Housing for Integrated Rural Development Investment Program (RRP UZB 44318) SECTOR ASSESSMENT (SUMMARY): MULTISECTOR Sector Road Map 1. Sector Performance, Problems, and Opportunities a. Rural Development 1. Approximately 64% of Uzbekistan s population lives in rural. 1 Agriculture remains the dominant sector, although its contribution to gross domestic product (GDP) has declined from 26% in 2008 to 18% in 2010. The two main crops cotton and wheat are grown on more than 80% of total irrigated land. 2 Other important products are fruit, vegetables, livestock, and silk. Domestic agricultural output generates more than 90% of domestic demand and accounts for 70% of domestic trade. 3 2. Agricultural livelihoods. Agricultural land has been traditionally held in the form of dekhan farms (small land blocks which average 0.17 hectares). Reforms through 2004 focused on restructuring of agricultural output to reduce cotton production and increase the farming of food products. The government s current agricultural policy, as set out in the Welfare Improvement Strategy (WIS) 2008 2010, reflects a continued shift to higher-yielding cash crops and an increased size of dekhan farm plots, 4 improved agricultural practices, improved water resource management and investment in irrigation, and greater access to finance for farmers. While the government is implementing policies to improve sector productivity, parallel efforts are being made to develop the nonfarm economy, viewed as key to raising rural living standards. 5 3. Nonfarm livelihoods. The nonfarm rural economy, which is mainly informal, 6 is dominated by agricultural wholesaling and merchandising, agro processing, and services. Less than 15% of fruit and vegetables are processed. 7 Other agro products include meat, dairy products, and pasta. The few small agroprocessors and many informal micro or home-based food processors in rural are constrained by lack of access to finance, limited management skills, and insufficient marketing, logistics, and technology. Demand for affordable finance is high for both working capital and purchase of equipment, especially by small agroprocessors unable to meet volume requirements. High interest rates and short maturities (unsuitable for equipment purchase) preclude access by most micro and small enterprises (MSEs). Microfinance organizations are lending with limited funding availability (footnote 2). 4. The rural service sector is well developed and includes retailing, wholesaling, and trading; banking, credit unions, and microfinance; transportation; and other personal services 1 Republic of Uzbekistan. 2007. Welfare Improvement Strategy of Uzbekistan: Full Strategy Paper for 2008-2010. Tashkent. 2 United Nations Development Programme (UNDP). 2010. Policy Brief on Rural Economic Development in Uzbekistan. No 2 (150). Tashkent. 3 Republic of Uzbekistan. 2007. Welfare Improvement Strategy of Uzbekistan: Full Strategy Paper for 2008 2010. Tashkent. 4 To take advantage of greater efficiencies of scale, cooperatives have been established whereby all farms nationally are a minimum of 100 hectares (the exception is in the Ferghana Valley where the minimum is set at 50 hectares). 5 Fifty percent of the formal rural workforce is employed in the agriculture sector, which provides lower wages than other sectors. Ongoing market reforms are expected to lead to a significant decline in employment in this sector. 6 Survey respondents are reluctant to report on their incomes for tax reasons. Thus, statistics on nonfarm income are not maintained. 7 United Nations Development Programme (UNDP). 2010. Policy Brief on Rural Economic Development in Uzbekistan. No 2 (150). Tashkent. Citing UNDP. 2009. Investment Guide to the Food Processing Sector in Uzbekistan. Tashkent.
2 (restaurants, hairdressing, car repairs, etc.). Tourism and related services are also well developed and support extensive home-based production of traditional handicrafts, particularly in rural near historical heritage sites. For services and other home-based MSEs, the lack of reliable energy and water remains a key constraint to development. Most suffer from regular power cuts. Constraints arise from the unreliability of potable water supplies, which undermines food processing and other enterprises. Other key constraints to attracting private sector investment in the rural nonfarm sector include limited access to credit (para. 3) and difficulties in registering property and paying taxes. 8 5. Rural living standards. Living standards in rural have not kept pace with those in urban. Poor employment opportunities (including lower wages) and insufficient rural housing lower rural living standards. 9 Most rural housing dates from the Soviet period and is occupied by growing multigenerational families. Although increasing, 10 new housing construction is not keeping pace with population growth (1.5% per year) and the over 200,000 young families and adult children ready to leave the parental home each year. 11 The government estimates that 1.5 million households need new housing or major renovation. Land for constructing houses is in short supply and is not readily obtained. Where land is available, single family home construction in rural is mainly handled by individuals on their own initiative and homes and built by temporary unregistered construction workers. New rural housing development is constrained by unavailability of large tracts of land with ready access to basic utilities, and limited to contractors who build houses for local governments or individuals on land made available by local governments. b. Housing Finance 6. Nascent housing finance sector. In 2009, the total housing finance market amounted to about 1% of GDP, with less than 10% of real estate deals financed through bank loans. 12 Table 1 details the trend of urban and rural housing loans from 2005 to 2010. Housing construction is mainly financed from personal savings or informal loans. Affordable housing finance is rarely available (particularly for women, who are typically employed in lower-paid sectors and have limited access to collateral). 7. Following a history of state housing provision, two government programs have been implemented primarily to support the urban housing finance market. From 1996 to 2004, the Uzbek Housing-Savings Bank (Uzjilsberbank) provided loans for social and commercial housing in new apartments in buildings whose construction was commissioned by the bank. 13 A second 8 Uzbekistan was recently ranked 150th out of 183 countries in ease of doing business. World Bank and International Finance Corporation. 2011. Doing Business 2011: Making a Difference For Entrepreneurs. Washington, DC. 9 Due to insufficient nonfarm job opportunities, retrenched or new entrants to the labor market cannot be absorbed. Educated professionals with marketable skills, particularly the young, are migrating to urban and abroad. 10 At the beginning of 2006, there were 179,266 families waiting to obtain land for home construction and 86,537 officially registered families waiting for apartments. Between 2005 and 2009, only 60,000 new houses were built per year (average 115 square meters per house). Source: World Bank. 2007. Housing Finance Development in Uzbekistan. Tashkent. 11 World Bank. 2007. Housing Finance Development in Central Asia. Washington, DC. 12 Source: ADB staff estimates. 13 For social housing, the government paid 50% of the cost with the borrower providing a 20% down payment and taking on a 30% mortgage for a term up to 10 years. For commercial housing, a 50% down payment was required from the borrower and the 50% mortgage was offered for up to 5 years. Both social and commercial mortgages were offered at market rates. The program was discontinued due to hurdles in obtaining land plots for development and construction and significant increases in housing construction costs.
3 program, implemented by Ipoteka Bank, was initiated in 2005. 14 Additional banks also began providing market-rate mortgage loans, but mostly to middle- and high-income borrowers in Tashkent and other major cities. 15 The level of nonperforming housing loans has been very low. Expansion of residential housing loan portfolios is primarily constrained by lack of access to cost-effective long-term funding, and high inflation risk. 16 Table 1: Residential Housing Loans in Uzbekistan (SUM billion) Loans 2005 2006 2007 2008 2009 2010 No. Amount No. Amount No. Amount No. Amount No. Amount No. Amount Rural 28 0.4 97 1.2 1,272 20.1 2,258 42.5 2,471 59.6 7,818 267.3 Urban 172 2.2 672 9.7 4,434 99.7 6,360 208.4 3,952 128.5 2,064 75.2 Total 200 2.6 769 10.9 5,706 119.7 8,618 250.9 6,423 188.1 9,882 342.5 Source: Central Bank of Uzbekistan 8. Rural Housing Scheme. As a strategic focus of the Rural Development Program (RDP), a third initiative, the Rural Housing Scheme (RHS), was launched in 2009. About onethird of the total rural housing loans issued in 2009, and more than 85% in 2010, was associated with the RHS. 17 Under the RHS, in addition to government-supported financing to stimulate the rural housing market, land is made available, access to basic utilities and related infrastructure is provided, and a number of reforms to stimulate rural housing construction have been adopted. 9. Qishloq Qurilish Bank, a majority state-owned bank with an extensive national branch network, has been mandated to offer affordable housing finance to creditworthy rural residents who are interested in buying new houses under the RHS. Borrowers are required to make a minimum down payment of 25% and purchase housing insurance. Under Presidential Resolution PP-1083, a maximum loan size of 1,000 times the monthly minimum wage 18 can be borrowed at an annual interest rate of 50% of the Central Bank of Uzbekistan refinancing rate, 19 with a minimum repayment period of 15 years and a 6-month grace period. 10. To address market failures in rural housing development and stimulate rural development, the RHS is being implemented at a number of levels. At the household level, the scheme captures household savings (including from remittances) to fund rural construction growth while enabling new opportunities for MSEs. With a minimum 25% deposit required and a maximum housing loan of 1,000 times the minimum wage, household savings equal to 25% to 45% of the value of the house are being captured to stimulate rural economies and job opportunities. Use of local construction firms and locally sourced construction materials and supplies is expanding construction opportunities, strengthening the skills of local contractors, 14 Subsidized lending was facilitated through the Mortgage Lending Support Fund (MLSF). The fund provided longterm financing on concessional terms to Ipoteka Bank for onlending to qualified individuals for housing finance. Between 2005 and 2010, Ipoteka provided about 5,000 housing loans totaling SUM116 billion. The government stopped periodic replenishment of the MLSF due to losses from lending at negative interest rates. 15 Interest rates for housing finance in urban usually range between 14% and 20%, with a tenor of up to 5 years. Source: Central Bank of Uzbekistan. 16 Inflation reached 14.1% in 2009 and is estimated at 9.3% for 2010 and 9.5% for 2011. ADB. 2010. Asian Development Outlook 2010 Update. Manila. 17 Under the RHS, 6,800 rural housing loans were approved in 2010; 7,400 rural housing loans are planned to be approved in 2011 and at least 7,000 rural housing loans annually during 2012 2015. 18 As of 1 December 2010, the minimum monthly wage was increased to SUM49,735 ($30). Over the last 5 years (from 2005 to 2010), the minimum wage has been increased by an average of 35% annually. Source: Ministry of Finance. 19 For 2009 2011, the RHS interest rate is set at 7%.
4 and creating a demand for skilled construction workers in rural. Modern new houses with reliable access to electricity and water will also stimulate startup and expansion of rural, homebased microenterprises and cottage industries, especially by women. 20 11. Constraints to expanding rural housing and housing finance. As noted in para. 5, land for constructing houses is not readily accessible. Land is primarily state owned and procedures for land allotment and sale of land plots for individual housing construction are defined in legislation, 21 without an established process for routine allocation of land. 22 The process of land allotment and auction of usage rights for residential land use are opaque, and statistics on housing transactions are not publically available. Individuals or legal entities may obtain proprietary rights to the use of land with permanent or temporary possession and use, and lifetime possession with hereditary succession. Legal requirements for purchase and/or transfer and registration 23 of property are onerous and lack clarity and consistency, and the concept of a single real estate asset, i.e., buildings and land, is not legally recognized. 24 Access to information for credit assessment purposes is constrained by immovable asset and land registries that are not fully computerized. 25 2. Government s Strategy 12. Rural development. The government s rural development policies are set forth in the WIS. In 2009, the government initiated the RDP under the WIS. The RDP focuses on stimulating rural economic activities in agriculture, as well as nonagricultural sectors, and other initiatives to support creation of rural jobs. To improve rural living conditions, the RDP includes the RHS. Under the RHS, during 2009 and 2010 the government built 7,647 new modern houses and, through a low-cost credit line provided to Qishloq Qurilish Bank, financed the acquisition of these houses by rural residents at a concessional interest rate. In 2011, a 5-year extension of the RHS was launched, under which an additional 40,800 houses will be built. 13. To improve rural living standards and build on ongoing achievements under the RHS and other related programs and strategies that impact rural development, the government s Housing for Integrated Rural Development Strategy, a multisector strategy and road map (supplementary document 13), was adopted. Under this strategy, the 5-year extension of the RHS will be downstreamed with improved targeting of moderate- and low-income households, closely coordinated, and better integrated with related government strategies and programs to leverage synergies and improve outcomes, and focus more on achieving results. 20 Home-based food processing and personal services tend to be established by women and offer opportunities for supplementing household income for those who need to balance family responsibilities with work opportunities. 21 The legal and regulatory framework for residential housing and housing finance in Uzbekistan is governed by (i) the Land Code for allocation, transfer, or sale of land; (ii) the Civil Code, Law on Mortgages, and Law on Registration of Land and Immovable Assets for sale of property, ownership rights, and title transfer; (iii) the Family Code for title and ownership rights for family members; and (iv) national standards for housing design, construction, and construction materials. 22 Progress on land privatization has been extremely slow given the difficulty of assigning prices to ownership rights that, in many cases, have never been traded. Auctions of serviced land sites are only sporadically held, and final bids are not generally affordable to moderate- to lower-income households. 23 Purchase sale agreements need to be registered with both the building and land registries managed by the State Committee on Land Resources, Geodesy, Cartography and State Cadastre. 24 This impacts the use of property for collateral purposes. Risk of lending is increased since pledges are only associated with the building and not the land upon which it is built. The state, as owner of the land, may seize land for public requirements. While compensation for land use rights is defined under the Civil Code (and related legislation), it lacks detail on how such compensation is calculated, paid, and enforced. 25 International Finance Corporation. 2006. Central Asia Housing Finance Gap Analysis. Washington D.C. pp. 126 34.
5 14. Housing finance. Under the Housing for Integrated Rural Development Strategy, over the medium term the government will improve the enabling environment for housing finance to address legal and regulatory constraints. Immediate priorities include improving laws which govern the exchange of credit information among lenders, registering pledges of collateral (to streamline such procedures), developing and implementing prudential standards for mortgage lending, improving the public electronic registry for immovable property, and publicly disseminating additional data on the real estate and housing finance markets. 3. ADB Sector Experience and Assistance Program 15. Asian Development Bank (ADB) assistance in rural has focused on improving agricultural productivity, water supply and sanitation, and the quality of basic education and health in rural, as well as improving access to finance for MSEs throughout the country. 26 The Housing for Integrated Rural Development Investment Program will be ADB s first program supporting improved rural living standards through improved access to new rural housing and housing finance and related reforms to promote development of rural MSEs. Problem Tree Pressure on urban living standards and infrastructure Non-inclusive economic growth Effects Urban migration Lower productivity, education attainment, and health conditions Declining living standards in rural Development Problem Limited economic opportunities in rural Limited new housing and housing renovation Growing young population Return of migrant workers Limited access to long-term housing finance Limited access to serviced land for residential use Limited accessibility to high quality infrastructure (water supply, sanitation, energy, etc.) and social services (health, education) in rural Causes 26 Since 1996, ADB has provided two loans to support Uzbekistan's small and medium-sized enterprise sector and two loans for small- and micro-finance development, as well as four technical assistance projects, five projects in agriculture and natural resources ($175 million), eight projects in urban and rural water supply and sanitation ($437 million), eight projects in education ($248 million), and one program in health ($40 million).
6 Sector Outcomes with ADB Contribution Improved housing for targeted beneficiaries in rural communities Sector Results Framework (Multisector, 2011 2015) Country Sector Outcomes Country Sector Outputs ADB Sector Operations Indicators with Sector Outputs with Indicators with Planned and Ongoing Targets and ADB Contribution Incremental Targets ADB Interventions Baselines At least 95% of 40,800 new rural modern homes with access to basic utilities owned and occupied by targeted beneficiaries (moderate- and lowerincome households, young families, singleheaded households, rural teachers, and health workers [of which 30% are women]) (2011 baseline: 0%) Housing loans provided by PCBs to targeted creditworthy subborrowers in rural Improved capacity of local governments to prepare and implement integrated rural development plans and investment promotion strategies Improved enabling environment for entrepreneurs and MSEs to expand or establish new businesses in rural Number (at least 39,000) and value (SUM2.4 trillion) of housing loans provided to targeted beneficiaries (of which 30% are women) Number (at least 65,000) of staff of local governments trained in integrated rural development planning and investment promotion strategies (with 80% of female staff trained) Total microcredit lending in rural increases from SUM485 billion in 2010 to SUM1.36 trillion in 2015. Number of newly established MSEs in project (disaggregated by sex of owner) Number (and list) of new or revised policies, regulations, and laws adopted Planned key activity Rural housing finance ($499 million) Capacity development ($1 million) Pipeline projects with estimated amounts Lending: MFF Housing for Rural Development ($500 million; $200 million for 2012, and $100 million each year for 2013 to 2015) Ongoing projects with approved amounts Kaskadarya and Navoi Rural Water Supply and Sanitation Project ($25 million) Main Outputs Expected from ADB Interventions Planned key activity SUM2.4 trillion in housing loans provided by 2015 Pipeline projects with estimated amounts SUM2.4 trillion in housing loans provided by 2015 Ongoing projects 1,042 kilometers of rural water pipeline constructed by 2011 ADB = Asian Development Bank, MFF = multitranche financing facility, MSEs = micro and small enterprises, PCB = participating commercial bank, PFR = periodic financing request. Source: Asian Development Bank.