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Shelter
February 1985
>> This Is USAID >> USAID Policy Papers >> Shelter
[Download original document] VII. Determination of Countries Suitable for Shelter Project Loans
1. Country Need for USAID Resources for Shelter
Sectoral issues which would establish a country's need for USAID assistance include the following:
- Recognition that deficits in shelter and shelter production are adversely affecting economic efficiency and productive potential.
- Reasonable prospects that the LDC will make progress in correcting inappropriate shelter policies, such as the use of unaffordable shelter sector standards, reliance on deep subsidies, or inadequate cost recovery, or other problems that can be usefully ad dressed by USAID programs which will lead to substantial increased efficiency in the utilization of domestic shelter sector resources.
- An assessment of the LDC's need and willingness to increase the mobilization of sufficient domestic savings to support essential shelter production. The identification of opportunities for enhancing the private sector's role in the shelter sector. The determination that USAID's shelter sector initiatives will be supportive of the overall USAID country strategy and the LDC's national development objectives.
2. Country Risk and Capacity to Service HG Loans
The determination of the eligibility of countries for market rate loans will be based on a case by case analysis of their debt servicing capabilities and an assessment of the prospects for timely repayment and of the risk of payment interruptions and consequent drain on HG reserves. The objective is to minimize the risk of lending to those countries which may soon be confronted with acute balance of payments and debt servicing problems. This analysis should be undertaken early in the project development process and any issues identified and re solved at the CDSS or OYB stage of project preparation. The analysis required is dynamic in nature. The level and rigor of analysis should be in line with generally accepted professional standards and with those followed by other U.S. Government agencies dealing with international loans. The time frame selected should be based on professional considerations. It should consider, among other factors, the volume of existing and projected debt, its costs, the time profile of servicing obligations, the economy's structural capacity to earn foreign exchange, past patterns and future prospects for economic growth and foreign trade, past management of external debt, and the effect of additional HG debt on its debt structure and debt service. The analysis should also assess whether a potential borrower is operating within an internal policy environment conducive to maintaining or improving its capacity to service external borrowing. USAID requires as a condition for its Housing Guaranty that the borrowing country either provide its sovereign guaranty or other acceptable guaranty to USAID to compensate USAID for any payments made to in investors. The sovereign guaranty of the borrowing country constitutes the maximum assurance USAID can have that HG loans will be repaid in dollars over the long-term.
3. HG Reserves Considerations
The HG loan program is not immune to the foreign debt servicing problems which many of the LDCs experience from time to time. The reason for applying credit worthiness standards to HG loans is to enhance the prospect of timely debt service performance and in this way minimize drawdowns of the reserve fund. As the HG loan from the private U.S. investors is protected 100% by the full faith and credit of the U.S. government, the investors look to the guaranty for the security of their investment and, therefore, perform no meaningful risk analysis on their own behalf. The purpose of the reserve fund is to provide for immediate compensation to the private U.S. investor for any delay in loan service receipts due. It therefore increases the attractiveness of HG loans as a media for investment.
A result of a series of non-performing HG loans (delinquencies, debt reschedulings, losses written off and in rare cases default) would be the ultimate depletion of the reserve fund and the inescapable requirement to ask Congress for appropriations to replenish it. Congress could be expected to take action to preserve the full faith and credit of the U.S. government guaranty backing outstanding HG obligations. However, there is no assurance that such action will result in a higher level of foreign assistance appropriations than would have been authorized in the absence of the necessity to accommodate the requirements of the HG program. Therefore, the accumulative result of non-performing HG loans and the requirement to make good the concomitant guaranties could result in unintended competition for new appropriations between HG loans authorized in the past and urgent current needs. Thus, the major difference between HG loans and ESF or DA loans is the risk that non-performing HG loans will result in the a priori attribution of precedence to the HG program over competing development programs, unplanned cuts in high priority items in our appropriations requests, and diminished control over allocations of FAA resources among countries and uses. These are the reasons more vigorous debt servicing capability analysis designed to identify risky countries is required for HG loans than for DA or ESF loans.
4. Ineligibility of Very Poor Countries
As a general principle, market rate HG loans are not an appropriate form of development assistance for very poor countries. Therefore, those countries which receive IDA credits, but not IBRD loans, will receive HG loans only after special justification is approved by Assistant Administrator of the Regional Bureau concerned and PPC, or the Administrator for the exceptional country.
Characteristically, these very poor countries, as defined above, have shallow resource bases and, consequently, slim prospects for improvement in their export earnings relative to their minimum import needs. In order not to jeopardize their long term development hopes, these countries must exercise caution in mortgaging their prospective export earnings. They must examine carefully both the terms of their foreign borrowings and the purposes for which such debts are incurred. The thirty year life and the ten year grace on principal repayments of the typical HG loan are advantageous, but the near commercial rate interest rate is not appropriate for the world's poorest countries. It is USAID's general policy to make all of its assistance to the Least Developed Countries in the form of grants if the availability of grant funds permits. In ranking competing needs for the small volume of nonconcessional foreign loans they can afford to service, priority must be given to financing the essential imports requirements of highly productive investments which will improve the economy's trade balance and its foreign debt servicing capabilities. Shelter projects require few imports (typically less than ten percent of the total cost). Hence they can be financed largely with local resources. They will not improve the debt servicing capability of the borrower. Therefore, shelter projects merit low priority in the competition for foreign loan resources.
Given these circumstances, a market rate HG loan to a very poor country can be justified only if the Mission concerned can demonstrate that the free dollars in excess of the requirement for imports for the shelter projects will be used in support of a sound investment program within the context of acceptable economic policies so that the benefits to the economy in terms of enhancement of its productive base and/or debt servicing capacity will exceed the cost of servicing the market rate HG loan over its life term. Alternatively, a HG loan may be justified if the Mission can demonstrate that the free dollars made available through the HG loans are programmed for investment in a specific set of priority productive projects which will yield high returns in increased production for exports or decreased import requirements, and that these benefits will exceed the cost of the HG loan.
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Last Updated on: July 11, 2001 |
