and proposed projects' Initially, emphasis will be on smaller Bank projects (limited in scope, amount and geographical coverage) to demonstrate market based alternatives, promote key reform measures and provide technical assistance to initiate further policy development. These projects would be followed by projects, the scope, timing and scale of which will depend upon the progress made on overall economic stabilization and structural reforms, reforms within the housing sector and experience under the earlier projects. Change is expected to be slow in the beginning given lack of depth of the emerging private enterprises, peoples' attitudes towards change and time required for new market oriented systems and institutions to be fully established and functional The proposed Housing Project is envisioned as the first in a series of housing projects. The project will work with reform minded city administrations to foster housing reform and housing development at the local level by: (i) promoting private ownership of housing and homeowner management of multi-family buildings; (ii) improving construction enterprises' access to land for housing development; and (iii) introducing competition in the selection of contractors for local government contracts. In order to participate in the project, the city administrations have agreed to: (a) (b) (c) (d) Sell unfinished housing completed through the project, breaking with the past policy of allocating housing to families on the wait list. Buildings financed through the Bank project will be fully privatized (i.e. all the apartments will be privately owned) and the residents, through their condominium associations, will be responsible for managing and maintaining their building. Increase housing developers' access to land by continuing with the land auction programs initiated under assistance from USAID (para. 1.12) and selling land developed under the project in Kharkiv and Lviv. Preparation of a land auction program for 1996 and 1997 were a condition of negotiations, (para. 6.1) and adoption of the program will be a condition in the subsidiary loan agreements with the project cities. Review and simplify, where appropriate, land and building regulations at the city level with support from consultants funded under the technical assistance component of the project. Simplification of the existing review and approval procedures should facilitate greater private sector investment in urban real estate. Select contractors for completion of the unfinished buildings and construction of infrastructure through competitive bidding, rather than through assignment by the city administration. This is a standard Bank requirement but it will be the first time that the city administrations (and the local construction companies) will experience open competition in the selection of contractors for local government construction works. 8/ Specific operations include: (a) the ongoing Rehabilitation Loan (Loan No. 3831) and the proposed Enterprise Development Adjustment Loan which support the Government's enterprise privatization program; (b) the proposed Financial Sector Adjustment Loan and the proposed Financial Institution Development Loan which would strengthen the policy and legal framework for bank operations and provide private developers with access to investment financing; (c) the proposed Agricultural Sector Adjustment Loan and Land Registration Loan which would address property rights, private ownership of land and land administration; and (d) the proposed Social Protection Adjustment Loan which would strengthen the social safety net for the poor.

13 -7- The above agreements were confirmed during negotiations and reflected in the legal documents (para. 6.2) The project will also lay the basis for further housing policy reform and future projects at the national level. The Housing Policy Concept Paper expresses the Government's intent to move towards a housing market, but there are two key areas where additional analytical work needs to be carried out and specific policies developed. The Policy Concept Paper makes reference to low interest loans to promote homeownership, continued government housing support for low income families and other policy measures. However, these measures are not developed in detail and no consideration is given whether they are sustainable given the fiscal constraints faced by the Government. Families will need to be provided with long term financing if they are to purchase housing which is typically several times annual household incomes. The institutional arrangements and measures needed to developed a housing finance system would need to be considered as part of the overall financial sector development. While the Policy Concept Paper points out the need for a housing finance system, it does not include specific recommendations on the action the Government will need to take. Studies on the review of government support for housing and development of housing finance will be included in the technical assistance component of the project (para ) The Bank's strategy in Ukraine supports the Government's structural reform agenda with special emphasis on private sector development, public sector restructuring, social protection and poverty alleviation, and environmental protection. The proposed housing project will promote the growth of private real estate developers by improving access to land for housing construction and simplifying and making transparent building regulations and procedures to facilitate start up of real estate investments. Local construction enterprises will also gain experience in tendering by participating in the procurement training to be carried out as part of project implementation. The project will promote private ownership of housing and reduction local government's role by completing and selling unfinished municipal housing. The technical assistance studies will lay the foundations for future development of the housing market and a less direct role for the government in the housing sector. This project is consistent with the Bank's Country Assistance Strategy for Ukraine The project is also part of the Bank's strategy to improve public sector management at the local level and increase local autonomy. City administrations are in a better position to gauge local priorities and are expected to play a larger role in the delivery of basic infrastructure and municipal services. The cities have taken the lead in project development and will be given control over project implementation. Lviv and Odesa are also considered for participation in the Bank's proposed Urban Transport Project and Municipal Water Supply Project. These projects will allow the Bank to establish working relationships with officials at the local level and be more aware of the needs of residents in the regional cities.

14 - 8 - E. Bank Experience 1.23 The Bank has limited experience lending to Ukraine 9 and for housing in Eastern Europe. There are only three housing projects under implementation in Eastern Europe: (i) the Poland Housing Project (Loan 3499-PL), approved in June 1992, which provides financing through local banks for mortgages and housing construction; (ii) the Albania Housing Project (Credit AL), approved in July 1993, focusing on completion of unfinished housing through a national agency (the National Housing Authority) created through the project; and (iii) the Russia Housing Project (Loan 3850-RU), approved in March 1995, which provides financing for land development, housing construction and building materials industry development. The different approaches taken in these projects reinforce the need to design projects according to the needs and level of transition in the respective countries. The Albanian project, which is similar to this project, points to the risk that the cities may go back on their commitment to market housing and allocate them to households on the municipal housing wait list and/or continue their role as housing developers. The project addresses these concerns by focusing on those city administrations which have undertaken and agreed to housing reforms and promoting private developers through increased access to land and changes in housing regulations. 2/ Tle Bank is still in the process of building its portfolio in Ukraine. The Institution Building Loan (a technical assistance project) and the Rehabilitation Loan (a policy loan) are under active implemnentation. Two additionaloans, the Agricultural Seeds Development Loan and the Hydropower Rehabilitation Loan became effective in September 1995.

15 -9 - II. THE PROJECT A. Project Genesis 2.1 Project preparation was carried out jointly with the State Committee on Housing and Municipal Economy (SCHME), the State Committee on Urban Development and Architecture (SCUDA) and the project cities. Initial discussions on developing a housing project were held with the Government in The cities of Kharkiv, Lviv and Odesa were selected as possible project cities because of their support for housing reform and interest in attempting alternative, market based approaches to housing provision. B. Proiect Objectives 2.2 The overall objective of the proposed Housing Project is to support the development of a housing market to meet the housing needs of the people of Ukraine. Specifically, the proposed project will aim to: (a) further private ownership of housing and fully privatized apartment buildings by selling all apartments financed by the loan to city residents; (b) promote resident take over of the management and maintenance of their buildings through formation of homeowners' (condominium) associations; (c) encourage the growth of private housing developers by providing access to land with infrastructure for housing construction and simplifying building regulations; (d) pilot competitive bidding in selection of contractors; and (e) further housing reform through national policy studies. C. Project Description 2.3 The project will consist of completion of unfinished housing, development of land sites for further residential construction, housing policy studies and technical assistance for project implementation and capacity building. It will include the following components: (i) (ii) (iii) Housing Completion (US$16.7 million of which US$14.3 million is incremental): Completion of the unfinished city housing stock for sales to private households in Lviv and Odesa; Land Development (US$10.0 million of which US$6.6 million is incremental): Provision of off-site infrastructure to develop serviced land for sale to private developers for housing construction in Kharkiv and Lviv; and Technical Assistance (US$1.2 million): Financing for housing policy and land and building regulations studies and consultancies and training to assist with the project implementation both at the national and local levels. The project will finance completion of a large portion of the existing stock of unfinished municipal housing in the project cities. During negotiations, the Government's commnitment to encourage the growth of private developers and the project cities' commitment to promote competition in the housing sector in their respective cities were confirmed and incorporated into the Project Agreements (para. 6.2). Provision of infrastructure and promotion of private housing developers are new undertakings for the cities in Ukraine and are more in line with the role of local governments in a market economy. The possibility of auctioning the uncompleted buildings directly to the private developers was considered but dropped because developers would still face difficulties in mobilizing

16 - 10- the necessary funds to complete buildings and did not show strong interest to take over partially completed buildings. Construction financing is expected to be made available to developers subsequently through financial institutions with support from other Bank loans' so that this should not be as serious a constraint when land sites developed through the project will be marketed in the latter part of 1997 and early Housing Completion Component 2.4 Construction of municipal housing has stopped or slowed down significantly in most cities in Ukraine because of lack of funding. The buildings are in different stages of construction, some have only site preparation and foundations completed while other have structures erected but the interior work and mechanical equipment is yet to be installed. A significant amount of city resources have gone into construction of these buildings. If left to the elements, work done to date would deteriorate to the point of being unsalvageable. Although based on standard government designs, improvements can be made to interior layout design of the buildings and insulation to improve energy efficiency, making the apartments more attractive to potential buyers. 2.5 All apartments completed under the project will be sold to city residents at market prices. The buyers will form condominium associations to jointly manage the building and be responsible for repairs and maintenance. Sales of completed housing and homeowner management of the buildings will be a significant break from past practices where housing was allocated to families on the wait list and management and maintenance was carried out by municipal maintenance organizations for a nominal fee. The housing wait list continues to be political issue for both national and city governments. A study on government support for the housing sector, included in the technical assistance component of the project, will assist the government develop alternative measures to promote home ownership and address the housing needs of low income groups in lieu of government allocation of housing. 2.6 The project will finance completion of the following municipal housing in the Cities of Lviv and Odesa: (i) (ii) Lviv City: Six partially constructed municipal residential buildings will be completed at Lysynichi district for a total of around 500 apartments with 30,000 sq.m. gross area of space. The estimated cost of completion is US$4.9 million. The six buildings constitute only part of the site and the remaining area will be sold to private developers for housing construction (see para. 2.9). Odesa City: The project will finance completion of seven residential buildings for a total of around 520 apartments with about 31,000 sq.m. gross area of space. The estimated cost of completion is US$9.4 million. 2.7 All buildings selected are located in areas with relatively convenient access to employment, commercial areas, recreational and other urban facilities. The Lysynichi site in Lviv is a new housing development located on the northern fringe of the city but still within 6 Ian. of the city center. The seven buildings to be completed in Odesa are located in Vuzovsky, Yuzhny and Moldovanka districts in the southern part of the city in established neighborhoods. The city center lo/ The proposed Ukraine Financial Institution Development Loan will mnake financing available to enterprises, including construction firms, for investment projects.

17 and southern parts of Odesa, where many of the beaches on the Black Sea and recreational facilities are located, are considered to be the more desirable residential areas. Prior to negotiations, the city admninistrations confirmed their ownership of the sites and buildings to be financed through the loan (para. 6.1). Land Development Component 2.8 One of the major constraints to residential construction in Ukraine is lack of access by private developers to land. Furthermore, due to sharply reduced investments of the Government, many land sites which could have been attractive for residential construction stay idle because of a lack of main infrastructure. The project will address this problem by financing trunk infrastructure (water, drainage, heating, electricity, gas, roads etc.) and selling serviced land to private developers. The developers will construct housing and onsite infrastructure, hooking up to the trunk infrastructure financed through the project. The sites will be zoned for low rise residential development and the developers will be provided flexibility in developing their individual sites. 2.9 The project will finance infrastructure provision for the following sites in Kharkiv and Lviv: (i). (ii) Kharkiv City: Water, sewerage, drainage, heating, electricity, gas, roads and other off-site infrastructure facilities for development of about 65,000 sq.m. of land adjacent to Shevchenko Street of which about 60,000 sq. m. will be sold to developers for low-rise housing construction. The estimated cost of development is US$2.0 million. Lviv City: Water, sewerage, gas, electricity, heating, road and other off-site infrastructure facilities for the development of approximately 87,000 sq.m. of land, of which 50,000 sq.m. can be sold to developers for residential construction in Lysynichi district. Part of this infrastructure has already been constructed and the project will finance the missing links. Total cost of infrastructure provision is estimated to be US$4.6 million The proposed site in Kharkiv is well located with ready access to tram and bus lines, social facilities, urban amenities and a recreational area with an artificial lake. The tram and bus lines connect the site also with a subway station 2.4 km. away from the site. The site is located among well developed residential areas and has trunk infrastructure readily available. The Lysynichi in Lviv was discussed in para. 2.7 above. Prior to negotiations, the city administrations confirmed their ownership of the sites to be financed through the loan (para. 6.1). Technical Assistance Component 2.11 The project will include financing for housing policy studies, a land and building regulations study and consultancies and training to assist with the project implementation both at the national and local levels. Specific activities will include: (i) Housing Policy Studies: Studies will be carried out to follow up on key aspects of the Government's Housing Policy Concept Paper (para. 1.20): a) Review of Government Assistance for Housing (US$100,000): The Government's Housing Policy Concept mentions the need for govermnent

18 assistance for people on the wait list and low income families. A key concern will be the level of government support (subsidies) and hence the sustainability of these policies, especially in view of the government's inability in the past to adequately fund its housing programs and the tight budget situation expected in the immediate future (as many demands are made on government resources during the transition period). Alternative policy measures would need to be examined to develop cost effective policy packages which would provide maximum impact but stay within financing limits set by the tight budget. The study will also explore ways of addressing previous commitments of the Govermnent linked to the large stock of unfinished housing, part of which was pre-allocated to the people on the waiting list. b) Housing Finance Development (US$100,000): A system of housing finance will need to be developed to provide households with access to long tern financing for housing purchase and developers with construction financing. Specific characteristics of housing require a strategy be developed for housing finance. For example, mortgage lending involves a large number of relatively small loans made to households. Longer maturities of mortgage lending requires that lenders explore the option of tapping capital markets and traditional sources of long term financing (such as pension funds) for financing; the small size of individual loans requires that special institutional arrangements may need to be developed to allow originators of home mortgages to tap into capital markets. (ii) (iii) Land and Building Regulations Studies (US$100,000): The existing overly complex and non transparent system of real estate project review and approval constrains growth of private developers and limits private financing of residential and commercial construction. The study will review the exiting system and propose simplifications and modifications to review and approval procedures. Assistance to the Project Implementation (US$900,000): There is only very limited experience in Ukraine, both on national and local levels, with implementation of World Bank financed projects. Outside assistance and training will be provided to local and central government officials in procurement procedures, financial management and other aspects of project implementation, monitoring and evaluation and beneficiary assessment. The housing policy and land regulation studies are expected to be completed by end The results of the policy studies would be incorporated as appropriate in the Bank's dialogue with the Government and reflected in the future assistance program. The results of the land and building regulations study will be implemented by city adrninistrations in their efforts to simplify land and building development procedures (para 1.19). The outcome of these studies and follow up action will be taken up during the formal mid-term implementation review. The outline of terms of reference for the above technical assistance is provided in Annex C.

19 III. PROJECT COSTS AND FINANCIAL ASPECTS A. Project Costs 3.1 Total project cost is estimated to be US$27.9 million equivalent, excluding local taxes and including cost of works already financed by the city administrations on selected buildings/sites. The project costs are summarized in Table 3.1. All estimates are presented in US dollar equivalents in order to minimize distortions resulting from fluctuating exchange and inflation rates. Base costs are shown in September 1995 prices. Physical contingencies of 15% were used for civil works. Price contingencies have been estimated using Bank: (a) international inflation estimates, %, %, %; and (b) domestic inflation estimates %, %, %. The local currency, the Karbovanets, is projected to appreciate in real terms and these changes are incorporated in the price contingencies. The sunk costs are estimated on the basis of recorded past expenditures and converted into US dollar equivalent according to the exchange rate at the time when expenditures occurred. Detailed cost estimates are presented in Annex D. TABLE 3.1: Project Costs Millions of US$ Local Foreign Total Forex Base Cost A. Housing Completion B. Land Development C. Sunk Costs C. Technical Assistance Base Costs (in September 1995 prices) Physical Contingencies Price Contingencies Total Project Costs

20 B. Financing Plan 3.2 A Bank loan of US$17.0 million will finance 61% of total project costs net of taxes (55% of costs including taxes) or 93% of the foreign costs and 42% of local costs. The loan to Ukraine will be payable in 17 years including 5 years grace, at the Bank's standard variable interest rate with level repayments of principal. The loan will finance: (a) 80% of the housing completion component incremental costs; (b) 80% of the land development component incremental costs; and (c) 27% of the technical assistance component not financed through grants from other bi-lateral and multi-lateral sources. Most of the Bank loan, US$16.7 million, will be onlent to the project cities for the housing completion and land development components: Kharkiv - US$1.5 million; Lviv - US$7.6 million; and Odesa - US$7.6 million. The remainder, US$0.3 million, will be made available to the national government for the technical assistance component. The financing plan is presented in Table Counterpart funds will be provided by the project city administrations and the national government (for the technical assistance component). The city administrations will finance: (a) 20% of the costs of the housing completion component incremental costs; and (b) 20% of the costs of the land development component incremental costs. All sunk costs have been financed by the city administrations and constitute part of their counterpart contribution. The counterpart funding for the technical assistance component will be provided by the national government and the project cities utilizing other multi-lateral grant sources available for housing policy development (for foreign costs) and local budget funds (for local consultants and other local costs). All applicable taxes related to the project will likewise be financed by the national government and city administrations. Total taxes are estimated to be US$4.2 million. TABLE 3.2: Financing Plan (in US$ millions) Bank Local Cont. Total Loan Housing Completion Land Development Technical Assistance Total

21 C. Onlending Arrangements Legal Arrangements 3.4 The onlending arrangement for the Housing Completion and Land Development Components would be as follows: (i) (ii) The Bank would enter into a Project Agreement with each project city administration. The Project Agreement will, among others: define scope of the city investment program, outline the implementation and review requirements, and incorporate actions to be carried out by the city administrations and other city level conditionalities. The Government of Ukraine would enter into a Subsidiary Loan Agreement with each project city administration. The Subsidiary Loan Agreements will incorporate, among others: the loan amount for each city, the use of funds, on-lending terms and conditions, adoption of the land auction program and sub-loan effectiveness conditions, if any. Signing of the Subsidiary Loan Agreements, satisfactory to the Bank, with two of the three project cities will be a condition for project effectiveness. Signing of the third subsidiary loan agreement will be a condition of disbursement for that city. These arrangements were confirmed at negotiations and reflected in the Loan Agreement (paras. 6.3 and 6.4). Onlending Terms and Conditions 3.5 The National Government will onlend funds directly to the project city administrations on the Banks' terms and conditions with a spread of 1% to cover the administrative costs and risk associated with the onlending to cities. The foreign exchange risk will be borne by the project cities. The national government will bear the cross currency risk and the sub-loans will be denominated in US Dollars. These arrangements were confirmed during negotiations and reflected in the Subsidiary Loan Agreements ( para. 6.2). D. Pricing and Cost Recovery 3.6 The cost of the completed housing and developed land financed through the project will be recovered through sales. The apartments and land will be sold at market prices; the apartments at estimated market values and the land through auctions. Buyers will be required to make full payment at the time of purchase which is currently the practice in the real estate market in Ukraine. The sales prices of completed apartments in current prices are estimated to average US$14,000 per apartment in Lviv and range between US$17,000 to US$48,000 per apartment in Odesa depending on the building and are estimated to cover the incremental investment costs. These prices are in line with the existing price of similar apartments in Lviv and Odesa. A comparison of the projected sales prices and market prices is provided in Annex 1. Land sales prices in current prices are projected to be US$ 25 to 33 per sq. m. in Lviv and US$31 per sq. m. in Kharkiv. There is very little experience with land sales in Ukraine so it is not possible to compare the projected prices with actual sales prices. However, the land auction program will generate information on land sales prices so that the city will be in a better position to determine the marketability of the land developed under the project. Assurances were obtained at negotiations that the respective city administrations

22 will prepare a marketing plan for the apartments and land, by end June 1997, prior to the completion of construction. The plan will include, among others, the proposed method of sales (auction or fixed price sales), advertisement and promotion, administration of sales (agencies responsible, documentation required, etc), and sales prices (or minimum prices in case of auctions) by apartment unit or land parcel and, for buildings, provisions for formation of homeowner associations. This was reflected in the Project Agreement (para. 6.2). 3.7 The debt service requirements of the project are projected not to have a significant impact on the project city finances. The cash flow projections for the investment components in each city are presented in Annex E. The maximum loan repayment will occur in the sixth year after loan effectiveness, i.e. after the expiration of the grace period. The loan repayments in the sixth year are estimated to be less than 1.5% of the 1995 budget expenditures in Lviv and Odesa and less than 0.1 % in Kharkiv"..L/ Even under a worst case scenario where the cities were not able to recover any costs from sales, the city will be able to service its debt obligations.

23 IV. PROJECT IMPLEMENTATION A. Project Implementation Plan 4.1 Overall project oversight and policy coordination will be assigned to a national level Project Steering Committee which will be supported by a small technical group. Implementation and management of the Housing Completion and Land Development Components will be carried out by the project city administrations. The Ministry of Finance will oversee the implementation of the Subsidiary Loan Agreements and repayment of subloans to the project cities. Respective roles and functions of these entities are described below. Project Steering Committee (PSC) 4.2 The Project Steering Committee will be responsible for oversight of project implementation, coordination and policy guidance. The PSC will be co-chaired by the chairmen (or deputy chairmen) of the State Committee on Urban Development and Architecture (SCUDA) and the State Committee for Housing and Municipal Economy (SCHME) and will also include representatives of the Cabinet of Ministers, the Ministry of Finance, the Ministry of Economy and the participating cities. SCUDA and SCHME are two sector agencies in Ukraine with SCUDA responsible for all issues related to construction" 2, including residential construction, and SCHME responsible for overall housing policy and supervising maintenance of the existing municipal housing stock. The PSC will meet on a monthly basis or upon request of its members to analyze project implementation, recommend corrective measures for problem areas, share experience among cities, and, where necessary, inform and seek guidance from higher level officials on project related issues. A proposal to establish the PSC has been drafted and is being reviewed by the Government. The PSC was formally established in January 1996 prior to negotiations (para. 6.1). 4.3 A small Technical Group (TG) will be attached to the PSC to oversee implementation of the project. The TG will: (i) provide administrative support to the PSC; (ii) based on quarterly reports from the CEUs (para 4.5), prepare consolidated quarterly progress reports for the PSC and the Bank; (iii) coordinate preparation of the annual project audits; and (iv) implement the technical assistance component of the project and coordinate assistance to the project cities, including assistance in procurement and disbursement procedures, training of local officials. In order to overcome absence of necessary expertise in project management and, particularly, procurement, necessary technical assistance will be provided to the TG on these aspects. City Executing Units (CEU) 4.4 Several departments in the city administration are involved in housing and land management at the local level and will play a role in implementation of the project. Housing Departments arc responsible for maintenance and rehabilitation of existing municipal and cooperative housing. Capital Construction Departments are responsible for new construction. They do not carry out any actual construction themselves but act as the procurement arm of the city administration, organizing construction enterprises, supervising construction works and certifying completed buildings 12/ Until recently, SCUDA was directly involved in construction, owning large construction enterprises. However, these are being privatized. SCUDA has withdrawn from actual construction and is currently focusing on development of new building codes, zoning regulations, licensing of construction enterprises, promoting energy efficiency in building designs and establishing competitive bidding procedures for government building contracts.

24 for acceptance by the city. Land Departments used to be in charge of allocation of land sites for different municipal purposes, including residential construction. While still maintaining the old function, land departments are managing land privatization process and becoming involved in land registration and cadastre issues. 4.5 In order to implement city specific components, each city administration will establish a separate executing unit (CEU). Each CEU will be led by a city administration official appointed by the mayor and staffed from employees of Capital Construction Department, Finance Department and, if need be, Housing and Land Departments. The CEU will be responsible for all aspects of the implementation of the city components, will report to the mayor and will disband at the completion of the project with various staff returning to their respective units. The following are specific functions assigned to the CEUs: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Administer the loan for the respective city components and maintain project accounts; Pre-qualify prospective bidders, prepare and issue bidding documents, evaluate bids and select contractors; Supervise construction and ensure appropriate quality of works; Release funds to contractors; Prepare withdrawal applications, statements of expenditures (SOEs) and respective Special Account replenishment requests; Carry out public information campaigns and marketing and advertisement programs; Organize sales of completed units and implement auctions of developed land sites; Prepare quarterly progress reports on respective city components to be submitted to the TG. 4.6 Since there is only limited experience in Ukraine with international bidding and financial management, the CEUs will receive assistance on these aspects through the technical assistance component of the project. Establishment of CEUs in two out of the three project cities is a condition of loan effectiveness (para. 6.3); the establishment of the CEU in the remaining city is a condition of disbursement for that city (para 6.4). B. Ouality Control 4.7 Quality control is critical for the success of the project. There is general dissatisfaction with the buildings constructed under central planning due to poor quality of construction. Therefore, construction will be tightly supervised to assure that buildings and infrastructure are built to specification. The participating city administrations will pay particular attention to appropriate technical supervision of the works. Funds will be released to contractors only after satisfactory quality of works is ascertained. For these purposes, the CEUs will include technical experts, supported by international engineering consultants funded through the technical assistance component, who will be in charge of quality control of the works.

25 Proper maintenance of the completed buildings will be essential to sustain the completed works. All the apartments in the Bank financed buildings will be privately owned. The residents will form condominium associations and will be directly responsible for building management and maintenance. C. Procurement 4.9 An informal construction industry existed even under the Soviet system. In addition to the official structures, an unofficially acknowledged and tolerated parallel construction sector developed to fill the needs which could not be met by the central planning process. Formalization of this parallel sector began in 1988 when the Law on Cooperatives of the then-ussr allowed small cooperative-owned construction companies to develop and conferred on them certain advantages such as salaries no longer limited by regulations and low taxes. This process of formalization was completed in Ukraine when the 1991 Law on Industrial Enterprises permitted any form of enterprise ownership With the launching of the Government's enterprise privatization program, vertically integrated state owned construction enterprises (so called combinats) disintegrated and their units were transferred into private ownership, thus increasing and expanding private sector participation in the construction sector. Private ownership forms are joint-stock companies, lease-buyout companies, cooperatives, small companies with limited liability and single owner companies. In some cases the state devolved the ownership of companies to their workers/management. In many instances "'spontaneous privatization" took place wherein managers and/or workers' collectives set up a private company, leased state-owned company's assets and gradually purchased these assets Currently, there are both private and state construction enterprises operating in Ukraine. At the end-october 1994, according to the State Committee of Urban Development and Architecture, there were about 4,134 construction enterprises in Ukraine, of which 1,556 (38%) remain state owned; the remainder 2,825 (62%) are private or have residual state ownership. There are several foreign construction companies, among those Polish, German and Austrian, operating in Ukraine. Some of those are operating through joint ventures, established with local partners There is increasing competition among construction enterprises as the system of state sponsored construction breaks down. The cut in state budget funding for construction has created excess capacity among the construction cnterprises. Competition among enterprises for the remaining work is quite keen. Construction enterprises are actively seeking job opportunities everywhere in Ukraine and sometimes even outside the country.

26 TABLE 4.1: Procurement Arrangements (in US$ millions) Procurement Method ICB NCB Other NBF Total Cost 1. City Components 1.1 Kharkiv land Development (1.5) (1.5) 1.2 Odesa Housing Completion b_/ 10.4 (7.6) (7.6) 1.3 Lviv Housing Completion b_/ 6.3 (3.9) (3.9) Land Development b_/ 8.0 (3.7) (3.7) Sub-Total City Components b_/ 26.7 (16.7) (16.7) 2. Technical Assistance 2.1 Consulting Services a/ (0.3) (0.3) 2.2 Studies c / 0.3 () Sub-Total Technical AssiLtace (0.3) (0.3) Total (16.7) (0.3) (17.0) Note: Numbers in parenthesis are World Bank loan amounts. a / Services to be procured in accordance with Bank guidelines. b / Sunk costs. c_/ Financing expected to the provided by the EU.

27 In Ukraine, similar to many other states of the former Soviet Union, there is no public procurement law at present. Experience in competitive bidding is limited to a few projects financed by other international organizations. However, the State Committee on Urban Development and Architecture is interested in introducing competition in government construction contracts. The Committee is preparing tendering documents and bidding procedures, with EU assistance, and is planning to develop public sector procurement legislation and bring the Ukrainian system in line with EU standards. The Bank project will support the Committee's efforts to promote competitive bidding. A country procurement strategy note is scheduled for FY The proposed project elements, their estimated costs and method of procurement are summarized in Table 4.1. Details of the procurement arrangements including plan and schedule are given in Annex F Housing Completion and Land Development All civil works contracts for housing completion and land development, totalling US$20.8 million, will be bid through International Competitive Bidding (ICB) following the Bank Guidelines on Procurement under IBRD Loans and IDA Credits (January 1995) and utilizing the Bank's Standard Bidding Documents for Works: Smaller Contracts (1995) and, to the extent possible, on a "slice and package" basis. There are estimated to be 12 civil works contracts, ranging between US$0.5 million to US$2.6 million equivalent. The size of contracts and use of local design standards make unlikely participation of western contractors in the bidding; however, contractors from neighboring FSU countries and Eastern Europe might wish to participate. Given the increasing competition in the Ukrainian construction industry, significant numbers of local firms are expected to express interest and participate in the tender. Their participation in the bidding process will be subject to eligibility under the Bank Guidelines on Procurement under IBRD Loans and IDA Credits (January 1995). Bidders both for housing completion and land development components will be prequalified utilizing the Bank's Standard Prequalification Documents. The city administrations will be responsible for procurement. The CEUs will carry out the administration of the tender. The CEUs will receive technical assistance on all aspects related to procurement Technical Assistance The PSC technical group will be responsible for implementation of technical assistance. All consultant services will be procured according to the Bank's Guidelines for Use of Consultants by World Bank Borrowers and the World Bank as Executing Agency published in August 1981 following shortlisting and competitive procedures. The TG will receive technical assistance on all procurement related matters Prior Review Arrangements and Reporting The prior review arrangements will be as follows: (i) (ii) Pregualification: Prequalification of bidders for housing completion and land development components will be subject to Bank's prior review. Civil Works: All ICB contracts will be subject to prior review". 13/ All contracts are estirnated to be above the Bank's current prior review threshold for civil works contracts of US$500,000.

28 (iii) Technical Assistance: Contracts of total value below US$100,000 equivalent for consulting firms and below US$50,000 equivalent for individual consultants will not require Bank's prior review. However, all Terms of Reference will be subject to Bank's prior review, regardless of contract value. The CEUs will be responsible for arranging for Bank review of procurement documents, notifying the PSC and Bank on contract award and other key actions, collecting and recording data on procurement and preparing quarterly reports on respective city components. A detailed procurement plan is presented in the Annex F. D. Disbursement 4.18 Loan proceeds will be disbursed over four years with closing date of June 30, Disbursement estimates are provided in Annex G. The proposed project is the first housing project in Ukraine. Moreover, there is limited experience with investment projects in Ukraine and housing projects in the Europe and Central Asia Region. Therefore, no standard disbursement profiles are yet available. The total Bank loan of US$17.0 million will be disbursed as follows: TABLE 4.2: Disbursement Categ2ories Category Loan Amount Expenditures to be Financed (in US$ million) 1. Housing Completion % of civil works 2. Land Development % of civil works 3. Technical Assistance % of consultant services Total Bank financing would follow normal Bank disbursement procedures as summarized in the Disbursement Handbook. The following are disbursement arrangements for the different components of the project: (i) (ii) Housine Completion and Land Development Components Disbursements will depend on work progress and will be based on full documentation of expenditures. Minimum size of withdrawal applications for direct payments will amount to 20% of the amount of deposit on the Special Accounts. Withdrawal applications for the Bank would be prepared by the CEUs. All disbursement documentation would be duly maintained in the CEUs and will be made available for review to the appropriate Bank staff upon request. Technical Assistance Component Loan proceeds would be disbursed against eligible expenditures either directly to retained consultants or by way of reimbursements for expenditures already incurred. The Technical Group (TG) attached to the Project Steering Committee will be responsible for preparation and submitting of withdrawal applications to the World Bank. For contracts with consulting firms of total value

29 below US$100,000 and with individual consultants of total value below US$50,000 TG will use the SOE procedure To facilitate implementation of the project, the Borrower would establish four Special Accounts (SA) in a major foreign commercial bank or banks on terms and conditions satisfactory to the World Bank to cover the Bank's share of expenditures. The Authorized Allocations would be US$140,000 for Kharkiv; US$600,000 for Lviv, US$600,000 for Odesa and US$100,000 for the TG, representing about four months of average expenditures made through Special Accounts. During the early stage of the project, the initial allocation to the Special Accounts would be limited to US$70,000 for Kharkiv, US$300,000 for Lviv, US$300,000 for Odesa and US$50,000 for the TG. However, when the aggregate disbursements under the credit have reached the level of US$2,000,000 the initial allocation may be increased to the Authorized allocation of US$140,000 for Kharkiv, US$600,000 for Lviv, US$600,000 for Odesa and US$100,000 for the TG by submitting the relevant applications of withdrawal. Applications for replenishment of the Special Accounts would be submitted monthly or when one third of the amount has been withdrawn, whichever occurs earlier. Documentation requirements for replenishment would follow the standard Bank procedures as described in Disbursement Handbook, chapter 6. Monthly Bank statements of the Special Accounts which have been reconciled by the Borrower would accompany all replenishment requests. E. Accountina and Auditing 4.21 Each CEU will maintain accounts for loan financed components separately from any other existing accounts. The CEUs will maintain records of all receipts and disbursements of funds. The TG will maintain documentation supporting disbursement requests made through SOEs for consultant services. Copies of these documents will be routinely submitted to the PSC. Each project account will be audited separately on an annual basis by a firm of independent accountants acceptable to the World Bank. Audits will be made available to the World Bank by June 30 each year. The audits will include a separate opinion on the SOE and SAs. These arrangements were confirmed at negotiations (para. 6.2). F. Supervision. Monitoring and Evaluation 4.22 Supervision of the Project implementation on the national level would be assigned to the Project Steering Committee. Monitoring and coordination of project implementation would be assigned to the TG attached to the PSC. Consultants financed through the technical assistance component of the project will provide expert advise in procurement, financial management and beneficiary assessment. The TG will prepare a quarterly progress report on overall project implementation based on reports from the cities. These arrangements were confirmed at negotiations (para. 6.2) Since Ukrainian cities and the national housing agencies have virtually no experience in implementing Bank projects, the project will require substantial supervision by the Bank in the initial years. A project launch workshop is scheduled for early The Bank will reach an understanding with the project cities and the TG on the critical actions to be taken by quarter and have these confirmed by the PSC. These actions will be included in the progress reports. A formal mid-term project implementation review is scheduled for the first half of 1997 whereby senior govermment officials and the Bank would undertake a comprehensive review of project implementation

30 to date and the follow up to the housing policy and land and building regulation studies. Under the supervision of the PSC, the TG will coordinate with the CEU staff and prepare an evaluation report by March The report will be reviewed by the Bank and Government. The timing of the midterm review was confirmed during negotiations and reflected in the legal documents (para. 6.2). In the subsequent years, supervision efforts may be reduced, depending on the success in the implementation process and accumulation of the relevant experience by local authorities. The supervision plan, implementation schedule and development monitoring indicators are attached as Annex H.

31 V. PROJECT BENEFITS AND RISKS A. Economic and Social Benefits 5.1 The project will be a first step in the Bank's assistance to the Government in developing a housing market in Ukraine. A housing market would provide greater choice and allow for a more efficient allocation of housing as family needs change (e.g. with the birth of children, changes in employment, growth of incomes, etc.). A vibrant housing market would generate employment in the construction industry and contribute to domestic resource mobilization by providing motivation for households to save. Housing reform and development of a housing market is an integral part of the economic transformation of the Ukrainian economy. Cessation of the free allocation of housing, housing privatization and homeowner takeover of building management and maintenance would reduce government budgetary assistance to the housing sector and contribute to the reduction in the budgetary deficit. A housing market would allow people to obtain alternative housing and make it easier for them to move and seek better employment opportunities. 5.2 The project will foster the development of a housing market by promoting private ownership of housing and homeowner management of multi-family apartment buildings, improving enterprise access to land for housing construction and simplifying land and building regulations to promote greater private initiative in housing and commercial real estate development. Municipal housing once planned for allocation will be sold to households. Unlike privatized existing buildings where there continues to be a mix of private and municipal apartments in the same building, these buildings will be occupied entirely by private owners. The residents will form homeowner associations in these buildings and take over management and maintenance. With new buildings, the maintenance requirements should be initially low so the associations should not be faced with many contentious problems which will make association management difficult. The project will promote the development of private developers by improving construction enterprises' access to serviced land for housing construction and simplifying business regulations. The project will also create demand for construction enterprises and creating employment opportunities. The project will encourage the cities to move from allocation of housing to families on the municipal housing waitlist to provision of infrastructure and creation of an environment for private developers to construct housing in line with market demand. Finally, studies financed under the technical assistance component will assist the Government operationalize its Housing Policy Concept and move towards a housing market. 5.3 The project will support reform oriented city administrations and provide an opportunity to demonstrate an alternative to state allocation and management of housing. Kharkiv, Lviv and Odesa city administrations have demonstrated a willingness to experiment with alternative market oriented approaches in housing. In addition, Lviv is considered for inclusion in Bank projects in municipal water supply and urban transportation and Odesa in a Bank municipal water supply project. 5.4 Economic analysis was carried out to examine the viability of individual investments. Market prices were used to quantify the economic benefits assuming that current prices reflected the consumer's willingness to pay for housing and that sale prices represent the discounted future flow of housing services. Economic analysis requires information from the very markets that the project is trying to develop, which is a constraint when carrying out economic evaluation in transition economies. A small, growing market for existing apartments in the three project cities provided some information on prices by type of apartment and general location. A simple economic evaluation was carried out on the housing investments. The analysis is summarized in Annex I. The project

32 investments are estimated to have a weighted average economic rate of return of 25 %. The economic returns are vulnerable to a down turn in housing prices and increase in costs: the weighted average economic rate of return dropping to 14% if the price of apartments drop by 15%, and to 13 % if construction costs increase by 20%. Without the project, the buildings would have deteriorated and investment made by the cities lost. B. Environmental Imnpact 5.5 The project is expected to have minimal negative environmental impact at the sites and a positive impact on peoples' standard of living through improvements in housing design and quality of construction. The housing to be completed and sites to be developed are located within the urban areas, conform to overall city development plans, are not subject to noise or air pollution from adjacent areas, will not disrupt sensitive ecological or social areas and will be provided with adequate infrastructure and proper landscaping to prevent pollution of surrounding areas from sewerage and runoff. Safeguards will be introduced to minimize environmental damage, such as soil erosion, during construction. Improvements in ventilation, heat controls and other design standards will ensure a more healthy indoor environment; better insulation, heat control and metering have the potential to contribute to the country's energy conservation program. An environmental analysis of the project investments is provided in Annex J. C. Participatory Approach 5.6 The key stakeholders in the project are the city administrations and potential beneficiaries, the city residents and the emerging real estate developers. The city administrations have been involved in project preparation and the need for improving access to land and simplifying building regulations have been identified through interviews with developers. At the completion of construction, community organization and participatory approaches will be needed in formation of homeowners associations, especially since there is a lack of tradition of urban residents coming together to jointly reach decisions on amounts of expenditures needed for routine maintenance of buildings or emergency repairs (which they had previously left to the city). Pilot efforts have been carried out in organizing condominium associations in privatized apartment buildings in Kharkiv and Odesa with assistance from USAID; this program is being expanded to other cities in Ukraine. The introduction of Decree No. 588 mandates the creation of homeowners associations for management and maintenance of the common areas. Homeowners associations will be formed in the Bank financed buildings after sales have been initiated or in The Bank is embarking on a special initiative to introduce participatory approaches into city investment decision making in Odesa with support to be provided through an Institutional Development Fund grant. Progress on organizing homeowners associations in existing buildings will be monitored and experience incorporated into the marketing plan which will include provisions for forming homeowners associations". 14/ The city administrations are expected to take the lead, with assistance from local consultants where necessary, in organizing homeowners' associations in existing buildings. Under Decree 588, the city, as an owner, can initiate formation of associations in buildings with a mix of both municipal and privatized apartments.

33 D. Risks 5.7 The project faces many of the risks inherent in transition economies. The success of the project depends on the overall progress on economic reform and stabilization. Lack of economic growth, depressed incomes and high inflation would constrain the growth of the housing market, limit effective demand for new apartments and dampen developer interest in purchasing serviced land for housing construction. To address these risks, the scale of the project has been kept small; the number of apartments to be provided in Lviv and Odesa are estimated to be less than 0. 1% of the housing stock in both cities. The projected sales price of these apartments are considered to be in line with comparable apartments. The scale of the land to be developed in Lviv and Odesa has been cut back with only the initial phase of site development funded through the project. The city administrations can proceed to construct the subsequent phase with proceeds from the sales of the initial phase should demand for land turn out to be stronger than projected. Finally, the Bank loan will not impact severely on the cities' finances even under a worst case scenario where no apartments or land could be sold: the maximum annual payment of interest and repayment of principal is estimated to be less than 1.5% of city budget expenditures. 5.8 Another risk is that project costs may increase significantly due to lack of experience with competitive bidding and real appreciation of the local currency relative to the US dollar. Since actual bid prices were not available estimates costs, actual prices, based on bids, may differ from the project cost estimates. The physical contingencies have been set at 10% to take this possibility into consideration. The local currency, Karbovanets, is considered to be undervalued relative to its value based on purchasing power parity. The Government is proposing to introduce a national currency, the Hrivna, to replace the karbovantes in the near future. Introduction of the Hrivna, stabilization of the economy and renewed confidence in new national currency could result in an appreciation of the Hrivna in real terms as local prices increase while the currency remains relatively stable. This phenomenon was observed in other transition economies when new currencies were introduced. The local project cost expenditures, expressed in US dollar terms, would increase (and the project cities would be faced with a corresponding financing shortfall). The price contingencies were estimated assuming some appreciation in the local currency. 5.9 There is a risk that the city administrations will go back on their commitment to housing reform. Although the project cities have been identified and selected based on their past commitment to housing reform, changes in the mayor and local councils could bring in a new administration which may reverse decisions taken by the previous administration. Sales of land is most controversial and vulnerable since many conservatives hold a strong belief that land should remain under state ownership. The long wait list for municipal housing puts political pressure on local officials to continue to allocate housing. At the city level, there is awareness that both the national and local governments lack the resources to return to the previous system of state construction, allocation and management of housing and hence a willingness to experiment with alternative approaches. The project includes more than one city to spread the political risk. Agreements on the city level reforms are incorporated into the Project and Subsidiary Loan Agreements; the Subsidiary Loan Agreement will include a provision to accelerate repayment of the subloan to the city to the national government in case of default on city level policy conditionality. The study on government assistance to housing will explore alternative measures to promote homeownership that the Government could introduce to defuse the problem of the families on the government wait list which continues to be a serious political issue.

34 In sum, the project is kept small given the uncertainties and potential risks. The project would allow the Bank to continue to work with reform oriented city administrations even if the pace of economic reform and stabilization is slowed at the national level. Should the economic situation improve significantly, the Bank would be able to follow up with additional housing projects or housing components in other projects to further the development of a housing market.

35 VI. AGREEMENTS AND RECOMMENDATIONS 6.1 Prior to negotiations, the following actions were carried out: (i) (ii) The project cities prepared their 1996 land auction program and will prepare their 1997 plan for discussion with the Bank during 1996 (para. 1.19); The project cities confirmed ownership of the building sites (para. 2.7) and the land development sites (para ); and (iii) The national government established the Project Steering Committee (para. 4.2). 6.2 The following agreements were reached during negotiations and reflected in the Loan and Project Agreements: (i) (ii) Conditions for city participation in the project. The city administrations will: (1) sell housing completed and land developed under the project; (2) continue the land auction program; (3) review building and land regulations; and (4) carry out competitive bidding in selection of contractors (para. 1.19); Commitment by the government and the project cities to encourage the growth of private developers and promote competition in the housing sector (para. 2.3); (iii) The terms and conditions of onlending (para. 3.5); (iv) Preparation of a marketing plan for completed housing and land by end-june 1997 (para. 3.6); (v) Accounting and auditing (para. 4.21) and monitoring and evaluation arrangements (para. 4.22); and (vi) The mid-term review (para. 4.23). 6.3 The following are conditions of loan effectiveness: (i) Signing of subsidiary loan agreements, satisfactory to the Bank, between the Government and in two of the three project cities (para. 3.4); and (ii) Establishment of City Executing Units in the same two cities (para. 4.6). 6.4 Signing of remaining subsidiary loan agreements and establishment of a City Executing Unit in the city are a condition of disbursement for the third (remaining) city (para. 3.4 and 4.6). 6.5 Subject to the above conditions, the proposed project is suitable for a loan to Ukraine of US$17.0 million for a period of 17 years, including five years grace, at the Bank's standard variable interest rate.

36 Annex A Page 1 of 4 UKRAINE HOUSING PROJECT UKRAINE: The State Housing Policy Concept The weakness of the financial and credit system, the state monopolization of construction, rehabilitation and maintenance of the housing stock, the restrictions in the allotment of land parcels and individual housing construction, the lack of incentives for people to solve their housing problems on their own have all contributed to the acute housing situation in the country. More than 2.6 million families, including some with certain privileges, have been on the waiting list for housing improvement for a long time. Despite the shortage of housing the scale of housing construction decreases every year. Furthermore, the legal framework that currently regulates relations in the housing sector is itself in need of reform. The State Housing Policy Concept outlines the guidelines by which the rights of Ukrainian citizens to housing are secured. The objectives of the state housing policy are to create conditions for the realization of the right of citizens to housing, to expand housing construction and to improve maintenance and care of the housing stock. Construction, rehabilitation and maintenance of the housing inventory are among the priorities in the social and economic development of the country that will help to reduce social tensions in society. Factors That Reguire Restructuring of the Current State Housing Policy The need to restructure the current state housing policy is preconditioned by: - the inconsistency between the current housing system and economic reforms in Ukraine as well as the need to accelerate integration of the housing sector into the market economy; - the reduction of the government funding for housing construction resulting from structural changes in the national and local budgets as well as decline of the citizens' solvency and inflation processes in the economy; - the insufficient support by the state for cooperative and individual housing construction; - the discrepancy between rent payments and operating costs, the inadequate system of paying for maintenance of the state housing stock and the dependents' attitude of tenants to their housing which leads to its rapid physical and moral wear; - the socially unfair treatment of people who built housing at their own expense and still continue to pay, through taxes, for the maintenance of the state housing stock;

37 Annex A Page 2 of 4 the priority which has been given by the state housing policy to housing construction in big cities and which has created a large imbalance between rural and urban housing construction and has thereby led to the impoverishment of villages; excessive monopolization of housing construction, rehabilitation and maintenance; the inadequate system of allotting housing and limited choice of different types and locations of housing available to citizens; the absence experienced by young people of economic possibilities to build or purchase housing which is one of the reasons for the deterioration of the demographic situation; the inadequacy of the legislative framework regulating relation emerging during the privatization of the state housing stock. Principal Objectives of the State Housinag Policy The principal objectives of the state housing policy are: to create conditions for every citizen to build, purchase or rent housing according to his or her choice, needs and opportunities; to provide housing within the established limits at the expense of the state for socially unprotected people who need to improve their living conditions, particularly those with low income, invalids, war veterans, servicemen, Chornobyl affected citizens and some other categories, specified by the Housing Code of Ukraine and other legislative acts; to provide housing from the state housing stock or subsidies, preferential credits for the purchase or construction of housing to families who have been on the waiting list for a long time with a view to the period of waiting and level of income. Aid to young families in building or purchasing housing; to establish economic and financial incentives for the construction, rehabilitation and maintenance of housing; to reorient the urban development strategy towards the expansion of construction of more comfortable housing, single family homes and the development of small and medium-size communities; to create favorable environmnent with appropriate infrastructure for social, cultural and consumer services for the population; to liquidate dilapidated and dangerous housing; to expand the rehabilitation and upgrade of the old fashioned housing stock; to eliminate communal apartments; to promote the expansion and qualitative upgrade of housing development in rural areas, to improve services there and to urgently set up a housing and municipal system in the rural areas;

38 Annex A Page 3 of 4 to carry out in conjunction with the wage reform a gradual transition to a self-sustained system of payment for housing and municipal services as well as to targeted subsidies of these expenditures for low-income and socially unprotected families; to carry out, in conformity with the course of economic reform, a gradual redistribution of responsibilities between the national, local governments and self-government agencies, enterprises, institutions, organizations and individuals in the sphere of housing construction, rehabilitation and maintenance for the purpose of their decentralization. The state housing policy shall provide for: Implementation of the State Housing Policy financing the expansion of housing construction from alternative sources; promoting the attraction of non-governmental funds for housing construction, particularly personal savings of citizens, assets of enterprises, institutions, organizations, foundations, bank credits etc.; improving the housing construction investment system including the attraction of citizens' privatization certificates to housing construction and the creation of conditions for granting low interest credits to citizens for building or purchasing housing; incentives for enterprises, institutions and organizations engaged in designing, construction and rehabilitation of housing, in production of ecologically safe building materials and housing construction equipment, in maintenance of the housing stock as well as enterprises, institutions and organizations that build housing for their staff; - creating conditions for the development of exchanges, investment funds, mortgage and housing banks, insurance companies and other market structures to finance housing construction; - regulating the amounts of rent and municipal service fees adjusted for the indicators of their consumer quality; - ensuring social safety of the population in connection with the transition to the self-sustained housing operation system and providing housing and municipal services at their prime cost; - reviewing master plans and working out comprehensive programs for the development of cities and other populated areas with an allowance for new types and methods of housing construction, including low-rise, individual (single-family) housing; specifying perspective suburban areas for mandatory reservation for housing construction; making the allocation of land plots for individual construction by citizens requiring the improvement of living conditions a first priority and providing land for natural and juridical persons to build housing in accordance with the legislation in force; equipping the areas allocated for housing construction with access roads, utility networks and social infrastructure with the attraction of funds from respective budgets, developers and investors;

39 expanding the network of specialized houses for temporary residents (hostels, boarding houses, asylum hotels); Annex A Page 4 of 4 reorienting civil engineering organizations and building materials enterprises at new housing construction techniques, production of sophisticated ecologically safe and energy saving structures, articles and equipment in required quantities, increased use of local building materials; creating a market of construction services, building materials, articles, technologies, design documents and top priority channeling of non-governmental investments into the construction and rehabilitation of housing and other social facilities; involving the machine building and defense industry enterprises in the manufacture of machines, aggregates, equipment and small mechanization means for civil engineering organizations and the building materials industry; proceeding with the privatization of the state housing stock, setting up a housing market and market structures in the housing economy; expanding the responsibilities of apartment (house) owners and tenants for their due upkeep and maintenance, preventing the use of housing for the wrong purpose; a mandatory unification of apartment owners in apartment buildings into associations to ensure proper maintenance of buildings and adjacent territories; providing housing support from the state to young people. Public Participation in the Housing Stock Administration Citizens, their associations and public organizations may take part in: the housing stock administration to protect their social and economic rights and interests; the selection of organizations competing to build, maintain and repair housing; the supervision of expenditures and pricing of housing and communal services. Provisions of the State Housing Policy Concept are a framework for working out a new Housing Code of Ukraine, other legislative acts which regulate housing relations in the existing social and economic conditions and are taken into account when regional and departmental public housing programs are developed.

40 UKRAINE HOUSING PROJECT ANNEX B Page I of 4 Summary of Housing Policy Measures [ POLIY AREA & LONG TERM ACTIONS TAKEN TO DATE ACTIONS TO BE TAKEN UNDER THE AREAS FOR FURTHER ACTION POLICY OBJECTIVES PROJECT ACCELERATING HOUSING PRIVATIZATION OBJECTIVE: Government ownership The Government passed the Law on The Housing Proiect is fostering private Housing privatization is a national program of housing will be minimized; most of Privatization of State Owned Housing in 1992; ownership of housing by: (i) selling all and would encompass both enterprise and housing will be owned by private as of September 1, 1995, 32% of target housing financed through the project at municipal housing. The Bank operations in individuals and legal entities who will be housing has been privatized. market prices (thereby creating fully developing a social safety net (through the free to sell and purchase land and privatized buildings rather than mixed Rehabilitation Loan and preparation of a housing. Individual households will be Decree No. 733 issued in October 1994 public/private building resulting from Social Project) and improve municipal responsible for and have access to the increasing cost recovery for housing to 20% privatization of individual apartments); (ii) service delivery (through the proposed means to adequately manage and production cost and eventually to 60% by July requiring formation of homeowner municipal water project) would support maintain their buildings; provisions will 1995 and introduced an assistance scheme in organizations; and (iii) promoting home government efforts to sustain housing rent be made of joint ownership of common early 1995 capping rent and utility (water, owner takeover of management and and utility pricing reformn. A follow up areas in multi-family (apartment) sewer, heat) payments at 15% of a household's maintenance of the building. housing project could focus on accelerating buildings through condominium monthly income. The Government delayed the housing privatization nationwide by associations. Those residents who increases, raising cost recovery to 40% in end providing incentives to privatize (e.g. by remain in public owned housing will pay June 1995 and setting January 1996 as the funding building rehabilitation of buildings the full market cost of housing; low target date for reaching 60% which have been signifcanty privatized and income households, where necessary, where -ondondinium associations have been will be provided with financial assistance Pilot Condominium Associations were formed formed) including both enterprise as weul as to meet their housing needs. and a pilot program for contracting out building municipal housing. management and maintenance was carried out in Kharkiv City with USAID assistance. These programs are to be replicated in other cities, including Odesa and Lviv. The Government issued Cabinet of Ministers Decree No. 588 in July 1995, providing the framework for formation of condominium associations.

41 UKRAINE HOUSING PROJECT ANNEX B Page 2 of 4 Summary of Housinz Policy Measures POLICY AREA & LONG TERM ACTIONS TAKEN TO DATE ACTIONS TO BE TAKEN UNDER THE AREAS FOR FURTHER ACTION POLICY OBJECTIVES PROJECT DEVELOPING A HOUSING FINANCE SYSTEM OBJECTIVE: Banks and fuiancial Housing loans are generally not available and The Housine Project includes a housing Development of a housing finance system is institutions will compete with each other almost all housing transactions are made in cash finance development study under the linked to the overall growth of the financial to provide loans to families for purchase or through barters. technical assistance component which wdl sector. The Bank has carried out a review of new or existing housing and to assist the government formulate an approach of the fmancial sector and is preparing a builders for housing construction, to developing housing finance institutions Financial Institution Development Loan mobilizing their funding primarily from within the financial sector development (FIDL) which, among others, address the domestic savings. Mortgage instruments framework. The finding of the study and regulatory and institutional issues in the will be developed which provide funding for housing finance could be fmancial sector. Qualified construction sufficient returns to investors while incorporated in subsequent financial sector or enterprises and developers are expected to being affordable to the majority of the housing project. Follow up action will be be eligible to borrow through the FIDL for population. (Monopoly and interest rate discussed during the formal mid-term review their investment needs subsidies which discourage investment in early and competition in housing finance should be avoided). ESTABLISHING PROPERTY RIGHTS OBJECTIVE: A system of clearly defined, fair and enforceable property Private ownership of land was allowed under The Housina Proiect wil promote private The ongoing Rehabilitation Loan and the rights wiu be developed. Private the Land Code of 1992, but the sales or ownership of buildings and land through sales proposed Agricultural Sector Adjussment individuals and legal entities will have transfer of ownership of land is still limited. of apartments to households and sales of Loan include strengthening of property the right, among others to own property, development rights of serviced land to private rights through the amendment of the Land make decisions on use, and dispose of Auctions of urban land have been carried out in developers. Code and introduction of a Registration property through sales, transfer or Kharkiv, Odessa, Lviv and Chernihiv with Law. The proposed Land Registrtion inheritance. USAID assistance. Winning bidders are Project would assist cities upgrade their awarded 50 year leases with priority to renew administrative capacity to register property. for another 50 years. The Government is expanding the land auction program.

42 UKRAINE HOUSING PROJECT ANNEX B Page 3 of 4 Summary of Housing Policy Measures POLICY AREA & LONG TERM ACTIONS TAKEN TO DATE ACTIONS TO BE TAKEN UNDER THE AREAS FOR FURTHER ACTION POLICY OBJECTIVES PROJECT SIMPLIFYING AND MAKING TRANSPARENT LAND DEVELOPMENT REGULATIONS OBJECTlVE: Government land use, No action has been taken and the previous The Housing Project includes a review of building codes and other regulations system of approvals remains in place. building and real estate regulations under the encourage private development technical assistance component. Agreement (balancing public interests, such as will be reached to implement the environmental protection and structural recomunendations of the review. safety, with development); issuance of Implementation of the recommendations will building permit, government inspections be examined during the formal nmid-term and other tegulatory controls are review in early transparent and predictable and do not result in delays and costs in land and housing development. PROMOTING CONSTRUCT70IV AND BUILDING MATERL4LS INDUSTRY OBJECTIVE: Construction and building Construction and building materials industries The Housing Project will support The construction and building materials material supply are carried out by are being privatized as part of the government's development of construction firms at the city industries would be strengthened as part of private enterprises. Competition enterprise privatization program. level by: (i) providing access to serviced the Government's enterprise privatization improves quality of construction works land; (ii) simplifying building and land and development program. Construction and availability of materials and keeps Many construction enterprises are seeking regulations; (iii) introducing and piloting and material enterprise overall investment price increases in check. business opportunities outside their traditional competitive bidding; and (iv) creating needs would be addressed through the areas of operation, creating potential for business opportunities through the investment proposed Financial Institution Development competition in the industry. financed through the project. Loan. The State Committee on Urban Development and Architecture is developing competitive bidding procedures for government building contracts with EU technical assistance.

43 UKRAINE HOUSING PROJECT ANNEX B Page 4 of 4 Summary of Housint Policy Measures POLICY AREA & LONG TERM ACTIONS TAKEN TO DATE ACTIONS TO BE TAKEN UNDER THE AREAS r:or FURTHER ACTION POLICY OBJECTIVES PROJECT PROVIDING ESSENTiAL INFRASTRUCTVRE AND MUNICIPAL SERVICES OBJECTIVE: Local governments and A Local Government Law has been passed in The Housing Proiect will be moving the local Bank is developing an Urban Transport utility companies will develop roads, 1992, but local governments and municipal governments towards infrastructure provision Project and Municipal Water Project which drainage, water, power and other enterprises remain dependent on national for housing development and away from would tackle improvements in specific infrastructure and provide municipal government budgetary support. The direct ownership and management. municipal services and is planning to address services in a planned and coordinated Government issued Decree No. 733 in 1994 the question of local-central government manner. Local government and utility increasing cost recovery housing, water and fiscal relations through the Public companies wil have the flexibility, sewerage, gas, heating and public transport Expenditure Review. authority and access to resources to which would be the first step in providing construct infrastructure in anticipation of financial autonomy to municipal enterprises. development needs (or in line with local development trends and priorities). TARGETING GOVERNMENT SUBSIDIES OBJECTIVE: Government subsidies to Lack of funding for housing construction has The Housint Proiect includes a study on the housing sector (where necessary and resulted in practically adlocal governments government housing policies under the justified) should be transparent, have stopping allocation of free housing to families technical assistance component. The results clearly stated policy objectives, be on the government housing wait list. of the study are expected to be incorporated targeted to its beneficiaries (the poor into the Bank's policy dialogue and in a who would not be able to afford basic The Government issued Decree No. 733 in possible follow-up housing project. This housing) and be sustainable within the October 1994 increasing cost recovery for would be discussed at during the formal midfinancial constraints faced by the housing and municipal services (reducing term project review in early government. implicit subsidies) and introduced measures to cap housuig rent and utility payments at 15% of monthly incomes.

44 Annex C Page 1 of 8 UKRAINE HOUSING PROJECT Review of Government Assistance for Housin, Outline Terms of Reference Background 1. The Housing Policy Concept Paper outlines the government's approach to housing development in Ukraine. The paper advocates a market based strategy to housing provision, moving away from the central planning approach of allocating housing to the population. The principal objectives of the Government's housing policy are to: a. create the conditions for every citizen to acquire housing according to his or her choice, needs and opportunities; b. provide housing for low income households, invalids, Chernobol victims, war veterans and other socially vulnerable or priority groups; c. provide housing assistance to young families and families on the wait list to acquire housing; d. establish economic and financial incentives for the construction, rehabilitation and maintenance of housing and eliminate dilapidated housing; e. reorient urban development strategy towards the expansion of single family homes, smaller communities and promote rural housing; f. increase cost recovery for state housing and communal services in line with wage reform; and g. decentralize responsibility for housing to local governments, enterprises and citizens. The Government proposes to implement the housing policy concept through, among others, legislative acts, direct government budgetary support and low interest housing loans. 2. The specific policy measures have not been developed to implement the housing policy concept. Reference are made to direct government support for low income households and other socially vulnerable groups as well as low interest loan for housing purchase. However, no consideration has been given to the effectiveness of these and different types of intervention in housing sector nor to their potential cost to the Government. This is of particular importance since the Government is expected to face fiscal constraints over the medium term. It may not be possible for the Government to subsidize housing for Chernobyl victims, low income households and other social priority groups and provide preferential credits to families on the wait list. To be effective, policies will need to be designed to conform with the overall macro-economic and fiscal constraints facing the in mind and tradeoff between different policy objectives will need to be faced.

45 Annex C Page 2 of 8 Qbjectives of the Review 3. The objectives of the review will be to assist the Government operationalize its Housing Policy Concept Paper by developing policy measures the implement the key objectives of the policy within the macro-economic and fiscal constraints anticipated over the medium term. The review will develop a package of cost effective policy measures that the Government could consider. To the extent possible, the Government should be presented with various policy options. This initial review is expected to be broad based; detailed measures will be developed as a subsequent phase (not included under the technical assistance component). Scope of Work 4. The review would include, but not be limited to: a. A brief overview of housing policies and policy instruments in the OECD countries (low interest loans, government subsidies to the housing sector, regulatory requirements, etc.) and their effectiveness; b. Identify policy instruments to meet the priority, short term objectives of the Government in the housing sector and an evaluation of the possible impact of the policies on government finances and overall sector development; c. Develop a pack of policy instruments (including possible legislation) for the government to operationalize the Housing Policy Concept. The work is expected to be carried out over 4 months. 5. The consultants will report to the Housing Project Steering Committee which includes the key sectoral agencies and representatives from the three project cities (Kharkiv, Lviv and Odesa). Expected Outputs 6. The consultants will produce the following reports: a. Interim report: At the end of two months, the consultants will produce an interim report which would include review of housing policies (part (a) above) and policy options the Government could consider with an evaluation of their potential impact (part (b) above); b. Final report: At the completion of the assignment, the consultants will produce a full report including recommended policy package and action program for Government implementation. 7. The follow up to the study will be reviewed during the mid-term project review scheduled for early 1997.

46 Annex C Page 3 of 8 UKRAINE HOUSING PROJECT Housing Finance Development Study Outline Terms of Reference Background 1. A housing finance system is a critical element of a housing market, especially in creating demand for housing. Lack of long term financing is the key constraint for households in purchasing either new or existing house because housing generally costs many times the annual income of most households. A house is the single largest asset owned by households and housing purchase is a large motivation for households to save. 2. The Government has made housing finance one of its priorities under its Housing Policy Concept. In order to implement its housing policy, the government proposes to provide for (a) "creating the conditions for development of exchanges, investment funds, mortgage and housing banks, insurance companies and other market structures to finance housing construction"; and (b) "financing the expansion of housing construction from alternative sources, promoting the attraction of non-government funds for housing construction, particularly personal savings of citizens, assets of enterprises, institutions, organizations, foundations, bank credits, etc." 3. Development of a housing finance system will need to be considered with the overall development of the financial sector, but with consideration given to the special characteristics of lending to households for housing purchase or construction. The housing finance system will operate within a legal and institutional environment that applies to all banks and financial institutions: e.g. prudential lending regulations, laws assuring enforcement of contracts, foreclosure in case of loan default, registry of assets as collateral, etc. There are also characteristic of housing finance which set it apart from other forms of lending. For example, mortgage lending involves a larger number of relatively small loans to household. Longer maturities of mortgage lending requires the lenders explore the option of tapping capital markets and traditional sources of long term financing (such as pension funds) for financing; the small size of individual loans requires special institutional arrangements may need to be developed to allow originators of home mortgages to tap into capital markets. Objectives of the Study 4. The objectives of the study are to formulate a plan for promoting the development of a housing finance system for Ukraine. The study should outline the key elements of a housing finance system and develop recommendations on the policy, legislative (regulatory) and institutional actions that the government will need to promote housing finance in Ukraine. These actions will need to be sequenced with overall economic transformation and financial sector development. Scope of Work The review would include, but not be limited to a. An overview of existing financial system and prospects for future financial sector development: a review of banking laws (existing, under preparation), financial

47 Annex C Page 4 of 8 regulations, and government plans for future financial sector development; overview of existing financial institutions; overview of related industries, such as insurance and pension funds. The review will identify issues pertaining to housing finance that need to be addressed within the wider context of financial sector development. b. An overview of the housing sector: a brief review of land issues, housing privatization, growth of housing construction firms, provision of infrastructure for housing development, government support to the housing sector and other housing sector issues that would impact on the development of the housing finance system. c. Institutional options: discussion of different approaches to housing finance (e.g. specialized housing finance institutions versus universal banking, appropriateness of secondary markets, etc) and possible implications for Ukraine; identification of key issues (such as affordability and low interest loans) and discussion of possible policy alternatives. d. Strategy for housing finance development in Ukraine: definition of the role of the government in housing finance; legislative, institutional and policy actions for the government to consider. The work is expected to be carried out over 4 months. 5. The consultants will report to the Housing Project Steering Committee which consists of the key sectoral agencies and representatives from the project cities (Kharkiv, Lviv and Odesa). Expected Outputs 6. The consultants will produce the following reports: a. Interim report: At the conclusion of the review of the existing situation and overall prospects for financial sector development, the consultants will produce an interim report which identifies the key issues and policy and institutional options that the government could consider to promote housing finance. b. Final report: At the completion of the assignment, the consultants will produce a full report including recommended policy package and action program for Government implementation. 7. Follow action to the study will be reviewed during the mid-tern project review scheduled for early 1997.

48 Annex C Page 5 of 8 UKRAINE HOUSING PROJECT Building and Land Regulation Review Outline Terms of Reference Background 1. A market for real estate in the urban areas is emerging. Private investors see opportunities in a growing market for office space, modern shops, hotels and high quality housing for higher income people and foreigners. A local housing market is developing following privatization of state owned housing. People are privatizing their apartments and exchanging or selling them to adjust their housing to their current rieeds. Real estate brokers are emerging to link potential sellers with buyers. 2. Developers are interested in constructing new buildings and rehabilitating existing buildings to address the needs of this growing real estate market, but face various constraints. One key constraint is the complex (and not necessarily transparent) review and approval procedures for development project. For example, a developer in Kiev needs to go through the Permanent Comnmission for Architecture, Construction and Development of the city council, the Kiev Institute of Architectural Design and City Planning, the district authorities, archaeological authorities, Commnittee on Economic of the city council and the Department of Architecture of the Kiev City Administration. It takes about 2 years from the time an application is submitted to obtain approval to start construction. 3. While building standards, land use controls and building permits are necessary to protect public interest (e.g. environmental protection, structural safety, etc), excessive regulation can delay implementation of projects, increase costs and act as a disincentive for private investment. There is a need to balance the cost and benefits of regulations. The Government should review its regulations and procedures on allocation of development rights, mandatory government reviews and issuance of permits, estimate the time and costs (administrative expenditures, costs of delays) required to fulfil these requirements, and simplify or eliminate those that are cumbersome. Objectives of the Study 4. The objectives of the study are to review existing land and building regulations at the city level and recommend areas where the regulations can be simplified and where they need to be strengthened (e.g. in environmental protection). These recommendation would be followed up with regulatory changes at the national and city levels. Scope of Work 5. The review would include, but not be limited to a. An overview of existing rule and regulations pertaining to real estate development projects; and b. Recommendations on areas for simplification and strengthening of these regulations.

49 Annex C Page 6 of 8 The work is expected to be carried out over 6 months in collaboration with the city administrations of Kharkiv, Lviv and Odesa. 6. The consultants will report to the Housing Project Steering Committee which consists of the key sectoral agencies and representatives of the three project cities. Expected Outputs 7. The consultants will produce the following reports: a. Interim report: After 3 months, the consultants will produce an interim report which identifies the areas where rules and regulations need to be simplified or strengthened; b. Final report: At the completion of the assignment, the consultants will produce a full report including recommended action program at both the national and local levels. 8. The follow action taken by the project cities will be examined as part of the mid-term implementation review scheduled for early 1997.

50 Annex C Page 7 of 8 UKRAINE HOUSING PROJECT Project Implementation Technical Assistance Outline Terms of Reference" 5 Background 1. The housing project will bring about significant changes in the way in which civil works projects are implemented at the city level. First, contractors for civil works contracts will be selected through competitive bidding procedures. However, neither the city staff nor the contractors have experience in competitive bidding. Second, the cities will have to manage an international contract for which they have very limited experience. Stricter contract management and quality control during construction will be essential for the success of the project. One of the major shortcoming of construction under the Soviet system was poor quality control; many residents complained about the poor quality of construction and finish of their state provided housing. Finally, the accounts will need to be set up to track project expenditures. These accounts will need to be maintained following international accounting practices, kept separate from the city's regular accounts and subject to annual audit. 2. The cities will also be responsible for preparation of marketing plans for sales of completed units. The marketing plan will need to include method of sales, advertisement and promotion, organization of sales and pricing of apartments and land. The project cities have started and will continue to carry out land auctions but have no experience in marketing apartments. 3. Homeowners associations will be organized to take over management and maintenance of the buildings once they are sold. Two project cities, Odesa and Kharkiv, have organized condominium associations with assistance from USAID for privatized buildings. The Government has introduced a decree mandating formation of homeowners associations to takeover management and maintenance of the common areas. USAID through local consultants is expected to continue to provide support for the formation of condominium associations in Odesa, Kharkiv, Lviv and other cities in Ukraine. Community organization and participatory approaches may be needed in formation of homeowners associations, especially since there is a lack of tradition of urban residents coming together to jointly reach decisions on amounts of expenditures needed for routine maintenance of buildings or emergency repairs (which they had previously left to the city). Objectives of the Technical Assistance 4. The objective of the technical assistance is to provide support to the city administrations in key areas where they lack the necessary expertise to assure the success implementation of the project. 15/ For simplicity, a single outline is prepared. Implementation of the assistance can be split into more than one contract and separate detailed terms of reference developed accordingly.

51 Annex C Page 8 of 8 Scope of Work 5. Assistance will be required in: a. Project Implementation: organization and implementation of competitive tender, contract management, accounting systems and financial management and control; b. Preparation of marketing plan for apartments and land financed through the project; c Organization of homeowners associations. The consultants will report to the Project Technical Group at the national level and will work with the project city administrations at critical times in project implementation at the local level. Expected Outputs 6. The expected output would include: procedures and manual (for competitive tender, financial management, etc); training programs and technical advise.

52 UKRAINE HOUSING PROJECT Proiect Components Cost Summary A. Housing Completion Component % % Total (US$ 000) Foreign Base Local Foreign Total Exchange Costs Lviv Housing Completion 1, , , Odesa Housing Completion 3, , , Sub-Total Housing Completion Component 5, , , B. Land Development Component Lviv Land Development Component 1, , , Kharkiv Land Development Component , Sub-Total Land Development Component 2, , , C. Sunk Costs Lviv Housing Completion Component 1, , Odesa Housing Completion Component Kharkiv Land Development Component Lviv Land Development Component 3, , Sub-Total Sunk Costs 5, , D. Technical Assistance Technical Assistance , Total BASELINE COSTS 14, , , Physical Contingencies 1, , , Price Contingencies 1, , , Total PROJECT COSTS 17, , , Interest During Construction - 2, , Commiment Charges Total Costs to be Financed 17, , , X _,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-

53 UKRAINE HOUSING PROJECT ExRenditure Accounts Project Cost Summary I. Investment Costs % % Total (USS'000) Foreign Base Local Foreign Total Exchange Costs A. Civil Works Buildings 5, , , Infrastructure 2, , , Sub-Total Civil Works 8, , , B. Consulting Services Consulting Services , BASELINE COSTS 8, , , Physical Contingencies 1, , , Price Contingencies 1, , , TOTAL INCREMENTAL PROJECT COSTS 11, , , ,.. _...~~~~~~~~~~~~~~~

54 UKRAINE HOUSING PROJECT Expenditure Accounts by Components - Totals Including Contingencies (USS'00) I. Investment Costs Housing Completion Component Land Development Component Lviv Odesa Lviv Land Kharklv Land Housing Housing Development Development Technical Completion Complition Component Component Assistance Total A. Civil Works Buildings 4, , ,246.6 Infrastructure - - 4, , ,580.2 Subtotal Civil Works 4, , , , ,826.8 B. Consulting Services Consulting Services , ,235.0 TOTAL PROJECT COSTS 4, , , , , ,061.8 Taxes Foreign Exchange 2, , , ,405.5 > 0 x

55 UKRAINE HOUSING PROJECT Project by Years - Totals Including Contingencies (USS'000) A. Housing Completion Component Total Lviv Housing Completion , , ,880.3 Odesa Houisng Completion Moldovanka , ,032.0 Building # , ,808.0 Building # ,094.0 Buildings # 38&38B , ,502.0 Buildings # 7& , ,930.0 Sub-Total Odesa Housing Completion 2, , , ,366.0 Subtotal Housing Completion Component 3, , , ,246.3 B. Land Development Component Lviv Land Development Component 1, , ,580.2 Kharkiv Land Development Component , ,000.0 Subtotal Land Development Component 2, , ,580.2 C. Technical Assistance Technical Assistance ,235.0 Subtotal Technical Assistance ,235.0 TOTAL PROJECT COSTS 6, , , ,061.5,n o >e

56 UKRAINE HOUSING PROJECT KHARKIV: SOURCES AND APPUCATION OF FUNDS (in USS Millions) Total SOURCES OF FUNDS: City Budget IBRD Loan Sales Land Total APPUCATION OF FUNDS: Investments Infrastructure Debt Service Commitrnent Fee Interest , Principal Total , SURPLUS O.W , O Table Notes: a. City budget includes counterpart (investment) funds, taxes and debt service; exdudes city administrativexpenditures for prject implernentation. b. Sales assumpibons are as follows: Year Land (sq. m.) Price per Sq. M.: USS c. Investment costs indude conbngencies and taxes d. Bank loan funds are onlent with 5 years grace, repayment over 17 years in equal repayments of principal at an interest rate of 8.5% per annum. OQ 0 td (D 0

57 UKRAINE HOlING PROJECT LVIV: SOUtRCES AND APPLICATION OF FUNDS (In USS Millions) " 13f ToWl SOURCES OF FUNDS: City Bude IBRD Loan Sale Apinlents Land Total APPIJCAlION OF FUNDS: Invuitmen Infrashrcture BuHdiNg Debt Servce Commitment Fee Interast Prilndpl Tota SURPLUS Table Notes: a. City budget indudes counterpet (invesbrent funds, t nd debt sewvice; exdudes adinisnratie expenditures for proct b. Sae aisuetlors for spabnent and lnd we as fllows: iemention Yew Apatmet (no.) Prie per Apst US$ Land (sq. m.) Price per Sq. M.: USS , Q~ The lodn of tme sit e assuiond on awtment saes ae disasaed In Anrex H (EconomIC Analysis Sumnwy). Pices he been adused to retxicd empact of aprdaon of local caurrncy. M M c. lnvesent o lxdudes conlirvenciea and txe. K d. Bank loan fund aeon nt wlth 5 ym grace, rpble over 17 ym ki equa"l repenwn of pdncpal at an hiret ra of 8.5% per Onnnurn. 0 I-hI

58 UKRAINE HOUSING PROJECT ODESA: SOURCES AND APPLICATION OF FUNDS (in USS Million) 1it it" 1e t Total SOURCES OF FUNDS: City Budget IBRD Loan Apartnents Sales Total APPLICATION OF FUNDS: Investments Bulldings Debt Service Commnitment Fee Intereat Prncpal 0, Total SURPLUS Table Notes: a. City budget induaes counterpetl (invesment) funds, taxes and debt service; exdudes adninistrative expenditures for proect implementaton. b. Sales assumptions for apartrenb we as folows: Year Moldovanka: No Price: US Bldg. #42: No Price: USOO0O Bdg. 01: No Prke: US$ Bldg. 438&388: No Q Price: US000O I td Bldg. #7&8: No 38 Price: USOOOO The bcaton o the stes s id rtnassum of apwe sales ae dicnsd In Annex H (Economic Analysis Summery). Prk es adlusted to rdect Wd of exdcig rats dcagres. c Inv_sknint cost cbdude contingmnces d tx (A)

59 UKRAINE HOUSING PROJECT Procurement Plan (USS'OOO) ANNEX F Contract Value Procurement Implementation Package (US$ Million) Method Period I. Housing Completion Component Lviv Housing Completion Buildings 8, 11 & ICB 08/ /1998 Buildings 6, 7 & ICB 08/ /1998 Odesa Housing Completion Moldovanka 2.1 ICB 08/ /1998 Building # ICB 08/ /1998 Building # ICB 06/ /1997 Buildings # 38&38B 2.5 ICB 06/ /1997 Buildings # 7&8 1.9 ICB 06/ /1997 II. Land Development Component Kharkiv Land Development 2.0 ICB 06/ /1997 Lviv Land Development Water 1.0 ICB 07/ /1997 Sewage 1.6 ICB 07/ /1997 Heating/Hot Water 1.4 ICB 07/ /1997 Roads & Other Works 0.6 ICB 10/ /1997 Ill. Technical Assistance Consulting Services Financial Management 0.2 Cons. Serv. 08/ /1997_b/ Procurement 0.2 Cons. Serv. 06/ /1996 Contract Management 0.4 Cons. Serv. 06/ /1997_b/ Monitoring 0.2 Cons. Serv. Jun-98 Studies 0.3 NBF 06/ /1996 a/ The General Procurement Notice for the project was published on February 16, 1996 b/ These services are not expected to be continuous and will be provided when required

60 ANNEX G UKRAINE HOUISNG PROJECT Estimated Loan Disbursement Schedule Amount (US$ Million) Cumulation Bank FY Semester Absolute Cumulative as % of Total

61 Annex H Page 1 of 4 UKRAINE HOUSING PROJECT Supervision Plan Supervision of the project is expected to require 20 staff-weeks per fiscal year during first two years of implementation and 10 staff-weeks thereafter. A formal mid-term review involving senior government officials will be carried out in early 1997 to review progress on implementation, including simplification of land and building regulations and follow-up on policy studies. 15 staff-weeks in the field will be required for mid-term review. The schedule below indicates supervision plan and required resources in addition to regular review requirements for procurement actions, progress reviews and various correspondence. Dates Activity Staffing Staff-weeks' May, 1996 Project Startup - Task Manager - Economist - Architect - Procurement - Financial Management 10 October 1996 Supervision - Task Manager - Architect - Procurement - Disbursement 8 March 1997 Supervision - Task Manager Mid-term review - Division Chief - Economist - Architect - Financial Analyst - Procurement 15 September 1997 Supervision - Architect - Financial Analyst 4 March 1998 Supervision - Architect - Financial Analyst 4 October 1998 PCR Preparation - Economist - Architect - Financial Analyst 6 1/ Staff-weeks for IBRD staff only. Additional resources are expected to be obtained from consultant trust funds.

62 Annex H Page 2 of- 4 UKRAINE HOUSING PROJECT Supervision Plan Project Implementation Summary PRE-INVESTMENT ACTIVITY: Preparation of Tender Documents == Tendering ++ INVESTMENTS: Kharkiv: Land Development Lviv: Housing Completion Land Development /00000 Odesa: Housing Completion MARKETING & SALES: Preparation of Marketing Plan Kharkiv: Land... Lviv: Housing... Land... Odesa: Housing... HOME OWNER ORGANIZATION: Constituent Meeting Preparation of By-Laws Adoption of By-Laws ++ STUDIES: Govemment Support for Housing Housing Finance Development Land & Building Regulation MID-TERM REVIEW:

63 UKRAINE HOUSING PROJECT Annex H Page 3 of 4 Suvervision Plan Development Monitoring Indicators I Ro t -tevw1pment MON1TOWIXGNfICATO COM1S Further Private Ownership of Housing Marketing Plan for Apartments Lviv and Odesa city administrations Completed Under the Project: by June will prepare marketing plans which 1997 will include sales of all units completed under the project. The Bank will review these marketing plans. Promote Resident Takeover of Organization of Homeowners Lviv and Odesa city administrations Building Management & Maintenance Associations: within six months of will assist buyers organize start of sales homeowners associations using participation techniques with Adoption of Homeowner Associations assistance from the project By-Laws: within nine months of start implementation consultants. of sales Organization of the homeowner associations will be incorporated in the marketing plans. Encourage Growth of Private Implementation of Land Auctions All three project cities will carry out Developers Programs for 1996 & 1997 the auctions scheduled for 1996 & Kharkiv and Lviv city Preparation of Marketing Plan for administrations will prepare a separate Land Developed Under the Project: by marketing plan for the land developed June 1997 under the project by June Completion of Building and Land Regulation Study by December 1996 and Implementation of Agreed Action Plan (following study): by June 1997 The Bank will discuss the results of the Building and Land Regulation Study, reach understanding with the cities on follow up actions, and monitor implementation of the actions. Pilot Competitive Bidding in the Development of contract documents: The Bank will ensure competitive Selection of Contractors for By March 1996 bidding as part of the regular Government (City) Contracts superivison activities. Implementation of the first competitive tender: By June 1996

64 UKRAINE HOUSING PROJECT Annex H Page 4 of 4 Supervision Plan Development Monitoring Indicators PROJECT DEVELOPMENT MONiTORING INDICATORS COMMENTS OBJECTWES Further Housing Reform Completion of review of government The national government (through the assistance to housing and agreement on technical group) will oversee follow-up action plan: by December implementation of the policy studies 1996 financed under the technical assistance component. The Bank will discuss Completion of housing finance and agree on the follow up action development study and agreement on with the Project Steering Committee follow-up action plan: by December which include the key national 1996 government agencies involved with the housing sector and sectoral policy.

65 Annex I Page 1 of 8 UKRAINE HOUSING PROJECT Economic Analysis Summary 1. The main economic benefit of the project will be the promotion of the housing market itself and the contribution of the project to the process of economic transformation. A housing market would provide households with greater choice in the location and type of housing based in line with their changing needs and an incentive to save, and improve the quality and cost of housing through increased competition in supply. In the transition economies, development of a housing market will support the growth of industrial and commercial enterprises by allowing for divestiture of enterprise own housing and facilitating labor mobility. Growth of a real estate market will allow for greater flexibility in constructing offices and other commercial buildings in urban areas which will allow cities to function as dynamic service and information centers. Increased private ownership of housing and household involvement in the selection, management and maintenance of housing will contribute to the reduction in government housing subsidies, both for construction and maintenance, which will impact on the government budgetary deficit and overall macro economic stabilization. Finally, cramped quarters and poor quality of housing are seen by the people as one of the more visible shortcomings of the central planning system. Better housing will provide tangible results of the alternative to central planning and will sustain momentum for economic reform. 2. The project will contribute to the development of the housing market by: (a) promoting private ownership of housing through the sales of unfinished municipal buildings and moving away from the previous system of state allocation of apartments to families on the waitlist; (b) supporting private housing developers through improve access to serviced land and simplification of building and land regulations; (c) introducing competition in the construction industry through use of competitive bidding procedures in selection of contractors; and (d) assisting the national government develop policies for rationalizing assistance to the housing sector and devising a strategy for introducing housing finance. The project will support reform oriented city administrations and demonstrate an alternative to state management of the entire housing stock. 3. Economic evaluation was carried out of to examine the viability of the individual investments. Cost benefit analysis relies on the market to generate information on the beneficiaries willingness to pay for goods or services produced which is then used to measure the benefits from the investment. There are clear limitations to economic analysis in the transition economies where these markets are just emerging. 4. While a real estate market is developing in Ukraine, it is still limited and information on housing transactions scarce. In Kharkiv, Lviv and Odesa, there is a small but growing market for apartments. While realtors provide information on apartments available for sale or exchange and broker transactions, information on actual apartment sales is not readily available, expect possibly in Kiev where the local realtors are better organized. Sufficient information on land sales is not available. While land auctions have been carried out in all three cities, the number of actual transactions is very limited (information is available for only just over 20 sales) and prices vary from US$0.25 per sq. m. to US$200 per sq.m. Therefore, only a very simple economic evaluation was carried out for housing investments using information available from local realtors on the market for apartments in the three project cities.

66 Annex I Page 2 of 8 5. Imputed rental values, reflecting the beneficiaries willingness to pay for housing services, are generally used to quantify the economic benefits of housing investments. Sales prices are used as a proxy for benefits, assuming that sales price represents the discounted future flows of benefits to purchasers (homeowner). Information on sales of existing apartments in Lviv and Odesa was obtained from discussions with local real estate agents and published information where available. This information is available in the project files. 6. As in market economies, the location of the proposed investments is a key factor in determining their attractiveness to potential buyers. Similar sized apartments located in or close to the city center, in prestigious areas and/or with good transportation access commanded higher prices. The characteristics of the four housing sites are as follows: a Lviv. Lvsvnychi: The project will finance completion of six buildings which are located adjacent to each other in a new housing development at Lysynychi. The site is located on the outskirts of Lviv City, but it is not necessarily far, being only about 5 km from the city center (and about 20 minutes by car). The proposed buildings are part of a larger housing development, some of the buildings being already completed and occupied, two enterprise housing buildings' 6 under construction and an additional 18 buildings planned. Bus service is provided to the site. b. Odesa. Moldovanka: The project will finance completion of one building in Moldovanka. The site is located in an old established neighborhood, located close to the city center. The site is within 3 km of the city center (or minutes by car) and is served by tram and bus lines. c. Odesa, Vuzovsky: The project will finance completion of three buildings in Vuzosky. Two buildings (no. 7 and 8) are located adjacent to each other, are of the same design and can be considered as one development; the other building (No. 1) is located in same area although not necessarily adjacent to the other buildings. Vuzovsky is an established area with a mix of older single family houses (vacation homes), newer apartment buildings and resort facilities, situated along the Black Sea coast. The proposed housing sites are well located, approximately 4 km from the city center (or about 20 minutes by car) with tram and bus readily available and are also within walking distance to the beaches. d. Odesa. Yuzhnv: The project will finance completion of three buildings in Yuzhny. These buildings are located adjacent to each other with similar designs and can be considered as one development. Yuzhny is located a little further south of Vuzovsky. The site is located within an established housing estate consisting primarily of large apartment buildings with about 2,500 households. The distance to the city center is about 6 km (or about 30 minutes by car); bus and tram transportation is readily available. All three sites in Odesa are located in the southern part of the city which is considered to be a more desirable residential area with beaches along the Black Sea compared to the more industrialized northern parts. 7. The comparable average market prices were estimated for the apartments to be financed. It should be noted that these are very rough estimates based on available information on the 16/ Buildings constructed by enterprises to house their employees.

67 Annex I Page 3 of 8 market for existing apartments in Lviv and Odesa. The amenities included with the apartment, the specifics of the location of the buildings (its immediate surroundings, access to transportation, access to schools and other social facilities), the age and state of the building influence its market value. The market value of the apartments funded through the project were estimated to be slightly higher than the apartments of a comparable size in a similar location because they are new. The price estimates used for the economic evaluation are as follows: a. Lviv. Lysvnvchi: Estimated average market value per apartment: US$11,500 (or around US$190 per sq. m.) based on data of existing apartments for sale in Syhib, another housing estate established on the fringe of Lviv City. For comparison, the price for apartments for sale near the city center average around US$250 per sq.m. b. Odesa. Moldovanka: Estimated average market value per apartment: US$34,000 or around US$490 per sq. m. based on the average sales price for apartments in the Moldovanka district. c. Odesa, Vuzovsky: Different market values were estimated for building no. 1 and buildings nos. 7 & 8 to reflect the difference in unit size. The average size of an apartment in buildings 7 & 8 is about 100 sq. m. or about 50% higher than the average for apartments in building No. 1. The estimated market values were estimated to be US$22,000 or around US$340 per sq. m. for building no. 1 and US$39,000 or around US$390 per sq. m. for buildings nos. 7 & 8 based on the average sales price for apartments in the Vuzovsky district. d. Odesa. Yuzhnv: Estimated average market value per apartment: around US$ 15,000 or U$260 per sq. m. based on the average sales price for apartments in the Yuzhny district. Current estimates of market prices were used for the economic analysis since it will be premature to speculate on the movement of real estate prices". A sensitivity analysis was carried out assuming a decline in the prices of the apartments. 8. The cost were based on project cost estimates. Taxes were excluded from cost estimates. Prior expenditures made by the city for uncompleted housing units were considered as sunk costs and were not included in the cost estimates. In Lviv, part (15%) of the cost of the off-site infrastructure (in proportion to the total site) were added to the cost of the housing completion. No shadow prices were used because appropriate prices had not been developed. All prices were in constant 1995 prices. 9. The weighted average economic rate of return for the uncompleted housing investments is 29% (Table 1). There is difference among the individual investments with Lysynychi, Moldovanka and Buildings Nos. 7 and 8 having rates of return lower than the other component. Detail calculations are shown at the end of this Annex. 17/ The housing prices lsed in the city cash flow projections (Annex E) differ from these numbers since they are expressed in current prices and include an adjustment for possible real appreciation of local currency against the US dollar. All contingencies other than physical contingencies in the cost estimates were excluded from the economic evaluation.

68 Annex I Page 4 of 8 TABLE 1: Economic Rate of Return By Component Economic Rate of Return Component Weights J Base Case Decrease in Increase in Price: 15 % Costs: ~2 0 % Lysynychi 34% 14% 2% 1% Moldovanka 14% 23% 14% 15% Building No % 31% 23% 22% Building No. 1 8% 50% 37% 35% Buildings No. 38 & 38B 18% 41% 29% 27% Buildings No. 7 & 8 14% 14% 1% 0% Weighted Average ERR 25% 14% 13% 10. The main risks facing the project are weaknesses in housing prices and possible increases in costs. The housing market in Lviv and Odesa are just emerging and, unlike more mature markets, it is difficult to predict future price trends based on current market conditions, especially since real estate markets are location specific. Increase in supply of housing, shift in market preference or continued economic difficulties may result in real estate prices dropping below today's levels. Construction prices are also difficult to predict, especially with the collapse of the construction industry and break down in material distribution. As economic activity, especially construction picks up, the cost of materials may increase due to local shortages caused by the inefficiency in the distribution system. Appreciation of the local currency in real terms may also result in cost increases, although such increases could be offset by an increases in wages and household incomes and greater demand for housing. Sensitivity analyses were carried out to estimate the impact of a decrease in real estate prices and an increase in construction costs in costs. The weighted average economic rate of return would drop below 15% per annum if real estate prices drop by 15% from today's levels or costs increase by 20%. The impact on the individual investments would vary. 11. Changes in the potential sales price of the estate and increases in project costs will have a negative impact on project viability, especially for Lysynychi in Lviv and Buildings Nos. 7 and 8 in Odesa. The investments in Odesa are not considered to be at significant risk from price fluctuations since they are located in well established neighborhoods in the more popular southern sections of the city. The Lysynychi site in Lviv is more vulnerable since it is located on the fringe of the city. However, demand for new housing is expected to be strong over the short term, especially as city center areas are developed for commercial use. Private developers, including international firms, are interested more in developing the city center areas for commercial use and/or high income residences. This would require relocating existing residents and consolidating many of the smaller apartments into larger apartments or offices. New housing construction is limited so that the apartments constructed through the project should be attractive for developers to provide as relocation

69 Annex I Page 5 of 8 sites for residents when acquiring city center buildings. Cost increases are a significant risk; costs should be monitored closely during project implementation. 12. Without the project, the foundation and building work carried out to date would have deteriorated and the previous investments lost.

70 Annex I Page 6 of 8 UKRAINE HOUSING PROJECT Economic Analysis Summary A. Lviv: Lysynychi Basic Assumptions: Est. Market Price $190/sq. m. Av. Apartment Size 60 sq. m. Av. Sales Price $11,500 Project Flows: in US$ millions, in constant 1995 prices Apartments Sold Price Per Apartment Benefits (sales revenues) Investment Costs Net Flows EIRR 14%. Note: 15% (relative share of these housing units to overall site development) of off site infrastructure costs charged to housing development costs. B. Odesa: Moldovanka Basic Assumptions: Est. Market Price $490/sq. m. Av. Apartment Size 70 sq. m. Av. Sales Price $34,000 Project Flows: in US$ millions, in constant 1995 prices Year Apartments Sold Price Per Apartment Benefits (sales revenues) Investment Costs Net Flows EIRR 23%

71 Annex I Page 7 of 8 UKRAINE HOUSING PROJECT Economic Analysis Sunima C. Odesa: Building No. 42 Basic Assumptions: Est. Market Price $260/sq. m. Av. Apartment Size 55 sq. m. Av. Sales Price $14,000 Project Flows: in US$ millions, in constant 1995 prices Apartments Sold Price Per Apartment Benefits (sales revenues) Investment Costs Net Flows EIRR 31% D. Odesa: Building No. I Basic Assumptions: Est. Market Price $340/sq. m. Av. Apartment Size 65 sq. m. Av. Sales Price $22,000 Project Flows: in US$ millions, in constant 1995 prices Apartments Sold Price Per Apartment Benefits (sales revenues) Investment Costs Net Flows EIRR 50% _

72 Annex I Page 8 of 8 UKRAINE HOUSING PROJECT Economic Analysis Summary E. Odesa: Buildings No. 38 & 38B Basic Assumptions: Est. Market Price $270/sq. m. Av. Apartment Size 55 sq. m. Av. Sales Price $15,000 Project Flows: in US$ millions, in constant 1995 prices Apartments Sold Price Per Apartment Benefits (sales revenues) Investment Costs Net Flows EIRR 141% 1 l F. Odesa: Buildings No. 7 & 8 Basic Assumptions: Est. Market Price $390/sq. m. Av. Apartment Size 100 sq. m. Av. Sales Price $39,000 Project Flows: in US$ millions, in constant 1995 prices Apartments Sold Price Per Apartment Benefits (sales revenues) Investment Costs Net Flows EIRR 14%

73 Annex J Page 1 of 7 UKRAINE HOUSING PROJECT Environmental Aspect 1. The environmental aspects of the project investments were discussed with the city officials during project preparation and appraisal. The project is expected to have minimal negative environmental impact. The project will be completing housing construction or development of housing sites planned and initiated by the city administrations. The sites in Kharkiv and Lviv are existing sites, located on the city fringe, in areas planned for urban development, adjacent to existing housing development. In Odesa, only completion of buildings in existing, developed housing areas is included in the project. Water supply, drainage, sewer and other infrastructure requirements have been incorporated in the site designs. Some potential environmental impacts have been identified and mitigation measures initiated: e.g. raising the site at Kharkiv through filling to reduce the possibility of flooding. There is the possibility of some soil erosion and dust generated during development of land in Kharkiv and Lviv and control measures will be included in the construction plans. The project is expected to have a positive impact on people's standard of living through design improvements in apartment layout, ventilation, heat control and energy efficiency. The possible environmental impact of the investments in Kharkiv, Lviv and Odesa are discussed below; a check of the potential negative environmental impact for the site developments in Kharkiv and Lviv following the Bank's Environmental Assessment Sourcebook 1t is presented in tabular form at the end of this Annex. A. Kharkiv 2. Present Situation The proposed site is located at the intersection of Shevchenko Street and Geroyev Truda Street, 7 km. from the city center in the northeastern part of Kharkiv City. The site is surrounded by well developed residential areas and a recreational zone with an artificial lake. The surrounding residential areas have readily available shops, cinema, schools and other social facilities. They are served by buses and electric trams which provides convenient access to the city center, other parts of the city and a subway station 2.4 km. away from the proposed site. There are no major industrial facilities located in the vicinity; the industrial zones are located south of the city. 3. The Shevchenko Street site is an attractive site with access to transportation, shops, social and recreational facilities. It is situated between existing residential districts and is surrounded by two streets with tram and bus services, connecting site with the city center and a subway station. It is an attractive location with recreational facilities (an artificial lake and green space) close by. Previously, the site had been used for agricultural purposes, primarily small garden plots for urban households. 4. Proposed Investments The project will finance the provision of water, drainage, sewerage, heating, electricity, gas and roads to develop approximately 6.5 ha. at Shevchenko Street site of which about 6 ha. will be sold to private developers for construction of residential buildings. Due to zoning regulations, the buildings should be limited to 1-4 storey single family or multi-family 18/ Based on guidelines for "Large Scale Housing Project" in the Environmental Assessment Sourcebook, Volume II (Sectoral Guidelines), Chapter Nine, "Population, Health and Nutrition; Transportation; Urban Development; Water Supply and Sewerage. "

74 Annex J Page 2 of 7 apartment blocks. The estimated cost is US$2.0 million. No works have been carried out to date. However, the site already has access to trunk infrastructure of the adjacent residential areas, which have sufficient capacity to supply also the new site. 5. Environmental Impact The project is expected to have minimal negative environmental impact. The Shevchenko Street site is located adjacent to existing apartment buildings in established residential areas. Industrial facilities are not located in the vicinity. The area is flat. Previously, the site had been used primarily for some small urban garden plots. The city carried out preliminary analysis of geological conditions of the site and concluded that the site is suitable for the proposed development. Additional analysis of the site conditions will be carried out during design works and mitigation measures will be implemented as necessary. A check of potential negative environmental impact was carried out and the results are presented in tabular form at the end of this Annex. 6. The possibility of excessive dust and loss of soil exists during construction. Proper control measures (such as silt fencing, temporary silt basins, etc) will be required and implemented during project implementation. This will be reflected in the bid documents. B. Lviv 7. Present Situation The project site (Lysynychi) is located on the eastern periphery of Lviv City. It is located on an open hillside with good views in all directions. On one side, it is adjacent to single family residences, a cemetery and another housing development (Microrayon No. M-61) which is partially completed and inhabited. The other side overlooks agricultural fields. There are no industrial sites, major factories or other sources of air, noise and water pollution nearby. 8. The site is approximately 5.5 km from the city center (City Hall) and is currently served by bus. Transportation access is expected to improve significantly when a planned ring road for Lviv City is completed sometime in the future. 9. The project is part of a larger housing development (Microrayon M-62) for which construction of the infrastructure and some of the buildings had been started. Microrayon M-62 was planned as a community with residences, shops, kindergarten, schools and other social facilities. The total planning area is 21 ha. Construction of the main utility lines (water supply, sewerage, district heating system, electricity, etc) linking the site to the municipal systems has been started but stopped due to lack of funds. Construction is underway for two enterprise housing buildings at Lysynychi. Lviv City Administration started construction on six buildings, work on which has also stopped due to lack of funds. 10. Proposed Investments The project will include completion of municipal housing and development of part of the Lysynychi site. Financing will be provided for water, sewerage, gas, electricity, heating, road and other infrastructure facilities for the development of approximately ha. 8.7 of land, of which ha. 5 can be sold to developers for residential construction. Part of this infrastructure has already been constructed and the project will be financing the missing links. Total cost of infrastructure provision is estimated to be US$4.1 million. Six partially constructed municipal residential buildings will be completed at Lysynychi district for a total of around 500 apartments. The estimated cost of housing completion is US$4.3 million.

75 Annex J Page 3 of Environmental Impact The project is expected to have minimal negative environmental impact. The Lysynychi is located on the fringe of Lviv City, on a hill top in rolling terrain, adjacent to existing residential areas. It has no known cultural or historic value. There are no industrial facilities or other sources of pollution nearby. The site is already partially developed. Drainage, sewerage and other infrastructure planned for the estate and completed through the project will minimize any negative spillover effects to the surrounding areas. A check of potential negative environmental impact was carried out using the Bank's Environmental Assessment Sourcebook; the results are presented in tabular form at the end of this Annex. 12. The possibility of excessive dust and loss of soil exists during construction. Proper control measures will be required and implemented through during project implementation. The project is expected to have a positive impact on people's standard of living through design improvements in apartment layout, ventilation, heat control and energy efficiency. C. Odesa 13. Proposed Investments The project will finance completion of seven residential buildings for a total of around 520 apartments with about 31,000 sq.m. gross area of space. The estimated cost of completion is US$8.3 million. The seven buildings are not located in one area (as in Lviv) but are spread out in Vuzovsky, Yuzhny and Moldovanka districts in the southeni part of Odesa in established residential neighborhoods. The southern part Odesa, where many of the beaches on the Black Sea and recreational facilities are located, is considered to be one of the more desirable residential areas. 14. Environmental Impact The project is not expected to have a negative environmental impact. The buildings are located in established housing areas with access to transportation, infrastructure and municipal services. There are no industrial areas, large factories or other sources of air, noise or water pollution located in the vicinity of these buildings. The foundations are already in place and no historic or cultural facilities or waste or other problems were discovered during construction. Therefore, a separate check list for each of the building sites was not prepared. 15. The project is expected to have a positive impact on people's standard of living through design improvements in apartment layout, ventilation, heat control and energy efficiency.