United Nations Capital Development Fund

I. Basic Project Data

Type of Evaluation:	Final
Project Number:	ETH/89/CO7
Project Title:	Lafto Low-Income Housing Area Improvement Project
Government Executing Agencies:	Project Implementation Office (PIO) of the Addis Ababa Municipality Construction and Business Bank
UN Cooperating Agencies:	United Nations Development Programme
Sector:	Human Settlements (0900)
Sub-sector:	Housing and Infrastructure (0920)
Project approval date:	28 June 1990
Project start date:	August 1990
Project end date:	December 2000
Evaluation date:	19 April 2001 – 27 April 2001
Project Budget
UNCDF:	US$ 5,266,233
UNDP:	n/a
Government of Ethiopia:	2,623,000
Beneficiaries:	n/a
Total:	7,889,233
Actual Expenditures at Evaluation:	6,413,065

* Note:Government disbursed Birr 3,080,511 (In June 1990,the exchange rate between the US$ and the Birr was: US $ 1.00 = Birr 2.07)

II. Background

The project originated from a 1988 request by the GOE to UNCDF to finance a housing and infrastructure project in Lafto (a new residential area established eight km outside of the city center) , where the Government was planning to relocate 1, 500 families. These families were to be mainly drawn from low-income families of Teklehaimanot (a congested settlement near the center of Addis Ababa) in order to relieve the congestion in that area. The income distribution profile targeted by the project were to be as follows:

Income Range

(Birr/Month)	% of Households	No. of Households
100-170	15 %	225
170-250	65 %	975
above 250	20 %	300

The project included the construction of 1, 500 houses and the development of new access roads and other basic infrastructure. According to the project document, the following were the two main priorities of the GOE in the Housing and Urban Sector:

Improve the delivery system of housing, especially to low-income households, in a manner that ensures mixed development in the most resource efficient manner possible, keeping in mind the constraints of the economy.
Develop the present institutional base of the housing finance system so that it contributes to housing development, as well as provides a growing resource pool to the financial system at large.

The proposed project by the GOE in Lafto was similar to the World Bank-funded URBAN I project. UNCDF, building on the experience gained from URBAN I and through its continued support of the key participating institutions, decided to support the development of the Lafto project.

III. Description of the Project

The Development Objectives

The development objectives of the project are: “to improve the living standard of the urban poor by strengthening the financial capacity of the Housing and Savings Bank (now the Construction and Business Bank, CBB) and to put in place a series of interventions which will enable the construction sector to utilize resources more effectively, thereby enabling the production of more affordable housing units for low-income beneficiaries. This corresponds with the Government ’s objectives, which singles out investment, resources mobilization, and the construction sector as critical in improving the possibility of economic recovery and growth. ”

Immediate Objectives

To provide loan assistance to 1, 500 low-income households for self-help construction of individual housing units by creating a Revolving Loan Fund (RLF) at CBB (formerly HSB) according to the needs of the project. The RLF will be drawn by CBB in tranches and will be utilized to fund eligible households identified for resettlement at Lafto.
To develop a plot called Lafto at Goffa Sefer by providing necessary infrastructure for the planned 1, 500 housing units. For this purpose, a foreign exchange account will be created, operated by CBB, to defray the initial foreign exchange requirements.

The project included the following components to produce a settlement that would meet the preference of the potential beneficiaries and increase the prospect of resettling them from the inner city:

A site development component;
Construction of 1, 500 houses;
Establishment of a RLF for the provision of housing loans to 1, 500 families; and,
Four satellite projects to support the social aspects of the main projects

IV. Evaluation Findings

Evaluation of Results

Overall, the project has met most of its immediate objectives. The project has completed the construction of the 1, 500 houses as targeted by its immediate objectives, and has successfully relocated 1, 500 families into these houses. However, the project was designed to accommodate at least 750 families (50% ) from the lower income group as target beneficiaries but ended up serving mostly people in the higher income bracket.

The site development construction, including roads, water systems, and bridges, has also been completed. Except for a small portion of the street lighting, all other electrical work has been completed. The beneficiaries are now enjoying better living conditions, and the entire Lafto area has become an active economic development center. Small businesses, especially construction-related manufacturing firms, have sprung up around the area. The project impact on the housing situation is that it has added more than 1, 500 housing units to the city housing stock, and has injected life into private housing development activities (construction and material supplies) in the area.

Impact

Although the living standard of the beneficiaries has improved due to their access to better housing conditions, many of the targeted low-income beneficiaries were not reached. Therefore, the development objectives have been partially met. Also, the development objective that calls for the strengthening of the financial capacity of CBB to expand its outreach into the housing market has not been fully achieved. Most of the housing finance offered by the bank is subsidized loans to cooperatives using donor ’s capital, and in some cases its own capital. Despite the absence of key performance indicators linked to this objective, there is no evidence today that the bank has increased its activities in that sector, nor is there any evidence that the project ’s lending component was sufficiently profitable to ensure the sustained activities of the bank in that sector.

This, however, may be due to the unclear formulation of the development objectives in the original project document, underscored by the fact that there is a total absence of specific activities targeted at capacity building to improve the bank ’s outreach and innovation of new financial products for the sector. Furthermore, it is also important to note that the project was developed in 1989, at the time when the banking sector was fully controlled by the Government with no incentive for innovation and no perceived need for financially sustainable solutions. Hence, when the development objectives call for the “strengthening of financial capacity, ”its interpretation by the local partners could be diverse.

The project also suffered from the following shortcomings:

The project deviated substantially from its intended beneficiaries, serving people in a higher income bracket.
The construction costs overran by more than 79% during the implementation.
CBB has not fulfilled its reporting requirement to UNCDF on the performance of the RLF since April 1998.
The RLF was set up without any specific operational and financial sustainability goals. Loan terms do not reflect the cost of capital, the cost of operating the loan fund, the default rate, and any margin that CBB might want to earn.
Though the revolving loan fund is performing well according to the current contract between CBB and the cooperatives, the analysis of the individual repayment rate indicates a weaker loan portfolio.
CBB is taking 67% of the interest income for its administration fees, leaving only 1/3 of the interest income (1. 5% ) in the RLF, which in essence is decapitalizing the loan fund.

Evaluation of the Project Design

The Lafto project is based on URBAN I project of the World Bank. While the project document provided detailed information about the technical aspects of the housing construction, it lacked thoroughness on the following key aspects that, we think, would have added critical value to the implementation process:

The development objectives of the project were vague. The absence of specific activities and the disconnect between the development objectives and the imme- diate objectives led many of the local partners to concentrate on the immediate objectives because they were descriptive enough and could be linked to most of the project activities, especially in terms of their outputs.
The monitoring and implementation plan was basic and did not provide sufficient information and guidelines to facilitate an effective and systematic monitoring of the project.
The details of the lending process, including the roles and responsibilities of the bank, the cooperatives, and the individual borrowers, should have been spelled out in the project document.
The housing construction process should have been researched and included in the project document. While it may be true that because of the initial GEA ’s previous experience with a similar project (URBAN I) , it was not necessary to reinvent new processes, these processes should have been reviewed during the project formulation.
The project design did not provide an effective institutional framework to guide implementation. The interrelated linkages between all the project stakeholders should have been analyzed in the project document.

V. Recommendations

General Recommendations

The development objectives should be explicit, supported by project activities, and clearly linked to coherent key performance indicators.
To ensure that the project does not deviate from its target, the criteria for beneficiary selection should be realistic and reflect the dynamic nature of social economic conditions especially in multi-years projects.
For future project designs, a comprehensive exit-strategy should be formulated and included in the project document. This plan should spell out the modalities of the project closing.
The modalities of the collaboration between the participating partners should be described clearly and concisely in a document that is more binding than the general project document. A formal Memorandum of Agreement or a Partnership Contract should be used.
Include a comprehensive monitoring and evaluation plan in the project design, and ensure that this plan is systematically followed during project implementation.
For future lending programs, interest rates should be at the market level taking into consideration the cost of capital, expected loan losses, the related administrative costs, and a reasonable margin to ensure the integrity and the sustainability of the loan fund.
UNCDF and the GOE should negotiate with CBB to deposit the available balance of the RLF into an interest bearing account at a rate of no less than the minimum deposit rate on savings (currently 6 % ) .

Recommendations for the Future of the Revolving Loan Fund

The Ethiopian stakeholders proposed options 1, 2 and 3 outlined below during the debriefing by the evaluation team in Addis Ababa on April 27, 2001. The evaluation team, as a result of its findings, proposes options 4 and 5. It is important to note that these options proposed by the evaluation team do not in any way commit UNCDF. The final decision on how and when to use the remaining (and expected) resources of the RLF should be taken through negotiations between the GOE and UNCDF.

Option 1: Use the RLF to fund a housing project for 320 beneficiaries in ASCO (see project summary in Annex B)

Option 2: Funds to be allocated to other projects in different sectors by the Ministry of Finance, if not reprogrammed by the PIO.

Option 3: Research and develop other urban development projects that are integrated with UNDP Programs

Option 4: Research and establish a new Housing Micro-credit Program

Option 5: Implement a Local Environmental Health Program (LEHP)

In principle, we recommend that the RLF be viewed as seed capital that would leverage additional resources for urban development solutions to benefit low-income families.

VI. Lessons Learned

Housing as a Catalyst for Poverty Reduction

Housing development can be a catalyst for poverty reduction. As demonstrated in the Lafto project, the productive activities generated by the housing construction and the related businesses can help reduce poverty.
Lump Sum Subsidies instead of Interest Rate Subsidies

Should the Government provide assistance to lower-income groups, interest rate subsidies should be avoided in favor of a lump sum subsidy. Interest rate subsidies do not address the main housing procurement problem facing the lower-income population (i. e. access to credit) . Instead, it distorts the housing finance system, especially if the subsidy is provided over a long time period.
Increase Serviced Land release to Facilitate Housing Delivery

Rapid land release is a key catalytic requirement of an effective housing delivery policy/program. There can be no increase in housing delivery without access to serviced land. To encourage private sector housing development, the Government should accelerate its land release program to allow more development by commercial entrepreneurs and individuals.
Support a Flexible Regulatory Environment in the Housing Finance Sector

In relation to the above, the Government should also help secure a favorable regulatory environment to allow innovation in the housing finance market. New and flexible housing credit instruments will accommodate more needs, combined with a rapid land release, it will enhance housing development activities.
Capacity Building of Lower-Tier Government Entities

Capacity building of lower-tier government structures is critical to the success of any economic and urban development policy, especially when the provision of services is decentralized. The Kebeles and Woredas now face increasing responsibilities as part of the Government ’s decentralization policies and will need to become more effective in the provision of services to the low-income groups they serve.

VII. Composition of Evaluation Mission

Alain Noudehou, Community Habitat Finance (CHF) International, Team Leader, Housing and Housing Finance Specialist
Alemayehu Azeze, Consultant