Docwnt of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 6053-IND

STAFF APPRAISAL REPORT

INDONESIA

HOUSING SECTOR LOAN

May 29, 1986

Urban and Water Supply DivisionEast Asia and Pacific Projects Department

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS(as of December 1985)

Currency Unit Indonesian Rupiah (Rp)

US$1 = Rp 1,100Rp 1 mln = US$909

FISCAL YEAR

GOI: April 1 - March 31State Banks: January 1 - December 31

WEIGHTS AND MEASURES

1 sq meter (sq m) = 10.8 square feet (sq ft)1 hectare (ha) = 10,000 sq m or 2.471 acres

ABBREVIATIONS AND ACRONYMS

BI - Bank Indonesia (the Central Bank)BKPN - National Housing Policy BoardBPKP - State Audit AgencyBTN - Bank Tabungan Negara (a State Savings and Housing Bank)CL - Commitment LetterGOI - Government of IndonesiaKIP - Kampung Improvement ProgramKPR - Public Homeownership CreditLPPI - Institution for the Development of Banking in IndonesiaMOF - Ministry of FinancePERUMNAS - National Urban Development CorporationREPELITA - National Five Year Development PlanTUM-KPR - Downpayment Savings Scheme

FOR OMCIAL USE ONLY

INDONESIA

HOUSING SECTOR LOAN

Loan and Project Summary

Borrower: Republic of Indonesia.

Beneficiary Agency: Bank Tabungan Negara (BTN) and National UrbanDevelopment Corporation (PERUMMAS).

Loan Amount: US$275 million equivalent.

Loan Terms: Standard variable interest rate and 20 year termincluding 5 years of grace.

On-lending Terms: The Government of Indonesia (Got) would on-leadUS$268.9 million equivalent to BTN for mortgagefinancing at a fixed interest rate of 11.5% with arepayment term of 20 years including 5 years ofgrace. COI will bear the foreign exchange andinterest rate fluctuation risks of the Bank loan.The end-user terms for mortgage loans would be 9-15Xinterest rates with a 20 year repayment period. Theremaining US$6.1 million would be provided to BTU,PERUMNAS and the Office of the State Minister forHousing for technical assistance and relatedequipment.

Project Description: The key project objectives are to: (a) expandaccess to housing finance for low and middle incomehouseholds; (b) reduce overall subsidies and targetthe remaining subsidies to the lowest income groups;(c) reduce the reliance of the housing financesystem on government funds and introduce new instru-ments for resource mobilization; (d) stimulate theproduction of more low-cost housing by both publicand private developers; (e) generate employment atlow foreign exchange cost; and (f) strengthen thekey institutions in the housing sector, nawely BTNand PERUMNAS, and assist the Office of the StateMinister for Housing in developing and monitoringsector policies and programs. The loan comprises:(a) a credit line to BTN which would be used tofinance a share of total mortgage lendingcommitments (covering 195,000 housing units) duringthe last three years 'f the Fourth Five Year Plan orRepelita IV (1986-(7 to 1988-89); and (b) technicalassistance for BTN, PERAMNAS and the Office of theState Minister for liBuirtg.

Thi document has restrictd distribution and may be ued by rcipients onb in the prfomnceof their offci duties. its contents may not otherwse be discOed without World Dank autrination.

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Project Risks: The risks associated with this project irllude:(a) the possibility that institution-buildingefforts at STU could be prolonged and consequentlyBTU's effectiveness in performing the functionsassigned to it under the project would be reduced;(b) the risk that BTU will not fully implement GOI'snew policies regarding the size distribution ofunits and that its recent lending patterns willcontinue; (c) the risk that because of loanprocessing and other problems, PERUMNAS' deliv'irycapacity will be limited; and (d) the risk thathigher income groups will appropriate the housingtargetted for lower income groups, due to strongdemand and limited overall supply of housing. Theserisks have all been taken into account in designingthe project and are believed to be manageablethrough the proposed STU Policy Statement, BTN andPERUMNAS Institutional Action Programs, TechnicalAssistance and the proposed periodic reviews of theprogram.

Estimated Costs:Local Foreign Total

- IJS$ million--------… --

Housing Program 962.1 240.5 1,202.6Technical Assistance and Equipment 2.9 3.2 6.1

Project Cost /a 965.0 243.7 1,208.7

Financing Plan:

Beneficiary Downpayments 272.7 - 272.7Government Budget 200.0 - 200.0Bank Indonesia 162.0 - 162.0BTU 299.0 - 299.0World Bank 31.3 243.7 275.0

Total 965.0 243.7 1,208.7

Estimated Disbursements FY 1987 1988 1989 1990 1991

Annual 22.0 88.0 96.3 48.9 19.8Cumulative 22.0 110.0 206.3 255.2 275.0

Rate of Return: 15S

/a Including taxes and duties estimated at US$60 million equivalent.

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INDONESIA

HOUSING SECTOR LOAN

STAFF APPRAISAL REPORT

Table of Contents

Page No.

I. THE HOUSING SECTOR. . ...... ...... .....-...... * 1

A. Housing Demand and Su p p l y 1B. Housing Policies, Institutions and Programs.............. 2C. Sectoral Issues and Constraints..........................z 3D. Recent Policy Developments.,.......... e..e...........o. 4E. Experience with Past Bank Lending and Future Lending

Strategy .... . v........ ...... .......... ......... ................. 5

II. THE BANK TABUWGAN NEGARA (BTN)............................... 6

A. Legal Status, Objectives and Functions..ctions........... 6B. Organization, Management and Staffingaffing.............. 6C. Policies and Procedures........... ......... ,..e.e.....o. 7D. Links with PERIUMAS .................. ....... * . o. 8E. Operational Performance. .... ,..o....................... 10F. Financial Performance.... ...... e...... ...... e.e. *... 11

III. THE PROJECT .......... O.......... 13

A. Project Origin and Formulation ........................... 13B. Project Objectives, Description and Costs................ 14C. Financing Plan and On-Lending Termse r ms.................. 15D. Eligibility, Review and Approval Procedureso........o...o 17E. Procurement and Disbursements..o...o......eo.e..o....oo.. 17F. Accounts and Auti t s 18G. Monitoring and Supervisionp e rv i si............on.......... 19

IV. PROJECT BENEFITS AND RISKS..... ............. . ....... .... . 19

V. AGREEMENTS TO BE REACHED AND RECOMME NDATIONS.............. 21

This report is based on the findings of a Pre-appraisal Mission(July/August 1985) consisting of Messrs. J. Riderman (Mission Leader),N. Munjee and N. Rovshen (Consultants) and a Post-Appraisal Mission(February/March 1986) consisting of Messrs. J. Biderman (Mission Leader),T. lizuka, J.F. Tandeau, S. Malpezzi and N. Rovshen (Consultant).Messrs. B. Babson, F. Ford and P. Stott and Ms. K. Nordlander alsoparticipated in the Post-Appraisal mission. Ms. F. Fernandes assisted inpreparing the report.

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1. Detailed Program Composition and Affordability Analysis2. BTN's Projected Financial Statements3. PERUMNAS4. BTN Policy Statement5. STN Institutional Action Program6. PERUMNAS Institutional Action Program7. Technical Assistance8. Estimated Schedule of Disbursements9. Documents Available in the Project File10. G0I Housing Sector Policy Statement

MAP

Location of BTN Branches.

INDONESIA

HOUSING SECTOR LOAN

I. THE HOUSING SECTOR

A. Housing Demand and Supply

1.01 The urban population of Indonesia increased at a rate of about4Z per year during the decade of the 19709, reaching 33 million in 1980, whichrepresented 22X of the country's total population of 147 million. The urbanpopulation is expected to continue growing at a rate of more than 4% per year(almost twice the overall population growth rate) during the next two decades,leading to an urban population of 76 million or 36Z of the total by the year2000. Every year, an estimated 2.2 million new urban residents (o., 40O,C3Ohouseholds) will require housing and urban services. In addition, nearly two-thirds of the urban housing stock in 1980-81 was built out of semi-permanentor temporary materials (often with a useful life of less than ten years). Theupgrading and replacement of these existing dwellings constitutes a signifi-cant qualitative backlog. Moreover, about 161 of the estimated 6.2 millionurban households in 1980 shared their dwelling unit with at least one otherhousehold, indicating a considerable quantitative backlog as well.

1.02 The supply of housing is segmented into (a) a formal or regulatedsupply produced in accordance with government regulations by private andpublic sector developers who have legal access to land and institutionalfinance; and (b) an informal or unregulated supply produced by itndividuals andbuilders lacking legal access to land and finance and providing an oftenphysically deficient and legally insecure shelter. The annual cutput of theformal housing developers has ranged from about 40,000 to 65,000 units duringthe past five years, with private developers accounting for an increasingshare of the total (more than 801 of total output in 1984-85). This annualoutput represents less than 20% of estimated annual household formation duringthis period. Moreover, supply patterns have been shifting during the lastfive years towards more profitable larger units, and therefore do not corres-pond to the structure of demand, which is heavily weighted towards the lowcost units affordable by the bulk of the population. In view of the limitedformal housing supply, most urban households have relied on informal buildersand creditors to meet minimal shelter requirements. Informal housingconstruction has been quantitatively very significant, but the widening gapbetween formal supply and demand has generated a large qualitative andquantitative backlog of unsatisfied demand for housing (para 1.01). To reducethis backlog, the total volume of new housing needed during the next twodecades will significantly exceed the estimated 400,000 units per yearrequired to accommodate new households.

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B. Housing Policies, Institutions and Programs

1.03 Over the past decade, government housing policies and programs haveevolved from a relatively marginal activity to a key compionent of socialpolicy. The government's first policy initiatives in the housing sector beganin 1974 with the establishment of the National Urban Development Corporation(PERUMMAS) to produce low cost housing, the National Housing Policy Board(MNI) to coordinate housing policy, and a homeownership financing program(KPR) for purchasers of PEfUMNAS housing, through the State Savings Bank (BankTabungan Negara or BTN). Although the scale of PERUMNAS' program remainedquite limited in relation to overall demand, PERUMNAS steadily expanded itsoutput from 50,000 units constructed during Repelita II (1974-79) to approxi-mately 80,000 units built during ReRelita III (1979-84). More than half ofthese were core units of 15 to 21 m' built on serviced sites with designstandards and costs affordable by low income urban families.

1.04 Government housing policy was expanded in 1978 when BTN wasauthorised to provide mortgage finance for housing units built by privatedevelopers and construction finance was made available through the statecomercial banks for up to 75% of total construction costs. In addition, theCovernment created a Junior Minister of Housing position under the BKPNtsubsequently upgraded to full State Ministry status in 1982) to moreeffectively formulate and coordinate housing policy, in collaboration with theMinistry of Public Works. BTU processed only a few thousand mortgage loansduring Repelita II (1974-79) but its mortgagj lending operations increasedrapidly during Repelita III (1979-84) when it processed loans for more than190,000 units (of which 45% were built by PERUMNAS).

1.05 By the end of Repelita III, BTN and PERUMNAS had become the dominantinstitutions in the housing sector, under the general guidance of the Officeof the State Minister for Housing and the Ministry of Public Works. The basicpolicy framework established over the previous decade was to build or providemortgage financing for housing aimed at households between the 20th and the80th percentile of the urban income distribution (equivalent to monthlyincomes of about Rp 80,000 and Rp 300,000 respectively, in 1985), with theKampung Improvement Program (KIP) addressing the need for shelter-relatedservices for those below the 20th percentile. In general terms, PERUMNAShousing was aimed at those below the median income (approximately Rp 175,000per month in 1985) and the privately built units financed by BTN catered tothe needs of those above the median income. The housing finance system hascontinued to be dominated by BTN, designated as the main financial interme-diary in the sector. Other institutional sources of housing finance, such asa semi-private mortgage institution (P.T. Papan Sejahtera) established in1980, cater to a higher income clientele (over Rp 300,000 per month) on a verylimited scale, averaging less than 1,000 loans per year. Apart from BTN andP.T. Papan, there are no other srscialized mortgage lending institutions inIndonesia, though some large employers, insurance companies, and commercialbanks provide housing loans to their employees and clients.

1.06 In accordance with Government policy, BTN has provided mortgageloans for up to 90-95% of the value of housing units at highly concessionaryinterest rates ranging from 5 to 9% over a 5 to 20 year term. These high loan

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to value rEtios and low lending rates have been made possible by an annualflow of government funds into BTU to finance the housing program. The fundsused by BTU to finance PERUMNiS housing have been obtained from yearly budge-tary allocations, and since 1982 all funds for PERUMNAS have been channelledthrough BTU as mortgage finance rather than directly as construction finance.BTN's mortgage lending for privately-developed units has been financed by lowcost (3X) liquidity credits from Bank Indonesia and to a much lesser extent(about 10% of funding requirements) from the Tabanas savings program, throughwhich BTU mobilizes individual savings, largely via the post office network.Housing is one of the priority programs qualifying for Bank Indonesialiquidity credits, through which the government has traditionally channeledits financial savings into the banking system to achieve a variety of develop-ment objectives. The low cost of these funds has enabled BTN to maintaib lowmottgage lending rates, following government policy in the sector.

C. Sectoral Issues and Constraints

1.07 Although the government policies and programs described above haveled to a significant increase in housing production and mortgage financingduring the past five years, a variety of constraints have limited the impactand potential for expansion of these steps. First, artificially low mortgagelending rates have been maintained by BTN through an almost complete rel.anceon government funds. These lending rates have in turn sharply limited ITN'scapacity to mobilize non-government resources in order to expand mortgagefinance. Therefore, the availability of housing finance, and hence the supplyof housing, has been heavily constrained by government leading policies.

1.08 Secondly, the subsidies implied by BTN's lending terms have not beenclosely targetted to the lowest income groups. From the outset, a wide rangeof income groups has had access to subsidized mortgage finance (para. 1.05).Moreover, due io the shift in BTN lending in recent years towards the largerunits (45-70 m ) produced by private developers, the bulk of the subsidieshave in fact been received by higher income households. Although PERUUNASexpanded its low cost housing program considerably during Repelita III, BTNmortgage lending for privately constructed units increased much more rapidly,in response to the strong demand for housing finance generated by developersbuilding highly profitable larger units. Hence, BTN funds have beenincreasingly directed to the corresponding narrower segments of the housingmarket (i.e., those with incomes above the median). This trend in thecomposition of BTN's lending program continued into Repelita IV, raisingquestions about the allocation and distribution of government resources.

1.09 In addition to the above-mentioned constraints, a number of problemsof a policy, institutional or regulatory nature have limited the effectivenessof the government's housing policies. PERUMNAS' lack of autonomy with regardto project selection, pricing, allocation and sales policies, coupled withBTN's loan processing bottlenecks (para. 2.08 and Annex 3) led, inter alia, tothe following: (a) slow mortgage loan processing for PERUMEAS beneficiaries,resulting in a large backlog of unsold units by the end of Bepelita III, and aslow4own in the pace of construction due to the lack of sales revenue;(b) preferential treatment to certain occupational groups (i.e., civilservants) in the allocation of units; and (c) construction of housing for

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which there is limited demand, such as flets in larger cities, and projects ina large number of small cities to further the government's geographical equityobjectives. Land and regulatory bottlenecks have also constrained the supplyof housing. Cumbersome procedures for land acquisition, combined with landspeculation, have increased the time and cost required to secure adequate landfor housing construction. Moreover, the restrictive regulations affectingprivate land and housing development (e.g., prohibiting developers frombuilding small units or requiring a minimum plot size) and the difficulty anddelays in obtaining land titles have limited access to formal housing financeand restricted investment in housing.

D. Recent Policy Developments

1.10 In September 1985, after extensive discussion of sectoral con-straints (para. 1.07-1.09), the government took several policy initiativesdesigned to improve sector performance. These measures included: (a) anupward revision of mortgage lending rates to a range of 9-15X; (b) raisingdownpayment requirements to 10-40X of house values; (c) the explicit redirec-tion of BTN's lending program for the remaining three years of Repelita IVtowards smaller mortgage loans affordable by lower and middle income groups;(d) the introduction of a fully blended system of funding which limits lowcost government funds for BTU and encourages BTN to mobilize non-governmentresources; (e) giving developers other than PERUMNAS permission to build housetypes below 36 m'; and (f) guaranteeing access to government-supported housingto any person whose income is below the prescribed ceiling (Rp 300,000 permonth) without restrictions based on occupational status. In addition, thegovernment recently initiated specific measures to strengthen sector institu-tions, including management, procedural, and other institutional changesinvolving 8TU and PERUMNAS.

1.11 The new higher lending terms represent a major change which wouldreduce the magnitude and improve the targeting of interest subsidies, whileallowing BTN to mobilize more nongovernment resources. Although the newinterest rates remain bnlow commercial lending terms (e.g., 18% forP.T. Papan's mortgage loans), with local inflation rates projected at 6X orless in the foreseeable future, interest rates of 9-15% would clearly bepositive in real terms, in contrast to negative mortgage lending rates overthe past three years. Moreover, this upward revision of mortgage lendingterms constitutes an important step in the context of an overall financialsector strategy of reducing the excessive reliance of priority credit programson BI liquidity credits (Indonesia, Policies and Prospects for Long TermFinancial Development, Report No. 5501-IND dated July 10, 1985).

1.12 The reorientation of ITNts lending program would completely reverserecent trends and channel more than twc. thirds of BTN mortgage loans and abouthalf of the mortgage funding commitments for the remaining three years ofRepelita IV to the low-cost units affordable by households at or below themedian income (para. 2.12). The changes in the composition of the programwould enable BTU to reach more households at a lower total program cost andtarget interest subsidies more closely to the lowest income groups. Toaddress the large deriand for housing the government plans to provide mortgagefinance for some 325,000 units in Repelita IV (1984-89), of which about

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130,000 have already been financed in the first two years. The remainingthree year program of 195,000 units would be distributed in accordance withthe recently announced policy changes (i.e., at least 135,000 units would be36 m units or smaller, affordable by households at or below the medianincome). To achieve this distribution, the government announced that inaddition to PERUMNAS, ?rivate developers will now also be permitted to buildhouse types below 36 m . This very important regulatory change may not beenough to induce private developers to build a large volume of low-costhousing immediately, but it eliminated a key regulatory restriction in thesector. Further modifications in the regulatory and incentive system faced byhousing developers are expected to emerge from a housing market study underthe proposed loan, which would examine demand patterns and supply processesfor housing and identify constraints and solutions.

1.13 The recent measures taken by the government, formally announced in aMinisterial Decree dated September 10, 1985 and a letter to BTN's Board fromBank Indonesia dated September 9, 1985, represent a very significant turningpoint in the evolution of Indonesian housing policy. These changes in sectorpolicies and related regulatory and institutional measures constitute animportant step in the longer term process of sector rationalization andprovide the basis for the proposed Bank loan. To provide a broader contextfor these measures, the government has prepared a Housing Sector PolicyStatement (summary attached as Annex 10) which outlines current and futureobjectives as well as arrangements for implementation and monitoring of recentpolicy changes. The objectives that the government intends to pursue include:(a) further reduction and better targetting of subsidies; (b) the eliminationof regulatory controls which adversely affect housing supply; and (c) theintroduction of more competition in the mortgage financing market.

E. Experience with Past Bank Lending and Future Lending Strategy

1.14 Bank involvement in Indonesia's housing sector dates bank to theintitial sites and services component included in the Jakarta Urban Develop-ment Project (Loan 1040-IND, 1974) which financed some 8,000 serviced residen-tial lots (most with a core unit) and also provided start-up assistance forPERUMNAS and BTN housing activities. The project was completed in December1980 and the PPAR was issued in June 1983 (Report No. 4620). The PPAR notedearly disagreements over design standards and allocation criteria, butconcluded that the project largely achieved the objective of demonstratingthat sites and services with core units represented a viable approach to theprovision of low income housing. This apptoach, with a minimum habitable corehouse on each site, was accepted by government and became an integral part ofthe PERUMNAS program. In the Fourth Urban Development Project (Loan 1972-IND,March 1981), the Bank renewed its assistance to the housing sector with acomponent which financed some 11,000 core units in 8 cities as well as sub-stantiai technical assistance for PERUMNAS and BTU. This project is underimplementation and quantitative physical targets and institutional goals havenow been nearly attained. A key lesson of this project has been the impor-tance of adequate policies (e.g., regarding project selection, pricing,allocation and sales) to complement the increased construccion capacity ofPERUMNAS. In addition, the establishment of close links between PERUMNAS andBTN, and more generally the institutional development of BTN, have been shown

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to be key elements of successful sector performance. These lessons have beenincorporated in the design of the proposed project.

1.15 The Bank's approach to the housing sector has evolved from thefinancing of pre-identified site-specific operations, as in the First andFourth Urban Development Projects, to taking a more global perspective on thesector and its relationship to the Indonesian economy. Specifically, inprocessing future lending operations, the Bank expects to focus most of itsattention on issues such as overall program composition, lending terms andconditions, resource mobilization, regulatory constraints and itistitutionaldevelopment, and their links to macro-economic and financial sector concerns.This lending strategy would address not only the government's quantitativegoals in the sector, but also key policy and institutional aims, such as theconsolidation of a housing finance system with mortgage lending rates thatpermit the mobilization of nongovernment resources, as well as furtherstrengthening of the key sector institutions. The proposed housing sectorloan would be the first project financed by the Bank in Indonesia focussingexclusively on the housing sector, and the first housing operation through afinancial intermediary in order to maximize the impact of Bank intervention.The project has emerged from a two-year dialogue on sector issues andsignificant policy changes have already taken place during the process ofproject preparation (para. 1.10-1.13). The rationale for the Bank'sinvolvement would be to continue to act as a catalyst for sector policy andinstitutional changes,

II. THE BANK TABUNCAN NEGARA (BTN)

A. Legal Statust Objectives and Functions

2.01 The beneficiary of the proposed loan, Bank Tabungan Negara (BTN),was created by Presidential Decree under the State Savings Bank Act(Act No. 20) of 1968. Its original objective of stimulating savings wasa-nded in 1974, when the Ministry of Finance assigned BTN the responsibilityfor mortgage financing of housing units built by PERUMNAS. This new objectivewas expanded further in 1978 when BTN was authorized to provide mortgagefinancing for housing units built by private developers. Under thesupervision of Bank Indonesia and the Ministry of Finance, BTN has now becomethe country's only major housing bank, with its key function being theprovision of mortgage financing to a range of income groups for both publiclyand privately developed housing units.

B. Organization, Management and Staffing

2.02 BTN is managed by a Board of Directors comprising a PresidentDirector and two other Managing Directors all of whom are appointed by the'4overnment for a five year term. The current Board was appointed inMarch 1985 and includes a member of the previous Board as President Directoras well as the former head of BTN's finance and accounting department and athird Managing Director who is new to BTN. The Board members act as ChiefExecutive Officers making all major policy decisions and supervising theirimplementation through various "biros" or departments in BTN's head office inJakarta as well as BTN's eleven branches located around the country. The

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three Board members divide responsibility for various departments, with thecurrent President Director responsible for Personnel, Branch Operations andInternal Audit, another Director responsible for Loans, Funding and Planningand the third Director supervising Financial and Economic Affairs, Adminis-tration, Training and Automation. Branch managers report directly to theBoard of Directors, though they also have functional working relations withthe heads of the various head office departments, particularly the Loandepartment which is responsible for appraisal and supervision of projects andindividual loans (Annex 5, Chart 1).

2.03 Currently BTN-has 1,733 staff members, about 20% of whom areemployed in its head office and the remainder in the eleven branch offices.Only about 100 staff members are university graduates and over 1,000 are highschool graduates. About 75% of university graduates are employed in BTN'shead iffice with the branches having a maximum of four and in some cases nouniversity graduates at all. Thus BTN's staff, especially at the branchlevel, has a relatively low level of educational attainment. BTN's new Boardrecognizes that more intensive efforts need to be made to attract qualifiedstaff at the middle management level and to train the existing staff in orderto implement more effective systems for handling BTN's present and projectedvolume of operations. BTN recently recruited and will soon be strengthened by90 new graduates with accounting and other needed skills.

2.04 BTN has a newly completed residential training campus in Jakartawhich offers training programs for new and existing staff and is currentlyproviding extensive training for all internal audit personnel (a high priorityfor the Board). Since personnel quality is essential for the success of BTNand the proposed loan, confirmation was obtained at negotiations that BTNwill, as part of an Institutional Action Program (Annex 5), induct the newly-recruited university graduates and finalize agreements with LPPI (Institutionfor Banking Development in Indonesia) to provide trainers and assistance toBTN's new Training Department. BTN has also designated staff in each branchwho will act as counterparts to consultantd assisting 8TN in the implementa-tion of new manual and automated systems. Consultant assistance is alsoprovided under the loan to develop a comprehensive manpower development planwhich will identify in detail BTN's recruitment and training needs as well asremuneration packages required to attract and retain qualified staff (Annex 7).

C. Policies and Procedures

2.05 A Policy Statement spelling out key guidelines and safeguardsrelated to BTN lending and financial operations was agreed upon at negotia-tions. The Policy Statement (Annex 4), which will be formally adopted by BTNas a condition of loan effectiveness, covers, inter alia, the following:(a) BTN adherence to objectives of GO1's housing program, including the compo-sition of the program and financing terms; (b) BTU financial policies, to bemonitored through key financial ratios; (c) internal policies which ensureattainment of objectives; and (d) reporting requirements. Although theinternal policies and procedures followed by BTN are well established, itsoperational experience with mortgage lending is largely limited to the pastfive years. With the rapid growth of lending volume, deficiencies in severalareas of BTN's performance have become increasingly apparent (para. 2.06

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below). Measures to strengthen its operational performance and specificchanges in certain practices have been agreed with BTN's management and areincorporated into an Institutional Action Program (Annex 5). A, urances wereobtained at negotiations that BTN will implement the program at rrding to theschedule agreed with the Bank, and that it will periodically review with theBank progress made in the various areas.

2.06 BTN's mortgage Lending activities concentrate on the appraisal andsupervision of housing projects and individual loan applicants. BTN has inthe past treated PERUMNAS projects (para. 2.07-2.09 below) quite differentlyfrom those of private developers. With regard to private developer projects,BTN's branches perform an appraisal of each project, which provides the basisfor BTN's commitment to provide mortgage finance for the eventual purchasers.With BTN's commitment letter, the developer obtains construction finance froma commercial bank and builds the project, under BTN supervision. BTUprocesses individual buyers for mortgage loans before the construction work onthe project is completed, and after loan disbursement, administers theindividual loan accounts. Although BTN appraisal and supervision of projectsis quite detailed despite the large number of projects that are processed,branch staff is generally not adequately trained to perform these functionsanalytically rather than mechanically. As a result, the substantial volume ofinformation generated during this process is not summarized selectively tofacilitate management review and there is evidence that BTN's past rules con-cerning, inter alia, the size distribution of units within projects andmaximum unit prices and applicant incomes have not been followed. Generallylax enforcement of BTN's rules and regulations by a largely untrained staff,lack of uniform procedures among branches and inadequate safeguards andinformation have therefore led to a situation where corporate goals and objec-tives have not been satisfactorily achieved. Moreover, the lack of systematicloan accounting and follow-up procedures has led to increasing payment arrearson BTN's loan portfolio (para. 2.16). To improve BTN's operational perfor-mance, its new Board has already taken steps to gain better control of branchoperations (e.g., efforts to improve arrears management) and provide expandedstaff training. As indicated above, BTN's management has also agreed toimplement an Institutional Action Program (Annex 5), with technical assistanceprovided under the proposed loan for new systems implementation, manpowerplanning and a management adviser (Annex 7).

D. Links with PERUMNAS

2.07 BTN's initial mortgage lending activities were closely linked to thepublic housing program built by PERUMNAS, and untit 1982-83, PERUMNAS account-ed for more than half of BTN's annual lending operations. However, due to thebottlenecks described below and elaborated in Annex 3, loans for units builtby PERUNNAS have declined in the past three years, and the resulting salesbacklog and drop in sales revenue has slowed the PERtUMNAS construction pro-gram. Until recently, BTN processed loans for the beneficiaries of PERUMNASprojects without appraisals or commitment letters for these projects. How-ever, after 1982, PERUMNAS stopped receiving budgetary funds directly andtherefore required BTN's commitment letter in order to obtain constructionfinance for some projects. Since BTN has been receiving budgetary fundsearmarked for PERUMNAS mortgage loans, it has given commitment letters without

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requiring a detailed appraisal of its projects. However, BTU raised questionsat later stages about PERUMNAS projects and beneficiaries which slowed downloan origination, even though the units were in most cases already allocated.In mid-1985, some 43,000 completed PERUNNAS units were awaiting mortgage loanprocessing by BTN, although this backlog was substantially reduced in early1986 by an emergency sales program (para. 2.08).

2.08 There are several reasons for the operational problems which arosebetween BTN and PERUMNAS, including: (a) a lack of early contact betweenPERUMNAS and BTN staff regarding project and beneficiary selection; (b) inade-quate BTN staff for loan processing at the required time and place; (c) deLaysby PERUMNAS in establishing the sale price of the units since until recentlythis was done by its parent ministry (Public Works); (d) the lack of an imme-diate sale policy (i.e., the practice of allowing beneficiaries to move inbefore loan processing); (e) unmarketable units built by PERUMNAS in smalltowns due to external pressures; and (f) a variety of specific problems rang-ing from irregular plots which differ from those indicated in the originalcommitment letter to inadequate downpayments and disagreements over thecreditworthiness of some PERUMNAS beneficiaries. These problems have now beenidentified in detail and regular meetings are now taking place between theBoards and senior staff of the two institutions to resolve them. BTN hasspecifically committed itself to, inter alia, create "flying brigades" tosupplement local branch staff if necessary, and initiate regular appraisals ofPERUMNAS projects as part of the commitment letter process in order to ensureearly interaction with PERUMNAS and facilitate subsequent loan processing.PERUMNAS has developed and discussed with BTN a detailed inventory of allprojects and the specific bottlenecks affecting loan processing in each. Inaddition to this ongoing emergency sales program to clear the backlog ofunsold units, PERUMNAS management has agreed to implement an InstitutionalAction Program (Annex 6) which incorporates measures to prevent fu.urebacklogs and will improve the agency's operational and financial performancefor the remainder of Repeliti IV and beyond. The content of this ActionProgram and a detailed timetable for implementation and review was confirmedat negotiations.

2.09 Starting in April 1986, BTN introduced a contractual savings scheme(referrec to as TUM-KPR) designed to help prospective borrowers for PERUMNASand other projects accumulate towards their downpayment. The scheme has beentested for four months in three locations and some rigidities in the originaldesign have been removed in the process. In the short run, the scheme is notexpected to generate large resources, but it is expected to help resolveseveral problems including: (a) the lack of early contact between PERUMNASbeneficiaries and BTN which has delayed loan processing in the past; (b) thedifficulty of establishing creditworthiness, particularly for those withnonfixed incomes and no record of regular payments, and (c) the biases inbeneficiary selection (i.e., civil servant preferences) which have been partof the PERUMNAS and BTN programs. Since this approach represents a changefrom the voluntary savings (Tabanas) on which BTN has been relying to date,BTN has been advised to proceed cautiously with expanding a contractualsaving-for-housing scheme that carries large lending commitments. The schemewill be refined further as part of BTN's Institutional Action Program, andwill be closely monitored.

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R. Operational Performance

2.10 Past Performance. STN's lending operations during Repelita III(FY79/80-FY83184) expanded at a remarkably fast pace, as the demand for hous-ing finance increased rapidly and funds were made available from GOI's budgetand Bank Indonesia. Details on BTN's past and projected operations are pro-vided in Annex 1. BTU's mortgage loan portfolio increased sharply from only5,260 units financed during Repelita II (PY1974175-FY1978/79), for A mortgagevalue of Rp 11.6 billion to 191,938 units during Repelita III (PY79/80-FY83/84) for a total mortgage value of Rp 593.1 billion. In geographicalterms, BTN's operations concentrated in its four largest branches, namely,Jakarta, Surabaya, Jogjakarta and Bundung, which originated more than 70Z ofits loans and disbursed more than 801 of the total loan value. The annualnumber of housing units financed by STU reached a peak of 64,000 units inFY82183 but decreased to 50,000 units the following year. Thi. decline in theannual number of housing units financed by BTN was largely attributable to thereduced financing of PERUMMAS units due to the bottlenecks mentioned above(paras. 2.07-2.08). BTN's lending operations during this period wereincreasingly directed to the larger and higher cost housing units built byprivate developers rather than the low cost housing built by PERUMNAS. OfBTN's total mortgage lending during Repelita III, only 41X of the lons and181 of the funds were for the smaller core housing units (below 36 m ) whichwere affordable for households at or below the median urban income. More than851 of the PERUMMAS units financed by BTU during this period were core housingunits while only 5S of privately developed units were in this catlgory. Theremaining units financed by BTU ranged in size from 36 m to 70 m , and 36X ofthe total funds disbursed were directed at units in the 60-70 m2 range, whichwere affordable only by households above the 80th percentile.

2.11 Repelita IV Program. BTN's lending program for Repelita IV(FY1984/85-FY1988189) calls for the financing of some 325,000 housing units,of which about half would be built by PERUMNAS and the remaining half byprivate developers. In the first two years of the Repelita (FY1984/85 andFY1985/86), BTU has financed over 130,000 units (of which 371 are PERUMNASunits) for a total of Rp 728.7 billion. Of this total, only 391 of the loansand about 201 of the funds have been directed to the smaller units (below36 m ), affordable by households at oi below the median income, while thelargest units ranging between 60-70 m consumed about 401 of the funds. Table1 below summarizes and contrasts the actual program for the first two years ofRepelita IV and the projected program for the remaining three years.

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Table 1: BTN MORTGAGE FINANCING PROCRAM FOR REPELITA IV

Actual program (1984/85-1985/86) Projected program (1986/87-1988/89)Type of No. of Loan amount No. of Loan amountunit/a units X (Rp billion) 2 units Z (Rp billion) Z

< 36 M2 52,248 39 144.70 20 136,402 70 562.09 5537-49 M2 26,577 20 159.16 22 26,795 14 186.91 1850-59 M2 19,478 15 135.01 18 23,539 12 200.85 2060-70 H2 34,572 26 289.87 40 8,124 4 73.57 7

Total 132,875 100 728e74 100 194,860 100 1023.42 100

/a Includes flats and dormitory units which have been allocated to theappropriate size category.

2.12 Future Performance. BTN's lending program for the remaining threeyears of Repelita IV (FY1986/87-FY1988/89) comprises financing commitments fornearly 195,000 housing units for a total of about Rp 1,023 billion in currentprices. Based on decisions taken at the highest level in government (para.1.10-1.13), the future lending program has been significantly reoriented andtargetted towards smaller, lower cost units affordable to lower and middleincome groups. Specifically, more than two-thirds of the total n!mber ofunits to be financed by 8TN would be the smaller units below 36 m , affordableat or below the median income under the new lending terms and conditions.Hence, about one-half of the mortgage funds to be disbursed by BTN would bechannelled to households in the bottom half of the income distribution. Thedetailed program and affordability analysis is presented in Annex 1. Anunderstanding was reached at negotiations that BTN's lending program will bereviewed periodically with the Bank and revisions or corrective measurestaken, if warranted, to ensure compliance with the agreed overall compositionof the program.

F. Financial Performance

2.13 Recent Performance. BTN's summarized financial statements (IncomeStatements, Balance Sheets, and Sources and Application of Funds) reflectingits actual performance for the period FY1981/83-FY1984/85 and the correspon-ding performance indicators are presented in Annex 2. Between FY1981/82-FY1984/85, BTN's total assets more than tripled to Rp 991 billion inFY1984/85. BTN's net mortgage loan portfolio was valued at Rp 817 billion bythe end of March 31, 1985, representing about 82% of its total assets. BTN'slending operations have been funded primarily from GOT contributions in theform of quasi-equity and Bank Indonesia liquidity credits with a concessionalinterest rate of 3Z p.a., in addition to the funds mobilized through its ownresources. BTN mobilized the largest amount of the funds through liquiditycredits from Bank indonesia, which funded 68Z of the total housing loanportfolio in FY1984/85, followed by GOI contributions (20%) and BTN's ownresources (12%).

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2.14 BTN's income increased more than fivefold between F'81/82 andFY84/85 to Rp 78 billion in FY1984/85. Of this total income, 34% derived frominterest income on housing loansp 13% from investments in sho.t-term instru-ments and the balance 3% from various commissions, fees and administrativecharges. BTN's operations, which reached breakeven level in FY81/82, showed asignificant profit of Rp 5.2 billion in FY82/83 and this profit furtherincreased almost fourfold to Rp 19.8 billion in PY1984/85. The return onequity increased steadily over this period and reached 8.7% in FY84/85 ascompared to 0.2% in FY81/82 and 5.8% in FY82/83. This performance wasprimarily a consequence of two factors: (a) interest charges and other fundraising expenses, although increasing significantly in absolute terms,declined steadily from more than 48X of total income in FY81/82 to 38Z inFY84/85, and (b) payroll and related expenses declined even more rapidly from42Z of total income in FY1981/82 to 17% in FY1984/85. As indicated in Annex2, in FY1984/85 BTN earned an average interest income of 7.9% on average totalassets and its average cost of funds was 3.0% of total assets, yielding aninterest spread of 4.9% in FY1984/85 as compared to 3.0% in FY1981/82. Thissubstantial increase in its interest spread, due to a greater proportion oflow cost funds being used for the more profitable larger units, clearlycontributed to BTN's profitability over this period.

2.15 Regarding the quality of BTN's loan portfolio, arrears in principaland interest on its portfolio amounted to Rp 11.7 billion as of March 31, 1985,representing 1.4% of the entire outstanding portfolio. These arrears figuresprobably overstate the problem since they include payment delays of one monthand do not take into account unrecorded aggregate payments received by BTNfrom paymasters and other banks for which loan accounts have not been clearlyidentified. Nevertheless, BTN's loan portfolio affected by arrears increasedconsiderably from 0.8% in March 1982 to 1.4% in March 1985. Significant risksto BTN's cashflow and financial position would arise if these arrears oninstallments receivable continued to grow and more importantly, if theyreflected uncollectable loans which needed to be written off. The reorienta-tion of its portfolio to lower cost units targetted at lower income householdscould well increase the risk of growing arrears. BTN recognizes this poten-tial problem and has initiated a "crash" program to collect overdue install-ments, as well as a more systematic effort to improve arrears management whichhas been agreed with BTN as part of its Institutional Action Program (Annex 5).

2.16 Future Performance. BTN's projected financial statements (IncomeStatement, Balance Sheet and Statement of Sources and Application of Fun4s)for FY85/86-89/90 are presented in Annex 2. New housing loans valued atRp 470 billion would be disbursed by BTN in the current year (FY85/86) and afurther Rp 1,023 billion during the program period (FY86/87-FY89/90). Accord-ingly, BTN's net housing loan portfolio of Rp 817 billion in FY84/85 isprojected to increase to Rp 2,033 billion by the end of FY89190, representingmore than 85% of the total assets throughout the program period.

2.17 BTN's gross income is expected to increase from Rp 78 billion inFY84/85 to Rp 224 billion in FY89/90. Interest income from housing loans willincrease substantially over the program period, reflecting the recent changein interest rates on BTN's new housing loans. Interest income from housingloans will increase to Rp 189 billion, constituting 85% of gross income in

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FY89/90, as compared to Rp 50 billion or 64% of gross income in FY84t85.However, since BTN will be relying less on low cost government resourcesv itscost of funds is also expected to increase. BTN's financial projectionsindicate that BTN's spread and profitability will remain at a satisfactorylevel over the program period despite its increased cost of funds. The net.nterest apread would be at least 3S over the next few years and net profitsafter tax would increase in absolute terms from Rp 13 billion in FY1984/85 toRp 21 billion in FY89/90.

2.18 The projections of BTN's financial performance and indicators showthat BTN's net working capital would increase steadily as the current ratioreaches 2.7 by the end of 1988/89. Over the program period, BTN would main-tain its sound financial position, as indicated by the current, debt serviceaud debt/equity service ratios. The current and debt service ratios would bemaintined well above the minimum level of at least 1.5 and 1.2 respectively,while the debt equity ratio would remain well below the maximum of 6.0. Theprojections assume that BTN will take all necessary actions to improve thecollection of principal and interest receivables and to avoid arrears on mort-gage loans to a maximum extent during the project period. Provisions for baddebt accounts have been assumed to be 1.2X on the outstanding loan portfolio.

2.19 BTN's orojected resource requirements on a disbursement basis amountto a total of Rp 1,023.4 billion for the project period FY86/87-FY89/90. Theresources from GOI, BI and IBRD would cover about 682 of the financingrequirements, with BTN covering the remaining Rp 329 billion. Details areprovided in Annex 2. BTN will rely mainly on savings operations and internalcash generation through its lending operations to meet its share of the pro-jected resource requirements. The financial projections indicate that BTNshould be in a good position to meet these requirements. Although these pro-jections show a comfortable level of cash reserves, in view of GOI's budgetarylimitations STN may face some uncertainty regarding the expected GOI contri-butions. The detailed financing plan for the period FY86/87 to FY89/90 wasreviewed and confirmed during negotiations. In the future, BTN inter.ds tomobilize additional non-government resources through several new instruments,including time deposits aimed at institutional investors and a saving-for-housing scheme for the general public. These new instruments are now beingdesigned and tested by BTN and are expected to make a significant contributionto financing BTN's lending in the medium-term.

III. THE PROJECT

A. Project Origin and Formulation

3.01 The proposed project was identified in the context of a sectorreview in November 1983. This review identified the key areas of policyreform needed to enable GOI to achieve its objectives and targets. The recom-mendations of this review were a subject of extensive discussion between theBank and the government over a period of nearly two yeatA. In September 1985,the government announced significant changes in sector policies(para. 1.11-1.14). The project was appraised in October 1985 and a post-appraisal mission visited Jakarta in February/March 1986. BTN, the key

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beneficiary gency, PERUNNAS, the key housing developer, the Office of theState Minister for Housing and Bank Indonesia were actively involved in thepolicy discussions and preparation leading up to the proposed loan.

B. Project Objectives. Description and Costs

3.02 The objectives of the proposed project, in line with GOI goals forRepelita IV, would be to: (a) expand access to housing finance for low andmiddle income households; (b) reduce overall subsidies and target the remain-ing subsidies to the lowest income groups; (c) reduce the reliance of thehousing finance system on government funds and introduce new instruments forresource mobilization; (4) stimulate the production of more low-cost housingby both public and private developers; (e) generate employment at low foreignexchange costs; and (f) strengthen the key institutions in the housing sector,namely the Bank Tabungan Negara (BTN), and PERUMNAS and assist the Office ofthe State Minister for Housing in developing and monitoring sector policiesand programs.

3.03 The proposed loan would have the following components: (a) a creditline to BTN which would be used to finance a share of total mortgage lendingcommitments during the last three years of Repelita IV (para. 2.12); and (b)technical assistance and computer and other equipment for BTN and PERUMNAS tostrengthen their operational performance and management, and for the Office ofthe State Minister for Housing to develop its capacity for housing policyformulation and monitoring. The technical assistance for BTN and PERUMNASwould include the following: assistance in the implementation of new systems,manpower planning studies and advisory services for management, projectmonitoring and computerization. The technical assistance for the Office ofthe State Minister for Housing includes the following: a study of housingmarket behavior in urban Indonesia focussing on demand patterns and supplyconstraints, a post-construction study of low-cost housing projects andadvisory services for housing policy analysis and a study of land titlingbottlenecks for BTM-financed housing. Objectives and cost estimates for thetechnical assistance component are provid.!d in Annex 7. Detailed terms ofreference have been prepared and agreed upon for each of these technicalassistance i.ems. The terms of reference and consultant short list fortechnical assistance to BTN would be cleared by all agencies concerned so asto enable consultants to be appointed before loan effectiveness.

3.04 The total cost of the housing program for which financing commit-ments would be provided during the period 1986-1987 to 1988-89 (described inAnnex 1 and summarized in Table 2 below) is estimated at Rp 1,322.8 billion(US$1,202.6 million), of which 20X are estimated to be direct and indirectforeign exchange costs. Taxes and duties are estimated at about Rp 66 billion(US$60 million). Base cost estimates for the housing program (expressed inDecember 1985 prices) are based on unit sales prices for housing units of thetype to be financed under the project, which are in turn based on the actualexperience of recent PERUMNAS projects and the annually revised maximum pricesper m set by the Directorate General of Human Settlements (Cipta Karya) ofthe Ministry of Public Works and followed by BTN. Costs for the technicalassistance component (US$6.1 million) include about 600 man-months of consul-tant services, of which about 145 are foreign consultant services, as well as

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equipment and training (US$0.8 million). Estimated price increases over theproject period amount to about 13% of base costs. Price increases for localcosts are estimated at 61 p.a. and for foreign costs at 7.21 for 1986, 6.81for 1988 and 1989 and 7.01 for 1989.

Table 2: PROJECT COST SUMMARY

Billion Rupiah Million US$Local Foreign Total Local Foreign Total

Housing Program 1,058.2 264.6 1,322.8 962.1 240.5 1,202.6Technical Assistance and Equipment 3.2 3.5 6.7 2.9 3.2 6.1

Project Cost 1,061.4 268.1 1t329.5 965.0 243.7 1,208.7

C. Financing Plan and On-Lending Terms

3.05 The detailed financing plan for the mortgage lending program isshown in Annex 2, Table 7. Table 3 below summarizes the financing plan forthe combined housing and technical assistance programs. The proposed Bankloan of US$275 million would finance the housing program's full foreignexchange cost of approximately US$240.5 million and US$28.4 million (31) oflocal costs, as well as the full cost (US$6.1 million) of technicalassistance. In addition to the Bank's 23% share, the other sources of fundswhich would finance the balance of the project include beneficiarydownipayments (23%), liquidity credits from Bank Indonesia (13Z), budgetaryfunds from the Ministry of Finance (16X) and resources mobilized by BTU itself(251). The proposed Bank loan would be made to the Covernment of Indonesia,which would on-lend to BTN the portion earmarked for mortgage loans (US$268.9million) under a Subsidiary Loan Agreement. The signing of this agreementwould be a condition of loan effectiveness. The on-lending rate for BTN wouldbe fixed at 11.5Z with a 20 year term including five years of grace. Thegovernment will bear the foreign exchange and interest rate fluctuation risksof the Bank loan, which are expected to be covered by the spread between theBank's current rate and the proposed on-lending rate to BTU. The remainder ofthe Bank loan (US$6.1 million), which will finance consultant assistance andequipment, will be passed on to the implementing agencies as soft loans.Formal confirmation from Bank Indonesia on its commitment to provide US$162million in liquidity credits to BTN for the mortgage lending program and thesigning of a subsidiary loan agreement with PERUMNAS would also be conditionsof effectiveness. Bank Indonesia liquidity credits would have a rate of 31with a 20 year term. These onlending terms and conditions were confirmed atnegotiations.

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Table 3s PROJECT FINANCING PLAN SUMMARY(US$ million)

Local Foreign Total X of Total

Beneficiary Downpayments 272.7 272.7 23Government budget 200.0 200.0 16Bank Indonesia 162.0 162.0 13World Bank 31.3 243.7 275.0 23BTN 299.0 299.0 25

Total 965.0 243.7 1,208.7 100

3.06 BTN would use the proceeds of the Bank loan to finance loans toeligible borrowers at its new lending terms and conditior4. BTN's lendingterms are of three types, differentiated according to mortgage loan size:

* Type A: 9% interest over 20 years with a 10% downpayment,applicable to mortgage loans of Rp 3.5 million or less (1985prices);

e Type B: 12X interest over 20 years with a 20% downpayment,applicable to mortgage loans of between Rp 3.5 and Rp 5.0million; and

o Type C: 15% interest over 20 years with a 25% downpayment,applicable to mortgage loans of between Rp 5.0 and Rp 7.7million.

The mortgage size ranges to which the above terms would be applied correspondto various house types, s shown in Annex 1. Type A terms would apply iohousing units of 15-21 m , Type B terms would apply to units of 27-36 m ; andType C terms would apply to the remAining units in the progIam, althoughdownpayment requirements would differ for the largest (70 m ) units and theflats included in the program. The mortgage loan sizes to which the differentterms would apply would be updated periodically, in line with revised maxiumumunit prices set by the Directorate General of Human Settlements (D.J. CiptaKarya) in the Ministry of Public Works. During negotiations, assurances wereobtained that the Bank would review these lending terms and conditionsperiodically or before any proposed revisions to ensure consistency with GOIobjectives as well as BTN's financial viability.

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D. Eligibility, Review and Approval Procedures

3.07 Eligibility for BTU financing would be determined through theappraisal of projects and individual loan applicants. BTN's eligibility cri-teria would be revised in accordance with COI's new policies, including, interalia, the following specific revisions: (a) the required size distribution ofunits within projects would be modified to at least a 70/30 ratio betweensmall (<36 M2) and large houses; and (b) monthly income of the borrowersreceiving mortgage loans would not exceed Rp 300,000 (roughly equivalent tothe 80th percentile) and all applicants meeting this income criterion would beeligible, regardless of occupation. The revised criteria have been incorpor-ated into BTN's policy statement (Annex 4). All developer projects andindividual mortgage applicants who meet BTN's revised eligibility criteriawould be eligible for Bank financing.

3.08 Most of the approximately 300 privately-developed sub-projectsappraised and financed by BTN in the past two years comprised between 50 and300 units, with total financing ranging from about Rp 250 million (US$227,000)to Rp 2.1 billion (US$1.9 million). About half of PERUMNAS' 30 new projectsper year comprise more than 300 units, but the individuals loans are typicallylower, so total financing costs are in the same range. Initially all sub-projects with a total financing cost exceeding Rp 1.3 billion (US$1.2 million)or exceeding 250 housing units (whichever is less) will be reviewed andapproved by the Bank prior to approval by BTN. It is estimated that thesesub-projects would constitute about 20S of the total number of projectsfinanced by BTN and 60Z of total financing value. BTN would, before approvinga commitment to the developer. submit a completed Subproject Appraisal Summaryto the Bank (in an appraisal format agreed at negotiations) for each sub-project above this free limit. For subprojects below this limit, BTN wouldalso complete and retain a Subproject Appraisal Summary and these subprojectswould be subject to a posteriori review by the Bank on a sample basis. It isproposed that if the first twenty projects reviewed are acceptable, the Bankcould consider increasing the subproject free limit during the loan period.The Bank would also review the proposed annual programs for PERUMNAS and aperiodic sample of individual subloans for different types of units.

E. Procurement and Disbursement

3.09 Procurement: About 99Z of the proposed loan would finance BTNmortgage disbursements, and would thereby indirectly finance civil works andgoods contracts for infrastructure and housing construction. For all con-tracts indirectly financed by the loan, procurement procedures specific toeach type of developer, public and private, would apply. PERUMNAS, which isexpected to account for about half of the loan, will award most civil workscontracts following local competitive bidding procedures which are satisfac-tory to the Bank and lead to efficient house construction. Individualcontracts placed by PERUMNAS typically do not exceed about $1 million, due toits practice of subdividing construction on individual sites into severalcontracts tailored to suit locaL contracting capacity. Where possible,PERUMNAS will package work in general contracts suited to larger contractors,thus reducing project management and work scheduling requirements forPERUMNAS. Contracts exceeding the equivalent of US$5 million will be tendered

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by International Competitive Bidding (ICB), where prequalification ofinterested bidders shows that foreign bidders can be expected to compete.Private developers which are expected to account for the other half of theloan, typically use a mixture of outside contracting and in-house workforcesto execute construction. Following procurement practices laid down by BTh,they are required to engage a licensed architectural/engineering firm toprepare designs and certify construction compliance with specifications, andboth BTN and the relevant local authority building inspectorate scrutinizedesign and construction practices. About US$6.1 million of the loan would beused to finance technical assistance and computer equipment and training forinstitutional development. Equipment would be procured either by localprudent shopping or directly from manufacturers to ensure compatibility withexisting equipment on terms and conditions satisfactory to the Bank.Consultant services would be procured following Bank guidelines.

3.10 Disbursement: The proposed Bank loan of US$250 million would becommitted over a period of three years (mid-1986 to mid-1989), and is expectedto be fully disbursed in four and a half years with the closing date set atDecember 31, 1991. The disbursement projections are based on actual and ex-pected performance in the sector. The estimated disbursement schedule ispresented in Annex 6. The pace of actual disbursements will be a function ofthe ability of PERUMNAS and private developers to generate projects and BTN'scapacity to process the associated loan volume. In view of the large numberof small sub-loans, disbursements will be made by the Bank periodically on areimbursement basis, covering about 29% of BTN's total eligible mortgagedisbursements over the program period, against Statements of Expenditure (SOE)for an aggregate value of not less than US$500,000 submitted by BTN. Thesupporting documents will be retained by BTN and be available for inspectionby the Bank. Disbursement percentages would be link$d to the size of unitsfinanced by BTN, i.e., 50 for the smallest (15-21 mn, Type A loans), 45% forthe medium-sized (27-36 m , Type B loans) and 40% for the larger (45-54 m2,Type C loans). Disbursements for mortgages of type C shall not exceedUS$60 million (22X of total loan pr oceeds on-lent to BTU), and the Bank willnot disburse against loans for 70 m units, flats or dormitories. Retroactivefinancing of up to US$15 million, to cover BTN disbursements between April 1,1986 and the date of loan signing, is recommended. The disbursement rate forconsultant services would be 100% and for equipment either 100%, 95% or 65%,depending on the procurement procedure.

F. Accounts and Audits

3.11 Assurances were obtained at negotiations that 8TN would maintainprocedures and records adequate to monitor the progress of its operations andfinancial condition. BTU's accounting systems and internal control proceduresare presently deficient and need to be improved. BTN's 1983 and 1984financial statements were given a qualified audit report by the State Auditagency (BPKP), due mainly to inconsistencies in financial accounts betweenheadquarters and branches, and there have been substantial delays in thesubmission of audited financial statements. However, the 1984 audit reportshowed significant improvement, reflecting steps taken to review and clarifyinternal accounts by 8TN and a special audit team appointed by BPKP. Inaddition, 8TN is providing training for internal audit staff and has appointed

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a public accounting firm to assist in strengthening internal audit and controlfunctions. Moreover, under the proposed loan, technical assistance would beprovided to BTU to strengthen, inter alia, its accounting practices, particu-larly in the area of loan accounting. Assurances were obtained at negotia-tions that BIN will employ independent external auditors satisfactory to theSank, apart from the assistance being contracted for its internal auditingunit, and that the auditors' reports, together with BTN's audited financialstatements, would be submitted to the Bank (in English) not later than ninemonths after the close of each financial year. In addition, BTN's auditorswill provide an opinion on separate accounts related to the Bank loan andStatements of Expenditure (SOE).

3.12 PERUMNAS has also received qualified audit reports in recent years.For PERUMNAS, the principal qualification has been insufficient documentationof financial transactions incurred in the period 1975/76-1982/83. Steps havebeen taken to review and determine the amount of these accounts by a specialaudit team appointed by BPKP and the management of PERUMNAS. Other steps tobe taken have been included in the Institutional Action Program for PERUMNASand involve implementation of new accounting systems with ongoing consultantassistance.

G. Monitoring and Supervision

3.13 The Bank would monitor the progress of the proposed program with thehelp of quarterly reports, financial statements and supporting documents,which would be submitted to the Bank by BTN and the Office of the StateMinister for Housing within two months after the end of each quarter. Theformat of this report and the related reporting procedures were agreed atnegotiations. In addition, BTN will prepare and submit annual operating planscovering all of its activities. These monitoring procedures would be supple-mented by supervision missions. Supervision effort would initially concen-trate on monitoring BTE's adherence to new policies and procedures in itslending operations and on the institutional action programs of BTU andPERUMNAS. In addition to BTU's reporting requirements to the Bank, the StateMinister for Housing will chair a Coordinating Committee which will monitorthe program. The Office of the State Miniscer for Housing, in collaborationwith BTN and PERUMNAS, would prepare the Project Completion Report.

IV. PROJECT BENEFITS AND RISKS

4.01 Benefits The proposed project would be the first Bank project tofocus exclusively on Indonesia's urban houping sector and the first to channelassistance to the sector through a financial intermediary. The focus of the16oject on housing policies and institutions and the inclusion of privately-developed housing, would maximize the impact of Bank assistance. The projectwould help GOI to (a) reduce and target subsidies more closely; (b) increasesavings and resource mobilization; (c) augment the delivery of housing tolower and middle-income households; and (d) strengthen key institutions in thesector.

- 20 -

4.02 In quantitative terms, the project would provide mortgage financefor nearly 195,000 housing units built by the public and private sector, thuseasing one of the key constraints to a larger housing supply. Moreover, theproject would reorient the housing program by modifying the size distributionof the units financed towards the smaller units affordable by lower and middleincome households, in sharp contrast to the recent pattern of mortgage finance(paras. 2.10-2.12). Specifically, more than two-thirds of the units and halfof the mortgage funds would be directed to beneficiaries with incomes at orbelow the median. The social or poverty impact of the project will thereforebe very significant. It is estimated that at least one-third of the more thanone million people benefitting from the project would be below the urbanrelative poverty threshold for Indonesia (estimated at US$245 per capita in1983 prices). Moreover, it is estimated that housing investment of themagnitude proposed under this project will generate roughly 340,000 personyears of direct employment and approximately 135,000 person years of ineirectemployment in the building materials industry.

4.03 The economic rate of return for the project was calculated using thefoLlowing assumptions regarding project benefits and costs. Imputed rentswere estimated using data on market rents for dwellings of various sizes inthree urban locations in Indonesia. The data was provided by the Office ofthe State Minister for Housing. The benefit calculations assume that benefi-ciaries value the units at the (estimated) market rents. Using this measureof benefits, as well as the total costs of the housing program (net of taxes)and annual maintenance costs, the economic rate of return was estimated at15X. More extensive and reliable rental data would probably yield a muchhigher economic rate of return due to the limited supply and strong demand forwell-located low-cost housing units. In addition, the economic justificationof the project would be enhanced by considering the incremental benefits ofsubsequent housing improvements made by beneficiaries, the benefits brought bythe project to low income people who rent space from the beneficiaries and thepossible lowering of the rate of increase of housing rents cue to increasedsupply.

4.04 Risks Although this project would have a much larger impact thanprevious interventions in the housing sector, it involves more risks than theprevious sites and services components. The major risk is that the effective-ness of BTN to appraise projects, process loan applications and handle itsloan accounts in accordance with G3I's new policies and sound financialpractices remains uncertain and the proposed institution-building effortscould be prolonged. This risk is manageable through the Policy Statement,Institutional Action Program, Technical Assistance component and close projectsupervision.

4.05 A second risk is that private developers will not react well toGOI's and BTN's new policies regarding the composition of the mortgage lendingprogram and will either reduce their output (due to the smaller profitabilityof building lower cost units) or pressure BTN to continue to finance thelarger units that have increasingly dominated BTN's lending program in recentyears. BTN's new Board recognizes this risk but does not believe it willseriously threaten the proposed lending program. Nevertheless, the projec-tions of BTN's new loan disbursements and financial statements assume a slowdown in lending for privately developed units.

- 21 -

4.06 Another risk is that loans for PERUMNAS units will fall short of theambitious targets which are projected, either because of loan processingproblem. or limited delivery capacity. This risk has been reduced by therenewed commitment on the part of both PERUMNAS and BTN to resolving specificbottlenecks and the fact that if working capital is thereby assured, PERUMNAShas the construction capacity to significantly expand its output (Annex 3).

4.07 A final risk, associated with the limited supply of housing and thepressure of demand, is that higher income groups may appropriate the sheltertargetted for lower income groups, either directly by understating theirincome or indirectly by purchasing or renting the unit. These transfers orshifts among income groups are, in fact, very difficult to control, but BTNand PERUMNAS will attempt to reduce this risk by scrutinizing potentialbeneficiaries more carefully, applying eligibility criteria more strictly andmonitoring loan recipients more closely. In the medium term, the increasedsupply of housing may reduce these pressures in some locations.

V. AGREEMENTS REACHED AND RECOMMENDATIONS

5.01 The following were agreed upon or confirmed at negotiations:

(a) BTN's Policy Statement (para. 2.05 and Annex 4);

(b) the content and timetable for implementation of the InstitutionalAction Programs for BTN and PERUMNAS and a periodic review ofimplementat.on progress (para. 2.05 and 2.08 and Annexes 5 and 6).

(c) BTN's program for the remaining 3 years of Repelita IV and aperiodic review of BTN's actual and projected lending (para. 2.12);

(d) the financing plan for BTN's mortgage lending program (para. 3.05);

(e) on-lending terms for Bank funds (para 3.05-3.06);

(f) appraisal formats for subprojects (para. 3.08);

(g) formats for quarterly reports on operational and financial results(para 3.12); and

(h) the appoirtment of independent auditors satisfactory to the Bank toaudit BTN's annual accounts and financial statements (para 3.11).

5.02 The following would be conditions of effectiveness:

(a) formal adoption of the Policy Statement by BTN's Board of Directors(para. 2.05);

(b) appointment of consultants for new-systems implementation by BTN(para. 3.03).

- 22 -

(c) the signing of a subsidiary loan agreement between GOI and STU(para. 3.05);

(d) the signing of a subsidiary loan agreement between GOI and PERUMNAS(para. 3.05); and

(e) formal confirmation from Bank Indonesia on its commitment to provideUS$162 million in liquidity credits to BTN for the mortgage lendingprogram (para. 3.05).

5.03 Subject to the above agreements and conditions, the proposed projectwould be suitable for a Bank loan of US$275 million at the standard terms forIndonesia. The borrower would be the Republic of Indonesia.

- 23 -

AN= 1

INDONESIA

HOUSING SECTOR LOAN

Detailed Pro&ram Composition and AffordabilitZ Analysis

BTN's past and projected lending operations and an affordabilityanalysis for the units to be financed under the project are shown in theTables in this Annex. Table I shows the composition of BTI's mortgage financeprogram by type of unit and developer for Repelita II and III. Table 2 showsthe composition of BTN's program for all of Repelita IV, while Table 3 pro-vides the actual composition during the first year of Repelita IV (1984-85)and a preliminary estimate of the composition for the second year (1985-86).Table 4 compares the program composition during the first two years at theRepelita with the projected program for the remaining three years (1986-87 to1988-89). Table 5 shows the detailed composition of the pr3posed program forthe remaining three years of Repelita IV. The typical plot size associatedwith each type of unit is provided after the size of the unit itself (e.g.15/60). Finally, Table 6 illustrates the affordability of the different typesof units to be finaced under the project. The affordability analysis is basedon the assumption that households in various income groups can afford to spendbetween 20-33S of their monthly income on housing. The income percentilesshown in the analysis are based on rough income distribution estimates updatedto 1985 from the 1978 SUSENAS survev results for urban Indonesia. The unitprice for each type is an average of the PERUMNAS and privately developed unitprices for that type. PERUMMAS prices are established through a pricingformula which aims at full recovery of all capital costs and financialcharges, while maximum unit prices for privately developed units are set byCipta Karya in the Ministry of Public Works, using unit cost estimates forconstruction 4nd iand (the maximum ratio of land to construction cost is 1.3for units of !36M and I.0 for larger units).

-24 -

Table ICW OSITI OF 'S NIIImIm FIWCIiDB iRM FOR EfLITA 11 I Ill

kp.lita 11 (FTI974175-FY1978/19) apelita III 1FT19M79N-RIMU )

Ty" Of Unit Pruna I Privat I Toteal t Puas I Private I Totd I

ula6 Sq./lea 185 212 870 0 1015 201 73 82 S3 6a 7960 41t37-4? . /a 549 622 1667 8 2216 422 816* 1*1 3147 301 39609 21250-59 sq.le 34 41 97 23 1031 202 1477 22 -RIM m2 318 17n607Q sq./I 11 3 847 192 96 1n 23 3 38316 36t 40919 212

Total Units 879 1002 4381 1 526 1 M0 10 10603B 1002 1919 100?

Disbursemnts(I.billionl

himv 3 Sq.ls 0.20 141 1.70 17 1.90 la2 87.30 90 19.60 4 106.9 1in37-49 Sq.lm 0.80 57 3. 3M 4.70 412 2.90 32 121.70 25t 124.60 212

- Iq.Iu - 0.10 n 2.40 2 2.50 272 2.30 22 143.10 292 145.40 25260-70 Sq./a 0.30 212 2.20 222 2.50 222 4.60 52 211.60 432 216.20 362

Total Amnt 1.40 1002 10.20 1002 11.60 10ot 97.14 1002 496.00 100 593.10 1001

A;. but per UnitRp.sillionI 1.59 2.33 2.21 1.13 4.8 3.0

Table 2

- 25 -

COPOSITION OF BTN'sB NORTOAGE FINANCIN PRMORAN FOR REPELITA IV

Repelita IV RFY1784/85-F4YMOB/89)

Type of Unit Perumnas 2 Private l Total I

Bplau 36 Sq.Ia 120611 79? 68039 39? 188650 58237-49 Sq./a 17819 12? 35564 201 53392 16Z50-5? Sq.tI t1o10 7? 31946 189 43017 13?60-70 Sq./a 3283 2? 39413 23? 42696 13I

Total Units 152783 100? 174962 100? 32774q5 100

DisbursementsIRp.billion)

Belau 36 Sq./a 349.58 59? 357.21 31? 706.79 40237-49 Sq./a 118.09 20? 227.98 20? 346.07 20?50-59 Sq./I 96.07 161 239.80 21? 335.87 19?60-70 Sq./a 32.62 5? 331.42 29? 364.04 212

Total Aeount 596.36 100? 1156.40 100? 1752.76 100t

Av. Amount per Unit(Rp.Gillionl 3.90 6.61 5.35

-26 -

Table 3

COWUITIU OF 3U'S mR FI MES PRUIRU F 1ST 11 VUM OF ELIT4 IV (lI05 & rf 1 )

First Yw (1196416) -ktul Becud Ta (7193) - Peliuiry

Type ofi bit ermui I Private I Totl Pruu I Privat I Total 2

blo.36Sq.Ia 9237 13m 242 7 115 2 m5 2 2 42 4n 4737-49 Sq. 70 12 103 3 1103 241 2 l 1I1 32 174 12505 Sq.f 3 2 772 211 74 In 4 It l12 2 11714 14U0-70 q./* 71 12 1573 42 159 341 212 1U 111 m 137" 222

Total l.its "10 10 365 100 46235 12 392 1002 47112 t100 60 t0

OisbsmotsRpA.illii)

blov 36 Sq./, 20.51 97n 9.53 41 30.04 121 104.68 3 9.99 3 114.66 247-49 Iq.I. 0.13 1t 61.01 261 61.14 242 0.63 1t 97.3 m 98.02 211

5" q.a . 0.14 12 47.71 2 47.05 182 3.99 42 3.17 23 7.16 19260-70 sq.to 0.41 22 119.75 50 120.16 46* 3.19 3 166.52 4n 169.71 362

Total A_at 21.19 1002 238.0 100 259.19 1 112.49 1002 35.06 100 469.55 1002

Av. bArwt pmr (bit(Rp.illicul 2.25 6.46 5.61 2.85 7.56 5.42

- 27 -Anise I

Table 4E*IIR6 B f NII'S NRTIASE FINlICllS PROM6UI FOR REPELITA IV

Total Progru for First Tao Years of Repelits IV Projected Progra For R uinnlg Three Years of teplita IVIFYIIUG/85-fY1985IR4) 1FY986187-FM191M1)

Type of Unit Perunas I Private I Total t Pruas I Private I Total I

bels 36 Sq.l. 4771 987 4477 St 52248 392 720 7S 632 702 130402 70137-49 Sq. /a 363 It 26214 31? 26577 201 17445 1n 9o 1Ot 2619f 14250 Sq.!. 521 It 1897 2 19478 152 10550 101 1299 142 239 12S60-70 Sq.le 283 1 34289 41? 34572 26? 3000 31 5124 6t 8124 42

Total Units 48938 1001 83937 1002 132875 100 103835 1002 91025 1OOl 194860 1OOl

fisbursentstRIp.tillion)

8eloo 36 Sq.1. 125.19 942 19.51 31 144.70 202 224.39 482 337.70 602 562.09 SSl37-49 Sq.. 0.76 t2 158.40 271 159.t6 22U t17.33 252 6.9 12,? M6.A1 1o50-59 Sq.Ia 4.13 32 130.8 22? 135.01 192 91.94 202 106.92 191 200.86 20160-70 Sq./o 3.60 3t 296.27 482 289.97 40Z 29.02 62 44.55 el 73.57 n

Total Asount 133.6 1002 595.06 1002 729.74 1002 462.68 1002 560.74 1002 1023.42 1002

Av. Amnt per Unit(Rp.eillion) 2.73 7.09 5.48 4.46 6.16 5.25

KTAILED COIWOSITIIU Of sTN ISm FINIIII MBR1 FOR RF19861874Y1989190

Type of(bit

kner of Units ease Cost Contin- Total uWoYst total-gecies Cost ---- La

Petanas Prsivte Total S Pruass Private total I I Rate Ost I I

Mp.Bilhiin) IRp.Billionl IRp.illienl lSI illionl (R1.eilltoo0.156 196t35 - 19635 1o.1t 43.00 - 43.00 3.?t 5.56 48.56 3.n 1OZ 4.86 t.6t 43.70 4.31 coD.1m/72 20285 - 202 10.43 56.19 - 56.19 4.n 7.26 63.45 4.53 102 6.35 2.1S 57.11 5.."0.21/90 915 23060 32975 16.93 34.90 115.07 149.97 12.42 19.36 169.3s 12. 3 183 29.93 1o.O 139.42 13.610.2719o 10215 22202 32417 16.? 43.31 '42.54 165.85 15.4? 24.01 209.86 15.9 203 41.9? 14.03 167.69 16.4U0.36196 0I310 12300 22610 11.6 ss55t6 87.95 143.10 11.9 1.49 161.59 12.2? 233 37.28 12.12 124.31 12.1SP.451120 13600 9350 2290 11.63 107.96 87.14 195.13 16.23 19.58 214.71 16.23 253 53.6 17.9 161.03 15.7S0.54/160 10550 129 2Z3539 12.13 106.56 145.22 253.79 21.03 14.02 267.90 20.25 252 66.9 22.43 N00.65 19.61P. 7o200 3000 5124 8124 4.22 42.64 74.25 117.09 9.7? 5.53 122.62 9.3 403 49.05 16.43 73.57 7.23Seal flats 2480 - 2480 1.31 7.54 - 7.54 0.6Z .00 7.54 0.62 102 0.75 0.33 4.79 0.738Hiu Flats 3845 - 3845 2.03 28.76 - 23.76 2.42 .00 28.76 2.23 10l 2.8i 1.03 25.9 2.51Ooruitories - 6000 6000 3.13 - 25.32 25.32 2.11 3.27 28.59 2.2n 20 5.72 1.9 22.17 2.23

Total 10383! 91025 1960 100.0? 528.24 677.46 1205.72 100.03 117.1t 1322.83 100.02 2 29.41 100.03 1023.42 100.03

- 29

Annex 1

Table 6

AFFORDABILITY ANALYSIS fOR BTN-FINANCED UNITS (in 1985 prices)

Type of Unit Damn Mortgage Interest Monthly Incose Household PercentileUnit Price Payment Value Rate Payment spent an Income on Income

housing per month distrib.(Rp.Mil) (Rp.Hil) (Rp.'000) (Rp.'OOO)

D.15160 2.19 10 1.97 9? 17.99 201 99.96 20D.18/72 2.77 10 2.49 9? 22.76 20? 113.79 30D.21/90 4.26 lO 3.83 9? 35.00 20? 175.00 500.27/90 5.33 20? 4.26 12? 47.57 25l 190.29 53D.36/96 6.25 20X 5.00 121 55.78 25? 223.13 58D.45/120 8.63 25? 6.47 15X 96.17 33? 261.12 65D.54/160 10.74 25? 8.06 15Z 107.24 33? 324.97 939.70/200 14.39 40? 8.63 15? 114.95 33l 348.33 95

Sall Flats 3.04 10? 2.74 9Z 24.99 201 124.88 35iediun Flats 7.48 10 6.73 15? 89.63 33? 271.59 70Dorsitories 4.22 20? 3.38 12? 37.66 25? 150.66 40

- 30 -ANNEX 2Page 1

INDONESIA

HOUSING SECTOR LOAN

8TN'S PROJECTED FINANCIAL STATEKENTS

Assumptions Underlying Projections ofBTN Financial Statements

Income Statements

Income:

1. Interest earnings from new housing loans are based on the projectedlending program and the new interest rates for the different typesof mortgage loans (91 for type A, 122 for type B and 151 for typeC,D & E) while interest earnings from the existing loan portfoliowill continue at past rates (5-9X).

2. For intifest earnings from time deposits and other short-terminvestments an average interest rate of 171 p.a. is assumed.

3. Earnings from fees and service charges are assumed to be 2.51 of thenew loans disbursed by BTN (individual loan application fee 0.51;fee for developer project proposal processing, 1X; and fees forsupervision on disbursement, 1X).

Expenses:

4. Interest on borrowings and related charges are based on the currentfinancing plans and interest rates proposed for borrowings fromvarious sources: 31 on liquidity credits from Bank Indonesia, 11.51on the proceeds of the Bank loan; and an average interest rate of161 on other funds mobilized by BTN.

5. Payroll and related expenses are estimated to increase at a rate of161 per annum (real growth at 101 p.a. and inflation at 61 p.a.)from the actual expenses in FY1984/85.

6. Other expenses, except for provisions for bad debts, are based onthe following cost ratios as a percentage of total income:

(a) Material: 2.5Z(b) Establishment: 3.51(c) Miscellaneous: 2.01

7. Provisions for bad debts are estimated to be 1.2S of the outstandingbalances and are treated as non-cash charges.

- 31 -

ANNEX 2Page 2

Corporate Income Tax

8. It is assumed to be 35Z of the projected profits before tax.

Distribution of Profits

9. Projected net profits are allocated to dividends and reserves (402and 60X of the annual net profit in each fiscal year, respectively).

10. Dividends are assumed to be paid-out fully to the central governmentin each fiscal year.

11. As for reserves, 27.52 of the projected reserves (202 for specialaccounts and 7.5Z for employees' compensation) are assumed to bepaid out in each fiscal year. The remaining 72.5Z are treated asretained earnings.

Balance Sheets

Assets:

12. Projections of housing loans are based on BTU mortgage financingprogram (three year program assumed to be disbursed over fouryears).

13. Current maturities for mortgage loans are based on the-lendingpro*ram.

14. Loan principal is assumed to be fully collected, based on currentmaturities in each of previous years.

15. Net fixed assets are assumed to increase at 18% p.a. (real growth12X p.a. and inflation at 6X p.a.) and other assets at 13X (realgrowth 72 p.a. and inflation at 6% p.a.)

Liabilities and Equity

16. Long-term liabilities are based on the current financing plan (WorldBank loan is assumed to be fully disbursed over five years).

17. Current maturities for BI liquidity credits are based on 20 yearterms at an interest rate of 3% per annum.

18. Other liabilities include saving deposits (BTU's Tabanas) at aninterest rate of 15% p.a., downpayment saving deposits at 122 p.a.,time deposits at 17% p.a. and other institutional deposits at 172p.a. Reserve funds are calculated on the basis of the governmentrequirement of a minimum reserve ratio of 5Z for BTN's Tabanas and15% for the other deposits.

19. Paid-in capital is Rp. 100 million and PMP funds from Ministry ofFinance are also treated as equity.

- 32 -ANNEX 2Page 3

20. Retained earnings are derived from the projected income statements.

21. Accounts payable are estimated to be 15% of total operating expensesin each year.

22. Withholdings from developers are assumed to be 5Z of the value ofeach project.

23. Security deposits are assumed to decrease gradually from the out-standing balance in FY1985/86 based on current BTU's projections.

- 33 -

fIDEl 2

Table 1

BTN CTUAL FINANCIAL PERFOURMNCE (FY98I1/B2-f71984/831

Fiscal Years: 1981182 1902183 113/84 1904/65

Incue Statements lRp billion)

Interest incue 15.1 30.4 48.5 78.2Cost of borrodinqs 7.3 13.4 20.3 30.0Net incoee 7.0 17.0 28.2 46.2Operating expenses 7.7 £1.8 12.8 28.4Profit (before taxl 0.1 5.2 15.4 19.8

alance Sheets (Rp billion)

AssetsCurrent assets 61.8 15.9 120.0 160.6housing loams 191.6 360.9 548.4 816.8Fixed assets 8.1 9.3 17.0 13.7

Total Assests 261.5 446.1 665.4 991.1

Liabilities nd EquityCurrent liabilities 47.6 75.1 71.0 96.1LIT liabilities 169.0 281.0 455.6 6S3.1Equity 44.9 90.0 158.8 229.9

Total Liabilities and Equity 261.5 446.1 665.4 "9I.1

Key Indicators

Return on assets (Z) 2.8 4.2 5.2 5.0Return on equity I2) 0.2 5.8 9.7 8.6Spread 3.0 3.8 4.1 4.q

turrent ratios 1.3 1.0 1.7 1.6Debt/equity ratios 3.8 3.1 2.q 2.9Debt service ratios 1.0 1.4 1.8 1.7

- 34 -

Annex 2

table 2Page 41)

PROJECTED LEIDIN OPERATIlS FOR BIN

Total1l995/6 19948 7 19871 198 8189 8W-OMB19

WPOAS: (in billion rupiahs) -- --- ----- - -(Prelisinary)

A Type LonIbRun-Perus - _ , , -

Perumas 37.18 44.68 44.68 44.68 134.03

Sub. Total 31.18 44.6B 44.68 44.68 134.03

a Type Lannn-Perums 167.65 92.71 82.77 82.77 248.32

Pumas 27.10 28.81 28.81 28.01 86.43

Sub. Total 194.75 111.58 111t.8 111.58 334.75

C Type LoanRW-Permas 152.10 87.85 87.85 87.85 263.55Perunas 55.34 59.39 59.39 59.39 178.18

Sub. Total 207.44 147.24 147.24 147.24 441.73

D Type LoanIon-Peruwas - - - - -P.rumnes 13.91 11.95 11.95 11.95 35.84

Sub. Total 13.91 11.95 11.95 11.95 35.84

E Type LounNon-Peruunas 19.25 16.29 16.29 16.29 48.87Perumnas 8.37 9.40 9.40 9.40 28.20

Sub. Total 26.62 25.69 25.69 25.N- 77.07

Total Loansa 479.90 341.14 341.14 341.14 1023.42

(Of ubich:)ton-Perumnas 338.00 186.91 196.91 186.91 560.74Perumnas 141.90 154.23 154.23 154.23 462.68

Total Loans 479.9 341.14 341.14 341.14 1023.42...~~~~~~- - -. __ _ ---- -_ -- __ - - ---- --- - -- --------

- 35 -

AEE 2

Table 2Page (2)

PROJECTED LENDIN 11 RTIONS FOR DIN1Total

1965186 196@/7 1981/U8 19/891 1999/Y 96/649/OISUNS: tiU billion rupihs) ---- --- ---- --

(Irelioinary)A Type Loan

lon-PerumasPeruonas 29.47 33.51 33.51 33.51 33.51 134.03

Sub. Total 29.47 33.5t 33.51 33.51 33.51 W34.03

B Type LoauiRon-Peunas 171.10 62.0 62.08 62.08 62.08 248.32Peruanas 21.49 21.61 21.61 21.61 21.61 86.43

Suo. Total 198.59 83.9 93.69 93.69 83.69 334.75

C Type LoanNon-Perumnas 160.68 65.89 65.69 65.8 65.09 263.55Peruenas 43.87 44.55 44.55 44.55 44.55 178.18

Sub. Total 204.55 110.43 110.43 110.43 110.43 441.73

I Type LoanNon-Permunas - - - - -Peruonas 11.02 8.96 8.96 8.96 8.96 35.84

Sub. Total 11.02 8.96 8.96 8.9 8A.6 35.84

E Type LoanNon-Peruas 19.28 12.22 t2.22 12.22 12.22 0.87Perusnas 6.64 7.05 7.05 7.05 7.05 28.20

Sub. Total 25.92 19.27 19.21 19.27 19.21 77.07

Total Loanst 469.55 255.86 255.86 255.06 255.86 1023.42

(Of which:)Non-Peruanas 357.06 140.19 140.19 140.19 140.19 560.74Perumnas 112.49 115.67 115.67 115.67 115.6? 462.68

Total 469.55 255.86 255.86 255.86 255.86 1023.42

Cusulated: 1317.75 1573.61 1829.46 2095.32 2341.17 2341.17

-36-

111 2

PROCE INCIE STATENT OF BTi Table 3

(tIn illian iupiabs)

1"4185 165166 190617 1987166 91"816 99/90

INClOK: (kctul1a (Prelielnary)

Interest on Housing Loans 4N.70 97.0 105.05 127.34 158.93 1A.45Interest on Short-ters Investents 19.00 25.66 27.78 27.78 27.71 27.1Fees & Service Charg 9.50 11.14 6.40 6.40 6.0 6.0

Total Iotase 78.20 134.47 139.23 161.52 193.11 223.63

EXPENSES:

Interest on Borrowings 30.01 43.31 56.82 77.62 100.45 122.14Payroll Related Exp. 13.10 15.20 17.63 20.45 23.72 d .i1flterials 1.9 3.36 3.46 4.04 4.83 5.59Provisions for Dad Debts 11.43 13.69 21.25 24.81 28.27 31.50Nisellaneous 1.96 2.69 2.78 3.23 3.8U 4.47

Total Ebpenses 58.40 78.45 103.96 130.oa 161.13 191.92

Profit before Tax 19.80 56.02 35.26 31.37 31.98 31.71

Less: Corporate Income Tat 6.93 19.61 12.34 io.98 11.19 11.10

Net Profit 12.87 36.41 '2 a" 20.39 20.79 20.61

kccuneulated 60.60 17.ai 140.14 160.53 181.31 201.92

Dividends to S6It S.15 14.57 9.17 8.16 8.31 8.24

Accu uulated 10.97 25.54 34.70 42.96 51.17 59.42

Reserves: 7.72 21.85 13.75 12.23 12.47 12.37

cumulated 16.42 36.27 52.02 64.26 76.13 69.09

Lesst Reserves Paid-Out 2.12 6.01 3.76 3.36 3.43 3.40

Accumulated 4.52 10.52 14.31 17.67 21.10 24.50

Retained Earnings 5.60 15.94 9.497 8.7 9.04 9.97

Accuulated 11.90 27.74 37.72 46.59 55.63 64-.59

- 3? -

Annex 2

PRWEE UlmSCE SHEETS OF BTS Table 4

lln lillion Rupiahsl

1984/05 195/06 1986/B7 1987/88 19891N9 199/90

ASSETS6 (kctual) (Preltematry)CURErNT ASSETSt

Caaln lnk 12.72 19.36 25.84 33.93 40.40 l3.27Short-tern Investeents 115.50 146.20 146.20 146.20 (46.20 146.20Interest Receivable I1.43 24.27 26.26 31.84 39.73 47.36Current Naturity 20.00 22.25 25.57 27.24 37.77 44.2?

Total Current ssets 160.64 212.08 223.87 239.22 264.18 3111O

lIsiWg Loans 84.20 1317.75 1573.61 1829.47 20M5.33 2341.19(Less) Current Naturity 20.00 42.25 61.82 95.09 132.85 177.12

Provision for lad Debts 11.43 25.32 46.57 71.38 9.65 13.15

Net Loan Portfolio 816.77 1250.10 145R.22 1663.01 1852.83 2032.92

let Fixed Assets S.70 10.27 12.11 14.2V 16.S7 19.91Other Assets 5.00 5.65 6.38 7.21 0.15 9.21

Blb. Total 13.70 15.92 I1.49 21.50 25.02 29.12

Total Assets 9t.11 1475.19 1701.9 1923.73 2142.03 2373.1S

LIABILITIES 110 EgUITY

CUR0EtT LIAILITIESAccount Payable 2.54 3.19 3.58 4.16 4.86 5.64Interest Payable 7.50 (0.83 14.71 19.41 25.11 30.71lortjage Withhold 25.00 30.19 26.45 21.45 16.45 16.45SeEarity Deposit 42.41 55.13 44.76 32.38 17.79 12.79Reserve funds 6.45 10.80 6.70 8.20 9.85 (1.30Current Jaturity 14.21 20.92 23.92 25.37 25.37 25.37

Total Current Liabilitie 98.12 131.06 120.11 110.96 99.44 102.26

LOWS-TEAl LIASILITIESlant Indonesia 566.70 936.70 956.70 1014.90 1014.90 1014.90torld Bunk - 23.00 112.80 216.80 295.80

total 1t. Liabilities 566.70 936.70 979.70 1127.70 1231.70 1310.70Lesst Current l(aturwtt 14.17 S5.09 59.00 84.39 (09.75 135.12

Ant LUT Liabilities 552.53 001.62 920.70 1043.33 1121.95 1175.58

OTHER LIABILITIEShSavnqs(ll Ts Tabenas 111.00 135.00 161.00 193.00 228.00 268.00Lessi Rgerve Funds 5.55 6.75 0.05 9.65 11.40 13.40net DOposits 105.45 120.25 152.95 183.35 216.60 254.60

Other Sources 6.00 70.00 106.Q0 l50.00 204.00 266.00Lest Reserve Funds 0.90 10.50 25.90 22.50 30.60 39.90Net Deposits 5.10 59.50 90.10 12i.50 173.40 226.10

Total Not Deposits 110.55 107.75 243.05 310.55 390.00 480.70

total Liabilities 761.20 1120.42 1283.86 1465.14 1611.39 1758.54

ESUITYPaid-in Capital 0.10 0.10 0.10 0.10 0.10 0.10601 Contributions 164.50 276.50 326.50 358.50 421.50 496.50Retained Earnings 80.80 117.21 140,14 160.53 1(1.31 201.92Less: Dividends to 601 10.97 25.54 34.70 42.06 51.17 59.42

Reserves paid-out 4.52 (0.52 14.31 17.67 21.10 24.50…--------… ------------- ---

Total Equity 229.91 357.75 417.13 458.60 530.64 614.60

TOTAL tlABILITIESAND EQUIty 91.11 1478.18 1701.59 1923.73 2142.03 2373.15

- 38 -

Annex 2

PROJECTED SOURCES AND APPLICATIONS OF FUNDS FOR BTN Table 5

1984/85 1915/96 1986/17 1987(68 198/18? 1989/90

SOURCES: (Actuall (Prelii naryl

Retained Earnings 12.87 36.41 22.92 20.39 20.79 20.61Provisions for Bad Debts 11.43 13.89 21.25 k4.01 28.27 31.50

Cash 6enerations 24.30 50.30 44.17 45.20 49.06 52.11

Collection of Loans 16.76 20.00 22.25 25.57 27.26 37.71

Paid-in Capital - - - - - -601 Contributions 21.00 112.00 50.00 32.00 63.00 75.00BI Liquidity Credits 214.00 270.00 120.00 58.20 0.00 0.00World lank - - 23.00 89.80 104.00 79.00Saving Deposite(Tabanasl 18.00 24.00 26.00 32.00 35.00 40.00Other Sources 6.00 64.40 36.00 44.00 54.00 62.00Current Liabilities 25.00 21.86 -9.84 -12 10 -13.17 1.37

Sub. Total 284.00 491.88 245.16 243.90 242.83 257.37

Total Sources 325.06 562.19 311.58 314.67 319.14 347.25

APPLICATIONS

Loan Disbursements 260.20 469.55 255.86 255.96 255.86 255.86Short-term Investments 20.00 30.70 0.00 0.00 0.00 0.00Interest Receibible 12.43 11.94 2.00 5.57 7.90 7.63Fixed Assets 4.75 2.22 2.57 3.01 3.52 4.10Dividends to 601 6.61 14.57 9.17 8.16 8.31 8.24Reserves paid-out 2.73 6.01 3.78 3.36 3.43 3.40Reserve Funds 5.50 6.45 10.80 6.70 9.20 9.85Repayment of Loans 11.22 14.21 20.92 23.92 25.37 25.37

Total Applications 323.44 555.55 305.10 306.58 312.59 314.46

Increase (decrease) in cash balance 1.62 6.64 6.48 8.09 6.55 32.80

Opening cash balance 11.09 12.72 19.36 25.84 33.93 40.48Closing cash balance 12.72 19.36 25.84 33.93 40.49 73.27

Annex 2

Table 6PROJECTED PERFORRANCE INDICATORS FOR BTN

1984185 1985/86 1986197 1987(88 198/89 1989190

Operation (Actual) (Preliminary)

Gross Income/total assets 7.9% 10.9l 8.81 8.9Z 9.5X 9.9%Administrative Costs/total assets 2.91 2.81 2.8Z 2.91 3.01 3.1ZFinancial Costs/total assets 3.02 2.2X 2.4X 2.81 3.2X 3.61Housing Loansitotal assets 82.4% 84.6% 05.81 86.42 86.5% 85r71Loan Collectionlloan portfolio 2.1Z 1.6l 1.5X 1.5% 1.5Z 1.91Interest Incoae/LT borrowings 7.31 9.31 8.4% E.7% 9.61 10.3%Financial Costs/LT borrowings 4.4% 4.2% 4.71 5.3% 6.01 6.7%Net Interest Spread 2.9% 5.2% 3.71 3.4% 3.51 3.6%

Pro4itability

Incone bfr Fincial Costs/total asset 4.91 7.4% 5.1% 4.61 4.6% 4.51Profit bfr Tax/total equity 8.61 15.7Z 8.4z 6.8Z 6.0% 5.2%Net Profit/total equity 5.61 10.2% 5.5% 4.4% 3.9% 3.41

Financial Position

Current Ratios 1.6 1.6 1.9 2.2 2.7 3.0Debt Service Ratios 1.7 2.0 1.6 1.5 1.4 1.4Debt/Equity Ratios 3.3 3.1 3.1 3.2 3.0 2.9

- 40 -

Annex 2

Table 7TN'S FINANING PAN1 FOR FYIY/87S-F119B919 (IN BIIUON RUPIAHS)

Annual 198U4/5 985/6 Sub.Total 19861/87 1917180 t98/89 1989/90 Sub.Total Percent (Z)

(Actual) (Preliuinaryl6DI Contribution 21.00 112.00 133.00 50.00 32.00 63.00 75.00 220.00 221

ilbUquidity Credits) 214.00 270.00 44.00 120.00 51.20 - - 178.20 171world BankfIIRD) - - - 23.00 9?.80 tO4.00 79.00 295.90 29Savings Operations(Tabanas) 18.0 24.00 42.00 26.00 32.00 35.00 40.00 133.00 13?Othew Swrcu 6.00 64.00 70.00 36.00 44.00 54.00 62.00 196.00 19

Total 259.00 470.00 729.00 255.00 256.00 256.00 256,00 1023.00 1001

- 41 -

ANNEX 3Page 1

INDONESIA

HOUSING SECTOR LOAN

PFRUMNAS

1. The National Urban Development Corporation (PERUMNAS) is anautonomous state enterprise established in July 1974 under the first Bank-financed urban project. Its objectives are to develop residential urban landas well as to plan, construct and sell low and middle income housingthroughout the country, consistent with national policies.

Organization, Management and Staffing

2. PERUMNAS is headed by a President Director responsible to aSupervisory Board chaired by the Director General, Cipta Karya, in theMinistry of Public Works. sThe President Director and four other Directors,each in charge of a Directorate (Planning, Construction, Estate Management andFinance) constitute the Board which is responsible for managing PERUMNAS. Thefour Directorates are subdivided into seventeen subdivisions (see Chart 1).In addition, there are seven Branch Offices which report directly to the Boardand several Project Offices (in each location where PERUMNAS is building)which report to the Board via the corresponding Branch.

3. PERUMNAS has over 2,500 employees, of which about 500 are located atthe headquarters in Jakarta. Of the total staff, about 175 (7X) are univers-ity graduates. Of the graduates, over 80 are technical personnel (engineers,architects and planners) and about 60 are economists.

4. Overall, the quality of PERUMNAS staff is relatively good and theinstitution has demonstrated its capacity to construct a steadiiy increasingvolume of housing to appropriate quality specifications and stringent coststandards. Its project planning capabilities have also shown marked improve-ment over the last three years, due largely to the continuing technicalassistance inputs provided to PERUMNAS under the Bank's Fourth Urban Develop-ment Project. However, its ability to market and sell completed houses anddeveloped plots, as well as other aspects of its operational and financialperformance, still require improvement.

Operational Performance, Policies and Procedures

5. During Repelita II, PERUMNAS constructed 50,670 units, increasingits output by 60X to 81,323 units in Repelita III. During the first year ofRepelita IV, only 10,516 units were constructed, but this was due to a paucityof working capital funds rather than an inherent decline in its constructioncapacity. In fact, as far back as 1979/80, PERUMNAS constructed over 26,000units in a single year. Such ambitious production rates in a relatively youngorganization have revealed, not unexpectedly, sporadic but sometimes seriousproblems of poor site selection, inappropriate designs, inefficent procurementand contract management, as well as excessive maintenance demands. Cursory

- 42 -

ANNEX 3Page 2

site investigations prior to purchase, weaknesses in technical capacity ofstaff and consultants, onerous GOI procurement regulations (which among otherthings dictated packaging of works suitable for small contractors) coupledwith weak supervision, and the absence of comprehensive project monitoringhave led to many of these problems. These weaknesses are being addressed byPERUMNAS, and further significant measures will be carried out as part of theagreed Institutional Action Program (Annex 6).

6. While PERUMNAS had constructed a total of 142,509 units by the endof March 1985, it had only sold 99,541 of these, leaving an unsold backlog ofalmost 43,000 units (although the number of unallocated units was less than3,000). The problem dates back primarily to the Repelita II period, whe:50,670 units were constructed but only 38,380 were allocAted and only 888sold. This was due to various problems which arose in the early years whenPERUMNAS concentrated on housing production and neglected other importantactivities such as marketing, estate management and arranging mortgagefinancing for its house buyers.

7. However, the most important contributor to the backlog problem wasthe preliminary sale or PPJB policy, under which successful applicants forPERUMNAS houses moved in and paid their down payment (5-10X) in small install-ments over two years. At the end of this period, if the entire down paymenthad been paid, the house price had been announced and the title had becomeavailable, a mortgage was signed through BTN and the house was finally sold.In practice, this often took well beyond two years. Although assurances wereobtained as part of the Fourth Urban Development Project that after July 31,1981, PERUMNAS would sell units immediately on completion, this did notoccur. Instead, the PPJB period was progressively reduced, first to one yearand more recently to three months. PERUMNAS has indicated that for thoseunits not yet allocated and projects not yet announced, it would now follow animmediate sales policy.

8. Another reason for the sales backlog was that PERUMNAS built unitsin small communities in response to political pressures for spreading thepublic housing program to as many places as possible, and its sites even inlarger cities were often inadequately located. As a result, there wasinsufficient demand for the units built by PERUMNAS and many remained unsoldfor extended periods.

9. In addition to the adoption of an immediate sales policy, agreementwas reached with PERUMNAS management on several other important policies andprocedures (see Annex 6, Institutional Action Program), which if implemented,will lead to a rapid reduction in the backlog of unsold units and ensurePERUMMAS' future financial viability. Noteworthy among these are thefollowing:

(a) housing demand studies will be conducted prior to land acquisitionin all cases, and project phasing as well as the mix, quality andprices of house types and lot sizes will reflect the results ofthese studies;

- 43 -

ANNEX 3Page 3

(b) the house allocation process will now give priority to those whohave already accumulated the down payment, either in a Tabanasaccount or in BTU's new saving for housing scheme;

(c) while final house prices were previously fixed and announced by theKinistry of Public Works, often well after houses had been allocatedand occupied, now PERUMNAS will fix its own prices and announce themprior to house construction being 60% complete, so that the houseallocation and mortgage loan appraisal processes can commence atthis stage;

(d) the bulk of PERUMNAS' units will be built in cities/metropolitanareas with populations over 100,000 and/or population growth ratesof over 4%, on sites with good access to public transport, employ-ment opportunities and shopping facilities, so as to ensure thatthere is good demand for them;

(e) the principal reasons for delays in processing of PERUMNAS mortgagesby BTN have been identified and regular meetings are taking placebetween the Boards and senior managers of the two institutions teresolve these (see Annex 6 for more details); and

(f) PERUMNAS has now developed an emergency sales program and hasdiscussed it with BTN. This program has already led to a substant-ial reduction in the sales backlog, and PERUMNAS is committed toreducing the remaining backlog of approximately 10,000 completedunits and 14,000 developed plots by one half before March 31, 1987,and eliminating it entirely before March 31, 1989.

10. The slowdown of housing sales, coupled with the GOI decision todiscontinue construction fund inflows to PERUMNAS since 1982 (tOI now channelsall funds through BTN), resulted in a scarcity of working capital during thelast few years. This, in turn, has affected the construction program; thenumber of units completed dwindled while work-in-process (units under con-struction) increased rapidly. As a result, over Rp 150 billion is tied up inprojects under construction, exacerbating the working capital problem andsetting a vicious circle in motion. The measures agreed to with PERUMNAS(summarized in para. 9 above) are already being implemented and will cause anacceleration of sales revenue inflows, thus allowing PERUMNAS to complete moreprojects. Moreover, PERUMNAS has agreed to elaborate a detailed plan for thecompletion of projects under construction. The plan will include a priorityranking of projects, i.e., PERUMNAS will first concentrate on completing thoseprojects which will produce the quickest and largest return with the lowestinput. PERUMNAS has also agreed to adopt a project monitoring and informationsystem and technical assistance will be provided for this purpose (Annex 7).

11. Regarding the composition of PERUMNA' past program, over 501 of theunits constructed through K rch 1985 were 21 m or smaller, and a further 39Zranged in siie between 21 mz and 36 m G, Only 10X of the houses rangedbetween 37 m and 70 m2. PERUMNAS has thus targetted its construction largelyto low and n ddle income beneficiaries. However, its system for selection ofbeneficiaries has been biased in favor of those with fixed incomes and

- 44 -

ANNEX 3Page 4

long-term employment records. Moreover, PERUMNAS (and BTU) have viewed theirprimary mandate to be the provision of housing for civil servants and membersof the armed forces, and operated with guidelines specifying that 75S of thebeneficiaries in each project should be from the above categories.

12. During project preparation, PERUMNAS management agreed to use arandom selection procedure for allocation of units from among qualified appli-cants. Moreover, in a letter dated September 9, 1985, addressed to the Boardof Directors of BTN, the Board of Bank Indonesia has clarified that privatecitizens with incomes below civil servant salary level four will be equallyeligible for mortgages as civil servants and military personnel, provided theysatisfy the basic eligibility criteria and, like all other applicants, areable to pay or save the required down payment in advance. Thus, there are nolonger any policy constraints preventing the establishment of a completelyopen process of beneficiary selection. The distribution of beneficiaries, inoccupational as well as income terms, requires continued monitoring to ensurethat equal access for eligible beneficiaries is guaranteed.

Financial Structure and Performance

13. The financial statements of PERUMNAS for the last two years arepresented in Tables 1-3. As is evident from the balance sheets, over 86% ofPERUMNAS' funds have been obtained from government (primarily PMP contri-butions). The balance are derived primarily from long-term borrowings (5%from IBRD and ADB), other liabilities such as PPJB installment payments andshort-term bank borrowings and current liabilities. These funds have beenused primarily to fund its noncurrent assets, i.e., projects under con-struction, and completed units and plots ready for sale.

14. During 1983/84, PERUMNAS made a net profit of Rp 893 million onincome from house sales of Rp 26.5 billion. In 1984/85, sales revenueincreased to Rp 31.2 billion and profits to Rp 1.15 billion. PERUMNAS hascontrolled its fixed and operating expenses effectively over the last fouryears (Rp 4.1 billion in 1982/82 and Rp 4.2 billion in 1984/85). Moreover, ithas steadily increased its gross margin on housing unit salce from about 15%of sales in 1981/82 to almost 20% of sales in 1984/85. As indicated by thebalance sheet, the accumulated losses from the first few years of operationshave also been eliminated. Therefore, PERUMNAS is now poised for much betterperformance, provided it can turn over its noncurrent assets more rapidly (theratio of noncurrent assets to cost of sales in 1984/85 was 8.2). PERUMNASmanagement is now acutely aware of this problem and, as indicated above, istaking the necessary steps to Liquidate its inventories by increasing salesand completing projects more quickly.

Future Program, Land Requiremencs and Financial Implications

15. It is envisaged that during the remaining years of Repelita IV,PERUMNAS will sell 103,835 units, including 2,480 small flats and 3,845medium-sized flats (see Table 5 in Annex 1). Of these, some 10,000 units(including all the flats) have already been built, leaving a balance of 93,835units to be completed over the program period. This is deemed to be wellwithin PERUMNAS' capabilities, particularly since a large number of units are

_ 45 -

ANNEX 3Page 5

already under construction and units on a large proprtion of PERMUNAS'developed plots (KTMs) would actually be built by private developers andcharged against the PERMUNAS targets.

16. PERUMNAS has estimated that in addition to the land it has alreadybanked, it will require an additional 800 ha to fulfill the Repelita IVprogram. As indicated above, if PERUMNAS units are not to face demandproblems, this land will need to be well located in larger urban centers.PERUMNAS has estimated that Rp 50 billion will be required for this landacquisition program and that it will be able to generate about half of thisfrom internal sources. The balance (approximately Rp 25 billion) is expectedto come in the form of soft loans from the Ministry of Finance, whichconfirmed that this would not represent a problem.

- 46 -

ANNEX 3Table I

INDONESIA

ROUSING SECTOR LOAN

PERUMNAS

Profit and Loss Statements(for the period ending March 31 each year)

1984 1985Rp I of total Rp X of total

million income million income

RevenuesHouse (land) sales 26,453 92.4 31,198 96.4Less cost of house & land sales 21,748 76.0 24,886 76.9

Gross Profit From Sales 4,705 16.4 6,312 19.5

Estate management revenues 1I227 4.3 465 1.4Less estate management expenses 1,484 5.2 2,134 6.6

Gross Profit (Loss) PromEstate Management (257) (0.9) 1,669) (5.2)

Total Gross Profit from Salesand Estate ManaLement 41448 15.5 4,644 14.4

Operating ExpensesSalaries, wages and allowances 2,701 9.4 2,628 8.1Transportation expenses 652 2.3 496 1.5Office expenses 895 3.1 969 3.0Depreciation and misce. expenses 210 0.7 106 0.3

Total Operating Expenses 4,459 15.5 4,199 13.0

Profit (Loss) From Operations (11) (0.1) 445 1.4

Other IncomeOther income 940 3.3 706 2.2Less other expenses 36 0.1 1 0.0

Net Profit 893 3.1 1,150 3.6

- 47 -AMNN 3Table 2

INDONESIA

ROUSING SECTOR LON

PERUMDAS

Balance Sheets as at March 31

1984 1985Rp Rp

million of total million of total

AssetsCurrent assets 15,756 7.0 19,740 8.6Noncurrent assets:Land 65,884 29.1 64,998 28.4Infrastructure 47,564 21.0 47,564 20.8Housing construction 72,819 32.2 71,884 31.4Overheads 9,830 4.3 9,093 4.3Materials 38 0.0 25 0.0Long-term receivable 7,902 3.5 9,010 3.9Land & buildings for rent .1,377 0.6 1,315 0.6

Subtotal 205,374 90.8 203.889 89.1

Net fixed assets 2,781 1.2 3,551 1.6Other assets 2,261 1.0 1,730 0.8

Total 226,172 100.0 228,910 100.0

Liabilities & Net WorthCurrent liabilities 16,785 -7.4 9,092 4.0Long-term borrowings 6,363 2.8 10,906 4.0Other liabilities (includingPPJB Installment) 6,426 2.8 9,211 4.0

Equity 1,000 0.4 1,000 0.4Government funds (PMP) 197,682 87.4 198,001 86.5Retained earnings/(losses) (2,084) (0.9) 701 0.3

Total 226,172 100.0 228,910 100.0

- 48 -

ANNEX 3Table 3

INDONESIA

HOUSING SECTOR LOAN

PERUMNAS

Funds Flow Statement (1984/85)

Rp 2million of total

Sources of FundsFrom operations 2,785 22.4Increase in long-term borrowings 4,543 36.5Inerease in government funds 319 2.6Increase in other liabilities 2,785 22.4Decrease in net current assets 531 4.3

Total 12,448 100.0

Applications of FundsIncrease in current assets 3,984 32.0Decrease in current liabilities 7,693 61.8Increase in net fixed assets 770 6.2

Total 12,447 100.0

INDONESIAOrganization of Bonk Tabungon Negaro

I I . .. . - JI . § -~~~~~~~~~~~~Grw r .s.

jOopoimentI | E_co fnomicj B _|rach Intern_ | benerlad|| >0}~ Planning hOnn I Affairs Lon Tralnkng i |Operations Audit AdJmh,lstrotn |Persoqwe' Secrelortat

F0-~~ ~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Ai;" atlon'el's

DebtarS Persaoage

cli ~~~~ K~~d] I

WoodBk-3O i A2

-50- ANNEX 4

Page 1

INDONESIA

HOUSING SECTOR WAN

Bank Tabungan Ne%ara (BTN)

Draft Statement of General and Operational Policies

1. Ceneral. Bank Tabungan Negara (BTN), originally established as aState Savings Bank, was assigned responsibility by GOI for mortgage financingof low-cost houses built by PERUMIAS in 1975 and was further authorized toprovide mortgage loans for privately developed units in 1978.

2. Objectives and Areas of Activity. BTU's main objectives, as indica-ted in the recent ministerial decree issued by the Ministry for Housing onSeptember 10, 1985 and in accordance with the letter from Bank Indonesia tothe Board of Directors of STU dated September 9, 1985, which modified BankIndonesia': letter of November 6, 1978, are the following:

(a) to stimulate low cost housing by expanding access to housing financefor low- and middle-income households, and

(b) to mobilize and encourage people's savings.

To further these objectives, BTN's key areas of activity are (a) the provisionof utortgage finance for units constructed by PERUMNAS and private developers,with emphasis on the core housing units affordable to its target clien:ele;and (b) the generation of savings through various financial instruments tndprograms offered to the public and institutional investors.

3. Uligible Projects. Each proposed project and individual loan willbe appraised on the basis of the appropriate eligibility criteria. BTN wouldrequire, inter alia, that (a) the size distribution of housing units withinproject! correspond approxim tely to at least a 70/30 ratio between small(c 36 a ) and large (36-70 m ) units; and (b) the income of the subborrowers4eceiving A-, B- and C-type loans (see item 4 below) would not exceed theCivil Servant Salary Level 4 or equivalent, but not more than Rp 300,000,(roughly equivalent to the 80th percentile).

4. Lending Terms. BTN's lending terms are of three types, differentia-ted according to mortgage loan size and unit type:

Type A loans:

(i) interest shall be payable at a rate of not less than 9% p.a.;

(ii) shall be repaid over a maximum period oi 20 years;

(iii) shall be Rp 3,500,000 or less each;

- 51 -ANNEX 4Page 2

(iv) Subborrowers shall pay a down payment of at least 10 of the priceof the housing unit;

(v) Subborrowers shall have a monthly income of Rp 300,000 or less atthe time of approval of the loan; and

(vi) housing units shall have a maximum price which shall noi exceed thestandard price for units of a maximum size of 21 in the aggregateestablished from time to time by the Directorate General of HumanSettlements (D.J. Cipta [arya) in the Ministry of Public Works.

v Type B loansg

(i) interest shall be payable at a rate of not less than 12Z p.a.;

(ii) shall be repaid over a maximum period of 20 years;

(iii) shall be Rp 5,000,000 or less each;

(iv) Subborrowers shall pay a down payment of at least 20S of the priceof the housing unit;

(v) Subborrowers shall have a monthly income of Rp 300,000 or less atthe time of approval of the loan; and

(vi) housing units shall have a maximum price which shall nol exceed thestandard price for units of a maximum size of 36 m the DirectorateGeneral of Human Settlements (D. J. Cipta Karya) in the Ministry ofPublic Works.

o Type C loans:

(i) interest shall be payable at a rate of not less than 15% p.a.;

(ii) shall be repaid over a mazimum period of 20 years;

(iii) shall be Rp 7,700,000 or less each;

(iv) Subborrowers shall pay a down payment of at least 251 of the priceof the housing unit;

(v) Subborrovers shall have a monthly income of fp 300,000 or less atthe time of approval of the loan; and

(vi) housing units shall have a maximum size of 54 m2 in the aggregateand shall have a maximum price which shall not exceed the standardprice for such units established from time to time by the Director-ate General of Human Settlements (D.J. Cipta Karya) in the Ministryof Public Works.

- 52 -ANNEX 4Page 3

Two minor variations from these terms will apply to the flats and the largest(70 m ) units included in the BTN program, for which down payment requirementswill be 10 and 402, respectively (Types D and E).

5. Mortgage loan sizes to which the different terms will apply will beupdated periodically, in line with the annually revised maximum unit pricesset by the Directorate General of Human Settlements (D.J. Cipta Karya) of theMinistry of Public Works.

6. Financial Policies. STN will aim at earning a stable positivespread of at least 3.5 points between the return on its average outstandingloan portfolio and the average cost of its debt. BTN will continue to improvecollection of principal and interest receivable through its arrears managementprogram and would maintain the amount of arrears to a level not exceeding 2.02of its entire outstanding portfolio. BTN will set aside a provision for riskor bad debts equal to at least 12 of its outstanding portfolio. BTY will alsoaim at maintaining minimum current and debt service ratios of 1.5 and 1.2,respectively, and a maximum debt equity ratio of 6.0. BTN will not bear theexchange risk associated with its foreign currency resources. In compensationfor this, BTN will pay an exchange risk premium to the authority which willbear this risk, in an amount to be determined in consultation with theMinistry of Finance.

7. Management. The Board of Directors, consisting of a PresidentDirector and two Managing Directors, will examine and approve all financialcommitments in accordance with the policies and regulations established by GOIauthorities and will review the credit operations of BTU periodically toensure that all of the credit activities of BTN are meeting its objectives.BTN will prepare a corporate plan and an annual operating plan covering all ofthe necessary activities, including lending, financial and administrativeactivities. The operating plan will incorporate projected levels of activity,revenues and expenses. To allow the Board to decide on the most realisticalternative for its operations, the operating plan will include alternativeactivity projections for the planning period (at least three years), and ananalysis of the impact of alternative scenarios on BTN's income statements andbalance sheets.

8. Audit. BTY will provide its major lenders independently auditedannual financial statements within nine months of the end of the fiscalyear. To ensure that BTU benefits from appropriate auditing procedures, itwill employ independent external auditors apart from its internal auditors.The auditors will provide a detailed management letter covering accountingsystems, compliance with internal guidelines and external regulations and anyrelevant matters that are deemed to materially affect the welfare of BTY.

9. Reporting Requirements. BTN will furnish its major lenders quar-terly operating reports. These reports will include appropriate narrative andstatistical information on activity conducted and financial statements, aswell as variances from the annual operating plan of STY.

- 53 -ANNEX 4Page 4

10. Revision of Statement. Any revision to this Statement of Generaland Operational Policies will be made by the Board only after the Minister ofFinance, the State Minister for Housing and the Governor of Bank Indonesia,and major lenders (as may be required by specific agreements with suchlenders) have concurred with the proposed revision.

- 54 -

AME 5Page 1

INDONESIA

HOUSING SECTOR LOAN

Bank Tabungan Negara (BTN)

Institutional Action Program

1. Management and Corporate Planning

1.1 The board will, by October 1, 1986, adopt a Statement of General andOperational Policies outlining, inter alia, the objectives of BTU over theRepelita IV period, as well as its project eligibility criteria, lendingterms, financial and management policies and audit and reporting requirements.

1.2 The internal strategy that BTN intends to follow to meet its objec-tives will be spelled out in a corporate plan and an updated operating planfor 1986 which will be prepared by October 31, 1986, and which will include,inter alia, the requirements for each unit to meet specified targets, withparticular reference to the following:

(a) the mortgage lending program;

(b) the financing plan and resource mobilization strategy, withspecial attention to the new savings instruments;

gc) the upgrading of systems to deal with the new PERUMNASprojects; and

(d) the institutional plan and schedule for new systems implementa-tion, along the lines recommended by previous consultants,focusing on new manual and automated systems for Loan Adminis-tration, Accounting and Follow-up as the top priority.

2. Operational Policies and Procedures

In light of the revised Repelita program for years three, four andfive, STE will make modifications in its current lending policies andprocedures, with specific reference to the following:

A. Project P.ppraisal and Supervision.

2.1 BTU will strengthen appraisal and supervision of private developerprojects, through, inter alia, the following:

(a) 0TN will ot provid any new commitments for privately devel-oped 54 m and 70 i units except for privately developed unitson plots within PERMUNAS projects, and will closely monitor newCL (commitment letter) approvals to ensure compliance with itsnew policies regarding the size distribution of units;

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ANNEX 5Page 2

(b) BTN shall reduce average processing time for completed CLapplications from about 30 days to 20 days by January 1, 1987;

(c) BTN will, by October 31, 1986, separate the subsections dealingwith project and individual loan appraisal in each of itsbranches;

(d) BTN will, by October 31, 1986, standardize appraisal formatsand procedures among its branches and between the branches andhead office;

(e) BTN will, by October 31, 1986, evaluate the pilot project inits Surabaya branch whereby consultants are used for projectappraisal and supervision and then generalize this practice toother branches until staff can be trained or recruited in suf-ficient numbers and quality; and

(f) BTh will, by January 1, 1987, develop a computerized informa-tion base on developers, including ratings of past performance.

2.2 BTN will strengthen appraisal and supervision of PERUMNAS projectsthrough, inter alia, the following:

(a) BTN will, by October 31, 1986, initiate appraisals of PERUMNASproject proposals (albeit simplified and selective appraisals)and monitor construction progress to determine, inter alia,when to begin processing individual loan applications; and

(b) BTN will, by October 31, 1986, establish procedures forappraising PERUMKAS projects through joint workshops withPERUMNAS;

B. Individual Loan Appraisal.

2.3 BTN will strengthen individual loan appraisal procedures throughtinter alia, the following:

(a) BTN will, by October 31, 1986, revise general eligibilitycriteria to conform with Bank Indonesia's letter on thissubject;

(b) BTN will, by October 31, 1986, revise the loan application formin order to strengthen the credit appraisal process. The newform should include the following: (a) total household income,(b) total net wealth of household (assets and liabilities), (c)fixed monthly obligations, and (d) sources of funds for downpayment;

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ANNEX 5Page 3

(c) STN will, by October 31, 1986, revise loan approval proceduresso that all loans are approved by a loan committee comprisingat least three persons,-rather than just the Branch Manager.The committee's agenda would also include makingrecommendations to the head office regarding developerproposals. Minutes of meetings would be sent to the headoffice and would be subject to operational audits;

(d) individual applicants should be processed before projects arecompleted;

(e) BTN will not appraise private companies prior to approvingtheir employees for loans unless the company sponsors thehousing project or guarantees the loans; and

(f) BTN will, by October 31, 1986, begin to monitor the distribu-tion of loan beneficiaries in terms of income and occupation toensure appropriate targeting of the lending program and equalaccess for eligible or qualified applicants.

2.4 After pilot tests in three locations, BTN has begun implementing itsnew Downpayment Savings Scheme (TUM-KPR) on April 1, 1986. Althoughthis scheme is expected to facilitate BTN's individual loanappraisal and supervision, BTN needs to take several measures toensure the scheme's success, including, inter alia, the following:

(a) BTN will, by March 31, 1987, take stock of the transitionalexperience with its down payment savings scheme (TUM-KPR) andwill, thereafter, consider incorporating into such scheme therecommendations of the evaluation; and

(b) BTN will introduce additional flexibility or eliminateunnecessary rigidity in the scheme (e.g., on withdrawal orcancellation).

C. Loan Supervision and Follow-up.

2.5 BTE will implement, with the assistance of consultants, a new manualloan accounting system as a transition to automation and make asystematic effort to link KPR loan administration and arrears data.

2.6 STU will implement, by October 31, 1986, its new Guidelines forArrears Management. These include, inter alia, the following:

(a) immediate steps to improve the reporting systems on arrearsfrom collection centers such as banks and site offices;

(b) specific procedures to deal with different age categories ofarrears (e.g., reminder notices, door-to-door interviews);

(c) close monitoring of new accounts and prompt follow-up, withinthe month of arrears arising;

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ANNEX 5Page 4

(d) a new system of payment to be implemented via the post officenetwork as of October 31, 1986; and

(e) BTN will, by October 31, 1986, establish a special unit in eachbranch to manage arrears under the supervision of the Biro ofBranch Operations at the head office.

3. Organization

3.1 BTY will, with the assistance of consultants, review and modify itspresent organizational arrangements to improve the efficiency andcontrol of lending operations.

3.2 BTN will, by January 1, 1987, establish (in branches and the headoffice) separate Loan Department sections dealing with:

(a) project appraisal and supervision,

(b) loan preparation; and

(c) portfolio and arrears management.

3.3 BTU will, by October 31, 1986, strengthen and reorganize theInternal Audit Department in order to improve internal control andexpedite new systems implementation;

3.4 BTU will, by October 31, 1986, create within the Internal AuditDepartment a new system audit section manned by at least threeexperienced systems personnel, which will ensure that all newsystems are implemented, with modifications where deemednecessary. This subsection will report directly to the Board andwill be the interface between the external consultants and thevarious Biros for system implementation. It will also work withTraining to design a detailed working plan for staff training in newsystems. Finally, this subsection will be responsible formonitoring progress (quarterly reports) and evaluating the successof new systems implementation within the organization.

4. Branches

4.1 BTN will, with the assistance of consultants, formulate workingplans to implement immediately in its branches the new systems whichhave already been designed, particularly for loan administration,accounting and follow-up (as well as MIS), paying special attentionto those branches that are likely to face the most pressure from anaccelerated PERUMNAS sales program.

4.2 BTN will, by October 31, 1986, identify and train in-house personnel(at least two at each major branch) to work with the consultantsfull-time on new systems introduction and monitoring.

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ANNEX 5Page 5

5. Management Information System

5.1 STN will upgrade the timeliness and accuracy of the data that ispresently available, especially on commitments, loan processing,disbursements, arrears, savings and financial accounting.

5.2 BTU will, by October 31, 1986, use the monthly MIS format developedby the previous consultants in the HIS manual; and implement MISsystems that have been recommended and designed, with minor modifi-cations if necessary.

6. Staffing and Training

6.1 BTU will produce a manpower development plan (with the aid of con-sultants experienced in Personnel Management) which will identify indetail, inter alia, BTN's recruitment and training needs, as well asremuneration packages required to attract and retain qualifiedstaff.

6.2 BTN will, by October 31, 1986, induct the 90 newly recruitedgraduates selected in January 1986 and will take steps to recruitadditional graduates pending the results of the manpower developmentstudy.

6*3 BTE will, by August 1, 1987, finalize arrangements with LPPI (Insti-tution for Banking Development in Indonesia) and the Education Sec-tion of BPKP (State Audit Agency) to provide for regular trainersand assistance to BTN's new Training Department.

6.4 BTU will, to make maximum use of its training facilities, train atleast 250 staff members per year in various operational subjectmatters.

6.5 The Training DepArtment will, by January 1, 1987, translate the newsystems development programs into training packages suitable for theabsorptive capacity of existing BTN staff and will also identify andtrain appropriate staff in the branches as trainers in specializedactivities.

7. External Audit

7.1 BTU will ensure that financial statements are audited and providedto its major lenders within nine months after the end of each fiscalyear (this should be facilitated by the ongoing implementation ofthe new financial accounting system).

7.2 BTE will take steps to deal with the qualifications made on earlieraccounts in each successive year.

INDONESIAHOUSING SECTOR LOAN

Organization of Perumnas

Boatd

PreskdentDirector

Direcbt otf Director of Director of Drector ofPlanning Contction t M ate Administraton

Program Bukgg & Region B RItOlProgramming Emal Coop E ing Landscpcng Allocation Region C H

Monitoting Dtng Public Fadlites

Region A Programming TWr and Rates S & Bn efitsPlanning & ReinB Contracting Bid Preparation als& Leases Stawff Rltin-esb ARegion - E3Cf Bid Award L Sale &l & O g.Feasibility I~~~eg~ C Contrac Adrnin.sle ~rzao& g

Reseorci, Repxairs & Budge PlanningLand Iniern mprovemfents Bugt& Reglonal BudgetsAcquisiton AceuisMon Supervision Maintenance Utlfitie & Iane iesmntsa

Program

Research Cil Works r Il Programming CentralBuildings Progromming Lego ~~~~~~Advice Rgo

& Bulding Logistics Procurement Public Owe Acfion Treasurer Region APlanning MaterIAls Producion ReKOns RgDocumentitbn IQlon C

CentralAccounts & Region A

Audit Region 8Region C

Seven Branch OfficesWorld Bank - 305411

Y-ig:1:

- 60 -ANNEX 6Page 1

INDONESIA

HOUSING SECTOR LOAN

PERUNAS

Institutional Action Program

l. Special Sales ProLram to Reduce Backlog of Completed but UnsoldUnits and Plots

1.1 PERUMIUS shall reduce the existing sales backlog as at March 31,1986, of approximately 10,000 completed units and 14,000 developedplots (KTN) by one half before March 31, 1987, and the remainderbefore March 31, 1989. For this purpose, PERUMNRA will continue touse the procedures adopted in joint meetings with BTN and describedin the Appendix to this Annex.

1.2 PERUWIAS will implement the recommendations of a final reportprepared jointly with the Inspector General's Office, Ministry ofPublic Works concerning the persistently high vacancy rates at nineproject locations before October 31, 1986.

2. Revised Programming, Site Selection, and Feasibility StudyProcedures. In order to ensure continued efficiency in its sales program, thePERUNUAB Board will adopt and implement the following policies and procedures:

City Selection Criteria.

2.1 PERUMNAS will develop its future projects to maximize the number ofunits in metropolitan/city areas with populations over 200,000and/or population growth rates of over 4X (as determined using thelatest available data). In the case of land already bought andbanked by PERUMMAS in areas which do not meet the criteria (thuswith limited housing demand), PERUMNAS will either attempt to sellthese sites or delay their development until demand is shown toexist. Where PERUNVAS is requested by the Government to build inremote locations for political reasons, those projects will be smallin size (below 200 units).

Demand Studies and Project Planning.

2.2 Housing demand studies will be conducted prior to site selection andland acquisition. Survey methods and analyses performed to date willbe fully operational by April 1, 1987 and will be the primeresponsibility of each Branch Office. Technical assistance to theBranch Offices will be provided by the Read Office staff andconsultants. The demand analysis will make recomuendations withrespect to possible project size, phasing and house typedistribution and will include target prices and plot sizes. Each

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ANNEX 6Page 2

city or area requesting a PERUWNAS project will be required tocomplete the "Daftar Pertanysan Kota" or city statistics ques-tionnaire and assist in the interview process for the demand study.

Prefeasibility and Site Selection Analyses.

2.3 A prefeasibility study will be conducted prior to land acquisitionand as part of the site selection analysis. PERUMNAS will make useof the "Analysis Kelayakan dan Keterjangkauan Proyek PembansunanPerumahan Sederhana" model (prefeasibility model) which allows aquick evaluation of costs and profit margins for each proposedsite. The study will estimate the likely cost of developmentmatched to predicted demand and estimated project revenues. Projectproposals which are estimated to be below the financial break-evenpoint will be considered for elimination or restructuring.

2.4 PERUMNAS will allocate an adequate number of man-days for siteselection activities. Field study will include cadastral, topo-graphic, soils and hydrological investigations. PERUMNA5 willeither staff land investigation teams with engineers experienced iuthese investigations or will use local consultant expert in thevarious disciplines. Preliminary tests will be made on soils todetermine soil type and behavior.

2.5 Housing sites will be located in areas with reasonable access topublic transport, employment opportunities and shopping and socialfacilities. A checklist system to ensure that the site has accessto essential services such as water, electricity and flood controlwill be implemented. PERUMNAS will make full use of the recentaerial photo maps (contoured) available from the Director GeneralAgraria's Office.

Feasibility Studies.

2.6 Improved prefeasibility investigations will assist in thefeasibility study. As from October 31, 1986, PERUNNAS will ensurethat topographic, hydrological and off-site information is completeand accurate before finalizing the feasibility study. Advancedpreliminary engineering designs will be undertaken and costs basedon these designs. BRK review planning meetings will include BranchOffice staff. Land use design and costing will be supported bysoftware at present in place or in the process of acquisition.PERUMOAS will ensure that feasibility teams include the experiencedplanners and consultants necessary to this process.

3. Revised Pricing, Marketing and Sales Procedures.

Pricing.

3.1 PERUMMAS will formulate and fix house and plot prices on the basisof the detailed feasibility study (Buku Rencana Kelayakan or BRK).These prices can be announced before construction starts to enable

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ANNEX 6Page 3

prospective homeowners to save for a fixed down payment, payableeither directly to PERUMNAS or to 8TN, using the down paymentsavings program Tabungan Uang Muka or TUM. The BRK sales priceswill contain both price and physical contingency allowances, andinclude price escalation factors through to the estimated yearsale. PIRUMMAS will continue to use its current pricing formulawhich aims at full recovery of all capital costs and financialcharges and, through continuing design and construction managementimprovements, will ensure that unit costs remain low.

Immediate Sale Policy.

3.2 PERUMEAS will ensure that the down payment amount and closing costshave been paid before occupancy occurs.

Conmitment Letters (CLs) from Bank Tabungan Negara.

3.3 Commencing October 31, 1986, PERUMNAS will obtain from BTN aCommitment Letter (CL) for each project, regardless of whether ornot it requires construction financing for the project. This isrequired to ensure early coordination between BTU and PERUMNAS andto facilitate mortgage loan processing for the project.

Selection of Beneficiaries, Unit Allocation and Mortgage Processing.

3.4 Mortgage loan applications from nonfixed-income applicants are nowpermitted under the new mortgage lending criteria established inBank Indonesia's letter to BTN dated September 9, 1985. PERUMNASwill revise the selection procedures for applicants by October 31,1986, to eAsure equal access with maximum administrative efficiency(i.e., implement an automated random selection procedure forqualified applicants). To streamline allocation and loan processingand eliminate delays, PERUMMAS and BTN will combine the responsi-bility, procedures and appraisal forms required for unit allocationand mortgage processing by October 31, 1986.

Marketing Campaigns.

3.5 Promotional and advertising campaigns will occur at the demandanalysis phase (SKPR). Meetings with the Walikota/Bupati and localgovernment officials will be required early in the life of theproject, and local cooperatives and target groups will receivep.romotional material for their members regarding an upcomingPERUMNAS project. The BRK will contain one complete section devotedto a marketing plan and selected target groups. It is estimatedthat following a trial period,this work will be standardized in the83K reporting format by October 31, 1986.

Titling and Plot Measurement Problema.

3.6 PERUNEAS will establish joint task forces by October 31, 1986, withthe staff of the Director General Agraria at the local level

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AME 6Page 4

(Tingkat II), which will meet periodically and resolve problems onsite, if required. PERUMMAS will also discuss policies andprocedures which are deemed inadequate with the Director GeneralAgraria and other policymakers.

4. Revised Construction Policies and Procedures.

Current Construction Program.

4.1 By October 31, 1986, PERUMNAS will rank projects under constructionand develop a detailed action plan showingt

(a) the status of each project, including the value and types ofcontracts required for completion, the estimated completiondate and any problems or reasons for delay;

(b) the likely demand for the project including a marketing plan,the estimated sales program and the timing of sales revenues;

(c) from the estimated revenues and expenditures a priority rankingwill be prepared and projects will be completed in accordancewith their ranking; and

(d) the action plan will be updated on a quarterly basis, showingthe current construction and sales position.

Detailed Design.

4.2 PERUNVAS will immediately commence the development of a systematic"library of standards." The library will include standardspecifications and designs which have been tried and tested inuse. These designs will be used both by PERUNMAS and itsconsultants. PERUMNAS will immediately examine its system ofconsultant selection to reflect the high degree of competenceexpected. PERUMNAS will, in the future, avoid customized one-ofdesigns, except in unusual circumstances, and will used standardizeddesigns, materials and specifications.

Procurement.

4.3 PERUMNAS will immediately commence screening of nationallr qualifiedcontractors for its short list, using its knowledge of contractors'abilities. Where possible, PERUMIAS will package work in packetssuited to Class A contractors. Such contracts, where suitable, willbe "general contracts" for all aspects of the work includingmaterial supply, thus reducing the project management and workscheduling at present undertaken by PERUHIAB. Contracts awarded byPERUMMAS exceeding the equivalent of US$5 million will be tenderedby International Competitive Bidding, where appropriate, followingprequalification of interested bidders. PERUMNAS will immediatelyimprove its bid evaluation systems to ensure that the lowestresponsive bid is the recipient of the award. PERUMKAS will retain

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AUNEX 6Page 5

control of subcontracting by ensuring that contract documents affordPERUMNAS both the right of approval and the right of nomination.

Construction Management and Supervision.

4.4 In conjunction with the change towards contractor-based constructionmanagement. PERUMNAS vill allocate site supervison staff insufficient numbers with experienced technical guidance. PERUMNASwill proceed immediately with a site supervisor training program andwill ensure that site staff are competent to interpret specifica-tions, check contractors' materials and works and have clear author-ity to reject unsatisfactory work. PERUMNAS will immediately ensurethat where quality control, communications or other equipment is tobe supplied by the contractor, the items will be listed in the con-tract documents prior to tender. PERUMNAS will immediately improvequality control audit. A team will visit sites unannounced fromtime to time to detect problems and to assist in chAnnelingappropriate assistance.

Maintenance and Bandover.

4.5 PERUMAS will ensure that discussions take place with localauthorities during the planning stage and that clear lines ofresponsibility for maintenance and take-over are established.PERUMNAS recognizes that low-cost systems are often maintenance-intensive and will establish a maintenance control system to ensureproperly supervised maintenance, thus avoiding delays in take-overdue to poor maintenance.

Monitorig and Programming.

4.6 To provide continous technical guidance and control throughout theconstruction process, PERUMNAS will do the following:

(a) PERUMNAS will, whenever possible, appoint project managers atthe feasibility stage of the project;

(b) PERUMNAS will consider, and if regulations permit, byOctober 1, 1987, appoint a "chief engineer" or "technicaldirector" to control technical features and the planning,design, construction and maintenance process for all projects;and

(c) PERUMNAS will, by October 31, 1986, introduce computer-assistedconstruction programs. A monitoring program will be introducedto enable each project to be monitored in detail from inceptionto completion. Each stage of the program through feasibility,construction and sales will have detailed subprograms capableof measuring performance against predetermined standards.Personnel will be trained at both Branch and Head Offices inthe implementation of the program.

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ANNEX 6Page 6

Project Construction Award Approvals.

4.7 PERUMNAS is a publicly owned real estate developer, constructinghousing projects from its own revenues in competition with otherdevelopers. PERUMNAS will therefore take immediate steps tominimize the control and approvals required for contract award whichare currently in place with the Department of Public Works and/orother authorities who have already been consulted in the workprogram and annual budget process. It is recommended that PERUMNASshould submit to the Department of Public Works a quarterly reporton project activity and project expenditure and not be required toseek approval for every contract.

5. Land Acquisition.

5.1 Current PERUMNAS estimates indicate that a land acquisition programof approximately 800 ha is required to meet the Repelita IVprogram. PERUMMAS will therefore immediately start identifyingappropriate sites in key metropolitan areas, and initiate demandsurvey and site selection programs. Since the internal generationof funds from sales revenues may not be sufficient to finance suchlarge-scale land acquisition, PERUMNAS will attempt to obtain softloan funds for this purpose from the Ministry of Finance. Cash flowprojections for FY86/87 and FY87/88 indicating the shortage offunds, in view of the timing of land acquisition, will be preparedby PERUMNAS for submission to the Ministry of Finance. In thelonger term, PERUMNAS will need to rely on other funding sources.Therefore, PERUMNAS will begin exploring and developing schemes suchas land bonds, guided land development, land readjustment, landconsolidation and option purchase, as well as equity participationwith private landowners.

6. Electronic Data Processing (EDP) Suystems, Including a ManagementInformation System and Accounting System.

6.1 PERUMMAS will officially establish an EDP subdivision in the headoffice before June 1, 1987. PERUMNAS, working with consultants,will undertake a conceptual systems design and identify and priori-tize areas which would benefit from computerization. Software appli-cations will be developed by the EDP consultants and a trainingprogram implemented.

6.2 PERUMNAS will take steps to ensure that implementation of thefollowing systems have been completed and are or will beoperational:

(a) financial C g ` twti v CihP.) to include branch officeand proicct ui&L aCCOUnting systems (by October 31, 1986);

(b) a construction cost accounting system (by October 31, 1986);

(c) a budgeting system to be installed by October 1, 1987, to

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ANNEX 6Page 7

assist budget preparations for PY87/88; and

(d) a MIS system (by July 1, 1987).

6.3 ?UUIMAB will ensure that its financial statements for the year1984185 are completed and audited by October 31, 1986. PERUMNASwill implement procedures to enable future annual financialstatements to be audited within six months of the end of the fiscalyear. PERUMHAS will attempt to ensure that an unqualified auditopinion can be obtained for future years by systematicallyeliminating qualified items contained in past BPKP audits. PERUMNASmay attempt to hire independent external auditors if the State AuditAgency (BPKP) cannot fulfill the work on time.

7. Corporate Manpower Plan and Training Program.

7.1 PIRUMMAS will, by December 31, 1987, develop a corporate manpowerplan to reflect its three major tasks: (a) corporate planning; (b)design and production; and (c) marketing and sales. Technical staffrequirements and training programs to support the proposedreorganization plan will be developed.

8. Comunications Program to Assist Advertising, Marketing and Sales.

8.1 Hardware and software for multimedia presentations to support boththe demand analyses and marketing phases will be developed withconsultant assistance. A communications program for the corporationto include a review of all current marketing and consumer infor-mation aids/questionnaires will be completed by December 31, 1987.

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ANNEX 6Page a

APPENDIX TO AMNEX 6

Procedures to be Used in ExpeditingSales of Current Backlog

1. Irregular Plots. For those projects affected by the problem of lotsizes different from those indicated in the original commitment letter (CL),PERUMNAS will resubmit comprehensive project proposals to BTN whichincorporate site plans and specifications approved by the concerned localgovernment. BTN has undertaken to process these promptly. In the future,PERUMNAS will plan sites such that all but corner lots are of a standard sizeand will ensure that site development takes place in accordance with the siteplans incorporated in the CLs.

2. Notaries. To prevent delays in mortgage signing where there are nonotaries (at certain project locations), PERUMNAS (and BTU) will confirm withthe Ministry of Justice that the necessary documents can be executed in thepresence of Walikotas, Supatis or Camats.

3. Problem Applicants. In those cases where mortgage signing is heldup because the occupants of the house are different to those who signed theoriginal PPJB agreement, PERUMNAS will (subject to eligibility) officiallytransfer the PPJB agreement and subsequent mortgage agreement to the actualoccupants.

4. Problem Applicants. In cases where occupants have not accumulatedrequisite down payment by the end of the PPJB period (primarily due to houseprice revisions), PERUMNAS will either:

(a) demand the balance down payment in cash (or acceleratedinstallments); or

(b) if (a) is not feasible or the difference is small, PERUMNAS willwrite off the balance (i.e., give a discount), since the opportunitycost of delaying receipt of the mortgage funds will, in most cases,far exceed the amount in contention.

5. Delinquent PPJB Payments. Where occnpants have not made regularpayments or are in arears, PERUMNAS will:

(a) do an inventory of these arrears by age structure; and

(b) in the case of chronic cases, seek to evict such persons withoutrecourse to Ministry of Justice procedures, so that the unit may berellocated and sold.

6. Overpaid Down Payments. In such cases, PERUMNAS will request BTE toexpedite mortgage processing and pay back the excess amount to the occupantsfrom the mortgage proceeds.

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ANNEX 6Page 9

7. Inadequate BTU Staff. For large projects, where mortgage processingis delayed by inadequate BTN staff, BTN has committed itself to creating"flying brigades" to supplement local branch staff. This program should beclosely monitored by PERMUNAS and delays by BTU in the field reported directlyto the BTN Board.

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ANNEX 7Page 1

INDONESIA

HOUSING SECTOR LOAN

Technical Assistance Program V

A. Institutional Development Assistance for BTN

1. Consultant Services for Implementation of New Systems

Objectives: To implement new manual and automatedsystems for (a) loan administration,processing and accounting, includingarrears administration; (b) savingsadministration and accounting; (c)financial accounting and administra-tion; (d) management information; and(e) planning, programming and budget-ing.

Duration of Service: September 1986 - August 1988.

Costs:!' Nan-month Cost

(a) STN headquartersForeign 48 576Local 48 288

Subtotal 96 864

(b) BTU BranchesLocal 288 1,728

Subtotal 288 1,728

Total 384 2,592

1/ Terms of reference for technical assistance have been prepared by therespective agencies, with the assistance of consultants and Bank staff.All TORs were finalized by April 1, 1986 and are available in the ProjectFile.

2/ All costs are in US$ thousands. See Table 1 for overall suemmry.

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ANNEX 7Page 2

2. Management Advisor

Objectives: To provide BTNhs Board and senior staffwith advice and assistance on, interalia: (a) planning and monitoringmortgage lending and savingsactivities; (b) branch operations; (c)internal policies and procedures; and(d) reporting requirements.

Duration of Services September 1986 - August 1987

Costs: Man-months Cost

Foreign 12 144

3. Advisory Services for Manpower Planning

Objectives: To (a) review organizational structureand recommend changes to improve opera-tional performance; (b) assess existingmanpower and determine short-term andlong-term recruitment and trainingneeds, in light of corporate objec-tives; (c) design summary job descrip-tions and a performance appraisal sys-tem; (d) recommend new recruitment andtraining policies and programs, as wellas remuneration packages; and (e)develop a comprehensive manpower plan.

Duration of Services: September 1986 - August 1987.

Costs: Man-months Cost

Local 12 72

B. Institutional Development Assistance for PERUMNAS

4. Advisory Services for Manpower Planning

Objectives: To develop a detailed manpower plan,including identification of staffing,recruitment and training needs and rec-ommendations on required compensationpackages.

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ANNEX 7Page 3

Duration of Services: January 1987 - December 1987

Costs: Man-months Cost

Local 12 72

5. Advisory Services for Management and Finance

Objectives: To (a) advise PERUMMAS Board on overallpolicy, management, planning and finan-cial issues; (b) develop and implementa management information system; and(c) assist PERUMNAS in relations withBTN and other agencies.

Duration of Services% September 1986 - August 1988

Costs Man-months Cost

Foreign 24 288

6. Advisory Services for Project Monitoring System

Objectives: To design and implement a projectmonitoring system suited to PERUMNAS'needs, including on-the-job training ofproject managers to effectively use thesystem.

Duration of Services: September 1986 - August 1987.

Costs: Man-months Cost

Foreign 6 72Local 12 72

Total 18 144

7. Advisory Services for Computerization

Objectives: To determine PERUNNAS's computerizationneeds, including:

(a) identification and prioritizationof areas which would benefit from com-puterization;

(b) broad conceptual systems design;

(c) identification of a suitable ini-tial hardware configuration based on(a) and (b) above; and

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ANNEX 7Page 4

(d) recommendation of a computeriza-tion strategy and assistance with ini-tial implementation of the strategy.

Duration of Services: September 1987 - August 1989.

Costs: Man-months Cost

Local 12 72

C. Assistance to the Office of the State Minister for Housingfor Sector Policy Studies

8. Consultant Services for a Study of Housing Market Behavior in UrbanIndonesia

Objectives: To (a) provide accurate information onthe housing conditions and demand pat-terns of different groups (e.g., byincome, tenure and location) in orderto improve projections of housingdemand and affordability; and (b) pro-vide more accurate information on thesupply processes for formal and infor-mal housing and the related regulatoryand incentive frameworks in order toenhance the role of the private sectorin the provision of low cost housing.

Duration of Services: January 1987 to June 1988.

Costs: Man-months Cost

Foreign 36 432Local 36 126

Total 72 558

9. Consultant Services for a Post-Construction Evaluation of Low-CostHousin8

Objectives: To examine the post-construction expe-rience of PERUMMAS and privately devel-oped projects in selected locations(with special attention to rentalvalues, turnover, further investment inhousing, etc.) in order to improve thedesign and effectiveness of housingprojects and policies.

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ANNEX 7Page 5

Duration of Services: March 1987 to September 1988.

Costs: Man-months Cost

Foreign 18 216Local 24 84

Totel 42 300

10. Consultant Services for Housing Policy Analysis

Objectives: To (a) assist the Ministry in the anal-ysis of policy issues related to finan-cing and composition of the housingprogram, flats, urban renewal, etc.;(b) monitor and evaluate the progressof the Repelita IV program and HousingSector Loan; and (c) assist in detailedpreparation of the Repelita V housingprogram.

Duration of Services: January 1987 to December 1988.

Cost: Man-months Cost

Foreign 24 288

11. Consultant Services for Land Titling Study

Objectives: To (a) identify land related bottle-necks in t4e housing sector, includingland titling, measurement and registra-tion problems faced by PERUMNAS and BTNbeneficiaries; and (b) identify possi-ble solutions and technical assistancefor DC Agraria to ameliorate these.

Duration of Services: March 1987 - February 1989

Costs Man-months Cost

Local 24 84

-74- ANNEX?7Table 1

INDONESIA

HOUSING SECTOR LOAN

Summary of Technical Assistance Costs

Local Foreign TotalMan- Cost Man- Cost Man- Costmonths (US$'000) months (US$'000) months (US$'000)

BTNSystem implementationHead office 48 288 48 576 96 864Branches 288 1,728 - - 288 1,728

Management advisor - - 12 144 12 144Manpower planning 12 72 - - 12 72

Subtotal BTN 348 2,088 60 720 408 2,808

PERUMNASManpower planning 12 72 - - 12 72Management consultant - - 24 288 24 288Project monitoring system 12 72 6 72 18 144Computerization 12 72 - - 12 72

Subtotal PERUMNAS 36 216 30 36 66 576

Office of the State Ministerfor HousingHousing market study 36 126 36 216 42 300Post-construction evaluation

study 24 84 18 216 42 300Housing policy analyst - - 24 288 24 288Study of land titlingand TA for Agraria 24 84 - - 24 84

Subtotal Office of theState Minister forHousing 84 294 78 936 162 1,230

Equipment and Training - - - 750 - 750

Total (Base Cost) 468 2,598 168 2,766 636 5,364

Price Contingencies - 300 - 400 - 700

GRAND TOTAL 6,064

- 75 -

ANNEX 8

INDONESIA

HOUSING SECTOR LOAN

Estimated Disbursement Schedule(US$ mln)

Estimated CumulativeIBRD Fiscal Year disbursements disbursements

Total z

1987First semester 2.7 2.7 1.0Second semester 19.3 22.0 8.0

1988First semester 41.3 63.3 23.0Second semester 46.7 110.0 40.0

1989First semester 55.0 165.0 60.0Second semester 41.3 206.3 75.0

1990First semester 10.2 236.5 86.0Second semester 18.7 255.2 93.0

1991First semester 14.3 269.5 98.0Second semester 5.5 275.0 100.0

- 76 -

ANNEX 9

INDONESIA

HOUSING SECTOR LOAN

Documents Available in the Project File

1. Mission Working Papers

(a) Back-up Tables for Economic Analysis

(b) Back-up Tables for Financial Analysis

(c) Consultant Report on BTN

(d) Consultant Report entitled "Analysis of BTN's Financial Performance"

2. Other Documents on Sector/Institutional Issues

(a) Ministerial Decree No. 08/KPTS/85 by the Minister for Housing,regarding "policy and program for housing supply supported bymortgage financing from Bank Tabungan Negara (National Savings Bank)during Pelita IV', dated September 10, 1985 (translation datedOctober 14, 1985); d

(b) Letter to the Board of Directors, Bank Tabungan Negara from theBosrd of Directors, Bank Indonesia, regarding "Home MortgageFinancing", dated September 9, 1985 (translation dated October 14,1985);

(c) Government of Indonesia, Housing Sector Policy Statement, March 17,1986.

(d) USAID, Indonesia -- Shelter Sector Assessment, January 1985.

(e) Terms of Reference for all items in Technical Assistance Program(Annex 7).

(f) Formats for BTN Subproject Appraisal Summary and Quarterly Report.

_ 77 -

ANNEX 10Page 1

INDONESIA

HOUSING SECTOR LOAN

Government of Indonesia

Housing Sector Policy Statement (Summary Version)

1. The Government of Indonesia has developed and adopted a detailedhousing mortgage financing program for fiscal years 3, 4 and 5 of Repelita IV(1986-89). The development of this program was co-ordinated by the Office ofthe State Minister for Housing, working closely with the key agencies in thehousing sector, and focuses primarily on the supply and mortgage financing oflow cost units affordable by low and middle income families. The program iscontained in the policy directive (Surat Keputusan No. 08/KPTSI1985) issuedand signed by the State Ministar for Housing on September 10, 1985. Therevised mortgage lending terms and conditions required for the program areofficially described in a letter from Bank Indonesia's Board of Directorsaddressed to the Board of Directors of Bank Tabungan Negara (BTN), and isdated September 9, 1985.

2. Key government objectives in the design of the program are thefollowing:

(a) to reduce the reliance of the housing finance system on scarcegovernment funds and to introduce new instruments for resourcemobilization;

(b) to expand access to housing finance for low and middle incomehouseholds;

(c) to reduce overall subsidies and target remaining subsidies to thelower income groups who are able to qualify for home ownership;

(d) .o stimulate the production of more low-cost housing by eliminatinginefficient regulatory controls and by encouraging fullparticipation by both public and private developers on a non-discriminary basis;

(e) to generate employment at low foreign exchange cost; and

(f) to strengthen the key institutions in the housing sector which playa direct or major role in the supply and mortgage financing of lowcost units, namely Bank Tabungan Negara (BTN) and Perum Perumnas(The National Urban Development Corporation).

3. The mortgage financing program for the remaining three years ofRepelita IV establishes quantitative targets for each unit type. Thesequantitative targets are contained in the Surat Keputusan No. 08/KPTS/1985 andspecify that a 70:30 ratio will be applied, whereby 70% of the units financed

- 78 -

ANNEX 10Page 2

by Bank Tabungan Negara should be unit types D36 or smaller, and that theremaining 30% of the program may be larger than the unit type D36. Thefinancing program has since been modified by the Government to reduce unittypes larger than D36. In addition, to ensure sufficient viability in projectproposals over the three year program, the number of D45 and D54 unit types tobe financed by Bank Tabungan Negara in 1986-87 will be limited to one-third(1/3) of the 3 year totals for these unit types.

4. Both Perum Perumnas and Bank Tabungan Negara have supervisory boards(Dewan trngawas) which meet on a regular basis to review agency performance.These suji.rvisory boards will continue to fulfill their duties andresponsioilities. However, to monitor program implementation and furtherdevelop National Housing Policies, both in the short term and for Pelita V andbeyond, a Coordinating Committee, chaired by the State Minister for Housingwill be established. The Coordinating Committee will be charged withresolving issues and problems which emerge during the implementation of S.K.No. 08/KPTS/85. The Coordinating Committee will be commissioned by the StateMinister for Housing and will consist of senior officials from relatedministries, institutions and interest groups.

5. Recent changes in the Government of Indonesia's housing policies arebased on the recognition of the need for an integrated set of policies whichattack a wide variety of constraints to the supply of affordable housing.Over the next two year period, the Office of the State Minister for Housingintends to study the problems associated with input markets, such as landmarkets, finance and the supply of infrastructure with particular emphasis onrationalizing the two principal policy instruments available to theGovernment -- subsidies, whether direct or indirect, and regulatorycontrols. These studies are expected to provide useful information indeveloping national policies and programs for use in Pelita V and the periodbeyond. Future objectives therefore will be to further reduce the reliance ofthe housing finance system on government funds; to expand access tohomeownership to a broader range of income groups; to target subsidies moreefficiently; and to eliminate regulatory controls which adversely impact themarket for housing. Competition in the mortgage financing market placeremains one other important future objective to be achieved in the relativenear term.

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