Meeting the Iraqi Housing Challenge: Policy Options and ... of the Scenario... · Confidential...

Confidential

Intercontinental Hotel, Amman, Jordan

13 November 2012

Meeting the Iraqi Housing Challenge: Policy Options and Development Scenarios 7th Meeting of the Working Group on Infrastructure Finance in Iraq Organised by the MENA-OECD Investment Programme

Contents

Section Page

1 Current State of the Housing Sector in Iraq 3

2 Segmentation of housing demand 8

3 Scenarios 10

4 Sequencing 22

Current state of the housing sector in Iraq 1

Confidential – All Rights Reserved Ernst & Young 2012

Meeting the Iraqi Housing Challenge: Policy Options and Development Scenarios 4

Housing – Government - Markets

Government always needs to play a strong role in the provision of affordable housing

And government cannot meet the housing challenge on its own

The questions are:

1. What role for government?

2. How much private sector involvement?

3. How to engage with the private sector?

Housing is the hardest test for government



Challenges constraining the Iraqi housing sector

Supply

Demand

Pri

ce incre

ase

Housing and planning laws not in place

Government land not being developed for housing- speculative land holding

Affo

rdability

declin

e

Unprecedented level of housing demand as demographic bulge reaches economically active age

Housing finance not readily accessible to all households or property developers

Supply

gap

Contractor sector & building materials constrained



Unprecedented level of housing demand driven by demographics

3,000,000 2,000,000 1,000,000 0 1,000,000 2,000,000 3,000,000

Male Female

Iraq age pyramid,

2011

0

10

20

30

40

50

60

70

80

1950 2000 2050 2100 2150 2200 2250 2300

Po

pu

lati

on

(M

illio

ns)

Iraqi Population

0

1

2

3

4

5

6

7

8

0

10

20

30

40

50

60

70

80

1950 2000 2050 2100 2150 2200 2250 2300

Po

pu

lati

on

(M

illio

ns)

Fe

rtilit

y -

Ch

ild

ren

pe

r w

om

an

Iraqi Population and Fertility Rate



Why is housing such as issue in Iraq now?

Demographic Window is approaching for Iraq in 2035

Will it be a demographic dividend? Or will it lead to social unrest? Will Iraq’s greatest cities be competitive engines of growth in the regional and global economy?

Affordable housing in sufficient quantity and quality is a key to converting the opportunity dividend

1970-80 1980-90 1990-00 2000-10 2010-20 2020-30 2030-40 2040-50 2050-60 2060-70 2070-80 2080-90 2090-100

UAE

Qatar

Kuwait

Bahrain

Tunisia

Libya

Iran

Lebanon

Morocco

Algeria

Syria

Jordan

Egypt

KSA

Oman

Iraq

Palestine

Mauritania

Yemen

50 Years

40 Years

35 Years

40 Years

30 Years

40 Years

40 Years

30 Years

35 Years

35 Years

30 Years

30 Years

30 Years

35 Years

35 Years

30 Years

25 Years

35 Years

35 Years

Start date End date

1975

1985

1995

2000

2005

2005

2005

2005

2010

2010

2020

2020

2020

2025

2030

2035

2045

2045

2060 2095

2080

2070

2065

2065

2060

2050

2050

2050

2045

2045

2035

2045

2045

2035

2040

2030

2025

2025

Segmentation of demand 2



Segmentation of demand

Government

Private sector

0% 100% 0% 10% 20% 30% 40% 50% 60% 70%

Low income (lowest 20% of households)

Middle income (21% to 80% of households)

High income (81% to 100% of households)

0% 10% 20% 30% 40% 50% 60% 70%

Low income (lowest 20% of households)

Middle income (21% to 80% of households)

High income (81% to 100% of households)

Share of housing need by income (%), 2006 MOCH Housing Market Study

Government plays a stronger role in the provision of housing amongst the lower income households and less of a role amongst the highest income households

Scenarios 3



Current scenario # 1

Key facts

► Rent control

► Rental income tax

► Real estate transfer tax

► Tax on vacant land (not collected)

► Land registration – title ownership disputes

► Sale of government land – administratively allocated

► 1995-2004: 80%-90% of housing production by households with small contractors; remainder by government

► 2006 onwards: household sector producing about 5% of annual housing need. Government looking to be majority supplier at about 10% of annual housing need with different government bodies contracting contractors

► National Housing Fund (and Real Estate Bank) – interest free loans

► Commercial banks dominated by State banks (89% of commercial bank deposits in Dec 2011)

► Low level of financial intermediation (bank deposits 27% of GDP in 2011 – Egypt 71%)

► Commercial bank credit to housing finance – almost zero

Housing system component

Regulatory framework

Land planning system

Housing supply

Housing finance

Su

pp

ly

De

ma

nd



Government housing delivery model: Current

MOCH deals with many contractor organisations under this delivery Model

Housing production constrained by MOCH capacity

Government handles and pays for all the risks

MOCH

Architect Contractor Operator MOF

Consultancy Agreement

Construction Contract

Finance

Operation & Maintenance

Contract

Design Build Finance Operate



Risks

Low

High

Planning Operation

Risk

Bedding in of operational

relationships between the

MOCH and PSP

Reduction of risk on

build completion

Operational risks include ability to

deliver service levels within budgeted

cashflows

Build

Quantify Mitigate Carried by

Government of Iraq Identify

Demand Side Risk Supply Side Risk Market demand / volume risk Minimum service standards Title to land Unforeseen events Political risk Utilities risk Insurance Exchange rate

Planning risk Tax rate change Regulatory risk

Financial risk Interest rate risk Ground risk Completion risk Design & construction risk Early termination Resource/ input risk Latent defects Residual value

Technology risk Payment mechanism

Cost over-run risk

Interface risk

Political risk



Scenario # 2: partial regulatory reform

Key facts

► Rent control – eliminate 5 year leasehold on housing in event of loan default

► Keep rental income tax + Standardise real estate transfer tax at 1.5%

► Collect tax on vacant land (1.5 million vacant plots in cities)

► Introduce fixed annual property tax with banding based on dwelling size

► Land registration – title ownership disputes continue

► Sale of government land – by auction to highest bidder with zoning for affordable housing

► Alternative government private sector delivery models to provide scale of housing needed

► National Housing Fund – relax current criteria of 7 years employment and detached dwelling

► Encourage bank deposit taking for loans – savings and loans schemes

► Develop collateral law and reform rule that prevents govt. enterprises dealing with private sector banks




Housing supply

Housing finance

Su

pp

ly

De

ma

nd



Government housing delivery model: Delivery Partner

MOCH capacity significantly increased through the provision of resources and expertise to help ensure the housing program is delivered on time and on budget

Government continues to handle all the risks

MOCH

Architect Contractor Operator MOF



Finance

Employment / O&M


Delivery Partner



Government housing delivery model: Public Private Partnership

Create SPV company with private sector shareholders – Private Sector Partner

Concession agreement which allocates most of the supply side risks to the PSP – private finance

Government guarantees to buy all or a proportion of the dwellings – carries demand side risk

Private Sector Partner

Architect Contractor Operator PSP Equity

Bank Loan



Finance

Employment / O&M


MOCH

Concession Agreement



Risks

Low

High

Planning Operation

Risk

Bedding in of operational

relationships between the

MOCH and PSP

Reduction of risk on

build completion

Operational risks include ability to

deliver service levels within budgeted

cashflows

Build

Quantify Mitigate Allocate between

MOCH & PSP Identify

Demand Side Risk Supply Side Risk Market demand / volume risk Minimum service standards Title to land Unforeseen events Political risk Utilities risk Insurance Exchange rate

Planning risk Tax rate change Regulatory risk

Financial risk Interest rate risk Ground risk Completion risk Design & construction risk Early termination Resource/ input risk Latent defects Residual value

Technology risk Payment mechanism

Cost over-run risk

Interface risk

Political risk



Allocation of some of the risks

18

12/4/2012

Risk Description Impact Likelihood Significance Mitigation Allocation

Market demand / volume risk

Fluctuating demand with the international economic cycle

H H-M H-M Effective marketing

Long term contracts

MOCH/PSP (Private Sector Partner)

Utilities risk Enable site for operation H H-M H-M Early enablement of site MOCH

Planning risk Location correct for optimal market demand capture and efficient operation

H H-M H-M Consideration of planning ahead of going to tender

MOCH

Financial risk Ability to raise finance at an appropriate cost of capital

H H H Concession length

Debt / equity mix

PSP

Completion risk On time, budget and scope H-M M-H M LDs

Contractor selection

PSP

Resource/ input risk

Inability to secure skilled staff and materials

M M-H M PSP selection

Local / international partnering

PSP

Political risk New legislation changes project objectives

M M M High Committee Project endorsement

MOCH

Technology risk Ability to keep pace with technology improvements

M M M International JVs PSP

Cost over-run risk

Capex / opex underestimated by PSP

M M M Index linked payments

Scope for variations

PSP

Interface risk

Inefficient operational interaction with each of the stakeholders

H-M M-L M Draft interface agreements between PSP, MOCH and other stakeholders

Appoint competent expertise

Shared



Scenario # 3: fuller regulatory reform

Key facts

► Eliminate rent level control and replace with ceiling on rent increases

► Eliminate rental income tax + real estate transfer tax

► Collect tax on vacant land (1.5 million vacant plots in cities)

► Introduce fixed annual property tax with banding based on dwelling size

► Land registration – create right to buy land plot occupied continually for 5 years, giving clear title at stipulated price per m2

► Sale of government land – by auction to highest bidder with zoning for affordable housing

► Private Sector Partners take most of the supply side risks and the demand risk

► National Housing Fund – replace universal interest free loans with a tapered interest rate subsidy.

► Privatise state commercial banks

► Develop collateral law and reform rule that prevents govt. enterprises dealing with private sector banks




Housing supply

Housing finance

Su

pp

ly

De

ma

nd



Scenarios and housing need

Cumulative numbers

Estimations

0

1

2

3

4

5

2006 2010 2015 2020 2025

Housing need

Supply Current Scenario # 1

Supply Scenario # 2 Delivery Partner

Supply Scenario # 2 PSP with private finance matching govt budget

Supply Scenario # 2 PSP with private finance 69% govt budget 31%

Mill

ion

s o

f D

we

llin

gs



The cost of subsidy

2010-14 National Development Plan – 17% of investment on housing – US$ 31.6 billion

Budget Cost

20%

15%

5%

10%

50%

Budget Cost

Land opportunity cost

Demand Risk

Supply Risk

Loan interest opportunity cost

Economic Cost

Economic cost could be 5 times larger because of subsidy and risk

Sequencing 4



Delivery models deliver quickly

► The National Housing Policy will take several years before it starts producing housing on the scale currently required

► The MoCH needs some immediate solutions that deliver housing quickly and in volume

Delivery of first house Short Medium Long term

2012 2013 2014 2015 2020 2025 2030

National Housing Policy Implement strategy Delivery of housing

Develop legal frame

Develop subsidies

Reform land market

Reform finance market



Delivery models deliver quickly (cont’d)

► Delivery Partner and PPP would enable the MoCH to announce award housing contracts to private sector developers in 6 to 7 months and start delivering the scale needed sooner

Delivery of first house Short Medium Long term

Award housing contract 2012 2013 2014 2015 2020 2025 2030

A. Delivery Partner 19-25 months Delivery of housing

Develop framework

Contractor bids & review

Build housing units

B. PPP’s 24 to 30 months Delivery of housing

Develop Framework

Tender and select

Build housing units

Confidential

Intercontinental Hotel, Amman, Jordan

13 November 2012

Meeting the Iraqi Housing Challenge: Policy Options and Development Scenarios 7th Meeting of the Working Group on Infrastructure Finance in Iraq Organised by the MENA-OECD Investment Programme

Meeting the Iraqi Housing Challenge: Policy Options and ... of the Scenario... · Confidential...

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