# USAID Policy Paper

## Shelter

**Bureau for Program and Policy Coordination**

**U.S. Agency for International Development**

**Washington, D.C. 20523**

**February 1985**

**Shelter Policy Paper**

**TABLE OF CONTENTS**

Preface 3

Executive Summary 3

USAID Shelter Policy Paper 5

I. Introduction 5

II\. The Shelter Sector Context 6

III\. Framework For Developing Shelter Strategies 7

IV\. USAID\'s Shelter Sector Objectives 9

V. USAID\'s Instruments for Implementing Shelter Programs 10

VI\. Types of Shelter Programs Appropriate for USAID Support 13

VII\. Determination of Countries Suitable for Shelter Project Loans 14

VIII\. Allocations of USAID\'s Shelter Sector Resources within the
Recipient

Country 16

Appendix-Implementation of The Housing Guaranty Program

**PREFACE**

This Shelter Sector Policy supersedes PD‑55, \"Shelter Program
Objectives\" approved on October 24, 1974. This revision reflects the
additional experience USAID has gained since then, in responding to the
shelter requirements of the LDCS. This policy statement also describes
the forms of assistance which may be available for financing shelter
projects and sets out the criteria for determining the most appropriate
form for individual developing countries. The primary vehicle has been
the Housing Guaranty (HG) program. The HG projects are often
supplemented by DA or ESF financed capital and technical assistance
concerning housing policy formulation, institutional development and
training, and the introduction of appropriate technologies in the form
of innovative housing design, and support for the private sector as the
main vehicle for the delivery of shelter.

**EXECUTIVE SUMMARY**

The Shelter Context

Spontaneous shelter activities are high on individual priority lists.
People throughout the world will invest personal time and energy in the
construction and improvement of their own homes. Experience has proven
this to be as true in the upgrading of reed huts to tin and ultimately
to brick, as it is in the \"do-it-yourself\" construction activities of
developed countries. It is USAID\'s policy to take account of and
encourage these private energies. They act as a \"multiplier effect\" on
official inputs.

Shelter is a basic human need, following the need for food and clothing.
Most LDCs recognize shelter as a priority in their development
strategies because it is a basic aspiration of their people.

 Investment in the shelter sector represents the largest capital
investment in urban centers. Therefore, shelter policies, planning, and
programs which are efficient, affordable, and seek maximum cost recovery
are important components of national economic development and urban
policy.

 Shelter is one of the highest priorities of low-income households. It
represents a household\'s largest capital asset and is a major stimulus
to individual saving.

 Shelter contributes to national economic growth objectives directly,
through its stimulation of the construction and building materials
sector, and indirectly through the furniture and household products
industries. It provides jobs for large numbers of unskilled labor.
Shelter construction by the formal and informal private sector accounts
for the overwhelming portion of new shelter produced in developing
countries.

**USAID\'s Shelter Sector Objectives**

USAID\'s shelter sector objectives recognize the relationship of shelter
to overall economic development and to the basic priorities of the
Agency. They are to:

 Assist in the formulation of rational housing policies.

 Demonstrate the feasibility of shelter solutions poor families can
afford.

 Facilitate mobilization of additional local resources for financing
shelter.

 Develop sustainable shelter and urban service institutions.

 Increase participation of the private sector, including the informal
sector.

 Encourage the use of energy and resource efficient housing designs,
technologies and standards consistent with the objective of producing
shelter which is affordable.

 Increase the survival rate of people and buildings in disaster prone
areas through adoption of appropriate zoning and building regulations.

The overwhelming portion of annual additions to the LDC shelter stock is
the product of the effort and energy of the informal private sector. Any
shelter program with the goal of meeting minimum shelter needs must
acknowledge, facilitate, and support these informal sector efforts.

While significant, the shelter needs of a developing country are
solvable within a finite period if realistic and affordable minimum
housing standards are established, and appropriate financial policies
adopted. Analyses undertaken in a number of countries have shown that
basic shelter needs can be satisfied with a marginal increase in
national investment, if realistic design standards and financial
policies are adopted.

The magnitude of the shelter sector requirements of LDCs far exceeds the
resources available from USAID Therefore, it is essential that USAID
resources for shelter

be fully exploited as a catalyst to help the LDCs mobilize their own
resources for shelter and to use them more efficiently equitably. It is
also important to coordinate our technical and capital assistance with
that of other donors to the greatest extent possible.

USAID\'s shelter programs must benefit, directly or indirectly,
households below the median income level of the country or city of
concern.

Programs to meet USAID\'s objectives can include: provision of access to
secure land tenure for low-income groups; modification of inappropriate
building standards which unnecessarily result in structures that poor
families cannot afford; strengthening of weak institutional structures;
modification inappropriate interest rates; reduction of direct or direct
subsidies for housing; and emphasis on objectivity of shelter decision
by government.

**Forms of Assistance Appropriate for Shelter Projects**

Shelter programs should be based on justification in a Country
Development Strategy Statement (CDSS). Shelter projects are appropriate
for financing with DA, ES dollars, PL 480 and FAA generated local
currencies in all countries. USAID will continue to be sympathetic to
requests for assistance for reconstruction of shelter in countries
struck with earthquakes or floods, or other disasters. DA or ESF fund
may be used for such disaster relief as appropriate to the individual
country situation, if adequate PL 480 or FAA generated local currency is
not available.

Country eligibility for Housing Guaranties (HG) will be based upon the
judgment of the Mission, ME, the regional bureaus, an PPC upon an
analysis of the sectoral, economic, and political feasibility of the
proposed program. A thorough analysis of the debt servicing capability
and record is required for every candidate in order to identify
borrowers with doubtful prospects for meeting their loan servicing
obligations on schedule. This risk analysis must be under taken early in
the project development process and any issues identified and resolved
the first stages of project preparation. One reason for applying credit
worthiness standards to HG loans is to enhance the prospect of timely
debt service performance an in this way minimize drawdowns of the
reserve fund.

As a general principle, market rate HG loans are not an appropriate form
of development assistance for very poor countries. Therefore, countries
which receive IDA credits, but not IBRD loans, may receive HG loans only
after special justification for the exceptional country is approved by
the Assistant Administrator of the Regional Bureau concerned, and the
Assistant Administrator for PPC or by the Administrator.

Characteristically, very poor countries, as defined above, have shallow
resource bases. Consequently, the prospects are slim for sustained
improvement in their export earnings relative to their minimum import
need. In order not to jeopardize their long term development hopes,
these countries must exercise caution in mortgaging their prospective
export earnings. These countries 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 interest rate is not appropriate for the world\'s poorest
countries. In ranking competing needs for the small volume of
nonconcessional foreign loans very poor countries can afford to service,
priority over shelter projects 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 per cent 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.

**USAID SHELTER POLICY PAPER**

**I. INTRODUCTION**

\"USAID\'s goal in the shelter sector is to assist LDCs to develop the
institutional, technological, and financial capacity to provide shelter
under reasonable conditions for all levels of society, with emphasis on
government actions to meet the needs of the poor.\" This opening
sentence from the PD‑55, \"Shelter Program Objectives\", October 22,
1974, still summarizes the overall objective of the Agency. However, in
the nearly ten years which have gone by since this last Shelter Policy
Paper, USAID has gained substantial experience with shelter programs and
projects. It is, therefore, appropriate to redefine USAID\'s Shelter
Sector Policy in light of this experience and changing conditions.

For over 20 years, USAID has made an important contribution to
understanding and designing solutions to the shelter problem of the
LDCS. The vehicle has been capital provided through the HG program in
combination with grant-financed technical assistance in housing policy
formulation, institutional development and training, and the
introduction of appropriate technologies in the form of innovative
housing designs. USAID has been a pioneer of the sites and services and
settlement upgrading concepts and support for the private sector as the
main vehicle for the delivery of shelter.

During this 20-year history, USAID through the HG Program, has
undertaken 152 projects in 44 developing countries with over one billion
dollars in disbursements and \$1.5 billion in authorizations. Among
donor countries, the United States provides the largest amount of
assistance to the shelter sectors of developing countries through the HG
program.

**II. THE SHELTER SECTOR CONTEXT**

Shelter is a basic human need, following the need for food and clothing.
Most LDCs recognize shelter as a priority in their development
strategies, because it is a basic aspiration of their people and it is
an essential component for sustained national economic growth. Shelter
provides essential contributions to overall national economic
development

which, when combined with its social benefits, justifies a claim on an
appropriate level of national and international resources in relation to
investment in other sectors. In this sense, shelter and infrastructure
contribute toward making investments in other sectors, such as industry
and agriculture, more productive. A minimum level of shelter is
essential to productive workers.

Well located and designed shelter and urban services and facilities are
an essential part of the productive investment base of any modern
economy and contribute to the efficiency and productivity of national
development programs.

The supply of shelter is critical to the orderly growth of urban areas.
Shelter represents a significant share of overall urban investment from
both public and private sources. Typically, the informal sector has
provided 80 percent of the existing housing stock, without the benefit
of formal lines of credit. The efficiency and productivity of this
informal investment is of critical importance to individual households
as well as to national development.

Shelter and urban services and facilities create demand within the
domestic construction and building materials industries. A dynamic
construction industry is essential for overall national development.
Shelter construction, both formal and informal, can provide major
stimulus to the development of skills, entrepreneurship, and the capital
investment necessary to make the construction sector a major contributor
to national economic growth. It also provides a point of entry into the
job market for many unemployed and unskilled workers and can stimulate
small-scale and informal private sector contractors.

The maintenance of an adequate supply of well located and affordable
shelter contributes to overall worker productivity. The incentive of
home ownership can attract otherwise unavailable private savings into
the banking system. It contributes to the national capital stock. For
most low-income households, home ownership is their most likely means of
accumulating capital assets which in turn can be mortgaged to provide
working capital for small-scale enterprises and other household economic
purposes. Housing contributes to consumer demand for household products
and furniture, further strengthening other sectors of the economy.

The scale of the shelter sector challenge in the LDCs is enormous. The
United Nations estimates that urban areas in the LDCs will increase by
one billion persons between 1980 and 2000. Most of these people will be
poor USAID estimates that 300 to 350 million new housing units will be
required as replacement stock and to accommodate new household
formation, and between 41,000 and 105,000 square kilometers of new land
will be urbanized depending on the densities and policies selected. The
World Bank estimates that over \$600 billion will be required to meet
the water supply and sanitation requirements of the expected population
growth.

It is apparent that the selection of appropriate policies, interest
rates and standards, the pursuit of cost recovery mechanisms, the
mobilization of private savings for investment in shelter, the
coordination with other donors, the appropriate distribution of
responsibilities between the public to the private sectors, and the
efficiency of both the formal and informal shelter sector delivery
systems can have a major impact on the ability of LDCs to meet the
enormous challenge of urban growth. USAID, through its shelter sector
programs, can do much to assist LDCs to meet the challenge with
technical assistance, training, and selected capital assistance through
the Housing Guaranty mechanism.

USAID\'s research studies, now in process or being further developed,
show that most shelter sector needs of LDCs can be met through the
adoption of appropriate policies, affordable standards, and private
resource mobilization without adversely effecting other development
sectors.

**III. FRAMEWORK FOR DEVELOPING SHELTER STRATEGIES**

In seeking to improve the physical living conditions of its people, the
typical developing country is confronted with a series of difficult
problems. In assessing a proposed Shelter program for any country, the
Mission should make a judgment on whether its economic policy
orientation is consistent with reasonable expectation. Policy dialogue
objectives should be considered as part of a shelter strategy. Typical
problems to be reviewed include:

*1. Difficult National Economic Conditions*

Inflation, unrealistic interest rate policies, excessive levels of
subsidies, low levels of income and employment, and inadequate know-how
impede investment in and overall production of shelter. As a component
of the development strategy for an individual country, USAID\'s
involvement in shelter programs can help address some of these economic
problems and thereby influence the productivity of domestic savings
invested in shelter.

*2. Politically Charged Approach to Shelter Problems*

The combination of limited economic resources, the rising expectations
of populations in developing countries, and competition between interest
groups, make many aspects of development the subject of vigorous
political debates. Shelter is no exception. USAID may help LDCs to avoid
the sacrifice of long-term goals in shelter development for short-term
political expediency by maintaining a continuous policy dialogue with
host country officials, and encouraging the long-term support for
technical personnel and the private sector.

*3. Limited Access to Urban Land and Secure Tenure*

Inappropriate urban land policies often contribute to increased land
costs to the urban poor, inefficient land use, and increased
infrastructure and service costs. Unclear tenure inhibits urban
development and limits access of households to more formal lending
institutions. Development of simplified procedures to assist in
evaluation of satisfactory mechanisms for determining and transferring
title are vital to a healthy residential land market.

*4. Inappropriate Physical Development Standards*

The legal standards for physical development of housing units and
related urban services and facilities are often too high and therefore
too expensive for the majority of the urban population to afford. Since
low-income housing is very often built by the occupants themselves, such
standards affect low-income groups adversely. Greater inequities in the
shelter delivery system are the result. An example is the denial by the
government of urban services to self-built homes which are below
prevailing legal standards.

*5. Limited Institutional Capacity*

The process of development is frequently hampered by the limited
institutional capacity of the host country. Shelter policies and
programs, even when well designed, may fail due to the lack of skilled
professional personnel, inefficient procedures, dearth of basic data to
formulate appropriate policy decisions, and the lack of coordination
among various agencies responsible for implementing aspects of a shelter
program.

*6. Failure To Maximize Private Savings*

Many LDCs have not yet developed the financial policy framework or
institutional structure necessary to mobilize adequate private savings
for shelter sector investment. About 80 percent of shelter finance is
currently provided through informal channels. The remainder is supplied
through formal credit institutions which generally serve middle and
upper-income groups. While international transfers, such as the HG
program cannot substitute for domestic savings mobilization, they can be
used catalytically to assist in mobilizing domestic savings.

*7. Inappropriate Interest Rate Policy*

Host government policies often hamper the mobilization of indigenous
financial resources which might otherwise be available for shelter.
Ceilings imposed by the government on interest and/or below the
reasonably expected rate of inflation (so as to make them negative in
real terms), discourage the flow of investment funds into home finance
institutions and often lead to their ultimate decapitalization.

*8. Excessive Subsidies*

The needs of the developing countries for shelter are vast compared to
the availability of resources for meeting them. Therefore, the
prerequisite for any successful housing policy addressing the needs of
the poor majority is recognition by the government concerned that
programs dependent on public subsidies can only make a small dent in the
huge need for improved shelter. Their only realistic goal is to
undertake shelter construction at standards which are to be affordable
by poor families without the necessity for subsidies. The pre-conditions
for self-sustaining programs on a scale large enough to have an
appreciable impact on shelter requirements include sound pricing
policies and cost recovery. Public housing programs often produce
housing units that either require recurrent annual subsidies, which
exceed the resources available and compound their budgetary
difficulties, or produce completed units which are too expensive for
low-income households.

*9. Inadequate National Housing Policies*

Solutions to all of the above problems are made more difficult in the
absence of a clear, consistent national housing policy. However, many
LDCs do not have explicit housing policies in place. Unfortunately, many
of those which do exist are seriously deficient. They frequently do not
adequately address the shelter needs of the urban poor, fail to
recognize the potential contribution of the informal sector to shelter
delivery, do not provide sufficient incentives and opportunities for the
private sector to fully participate in all aspects of the shelter
sector, and do not reflect the linkage between shelter investment and
economic growth.

**IV. USAID\'s SHELTER SECTOR OBJECTIVES**

USAID\'s shelter sector objectives recognize the relationship of shelter
to the overall priorities of the agency: policy reform, institutional
development, private enterprise development, and technology transfer. In
the shelter sector, these Agency priorities address the basic problems
faced by most LDCs in striving to improve the physical living conditions
of their people and reflect the expertise and the 20-year experience of
USAID

The objectives of USAID\'s shelter programs are to:

1\. Assist in the formulation of rational housing policy:

to encourage the preparation and implementation of national housing
policies that reflect USAID\'s basic objectives and that provide an
internally consistent framework for future housing activities.

2\. Demonstrate the feasibility of shelter solutions poor families can
afford:

to promote the selection of appropriate physical standards, building
codes, technologies which will help low-income families gain access to
secure land tenure, basic services, and housing.

3\. Facilitate mobilization of additional local resources for financing
shelter:

to adopt interest rate policies which reflect the real cost of capital,
to develop viable institutional systems for financing shelter and urban
development, and to minimize the need for public subsidies.

4\. Develop sustainable shelter and urban service institutions:

to develop production and delivery capabilities commensurate with the
needs of the population with special emphasis on meeting the shelter
needs of the urban poor; encourage appropriate user fees, cost
accounting and cost recovery for utility expansion to facilitate more
rapid expansion of these services.

5\. Increase private sector participation:

to encourage and facilitate an increased role for both the formal and
informal private sector, including cooperatives and other self-help
institutions and credit institutions oriented to the homeowner and home
improvement credit, in low-income shelter financing, production and
delivery and to achieve an appropriate division of responsibilities
between public and private sectors. Government interventions should
normally be limited to services which people can not provide for
themselves, such as infrastructure. HG assistance should be targeted
toward expansion of demand for small contractors and other suppliers,
including those in the informal sector. Conversely, support of public
sector subsidized housing projects should normally be considered as low
priority for USAID funds.

6\. Encourage the use of energy and resource efficient housing designs,
technologies and standards:

to foster development and application of housing designs that make use
of local budding materials as appropriate to the varying regions of the
country, that generate on-site utilities (e.g., rainwater collection
systems) and that encourage and accommodate kitchen gardens, if
appropriate.

7\. Increase the survival rate of people and buildings in disaster prone
areas:

to discourage development in areas prone to flood, severe storm and
earthquake and to encourage adoption of hazard resistant building
regulations and codes.

**V. USAID\'s INSTRUMENTS FOR IMPLEMENTING SHELTER PROGRAMS**

USAID\'s shelter sector objectives are to be achieved through joint
activities of U.S.

USAID Missions, their respective Bureaus, and the Office of Housing and
Urban Programs (PRE/H) as defined in Handbook VIII. The following
program instruments are available to implement shelter programs:

1\. **Shelter Sector Assessments (SSAS)**

For countries where USAID is considering a shelter program, the first
step is to conduct a Shelter Sector Assessment in order to obtain an
over view of the shelter problems and opportunities. SSAs are designed
to identify the problems and policy issues that need to be addressed in
the shelter sector as they relate to overall national development
objectives and the Mission\'s Country Development Support Strategy
(CDSS). Shelter Sector Assessments are particularly important in those
countries where USAID is considering urban programs. PRE/H has prepared
a Shelter Sector Assessment methodology designed for this purpose. SSAs
have been prepared for most countries in which USAID has carried out
Housing Guaranty projects (see Appendix 1). Missions are encouraged to
use PRE/H skills and expertise. In countries vulnerable to natural
disasters, inclusion of appropriate wind and seismic-resistant features
should be examined.

2\. **Technical Assistance**

USAID provides both long-term and short-term technical assistance that
can contribute to the achievement of shelter sector objectives.
Technical assistance is frequently interwoven into the process of
preparing and implementing HG loans but can also be provided through
grant funds, independent of a capital assistance program. Where country
risk of repetitive disasters warrants, assistance may be offered on
techniques for reducing vulnerability of the local housing.

Long-term technical assistance involving resident advisers is usually
focused on enhancing institutional capacity, improving the shelter
delivery systems and financial structure, or the development of housing
policies.

Short-term technical assistance frequently involves assistance in
project design and implementation, and responding to specific needs and
requests from participating country institutions and agencies.

3\. **Training**

USAID\'s shelter training activities are directed toward the development
of improved competence and skills in the LDCs, the communication,
through training, of USAID\'s shelter policies and approaches; and the
development of a network of shelter professionals and local institutions
linked to U.S. and international organizations engaged in implementing
shelter programs.

The range of USAID\'s shelter training activities include annual
regional conferences, the annual one month Shelter Sector Workshop,
support for university short-courses in shelter-related subjects,
support for short-term training at regional institutions in third world
countries, and the design and presentation of in-country courses and
training seminars. Short-term technical assistance to LDC shelter
training institutions can also be provided.

U.S. USAID Missions are encouraged to nominate country participants from
the shelter sector to participate in these various training activates.

4\. **Research and Information Dissemination**

USAID supports a variety of individual research efforts which have been
designed to provide LDC technicians with specific, practical information
on innovative approaches to shelter sector issues supportive of its
overall objectives. For example, USAID has supported research work on
the use of indigenous building materials, building standards and
designs, temporary housing for disaster victims, use of bonds and
secondary mortgage markets, variable payment mortgages, computer
applications in the shelter sector, and analytical case study research
and evaluation.

USAID seeks to disseminate information on shelter sector issues and
innovative approaches throughout the LDCs through publications,
newsletters, and sponsorship and participation in conferences and
seminars.

5\. **Capital Assistance**

The primary mechanism for USAID capital assistance in the shelter sector
is the Housing Guaranty (HG) program. This program was developed as part
of the U.S. Foreign Assistance Program in 1961. It is a unique USAID
activity in which the U.S. private sector provides long-term financing
for low-income shelter and urban upgrading programs in developing
countries. (See Appendix I for a full description of the HG program with
a U.S. Government guaranty.) If consistent with the country strategy
statement, shelter projects are appropriate for financing with DA and
ESF resources and PL 480 or FAA generated local currencies in all
countries eligible for FAA assistance. Furthermore, USAID will consider
sympathetically requests for assistance for reconstruction of shelter in
countries hit with earthquakes, floods, or other disasters with whatever
resources are appropriate to the individual country\'s circumstances.

The combination of one of these more concessionary resources with a HG
loan has been successfully demonstrated in Zimbabwe, Mauritius, and
Costa Rica. It is recognized that USAID capital assistance is no
substitute for locally mobilized finance, but it can meet specific
important purposes in advancing USAID and LDC shelter objectives. These
include:

 Providing assistance toward reaching USAID objectives over time in the
broader national development-context. The incremental approach adopted
to develop a shelter program, where specific policy objectives are
established for each specific loan, provides a forum for on-going policy
dialogue and a mechanism to accelerate change.

 Providing capital to create or expand new institutions where necessary
and to demonstrate new shelter solutions or programs. Essentially, HG
loans assist countries by sharing the risks of innovation and change.

Although the size of any given HG loan must depend on many factors, it
is important to recognize that needed change is vastly enhanced by the
prospect that a given loan may be part of a continuing series of loans.
The series should include mutually agreed policy steps and accelerate
problem recognition and design of solutions.

Since HG loans provide untied foreign exchange in excess of the
immediate requirements of a particular project, they provide additional
foreign exchange resources which can be invested in other productive
ventures outside of the shelter sector. In this sense, HG loans can help
Missions achieve the broader economic development objectives established
for a given country. However, the basic purpose of HG loans is not to
provide balance-payments assistance.

**VI. TYPES OF SHELTER PROGRAMS APPROPRIATE FOR USAID SUPPORT**

The HG Program can be used to finance the following kinds of shelter
related programs for families below the median income:

 Slum and Spontaneous Settlement Upgrading: including the legislation
of land tenure, provision of potable water, sewerage, electricity,
roads, and drainage. Upgrading projects may also include home
improvement loans to residents in project areas. These projects are
designed to assist families in the informal sector.

 Sites and Services: involving preparation of vacant land for efficient
self-help shelter production through subdivision into individual lots
and the provision of water, sewer, and other urban services. This type
of project may also include training and building materials loans for
self-help builders and small-scale contractors. Sites and service
projects, therefore, help members of the informal sector reap some of
the economic and social benefits of development.

 Core Housing: including a sites and services approach with the
addition of a basic housing shell (typically a bathroom and a small
multipurpose living area) on each lot, designed to be improved and
expanded by the owner. Building materials loans may be provided.

 Low-Cost Housing Units: in special circumstances in middle-income
countries, especially when the focus can be on encouraging private
sector attention to low-cost housing for the poor population.

 Support for Improvement to Urban Services and Facilities: physical
improvements to urban services such as water supply and distribution,
sanitation, trash collection, and road and drainage improvements can
improve the quality of life in the pre dominantly low-income residential
neighborhoods, and foster the development of private enterprise.

 In addition, HG loans can be used to finance schools, health clinics,
markets\' job skill training centers, and other community facilities to
support the development of neighborhoods; and acquisition of strategic
parcels of land to accommodate long-range demand for land for low-cost
shelter.

**VII. DETERMINATION OF COUNTRIES SUITABLE FOR SHELTER PROJECTS 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.

**VIII. ALLOCATION OF USAID\'s SHELTER SECTOR RESOURCES WITHIN THE
RECIPIENT COUNTRY**

It is clear that the magnitude of the shelter sector requirements in the
LDCs far exceeds the level of resources available from USAID It is
important, therefore, to utilize these technical and capital resources
selectively to have the greatest impact.

1\. **Selection of Low-Income Target Groups**

It is essential to direct USAID\'s programming at households below the
median income. USAID\'s shelter program promotes equitable distribution
of benefits in the shelter sector through increased access to land,
shelter, infrastructure, and employment for the urban poor.

**2. Selection of City and Town Locations For Shelter Sector Projects**

We should seek to insure that neither shelter developments nor growth
directing infrastructure (water and sewer systems as well as
transportation arteries) take place or indirectly encourage building in
hazard prone areas. Similarly, given the scarcity and productive value
of agriculture and forest land in developing countries, our shelter and
urban infrastructure interventions should seek to avoid the pre-emption
of such lands for urban uses. Moreover, our shelter and urban
infrastructure interventions should support higher urban density and
greater infill development to the extent that they are viable options to
outward urban expansion. So doing would avoid the risk of encroaching on
valued agricultural and forest lands and, generally, would serve the
interests of economic efficiency as, with high densities and less
extensive infrastructure (shorter water and sewer trunklines, etc.), a
greater number of inhabitants can benefit from a given unit of
infrastructure.

Appendix I gives details on the implementation of HG projects.

**APPENDIX I**

**IMPLEMENTATION OF THE HOUSING GUARANTY PROGRAM**

The Housing Guaranty Program involves collaboration between the USAID
Mission and a host country housing institution, such as a government
ministry, a national housing bank or housing development corporation, a
central savings and loan system, a national cooperative organization, or
a similar institution in the private sector acting as borrower.

Following a request from the country and the USAID Mission, the Office
of Housing and Urban Programs, working with host country officials, will
prepare a shelter sector assessment. Based on this analysis, the office
and the borrower determine the type of housing program to be financed
and the institutional context within which it will be undertaken.

The major areas of concern to both parties at this stage are: (1) the
progress which has been made towards the development of a rational
shelter policy; (2) the contribution which the program will make towards
the creation or strengthening of institutions needed to meet national
shelter needs, especially the needs of the poor; (3) the establishment
of roles for public and private sector involvement in shelter programs;
(4) the capacity of the construction industry to supply housing over a
given period; (5) the effective demand for housing at the agreed upon
price level; and (6) the ability of the beneficiaries to repay their
loans and the ability of the economy to make the dollar repayment.

When a mutually agreeable project has been developed and authorized by
the Regional Bureau, the Office of Housing and Urban Programs and the
borrower enter into an Implementation Agreement defining the use of the
loan. Disbursements under the loan will be subject to the fulfillment of
certain conditions as set forth in this agreement.

At the same time, the borrower seeks the most favorable terms available
in the U.S. capital markets for a U.S. Government guaranteed loan. A
typical Housing Guaranty loan is a long-term loan for a period of up to
30 years with a 10-year grace period on the repayment of the principal.

The U.S. lender and the borrower then negotiate the terms of the
financing including interest rates which reflect the prevailing interest
rates for similar maturing U.S. Government debt. These understandings
are formalized in a loan agreement between the borrower and the lender,
which is subject to USAID approval. In addition, certain provisions with
regard to the paying and transfer agent, terms and amortization,
prepayment rights of the borrower, and lenders fees and other charges
must be included in each loan agreement, or otherwise agreed upon in a
manner satisfactory to the Office of Housing and Urban Programs.

**The USAID Guaranty**

USAID will sign a contract of guaranty upon the signing of a loan
agreement, indicating that repayment is guaranteed by the full faith and
credit of the U.S. Government. The fees that USAID charges for its
guaranty are as follows: 1) a fee of one-half of one percent (1/2%) per
annum of the unpaid principal balance of the guaranteed loan; and 2) an
initial charge of one percent (1%) of the amount of the loan, which is
deducted from the loan disbursements. Additionally, USAID requires that
the government of the borrowing country sign a full faith and credit
guaranty of repayment of the loan and outstanding interest.

**Lenders**

A variety of participants in the U.S. capital markets, including
investment bankers, commercial bankers, Federal Home Loan Banks, savings
institutions, life insurance companies, and pension funds, have lent
funds to host country borrowers as part of the Housing Guaranty Program.
To be eligible to participate, lenders must be: 1) U.S. citizens; 2)
domestic U.S. corporations, partnerships or associates substantially
beneficially owned by U.S. citizens; 3) foreign corporations whose share
capital is at least 95 percent owned by U.S. citizens; or 4) foreign
partnerships or associations wholly owned by U.S. citizens.

**Lender Selection**

Lenders are selected by host country borrowers. The Office of Housing
and Urban Programs encourages maximum contact between borrowers and
lenders to facilitate loan arrangements that will best meet project
needs, and to establish long-term borrower lender relationships to their
mutual advantage. Lenders are typically selected through competitive
negotiation process in which the Office of Housing and Urban Programs re
quires that lending opportunities be advertise and that borrowers
solicit lending proposals

A notice of each USAID guaranteed investment opportunity is published in
the Federal Register. Notices are also mailed to interested individuals.

In certain circumstances and with the written consent of the Office of
Housing and Urban Programs, lenders may be selected through
noncompetitive negotiated process.

**USAID Policy Papers and Policy Determinations**

The following reports have been issued in a series. These documents with
an identification code (e.g. PN-AAM‑323) may be ordered in microfiche or
paper copy. Please direct inquiries regarding orders to:

USAID Document and Information Handling Facility

7222 47th Street

Suite 100

Chevy Chase, MD 20815

[TitlePolicy Paper]{.underline} [Date]{.underline} [Fiche
\#]{.underline}

Bureau for Private Enterprise May 1982 PN-AAM-325

Domestic Water and Sanitation May 1982 PN-AAM-323

Food and Agricultural Development May 1982 PN-AAM-322

Nutrition May 1982 PN-AAM-321

Private Enterprise Development May 1982 PN-AAM-324

Recurrent Costs May 1982 PN-AAM-319

Population Assistance September 1982 PN-AAM-320

Private and Voluntary Organizations September 1982 PN-AAM-318

Women in Development October 1982 PN-AAL-777

Pricing, Subsidies, and Related Policies November 1982 PN-AAN-373

in Food and Agriculture

Approaches to the Policy Dialogue December 1982 PN-AAM-431

Basic Education and Technical Training December 1982 PN-AAM-190

Health Assistance December 1982 PN-AAL-817

Institutional Development March 1983 PN-AAN-108

Co-Financing May 1983 PN-AAN-457

Local Organizations in Development March 1984 PN-AAQ-157

Urban Development Policy June 1984 PN-AAQ-158

Energy July 1984 PN-AAQ-160

Shelter February 1985 PN-AAQ-162

[TitlePolicy Determination]{.underline} [Date]{.underline} [Fiche
\#]{.underline}

PD #1Narcotics August 5, 1982 PN-AAM-443

PD #2Mixed Credits September 29, 1982 PN-AAM-444

PD #3Voluntary Sterilization September 1982 PN-AAM-445

PD #4Title XII October 5, 1982 PN-AAM-446

PD #5Programming PL 480 Local February 22, 1983 PN-AAM-591

Currency Generations

PD #6Environmental and Natural Resources April 26, 1983 PN-AAN-375

Aspects of Development Assistance

PD #7Forestry Policy and Programs May 16, 1983 PN-AAN-376

PD #8Participant Training July 13, 1983 PN-AAP-273

PD #9Loan Terms Under PL 480 Title I September 27, 1983 PN-AAN-753

PD #10Development Communications February 17, 1984 PN-AAP-616

PD #11Using PL 480 Title II Food Aid for July 26, 1984 PN-AAQ-159

Emergency or Refugee Relief

PD #12Human Rights September 26, 1984 PN-AAQ-161