United States General Accounting Office

GAO Report to Congressional Requesters

June 1995 FOREIGN HOUSING

GUARANTY PROGRAM

Financial Condition Is

Poor and Goals Are Not

Achieved

GAO/NSIAD-95-108

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-258693 

June 2, 1995

The Honorable Toby Roth

Chairman

The Honorable Sam Gejdenson

Ranking Minority Member

Subcommittee on International

 Economic Policy and Trade

The Honorable Doug Bereuter

Chairman, Subcommittee on Asia and

 the Pacific

Committee on International Relations

House of Representatives

As you requested, we reviewed the U.S. Agency for International Development’s (USAID) use of

Housing Guaranty Program funds. Specifically, our review focused on the program’s

(1) evolution, (2) financial condition, and (3) impact. This report suggests that the Congress

may wish to terminate the program. If the Congress does not terminate the program, the report

also contains recommendations to the USAID Administrator intended to strengthen the financial

condition of the program and improve its management.

Unless you publicly announce its contents earlier, we plan no further distribution of this report

until 15 days from its issue date. At that time, we will send copies to other appropriate

congressional committees, the Administrator of the U.S. Agency for International Development,

and the Director of the Office of Management and Budget. Copies will also be made available to

others upon request.

This report was prepared under the direction of Joseph E. Kelley, Director-in-Charge,

International Affairs Issues. If you have any questions concerning this report, please call him at

(202) 512-4128. Other major contributors to this report are listed in appendix III.

Henry L. Hinton, Jr.

Assistant Comptroller General
Executive Summary

Purpose The Foreign Assistance Act of 1961, as amended (22 U.S.C. 2151 et. seq.),

authorizes the U.S. Agency for International Development (USAID) to

guaranty loans made by U.S. investors to borrowers in developing

countries for shelter-related projects. With this authority, USAID operates

the Housing Guaranty Program. A long-run goal of this program is to

increase shelter for low-income families in developing countries by

stimulating local credit institutions to provide the necessary investment

capital and other resources. Since 1961, USAID has guarantied over

$2.7 billion in loans (valued at $5 billion in 1995 dollars) in 44 countries for

home construction, mortgages, home improvements, urban infrastructure,

and other shelter-related projects.

Members of the House Committee on International Relations have become

concerned about the use of Housing Guaranty Program funds and the

program’s true cost to the U.S. government. At their request, GAO reviewed

the program’s (1) evolution, (2) financial condition, and (3) impact.

Background USAID’s Office of Environment and Urban Programs is responsible for

managing the Housing Guaranty Program and related technical assistance

programs, while USAID’s regional bureaus are responsible for authorizing

them. Overseas, the programs are implemented primarily by USAID’s

Regional Housing and Urban Development Offices.

Results in Brief Over the past 34 years, the focus and geographic scope of the Housing

Guaranty Program have changed significantly. Program focus has

expanded beyond home construction and mortgage financing to include

urban infrastructure financing and governmental policy reform. Due to

changes in international economic conditions and U.S. foreign and budget

policies, more creditworthy and advanced developing countries are now

the most likely recipients of loan guaranties. In addition to loan guaranties,

USAID relies on technical assistance to implement the program.

The Housing Guaranty Program is in serious financial condition because

program fees have not been sufficient to cover the cost of this program. In

1995 dollars,1

 program losses due to loan defaults have already cost the

U.S. government over $540 million,2

 and GAO estimates that the cost of

future defaults is likely to be an additional $600 million. Although USAID

program officials believe that almost all defaulted borrowers will

1

Unless otherwise noted, all figures are presented in 1995 dollars.

2

$383 million in then-year dollars.

Page 2 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Executive Summary

ultimately repay their debts, GAO estimates that USAID is likely to recover

only about $200 million. As a result, the total U.S. government cost

associated with the program’s existing portfolio is likely to be about 

$1 billion.3

 This amount does not include several hundred million dollars in

technical assistance that USAID has provided to implement the program but

has not reported as a Housing Guaranty Program cost. The legislated

ceiling on guaranties4

 did not effectively limit the U.S. government’s

overall investment in the program because defaulted loans, once repaid by

USAID, are not counted against the ceiling.

Although the Housing Guaranty Program has contributed to shelter sector

reforms in many participating countries, it has not stimulated increased

private investment in low-income shelter, one of the program’s long-run

objectives. Further, in nearly every country visited for this review, GAO

observed program-financed shelter projects that were outside the reach of

the poorer families that the program is supposed to target. USAID

documents also reflected this problem. For example, in India a USAID study

indicated that 36 percent of program-financed home loans went to families

with above-median incomes, and in Tunisia one sampling showed that

17 percent of eligible beneficiaries had incomes above the median. USAID’s

performance indicators do not adequately measure progress in achieving

these objectives.

Since fiscal year 1992, the Congress has authorized new loan guaranties

under this program and, as required by the Credit Reform Act,

appropriated about $50 million to cover probable loan default costs

associated with them. However, the Congress has done so without full

knowledge of the U.S. government’s liabilities from earlier guaranties and

the other problems GAO has outlined in this report.

Principal Findings

Housing Guaranty Program

Has Changed Significantly

Since the Housing Guaranty Program was introduced in the early 1960s, it

has changed significantly in terms of the (1) profile of participating

countries, (2) type of projects funded, and (3) implementation strategy.

Historically, assistance under this program went primarily to countries in

Latin America. Foreign policy considerations, U.S. credit reform, and the

3

GAO’s cost projections are rough and may vary over time depending upon market expectations for

USAID’s guaranty portfolio.

4

This $2.6 billion ceiling applies only to loan guaranties authorized before fiscal year 1992.

Page 3 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Executive Summary

1980s debt crisis have led to a program shift toward more creditworthy

and advanced countries in other regions of the world. Some program

activities, such as those in Israel and Portugal, were mandated by the

Congress for specific foreign policy reasons. Due to the Federal Credit

Reform Act of 1990, which requires appropriated funds to be set aside to

cover probable loan defaults, USAID has been unable to maintain its

historical volume of loan guaranties to higher risk borrowers with its

existing budget authority. Recent programs have focused on countries

such as Indonesia, India, Tunisia, and Thailand, which have relatively

favorable credit ratings and, therefore, require smaller reserves for

probable default.

With respect to the types of projects this program has funded, the

program’s loans were initially limited to financing housing built by U.S.

contractors and local firms. Now, program loans are used to finance a

wide variety of shelter-related projects that affect the urban environment

in developing countries. Such projects have included urban renewal

projects, sewage systems, water treatment facilities, and other

infrastructure projects.

USAID’s initial implementation strategy was to demonstrate the feasibility of

building low-cost housing projects that could be replicated by local

entrepreneurs and institutions. However, more recently, the goal has been

policy reform in the recipient country. USAID has offered loan guaranties as

incentives for governments to adopt more effective laws and policies on

shelter and urban development. USAID also provides technical assistance as

part of its efforts to achieve desired policy reform and institutional

development objectives. The cost of this closely-linked assistance, totaling

$471 million5

 for USAID’s ongoing projects, has been funded through USAID’s

regional bureaus.

Housing Guaranty Program

Loses Millions Annually

Although the Congress specifically authorized USAID to charge fees to

cover the cost of its Housing Guaranty Program, the program has been

losing millions of dollars annually. Fee revenues have been adequate to

cover administrative costs but not loan default costs. As a result, the total

net cost of the program to the U.S. government is likely to be about 

$1 billion. Based on audited financial statements and other financial

information, GAO determined that since 1970 the program has received

$417 million6

 in appropriations and has borrowed $125 million from the

5

Amount is not adjusted for inflation.

6

$258 million in then-year dollars.

Page 4 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Executive Summary

U.S. Treasury to finance losses due to loan defaults. The cost to the U.S.

government of future loan defaults on USAID’s portfolio is likely to be an

additional $600 million. USAID has only enough reserves to cover about

$50 million in defaults for loans authorized since fiscal year 1992.7

Although program officials expect to recover nearly the full amount of all

loan defaults, GAO estimates that USAID will ultimately recover only about

$200 million.

In addition to these costs, USAID has committed several hundred million

dollars in technical assistance to program participants. The cost of this

assistance, although not reflected in the program’s budget or financial

statements, should be considered a cost of the program.

To date, USAID has been unable to collect much of the debts owed by

defaulted borrowers and has continued to extend loan guaranties to

countries in spite of repeated debt rescheduling. According to the

program’s financial statements, uncollected debt has more than doubled

from $171 million in 1989 to $409 million in 1994.8

 Deferring repayment

through multiple rescheduling of uncollected debts is common, and some

debts have been rescheduled up to 10 times. By the end of fiscal year 1994,

USAID had recovered only 5 percent of all rescheduled debt.

The $2.6 billion legislated ceiling on pre-fiscal year 1992 loan guaranties

did not effectively limit the cost of this program to the U.S. government.

The ceiling limited only the amount of guaranties outstanding at any one

time. Thus, if a borrower defaulted on a guarantied loan and USAID made a

principal payment to the lender, the outstanding guaranty was reduced.

This allowed USAID to issue new guaranties under the ceiling, even though

the borrower had not repaid (and may never repay) USAID for its default

costs. Thus, USAID continued guarantying loans while over $400 million in

uncollected debt accumulated, and the total amount of the U.S.

government resources committed grew beyond the $2.6 billion ceiling. As

of March 1995, USAID planned to guaranty $193 million more in loans that

were authorized under this ceiling and are likely to result in over

$50 million in default costs.

7

Under the Credit Reform Act, USAID and the Congress must budget up-front for the estimated cost of

probable defaults for guarantied loans authorized since fiscal year 1992. Therefore, the Congress has

appropriated funds for the probable defaults of new loan guaranties under this program.

8

This total does not include debts that USAID has written off as uncollectible. Amounts are not

adjusted for inflation.

Page 5 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Executive Summary

Impact on Low-Income

Shelter Investment Is Not

Evident

Although the Housing Guaranty Program has contributed to shelter sector

reform in developing countries, it has not achieved one of its fundamental,

long-run objectives. The program has not led to an increase in the

availability of domestic capital to finance shelter projects benefiting poor

families, particularly from private sources. The Foreign Assistance Act

states that the program should demonstrate to local entrepreneurs and

institutions the feasibility of investing in low-income shelter projects,

thereby stimulating them to provide increased investment capital and

other resources. USAID-sponsored projects have contributed to increased

private managerial and technical involvement in the construction of

state-financed shelter projects. However, USAID documents indicate that

private credit institutions have not invested their own capital in similar

projects as a result of this program. Instead, financing has come from the

limited government resources of these countries.

In addition, the Foreign Assistance Act requires that at least 90 percent of

the guaranties be issued for housing suitable for families with

below-median incomes. However, USAID does not routinely ensure that the

projects it finances actually benefit such families. In many cases, USAID

relies on unvalidated reports from the borrowers to monitor the use of

loan funds. In the countries visited for this review, GAO readily found

instances where housing financed by the program did not appear to be

benefiting low-income families. For example, GAO’s review of the program

in India revealed that some home improvement loans went to the

above-median income employees of a participating bank. In some cases,

USAID documents GAO reviewed confirmed that a significant portion of

eligible program beneficiaries probably had above-median incomes. In

other cases in the countries GAO visited, USAID studies acknowledged the

potential for this problem.

USAID has not designed its performance indicators to measure the Housing

Guaranty Program’s progress in achieving the goals of stimulating private

investments and providing shelter to below-median income families.

Instead, USAID generally measures a variety of large-scale shelter sector

changes that are not directly attributable to the program.

Matters for

Congressional

Consideration

The Congress may wish to deauthorize guaranties for undisbursed loans,

where feasible, and terminate the Housing Guaranty Program because

(1) the program is now primarily benefiting borrowers in more

creditworthy and advanced developing countries that have access to

comparable loans from other international lenders; (2) the program

Page 6 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Executive Summary

annually costs millions of dollars more than anticipated; (3) loans

previously guarantied under the pre-1992 legislated ceiling continue to be

disbursed, even though USAID has not collected over $400 million in

defaulted debt; and (4) there is no evidence that the program has

measurably increased the availability of private domestic capital for

low-income shelter.

Other actions are warranted if the Congress believes that the goals of

(1) stimulating domestic investment in the recipient countries (particularly

private investment) and (2) targeting shelter assistance to below-median

income families are possible to achieve and are of sufficient priority.

Before authorizing additional loan guaranties, the Congress may wish to

require USAID to submit a comprehensive plan to the appropriate

congressional committees on how it plans to achieve the stated program

goals, reduce losses, and return the program to a viable financial

condition.

Recommendations If the Congress does not terminate the Housing Guaranty Program, GAO

recommends that the USAID Administrator take the following actions to

(1) minimize the financial impact of the Housing Guaranty Program on the

foreign assistance budget and the U.S. government budget deficit and

(2) bring the program in line with the objectives of the Foreign Assistance

Act:

• Withhold future loan disbursements and related technical assistance from

borrowers that have repeatedly rescheduled debt repayments to USAID.

• Increase program revenues by adopting a fee structure designed to offset a

larger portion of the program’s costs.

• Ensure that performance indicators measure the extent to which (1) local

investors replicate the program’s low-income shelter projects using private

sources of long-term financing and (2) project benefits accrue to the

below-median income target population.

Agency Comments

and GAO’s Evaluation

In commenting on a draft of this report, USAID strongly disagreed with

GAO’s findings, arguing that the Housing Guaranty Program was a

cost-effective method for pursuing development assistance and that the

program had achieved the goals established by the Congress. USAID

criticized the report for failing to adequately consider alternative program

goals and congressional directions. USAID also asserted that the report was

based on a flawed financial analysis and a distorted portrayal of program

Page 7 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Executive Summary

costs because of the use of 1995 dollars. Furthermore, USAID maintained

that GAO did not adequately consider evidence that the program had

successfully stimulated private investment and reached below-median

income target populations. USAID suggested that termination of this

program and deauthorization of guaranties might interfere with legally

binding agreements and congressionally supported activities. USAID did not

address the report’s specific recommendations, since it contended that

they were based upon incorrect information and a flawed analysis.

As a result of these comments, GAO modified its matters for congressional

consideration and recommendations to (1) recognize that it may not be

feasible to deauthorize all loan guaranties and (2) indicate that USAID

should increase its guaranty fees to cover more of its costs. However,

GAO’s evaluation of these comments revealed that USAID had not credibly

supported any of its broad and strongly worded criticisms. USAID did not

identify any specific legislated program goals that GAO overlooked or any

legal provisions that contradict the goals GAO focused on. USAID’s criticism

of GAO’s financial analysis is unfounded and even disregarded its own most

recent audited financial statements regarding probable losses from loan

defaults. GAO’s use of 1995 dollars reflects the true cost of the program

more accurately than the use of then-year dollars, especially for costs

incurred over many years. GAO denominated figures in both 1995 and

then-year dollars, except in cases, such as the discussion of legislated

ceilings, where it was not meaningful or possible to use 1995 figures.

Furthermore, none of the additional data USAID provided (most of which

GAO had already reviewed) undermined GAO’s conclusions.

Page 8 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Page 9 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Contents

Executive Summary 2

Chapter 1 

Introduction

14

Legal Framework 14

Loan Guaranty Process 14

Organizations With Responsibility for Shelter Programs 15

Objectives, Scope, and Methodology 16

Chapter 2 

Housing Guaranty

Program Has Changed

Significantly

19

Advanced Developing Countries Are Likely Loan Recipients 19

Scope of Program Has Extended Beyond Housing Projects 26

Current Strategy Focuses on Policy Reform and Technical

Assistance

31

Chapter 3 

Housing Guaranty

Program Is in Serious

Financial Condition

34

Program Has Already Incurred Significant Costs for Loan

Defaults

34

Projected Future Default Costs Total About $600 Million 35

Future Fee Revenue Will Be Inadequate to Cover Costs 36

USAID Is Unlikely to Recover a Growing Amount of Defaulted

Debt

37

Legislated Ceiling Did Not Limit Financial Commitment 41

Chapter 4 

Program’s Impact on

Low-Income Shelter

Investment Is Not

Evident

43

Program Has Not Stimulated Investment 43

USAID Does Not Always Ensure Access to Projects by Lower

Income Group

46

Performance Indicators Do Not Measure Progress Toward

Program Objectives

50

Chapter 5 

Conclusions, Matters

for Congressional

Consideration, and

Recommendations

52

Matters for Congressional Consideration 52

Recommendations 53

Agency Comments and Our Evaluation 53

Page 10 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Contents

Appendixes Appendix I: Housing Guaranty Program Debts as of

September 30, 1994

56

Appendix II: Comments From the U.S. Agency for International

Development

58

Appendix III: Major Contributors to This Report 80

Related GAO Products 84

Tables Table 2.1: Value of Loans Guarantied by USAID Under Housing

Guaranty Program by Country

22

Table 3.1: Comparison of USAID and GAO Analyses of Program

Cost to the U.S. Government

39

Table 4.1: Loan Guaranty History in Selected Countries 45

Figures Figure 1.1: Locations of Housing Guaranty Program Offices

Worldwide

16

Figure 2.1: Regional Distribution of Housing Guaranty Program

Loans

21

Figure 2.2: Countries That Have Received Housing Guaranty

Program Loan Funds

24

Figure 2.3: New Housing With Mortgages Financed by Housing

Guaranty Program in Carapungo, Ecuador

27

Figure 2.4: Housing With Construction Financed by Housing

Guaranty Program in Parral, Chile

28

Figure 2.5: Owner-Improved Housing With Original Construction

Financed by Housing Guaranty Program in Parral, Chile

28

Figure 2.6: Housing and Infrastructure Financed by Housing

Guaranty Program in El Mourouj, Tunisia

29

Figure 2.7: Housing Built on Sites With Infrastructure Financed

by Housing Guaranty Program in Larache, Morocco

30

Figure 2.8: Footpath and Drainage Ditch Financed by Housing

Guaranty Program in Kecamatan, Indonesia

31

Figure 3.1: Cumulative Uncollected Housing Guaranty Program

Debt Owed to USAID

38

Figure 3.2: Geographic Distribution of Uncollected Debt Owed to

USAID

41

Figure 4.1: House Partially Financed by the Housing Guaranty

Program for Above-Median Income Family in Bangalore, India

48

Figure 4.2: Pay Toilet for Tourists Financed by the Housing

Guaranty Program in Bali, Indonesia

49

Page 11 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Contents

Figure 4.3: Partially Unoccupied Housing Financed by Housing

Guaranty Program in Tetouan, Morocco

50

Abbreviations

OMB Office of Management and Budget

RHUDO Regional Housing and Urban Development Office

USAID U.S. Agency for International Development

Page 12 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Page 13 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Chapter 1 

Introduction

The Foreign Assistance Act of 1961, as amended, provides the framework

for the Housing Guaranty Program (originally called the Housing

Investment Guaranty Program). Since 1961, the Agency for International

Development’s (USAID) Office of Environment and Urban Programs, which

is responsible for administering the program, has guarantied $2.7 billion in

loans (valued at $5 billion in 1995 dollars) to 44 developing countries. The

projects funded by the loans were intended to develop the countries’

construction capabilities and encourage the countries’ credit institutions

to make domestic capital and other resources available for low-cost

shelter programs.

Legal Framework The U.S. government has provided a 100-percent guaranty on long-term

loans from U.S. lenders to borrowers in developing countries to finance

housing and shelter-related projects. If a borrower defaults on a loan

payment, the U.S. government pays any principal, interest, and fees due to

the lender. USAID then attempts to collect these funds from the defaulted

borrower.

The Foreign Assistance Act places certain restrictions on the amount and

use of these guaranties. For example, the face value of guaranties issued

may not exceed $25 million per fiscal year in any country, and the average

face value of all guaranties issued in a fiscal year may not exceed

$15 million. Also, at least 90 percent of the loan funds must be used for

projects suitable for the below-median income population. The Foreign

Assistance Act also includes provisions regarding allowable interest rates,

assessment of fees, coordination with other U.S. foreign assistance, and

other administrative matters.

Loan Guaranty

Process

USAID works in cooperation with host country officials to determine which

activities will be financed through the Housing Guaranty Program.

Borrowers have included government ministries, central banks, national

housing banks, housing development corporations, and private financial

institutions, such as cooperatives or savings and loan associations. U.S.

lenders have included banks, insurance companies, and other financial

institutions and investors. Because of the U.S. government guaranty,

lenders bear virtually no risk—similar to investing in U.S. Treasury bonds.

Lenders base loan interest rates, which can be either fixed or variable, on

prevailing commercial rates plus a premium. The borrower and the lender

negotiate the terms of the financing, subject to approval by USAID.

Typically, Housing Guaranty Program loans are extended for 30 years,

Page 14 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Chapter 1 

Introduction

with a 10-year grace period on the repayment of the loan principal. Loans

to governmental borrowers have a host country guaranty of repayment to

USAID. Loans to private borrowers are backed by equivalent collateral but

are not always guarantied by the host government. To pay for program

operations, USAID charges borrowers an initial disbursement fee of

1 percent of the loan principal, an annual fee of 0.5 percent of the

outstanding principal, and a fee for each day that a payment is late.

Organizations With

Responsibility for

Shelter Programs

USAID’s Office of Environment and Urban Programs is responsible for

administering the Housing Guaranty Program, including managing the loan

portfolio and associated technical assistance. USAID’s regional bureaus are

responsible for authorizing both the loans and the technical assistance

programs. Overseas, individual programs are implemented by USAID’s

seven Regional Housing and Urban Development Offices (RHUDO), located

throughout the developing world with assistance, when necessary, from

USAID’s Regional Economic Development Support Offices and USAID

missions. Figure 1.1 shows the locations of the major offices that

administer the Housing Guaranty Program worldwide.

Page 15 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Chapter 1 

Introduction

Figure 1.1: Locations of Housing Guaranty Program Offices Worldwide

Source: USAID.

The Office of Environment and Urban Programs and the RHUDOs employ

about 60 direct-hire staff members and 70 contractors to implement this

program.

Objectives, Scope,

and Methodology

At the request of Representatives Toby Roth, Doug Bereuter, and Sam

Gejdenson, members of the House Committee on International Relations,

we conducted a comprehensive review of the Housing Guaranty Program’s

(1) evolution, (2) financial condition, and (3) impact. We performed our

work at USAID offices in Washington, D.C., Chile, Ecuador, India, Indonesia,

Page 16 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Chapter 1 

Introduction

Morocco, Poland, and Tunisia. Programs in these countries reflected a

wide variety of shelter-related projects and program objectives. We

interviewed officials in USAID’s Office of Environment and Urban Programs

of the Bureau for Global Programs, Field Support, and Research; USAID

Regional Bureaus; and other organizations with responsibilities related to

the Housing Guaranty Program. We also met with representatives of

private voluntary organizations and other USAID contractors involved in

USAID’s shelter programs in the United States and overseas. We also

interviewed representatives of three multilateral organizations—the World

Bank, the United Nations Development Program, and the United Nations

Center for Human Settlement (commonly known as Habitat). We reviewed

the legislative history of the Foreign Assistance Act and examined USAID

records, including program documentation and evaluations.

To evaluate the program’s financial condition, we reviewed the program’s

financial records, including audited financial statements for fiscal years

1989 through 1993, examined budget documents for fiscal years 1961

through 1994, and reviewed prior reports on the Housing Guaranty

Program prepared by USAID’s Office of the Inspector General and our

office. We also interviewed officials of the USAID Office of Inspector

General; Riggs National Bank in Washington, D.C. (which acts as the

program’s transfer agent); the accounting firm that conducted the most

recent financial audit of the Housing Guaranty Program; and the Office of

Management and Budget (OMB).

To estimate the U.S. government’s probable costs due to nonpayment of

USAID’s existing loan guaranty portfolio, we applied an updated version of

our method for estimating the cost of country risk associated with loan

guaranties outstanding.1

 We developed our country risk ratings by

statistically averaging two contemporaneous, professionally-accepted

ratings—Euromoney and the Institutional Investor—and then transformed

those ratings into a country risk cost using econometric estimates based

on data from the secondary market. Cost estimates for USAID’s loan

guaranty portfolio using this method (as well as comparable methods) will

change over time depending upon market expectations for this particular

group of guaranties. Our method involves three issues that could qualify

our cost estimates. Those issues are whether (1) our sample size of debt

traded on the emerging market was large enough to capture the market’s

real behavior; (2) the price relationship we estimated for these traded

instruments could be extended to proxy the prices of similar debt

1

This method is presented in detail in Credit Reform: U.S. Needs Better Method for Estimating Cost of

Foreign Loans and Guarantees (GAO/NSIAD/GGD-95-31, Dec. 19, 1994).

Page 17 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Chapter 1 

Introduction

instruments held by the private sector but not traded; and (3) debt owed

the private sector—from which our country risk cost estimates were

derived—is as likely to be repaid in the long run as sovereign debt owed

the U.S. government.

USAID’s records did not allow us to categorize the use of guarantied loan

funds by project type. Also, due to the unique nature of the Housing

Guaranty Program in Israel, we specifically excluded it from the scope of

our assessment of USAID’s program management.

We performed our work from January 1994 through February 1995 in

accordance with generally accepted government auditing standards.

Page 18 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Chapter 2 

Housing Guaranty Program Has Changed

Significantly

The Housing Guaranty Program has changed considerably in scope and

content since its inception in 1961. Though initially concentrated in Latin

American countries, the program now operates in developing countries in

Africa, Asia, and the Middle East and increasingly in more creditworthy

and advanced developing countries. Similarly, the program’s focus has

expanded from basic housing construction to a variety of projects that

address the broader needs of the urban environment. The program’s

strategy has shifted from simply demonstrating the feasibility of

constructing low-income housing to reforming shelter sector policy in

borrowing countries. In addition, the provision of technical assistance has

become a fundamental part of the program.

Advanced Developing

Countries Are Likely

Loan Recipients

The debt crisis of the 1980s, U.S. credit reform, and foreign policy

considerations have influenced USAID to change the type of countries likely

to participate in the Housing Guaranty Program. The result has been an

increase in guarantied loans authorized for more creditworthy and

advanced developing countries and for countries specified by the

Congress.

Due in part to the worldwide recession of the mid-1980s and the resulting

debt crisis, many borrowing countries in Latin America and Africa began

to default on payments on their large portfolio of international debt and

became high credit risks.

In 1990, the Congress passed the Credit Reform Act, which required each

government department or agency to recognize its potential financial

liability for each loan authorized and disbursed after fiscal year 1991. Prior

to the act, USAID, like other agencies, treated a guaranty as having no cost

unless and until the borrower defaulted. Under the Credit Reform Act,

USAID must set aside a reserve to cover the estimated future cost of loans

guarantied, including default costs. The amount of the reserve is based on

an OMB-approved assessment of the borrower’s creditworthiness, which

reflects the probability that the borrower will default: the greater the

credit risk, the higher the subsidy required. Disbursement of loans is

restricted by the extent to which appropriations are available for the

reserve.1

 In response, USAID has ceased to authorize new loan guaranties to

many of the less creditworthy countries of Latin America and Africa that

had historically benefited from the program. Although the Credit Reform

Act has changed the financing for this program and influenced USAID’s

1

USAID has obtained over $50 million in appropriations since fiscal year 1992 to set up such reserves

for new loan guaranties.

Page 19 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Chapter 2 

Housing Guaranty Program Has Changed

Significantly

selection of borrowers, the program has continued to operate under the

same authorizing legislation and guidelines.

To cope with the budgetary constraints imposed by this legislation, USAID

has begun to concentrate its new loan programs in more creditworthy

countries, for which smaller reserves are required. Since Credit Reform

measures were enacted, USAID has authorized new guaranties for countries

such as India, Indonesia, Tunisia, and Thailand, which have relatively

favorable credit ratings. Because of their relatively low credit risk, such

countries have ready access to capital from international credit markets.

Foreign policy considerations have also caused USAID to devote a large

portion of its guarantied loans to several more developed countries. For

example, a program in Portugal was mandated by the Congress in the

1980s as part of an economic support package in exchange for maintaining

U.S. military base rights in the Azores. In 1990, $400 million in guaranties

were authorized for Israel in response to its request for help in coping with

the housing needs of Soviet immigrants. More recently, loan guaranties for

Poland, the Czech Republic, and Hungary have been authorized as part of

a larger U.S. effort to encourage democracy and promote free market

systems in countries of Eastern Europe and the former Soviet Union.

Figures 2.1 and 2.2 and table 2.1 show the geographic breakdown of

borrowing, by region and by country, in terms of dollars lent since the

Housing Guaranty Program’s inception.

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Figure 2.1: Regional Distribution of

Housing Guaranty Program Loans

(Fiscal Years 1964-94) (in Millions of

1995 Dollars)

1964 1969 1974 1979 1984 1989 1994

0

200

400

600

800

1,000

1,200

LatinAmerica/Caribbean

Middle East/North Africa

Asia

Africa

Other than developing countriesa

aIsrael, Portugal, and Poland.

Note: Shaded areas reflect total volume of guarantied loans contracted in respective regions during

5-year intervals. No loans were contracted prior to fiscal year 1964.

Source: Our analysis of USAID data.

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Table 2.1: Value of Loans Guarantied

by USAID Under Housing Guaranty

Program by Country (as of Sept. 30,

1994) 

Dollars in millions

Country/regional bank

Face value of

loans guarantied

Value of loans

guarantied in 1995

dollars

Belize $2.0 $2.9

Mauritius 4.0 5.4

Ethiopia 1.5 5.5

Guyana 1.6 6.7

Paraguay 4.0 9.3

Poland 10.0 10.2

Interamerican Savings and Loan Bank 6.0 11.9

Barbados 10.0 14.9

Botswana 9.9 15.9

Senegal 5.0 20.5

Republic of China 4.8 21.2

Iran 7.5 23.6

Pakistan 25.0 26.2

Zaire 10.0 33.5

Philippines 35.0 36.9

Thailand 15.0 37.0

Guatemala 17.7 45.1

Lebanon 30.0 45.5

Morocco 43.5 48.8

Mexico 10.8 50.2

Bolivia 28.4 59.4

Nicaragua 16.0 60.0

Dominican Republic 17.0 66.1

Jordan 55.9 66.3

El Salvador 25.9 71.0

Costa Rica 40.0 71.5

Sri Lanka 60.0 83.4

Zimbabwe 65.0 88.6

Kenya 50.0 90.7

Ecuador 63.2 105.0

Colombia 26.9 118.8

Honduras 68.1 119.4

Cote d’Ivoire 70.9 125.1

Indonesia 120.0 133.5

Argentina 39.7 154.9

(continued)

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Dollars in millions

Country/regional bank

Face value of

loans guarantied

Value of loans

guarantied in 1995

dollars

Chile 79.7 173.0

Panama 87.3 177.0

Tunisia 108.0 183.5

India 155.0 189.5

Venezuela 51.4 199.7

Portugal 140.0 215.5

Jamaica 123.3 223.3

Peru 103.7 226.0

Korea 95.0 251.9

Central American Bank for Economic

Integration 139.9 267.1

Israel 600.0 959.5

Total $2,683.6 $4,950.9

Source: Our analysis of Housing Guaranty Program Financial Summaries.

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Figure 2.2: Countries That Have Received Housing Guaranty Program Loan Funds

5

Page 24 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
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(Figure notes on next page)

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Note: Does not include loans to two regional banks serving multiple Central American countries.

Source: Our analysis of USAID data.

Scope of Program Has

Extended Beyond

Housing Projects

The Housing Guaranty Program originally provided financing for U.S.

construction firms to build housing projects in Latin America to

demonstrate advanced methods of construction and finance that could be

replicated in the borrowing country. In 1965, the Congress reoriented the

program toward “institution building”—financing demonstration projects

developed by local institutions so that they could gain direct experience

and continue to build low-cost homes.

In 1975, the Congress changed the authorizing legislation to require that at

least 90 percent of future guaranties be issued for housing suitable for

families with incomes below the median income of the borrowing country.2

The Congress also directed that the Housing Guaranty Program

complement other development assistance programs and that housing

projects demonstrate the “feasibility and suitability of particular kinds of

housing or financial or other institutional arrangements.” As a result of

these legislative changes, the focus was on financing low-cost, minimum

standard housing projects designed to be affordable to the poor.

In 1985, the word “housing” was replaced with the word “shelter” in the

Foreign Assistance Act, and the scope of the program was expanded to

include “essential urban development services.” USAID interprets the

broader language of the legislation as including any shelter-related project

that affects the greater urban environment, including infrastructure

projects.

USAID currently guaranties loans in developing countries for the following

categories of projects:

• finance projects for housing and infrastructure development, such as

potable water, sewerage, electricity, and roads, designed to be affordable

to below-median income families;

• institution-building projects to develop or enhance housing finance

systems, such as mortgage banking networks;

• urban environment projects designed to manage urban growth and

improve municipal administration; and

• projects that enhance local governance and municipal management to

foster broad-based participation in the governance of urban communities.

2

The International Development and Food Assistance Act of 1975.

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The following are examples of the wide variety of uses of guarantied loan

funds we observed in the countries we visited.

• In Ecuador and India, loans financed mortgages and home improvement

loans, aimed at involving private financial institutions in long-term shelter

financing.

• In Indonesia, loans financed the construction of drainage ditches, public

toilets, roads and walkways, and water supply and treatment facilities,

aimed at promoting the development and management of environmental

infrastructure by local governments.

• In Tunisia, loans financed serviced housing sites and sewer extensions to

slum dwellers, aimed at stimulating the production of more affordable

sanitary shelter.

Figures 2.3 through 2.8 are pictures of some projects financed through the

Housing Guaranty Program in the countries we visited.

Figure 2.3: New Housing With

Mortgages Financed by Housing

Guaranty Program in Carapungo,

Ecuador

Source: Ecuadorian Housing Bank.

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Figure 2.4: Housing With Construction

Financed by Housing Guaranty

Program in Parral, Chile

Source: GAO.

Figure 2.5: Owner-Improved Housing

With Original Construction Financed

by Housing Guaranty Program in

Parral, Chile

Source: GAO.

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Figure 2.6: Housing and Infrastructure

Financed by Housing Guaranty

Program in El Mourouj, Tunisia

Source: GAO.

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Figure 2.7: Housing Built on Sites With

Infrastructure Financed by Housing

Guaranty Program in Larache,

Morocco

Source: GAO.

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Figure 2.8: Footpath and Drainage

Ditch Financed by Housing Guaranty

Program in Kecamatan, Indonesia

Source: GAO.

Current Strategy

Focuses on Policy

Reform and Technical

Assistance

For many years, USAID used the Housing Guaranty Program primarily to

develop demonstration projects that USAID hoped would be replicated by

local entrepreneurs and institutions. However, USAID has begun to use the

program primarily to leverage policy reforms that are intended to have

positive long-term effects on the borrowing countries’ shelter sectors.

According to USAID officials, the loan guaranties have served as incentives

for recipient countries to enact USAID-recommended reforms. In some

cases, specific reforms are preconditions for receiving loans. In addition,

according to RHUDO officials we spoke to, the loans afford USAID day-to-day

influence on policymakers in the host country: the loans “buy USAID a seat

at the table” where shelter policy is made.

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Policy reform objectives associated with the Housing Guaranty Program

have included

• in Chile, enacting laws to establish a mortgage-backed securities market

intended to facilitate investment in low-income mortgages by pension

funds and other private investors;

• in Ecuador, adopting an accounting unit for housing finance indexed to

inflation (called the constant value unit), intended to facilitate private

investment in housing in a climate of high inflation;

• in Indonesia, strengthening local governments’ ability to develop urban

infrastructure by allowing the governments to retain 100 percent of

property tax revenues collected and by reducing the central government’s

direct involvement; and

• in Tunisia, converting a central government agency from a direct producer

of individual housing lots to a wholesaler of land to private developers.

Technical Assistance Is

Integral to Program

Consistent with its policy reform strategy, USAID has increasingly relied on

technical assistance to implement the Housing Guaranty Program.3 USAID is

providing technical assistance, through contracts, for all of its ongoing

projects at a cost of $471 million.4

 According to program officials, USAID’s

regional bureaus provide the funding for this technical assistance from the

Development Assistance, Economic Support Fund, and other program

accounts.

In the countries we visited, technical assistance was provided as part of

USAID’s efforts to achieve desired policy reform and institutional

development objectives.

• In Indonesia, USAID-funded technical advisors in four government agencies

helped implement decentralization policies intended to lead to more

efficient development of urban infrastructure projects by local

governments.

• In India, a USAID-funded seminar resulted in the development of a

government action plan to introduce fundamental urban policy changes

intended to facilitate private sector participation in infrastructure

development.

3

Technical assistance consists of consultants, training, equipment, facilities, and other assistance

provided to the borrower and other institutions participating in the program.

4

Amount is not adjusted for inflation.

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• In Poland, USAID-funded seminars and consulting services, including a

program to train employees of nine banks in mortgage underwriting,

enabled local financial institutions to originate sound mortgages.

• In Ecuador, USAID-funded technical assistance helped the city of Quito’s

Municipal Water Company find ways to reduce its construction costs and

improve water service to the city’s marginal neighborhoods.

• In Morocco, extensive technical assistance, including funding for

consultants, computer equipment, and vehicles, was provided to the city of

Tetouan to help it improve municipal management of urban infrastructure,

including project planning, construction, and cost recovery.

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The Housing Guaranty Program is not self-sustaining. Although the

Congress specifically authorized USAID to charge borrowers fees to cover

costs, the cost to the U.S. government of the existing loan guaranty

portfolio is likely to total about $1 billion (in 1995 dollars).1

 The Housing

Guaranty Program has already received $542 million in appropriations and

U.S. Treasury borrowings to finance earlier losses resulting from loan

defaults. In addition, we estimate the cost of future loan defaults to be

about $600 million more. Projected program revenues are not adequate to

cover administrative and default costs. Although program officials expect

to recover most of the losses from defaulted borrowers, we estimate USAID

will ultimately recover only about $200 million. These costs do not include

several hundred million dollars in technical assistance that USAID has

provided to implement the program but has not reported as a program

cost. Moreover, the legislated ceiling on loan guaranties was not effective

at limiting the U.S. government’s financial investment in this program,

since it allowed USAID to issue new guaranties even though defaulted

borrowers had not repaid their outstanding debts.

Program Has Already

Incurred Significant

Costs for Loan

Defaults

The President’s annual budgets for fiscal years 1971 through 1975 indicate

that the Housing Guaranty Program was originally intended to be

self-sustaining. The documents stated that “consistent with the intent of

the Congress that the housing programs be totally self-supporting, the

costs of administration, program evaluation and development, and claims

investigations are paid from fee income.” However, fee income has not

been adequate to cover all program costs, and USAID has required

$542 million in inflation-adjusted appropriations and U.S. Treasury loans.

Although historical financial information for this program is incomplete,

we determined, based on a review of audited financial statements and

budgetary documents, that from fiscal years 1970 to 1994, the program had

experienced at least $542 million in losses due to loan defaults. USAID

financed these losses with $258 million in appropriations ($417 million in

1995 dollars) and $125 million in loans from the U.S. Treasury.2

1

Unless otherwise noted, all figures are presented in 1995 dollars.

2

A more precise accounting of total losses was not available because financial records prior to fiscal

year 1989 are incomplete and unreliable. Prior to 1968, an undisclosed amount of administrative

expenses were paid from USAID’s general appropriation instead of from program revenues. In fiscal

year 1970, the Congress provided the program a reserve fund of $50 million and another $40 million in

1985 to cover expenses associated with borrower defaults. Having expended these reserves, from

fiscal years 1987 to 1992 the program borrowed, but has not yet repaid, $125 million from the U.S.

Treasury, and from fiscal years 1992 through 1994, USAID received $168 million in appropriations to

fund the program’s annual shortfalls. Adjusted for inflation, these figures represent a total of

$542 million that USAID required to finance program losses.

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USAID’s reported program costs do not include several hundred million

dollars that it has committed for technical assistance to implement this

program, as described in chapter 2. USAID does not report the cost of this

assistance as a Housing Guaranty Program expense in its budget or

financial statements, because the cost is funded from other USAID program

accounts. However, we believe that much of this assistance amounts to

closely-linked cross subsidies to program participants, and including them

in reports on the cost of the program is reasonable.3

 Although USAID’s

ongoing technical assistance is currently estimated to cost $471 million,4

historical cost information was not available. Therefore, the total cost of

technical assistance associated with this program is unknown, though it is

probably much higher than this amount.

Projected Future

Default Costs Total

About $600 Million

Our analysis of the program’s outstanding loan guaranty portfolio and the

risk profile of current borrowers indicates that over the remaining life of

the portfolio USAID will likely have to make principal and interest payments

now valued at $600 million on behalf of borrowers that do not fully repay

their loans.5

 These cost projections are rough and will vary over time

depending upon market expectations for the portfolio. According to the

program’s fiscal year 1993 audited financial statements, USAID estimates

this liability at over $700 million.

USAID has no reserves to fund this liability, except for about $50 million in

appropriations it obtained to finance projected default costs associated

with loan guaranties authorized after the Credit Reform Act took effect.

The remaining default costs will be financed with budget authority

established for such unfunded liabilities under the Credit Reform Act.6

3

We developed two criteria for defining a closely-linked cross subsidy program. They are that (1) the

appropriation for the cross subsidy program directs assistance to the credit program participants and

(2) the government’s commitment of the two programs is obligated concurrently. For a more detailed

discussion of closely-linked cross subsidies, see Credit Reform: Case-by-Case Assessment Advisable in

Evaluating Coverage and Compliance (GAO/AIMD-94-57, July 28,1994).

4

Amount is not adjusted for inflation.

5

To determine the probable default costs associated with USAID’s pre-Credit Reform loan portfolio, we

applied an updated version of our method for estimating the cost of country risk associated with loan

guaranties outstanding. Our country risk ratings were developed by statistically averaging two

contemporaneous, professionally accepted ratings—Euromoney and the Institutional Investor. Our

method transformed country risk ratings into country risk cost using econometric estimates on data

derived from the secondary market.

6

The Credit Reform Act requires that loans disbursed before fiscal year 1992 be budgeted and

accounted for on a cash basis. The act provides permanent, indefinite budget authority to fund defaults

from such loans to the extent that the defaults are not covered by funds available in the credit

liquidating account from prior year surpluses.

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USAID’s unfunded liability includes costs associated with $193 million in

loan guaranties it authorized before the Credit Reform Act took effect but

had not contracted or disbursed as of March 1995. Some of these loans are

to countries with relatively poor credit risk ratings, such as Ecuador and

Jamaica. If USAID deauthorizes these loan guaranties instead of disbursing

the loans as currently planned, future default costs could be reduced by

over $50 million.

Future Fee Revenue

Will Be Inadequate to

Cover Costs

Based on our analysis of the Housing Guaranty Program portfolio,

projected revenues will continue to be inadequate to cover future defaults

and other program costs. Presented in present value terms, we estimate

that from fiscal years 1995 through 2024, USAID’s program expenses for the

current portfolio are likely to total about $800 million: about $600 million

in default costs, about $80 million in administrative costs,7

 and

$125 million to repay funds it still owes to the U.S. Treasury to cover

earlier program losses. However, USAID is likely to collect less than

$100 million in fees during this period.8

The Foreign Assistance Act authorizes USAID to charge borrowers fees to

cover the cost of this program. However, despite the significant losses

incurred and anticipated for this program, USAID has not taken any steps to

increase fee revenues. The program’s existing fee structure has remained

virtually unchanged since fiscal year 1972. Specifically, on new loans

borrowers are assessed a 1-percent initiation fee and an annual fee of

0.5 percent of the outstanding loan balance, regardless of credit risk.

In its audit report on the program’s fiscal year 1991 financial statements,

USAID’s Inspector General recommended that USAID managers consider

implementing a risk-based fee structure, and USAID has funded two

consultant studies to examine this issue. One study showed that an

increase in annual fees to 1.5 percent of the outstanding loan principal for

fiscal years 1971 through 1990 would have eliminated the need for

$165 million (nearly $200 million in 1995 dollars) in appropriations and

U.S. Treasury borrowing during that period. Another study indicated that

7

Administrative costs were assumed to be a constant percentage of the probable outstanding loan

balance for the next 10 years and were estimated based on fiscal year 1994 appropriations figures. We

further assumed that after 10 years, the administrative costs associated with the existing portfolio

would be negligible.

8

Fee income includes initiation fees, annual fees, and USAID late fees. Late fees (charged at the loans

contracted rate of interest) were assumed to be a constant percentage of the outstanding loan balance

and were estimated based on actual fiscal year 1993 figures. This estimate assumes the same probable

default rate for annual fees as we used for principal and interest payments.

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the program’s fees are in the middle range of similar fees charged by other

international lenders. Both studies stated that an increase in fees could

negatively affect the willingness of countries to participate in the program,

although few other lenders offer the attractive 30-year repayment terms

that the Housing Guaranty Program does. According to one study,

charging higher fees for certain borrowers could be politically

embarrassing for USAID.

Our assessment of the program’s financial condition indicates a necessity

to raise fees in order to make the program as self-sustaining as possible.

Even with higher fees, USAID-guarantied loans would likely remain

attractive to many developing countries because of their low interest rates,

lengthy repayment terms, foreign exchange value, accompanying technical

assistance, and the increased financial credibility associated with

receiving U.S. government credit. Also, as one of USAID’s consultant studies

indicates, USAID could raise its fees and still remain competitive with other

international lenders.

USAID Is Unlikely to

Recover a Growing

Amount of Defaulted

Debt

Our review of USAID’s financial records indicates that the amount of debt

that defaulted borrowers owe USAID has been escalating in recent years.

Figure 3.1 shows that, not adjusted for inflation, uncollected debt more

than doubled, from $171 million in fiscal year 1989 to $409 million in fiscal

year 1994. This debt consists of defaulted principal, interest, and fees.

Based on our analysis of USAID’s portfolio of rescheduled debt, we estimate

that USAID can ultimately expect to recover only about one-half of this debt,

or about $200 million. According to the program’s fiscal year 1993 audited

financial statements, the most recent available, USAID is likely to collect

only about $30 million of this debt (see table 3.1 for a comparison of

USAID’s and our analyses of program cost). In addition to this defaulted

debt, USAID has incurred over $100 million in other unrecoverable program

costs over the life of the program.9

9

Unrecoverable costs include default costs USAID has “written off” ($39 million in then-year dollars),

including default costs for a loan to the Imperial Government of Iran and 31 pre-1973 loans to

nonsovereign borrowers with no host government guaranty of repayment. USAID has been making

principal and interest payments on these loans for many years but has recovered virtually none of its

costs and does not expect to recover them. A precise accounting of all unrecoverable costs was not

possible, because financial records provided to us for periods prior to fiscal year 1989 are incomplete

and unreliable.

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Figure 3.1: Cumulative Uncollected

Housing Guaranty Program Debt Owed

to USAID (Fiscal Years 1989-94) (Dollars

in Millions)

1989 1990 1991 1992 1993 1994

0

100

200

300

400

500

171

215

236

315

381

409

Note: Amounts are not adjusted for inflation.

Source: USAID Office of the Inspector General Audit Reports and our analysis of Housing

Guaranty Program Financial Summaries.

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Table 3.1: Comparison of USAID and

GAO Analyses of Program Cost to the

U.S. Government Cost

Dollars in millions

Program funding

Fiscal

year(s)

USAID financial

records

GAO analysis

(1995 dollars)

Appropriation for reserve 1970 $50 $185

Appropriation for reserve 1985 40 55

Net U.S. Treasury borrowings 1987-91 125 125

Appropriations for administrative

and default costs on pre-Credit

Reform guaranties

1992-94 168 177

Appropriations for future default

costs of post-Credit Reform

guaranties

1992-94 49 50

Appropriations for default costs

of pre-Credit Reform guaranties,

net of recoveries

1995-2025 707 575

Estimated recoveries from about

$400 million of defaulted loans

outstanding as of September 30,

1994

1995-2025 (29) (200)

Total $1,110 $967

Housing Guaranty Program officials believe that USAID is likely to recover

nearly all of this debt. This belief is based on their observation that over

the past 4 years many of the defaulted borrowers in Latin America have

undergone fundamental economic changes, resulting in increasing

creditworthiness. This economic improvement, they believe, is unlikely to

be reversed, and the long-term trend for these countries is positive. The

officials did not provide any specific estimates of probable defaults. Our

review indicates that USAID’s forecast is unreasonably optimistic; it is

essentially based on intuition rather than sound analysis. In our

December 1994 report on credit reform, we showed that the probability of

default for most of the Latin American countries with the greatest Housing

Guaranty Program debt, despite recent economic improvements, still

exceeded 50 percent.

Instead of immediately repaying defaulted debt to USAID, borrowing

countries have increasingly rescheduled their debts to the United States

through bilateral agreements under the Paris Club.10 The borrowing

countries agree to repay this debt along with other debt they owe to the

10When foreign countries are unable to meet their external debt obligations owed to governments, the

Paris Club is the mechanism the United States and other official creditors use to reschedule the debt.

Paris Club meetings are organized by the French Finance Ministry. The Department of State represents

the U.S. government in Paris Club negotiations.

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U.S. government, with interest, over an extended period of time. The

rescheduled debt includes all outstanding debt payments a country has

defaulted on or is in imminent default on. Multiple rescheduling of

rescheduled debt to defer repayment is common; in fact, one borrower has

rescheduled its debt 10 times. As a result, by September 30, 1994, USAID had

collected only about 5 percent of all rescheduled debt.

USAID has, in effect, provided additional benefits to borrowers that

rescheduled their debts instead of paying them immediately. For example,

we identified 12 cases since 1985 in which USAID authorized new

disbursements of Housing Guaranty Program loans to countries that had

recently rescheduled (or were in the process of rescheduling) debt to

USAID.

11 USAID provided new guarantied loans for four countries (Ecuador,

Jamaica, Jordan, and Panama) despite repeated rescheduling of old debt.

According to USAID officials, USAID waives initiation and annual fees on

rescheduled loans to encourage repayment of the original loan amount.

This has amounted to a waiver of over $11 million ($10.6 million in

then-year dollars) in fees for fiscal years 1987 through 1994.

Figure 3.2 shows the distribution of uncollected debt by geographic region

(see app. I for outstanding guarantied loan balances and unpaid debts by

country).

11This occurred for Bolivia, Costa Rica, Chile, Ecuador, Jamaica, Jordan, and Panama.

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Figure 3.2: Geographic Distribution of Uncollected Debt Owed to USAID (as of Sept. 30, 1994)

Latin America

Caribbean 

Africa

Middle East

 75.6% 

9.1% 

14.9%

0.4%

Source: Our analysis of Housing Guaranty Program Financial Summaries.

Legislated Ceiling Did

Not Limit Financial

Commitment

The legislated ceiling on loan guaranties has not been effective at limiting

the U.S. government’s financial commitment under this program. The

Foreign Assistance Act authorized USAID to issue guaranties for up to about

$2.6 billion in loans before fiscal year 1992.12 When loan principal was

repaid, USAID reduced the liability it recorded under the ceiling, allowing it

to issue a corresponding amount of new loan guaranties. This occurred

even when USAID was required, as guarantor, to make a payment on behalf

of a borrower. These amounts paid by USAID are no longer guarantied loans

but a program asset due from a borrower and are therefore no longer

12Beginning in fiscal year 1992, new loan guaranties were not subject to this authorized ceiling, but

were required to be authorized individually in accordance with the provisions of the Credit Reform

Act.

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counted against the loan guaranty ceiling. Thus, USAID continued to issue

new loan guaranties while the total amount of uncollected debt grew. As a

result, by fiscal year 1995, the total amount of U.S. government resources

committed by USAID had grown to $2.8 billion,13 despite the authorized

ceiling of $2.6 billion. If USAID had been required to include uncollected

debt under the ceiling, it would have been unable to issue $200 million in

loan guaranties, reducing the probable cost of loan defaults by about

$50 million.

13This figure reflects the face value (not the 1995 value) of all guarantied loans outstanding and

uncollected debt. It does not include $355 million in loan guaranties authorized since September 30,

1992, which are subject to the provisions of the Credit Reform Act and do not fall under the Foreign

Assistance Act ceiling.

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Program’s Impact on Low-Income Shelter

Investment Is Not Evident

The Housing Guaranty Program and related technical assistance have

contributed to many improvements in the shelter sectors of participating

countries. However, USAID has not achieved a major long-run objective of

the program as envisioned in the Foreign Assistance Act: to increase

private investment in shelter for poor families. The program has not

convinced local entrepreneurs and private institutions that investing their

capital in lower income shelter is financially viable. In addition, USAID’s

implementation of the program has not ensured that at least 90 percent of

guarantied loan funds were spent on projects directly benefiting families

below the median income level, the program’s target population. Finally,

USAID has not designed its performance indicators to measure progress

toward the program’s objectives.

Program Has Not

Stimulated Investment

Despite over 30 years in operation, the Housing Guaranty Program has not

increased private investment in low-income shelter. According to the

Foreign Assistance Act, the program was intended “to increase the

availability of domestic financing for low cost shelter by demonstrating to

local entrepreneurs and institutions that providing this shelter is

financially viable.” In the seven participating countries we visited, the

program has helped bring about some improvements in these countries’

shelter markets. However, the program has not stimulated local credit

institutions to make private investment capital available for low-income

shelter projects.

The program can be credited with helping countries increase participation

by private institutions in state-financed shelter production. However, these

institutions have not increased their own investment in the low-income

shelter sector. The following examples illustrate the limited involvement

of private sector investment in the Housing Guaranty Program.

• In India, the Housing Guaranty Program was aimed at increasing private

sector financing of low-income housing. To this end, the program has

helped India’s National Housing Bank finance low-cost mortgages and

home improvement loans through private housing finance corporations.

However, the housing finance corporations have not invested their own

capital in these types of projects. Thus, a 1994 evaluation of the India

program, conducted by a USAID contractor, indicated that USAID had not

met the goal of increasing the availability of private housing finance for

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low income households, but rather established another conduit for

distributing public resources.

• In Ecuador, the government dominates the formal development of

low-income housing. The most recent Housing Guaranty Program effort in

that country was aimed at involving commercial banks, credit unions, and

savings and loans in low-cost housing development by providing below

market rate investment capital through the state-run Ecuadorian Housing

Bank. Officials of several of these institutions told us that although their

involvement in the USAID program was financially satisfactory, they did not

plan to invest their own capital in similar projects.

• In Chile, the government provides families with direct subsidies and loans

to purchase homes, but the demand for affordable housing has exceeded

the supply, and many families cannot take advantage of the government

financing. Two of USAID’s recent programs in Chile provided short-term

construction financing to three cooperatives to encourage them to satisfy

some of this housing demand. In addition to Housing Guaranty Program

financing, the cooperatives have been able to obtain additional short-term,

market rate construction loans from commercial banks. However, when

the homes were completed, the government of Chile reimbursed the

cooperatives most of the development costs through subsidies to the home

buyers. Thus, while this program has helped enhance the availability of

housing, the long-term financing for the housing is still provided by the

government, not the private sector.

• In Tunisia, a recent Housing Guaranty Program provided a loan for the

country’s Housing Bank to increase private production of affordable

housing and developable land. The loan was contingent upon a series of

policy and institutional reforms. USAID has indicated that the program’s

initial $15 million investment led to millions of dollars of additional

lending by the Housing Bank for low-income mortgages. However, the

capital for this lending was not raised from private credit institutions,

rather from a 1-percent tax on salaries and from previous loan repayments.

According to a 1993 evaluation of this program, conducted by a USAID

contractor, the low return on investments in this area makes it impossible

to raise financing capital from alternative sources. According to USAID, the

Housing Bank raised about $75 million in short-term financing from

private sources to fund initial project construction. However, the

long-term financing of these projects was provided through the

government-sponsored mortgage program.

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• In Indonesia, infrastructure projects had been the domain of the central

government, which planned, financed, and constructed them. Since 1988,

in part with the encouragement and assistance provided by USAID through

the Housing Guaranty Program, the government of Indonesia has pursued

decentralization, allowing municipalities to raise funds locally and develop

infrastructure projects. With seed money from the program, the

government of Indonesia established a Regional Development Account to

lend funds to local governments for slum improvements and other

shelter-related infrastructure projects. However, this program has not

increased the availability of private financing for low-cost shelter because

the investment capital for these projects was provided by the government

of Indonesia at below-market rates and not from private credit markets.

Evaluations of the Housing Guaranty Program in Indonesia, conducted by

USAID contractors in 1992 and 1993, indicated that more attention was

needed on providing local governments access to private sector financing.

By failing to stimulate private investment and instead relying on host

government financing and subsidies, the program’s impact is limited.

Given the financial constraints on developing country governments, they

have been unable to provide adequate resources to finance the shelter

their poor populations need. As the Director of USAID’s Office of

Environment and Urban Programs has acknowledged, “most existing

housing subsidies . . . do not result in programs of sufficient order of

magnitude to really have an impact on the shelter sector.”

Even though it has not been able to convince local entrepreneurs to invest

in low-income shelter, USAID has repeatedly guarantied loans in the same

countries. As table 4.1 shows, in some of the countries we visited, USAID

has been providing guarantied loans for over 25 years.

Table 4.1: Loan Guaranty History in

Selected Countries In millions of 1995 dollars

Country

Year of first

loan

Number of

loans

Total value

of loans

guarantied

Chile 1968 8 $173.0

Ecuador 1968 7 105.0

India 1983 10 189.5

Indonesia 1989 5 133.5

Morocco 1985 5 48.8

Poland 1994 1 10.2

Tunisia 1964 12 183.5

Source: Our analysis of Housing Guaranty Program Financial Summaries.

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According to USAID officials, the Housing Guaranty Program and related

technical assistance have contributed to innovations and greater efficiency

of the host governments in providing shelter. They cite as an example a

demonstration project through which USAID convinced the government of

Morocco of the efficacy of rehabilitating slums rather than bulldozing

them. They told us that the program has also helped countries establish

more reasonable building codes and land tenure policies intended to

facilitate the construction and upgrading of low-income dwellings.

However, USAID has not demonstrated to what extent these innovations

have led to greater long-term investment by the private sector in

low-income shelter developments.

USAID hopes to make progress in marshalling private investment resources

in the future. For example, projects being initiated in Chile and Ecuador, if

successful, could allow financial institutions to raise capital for shelter

projects by selling mortgage-backed bonds to private investors, such as

pension funds and insurance companies. Also, efforts are underway in

India to enable housing institutions to access private credit markets for

long-term financing. However, our review indicated that these programs

were in their preliminary stages, and USAID has not yet demonstrated

whether this is a viable option for financing low-income shelter projects,

which are traditionally considered higher risk investments.

USAID Does Not

Always Ensure Access

to Projects by Lower

Income Group

The Foreign Assistance Act requires that at least 90 percent of the

guaranties issued under the Housing Guaranty Program be used to finance

shelter suitable for families with incomes below the country’s median

income. However, our review indicated that USAID does not always ensure

that its projects are fully accessible by the below-median income target

population.

USAID contends that as long as the projects funded by the program are

priced to be affordable to below-median income families, they are

considered suitable, regardless of whether those families actually benefit

from the projects. Many of our project site visits and extensive review of

USAID documents in the countries we visited, including a review of USAID

consultant studies, showed that factors other than price have sometimes

adversely affected below-median income families’ access to program loan

funds.

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• In India, we found that at least one bank participating in the program

extended loans to its own employees, who had above-median incomes.

One such employee we visited obtained a home improvement loan to build

an addition, where an extended family member conducted aerobics

classes. A RHUDO-sponsored survey of beneficiaries indicated that about

36 percent of the loans financed through the Housing Guaranty Program

went to families with above-median incomes.1

• In Ecuador, a nonprofit agency told us that many higher income people

had purchased and upgraded housing financed through the Housing

Guaranty Program. A 1989 USAID-sponsored evaluation of the Ecuador

program also expressed this concern.

• In Indonesia, several program-financed projects we visited appeared to be

serving people above the country’s median income. This included a pay

toilet in Bali that served tourists (shown in fig. 4.2) and small-scale

infrastructure projects in higher income neighborhoods. In a 1992

evaluation of the Indonesia program, a USAID consultant noted that USAID

had not taken adequate measures to ensure that at least 90 percent of the

beneficiaries were below the median income, leading to “conflicting

speculation as to whether these investments are reaching the poor.”

• In Morocco, program-financed housing built for lower income families to

relocate from slums (shown in fig. 4.3) had not been sold to those families.

Instead, at the time of our visit, the municipality that built them was

holding some of them vacant and intended to sell them to other buyers at a

profit to raise funds for other municipal projects.

• In Tunisia, a RHUDO-sponsored survey of beneficiaries indicated that about

17 percent of one sampling of families that USAID deemed eligible to benefit

from the program had above-median incomes.2

Figures 4.1 through 4.3 show examples of program-financed projects we

visited that did not benefit below-median income families.

1

According to USAID officials in India, these were acceptable results because participating institutions

made additional loans to families with below-median incomes for which they did not receive Housing

Guaranty Program financing. However, such loans were larger than USAID determined would be

affordable to a family below the median income.

2

According to RHUDO officials in Tunisia, these results were acceptable because the government of

Tunisia finances other loans to families below the median income.

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Figure 4.1: House Partially Financed

by the Housing Guaranty Program for

Above-Median Income Family in

Bangalore, India

Source: GAO.

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Figure 4.2: Pay Toilet for Tourists

Financed by the Housing Guaranty

Program in Bali, Indonesia

Source: GAO.

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Figure 4.3: Partially Unoccupied

Housing Financed by Housing

Guaranty Program in Tetouan,

Morocco

Source: GAO.

We determined that, in several countries we visited, RHUDO and USAID

missions did not routinely visit projects or review case files to monitor

beneficiary selection and ensure that programs benefited below-median

income groups. Instead, they often relied on reports from borrowers, such

as certifications attesting that mortgages or home improvement loans

were affordable to the below-median income target groups.

If USAID is to ensure that host country institutions follow its lead and

develop shelter projects that benefit below-median income families, USAID

must first ensure that its demonstration projects reach that target

population.

Performance

Indicators Do Not

Measure Progress

Toward Program

Objectives

Since 1991, USAID has been developing performance indicators to measure

the Housing Guaranty Program’s impacts on the shelter sectors of

developing countries. However, these indicators do not focus on the

effectiveness of the program in persuading local investors to finance

low-income shelter projects. Nor do they measure the extent to which the

program is serving its low-income target population. Instead, they measure

broad changes in the shelter sector, such as in infrastructure expenditures

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per capita and the house price to income ratio, and associate them with

USAID’s programs.

Given the many factors outside of USAID’s control that affect the overall

shelter sector in a country, direct correlations between individual Housing

Guaranty Program efforts and broad sector changes are unreliable.

Domestic conditions, such as the level of social, economic, and political

stability, are significant factors affecting a country’s shelter sector that

could be reflected in USAID’s indicators. Also, the effects on the overall

shelter sector of parallel initiatives are difficult to independently monitor.

USAID’s assistance may be relatively minor in relation to a country’s own

investments and the assistance provided by other bilateral or multilateral

donors. For example, in 1993 USAID-guarantied loans represented only 

7 percent of the capital in Indonesia’s Regional Development Account for

shelter-related infrastructure investment. In Poland, USAID’s $25 million

loan guaranty program is part of a $400 million housing finance program

with the World Bank and the European Bank for Reconstruction and

Development. USAID officials have also observed that the performance

indicators are of limited use in measuring the direct results of its program.

USAID can develop ways to measure progress toward its objectives on a

smaller, more realistic scale. For example, through surveys and other

evaluation methodologies, USAID can measure the direct impact of its

demonstration projects and policy reform on the investment patterns of a

sampling of private sector institutions.

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Conclusions, Matters for Congressional

Consideration, and Recommendations

Throughout the Housing Guaranty Program’s 30-year history, the Congress

and USAID have modified the program to try to improve its effectiveness.

After initially focusing primarily on Latin American countries, USAID shifted

to other regions of the world and then to more creditworthy and advanced

countries. USAID has also altered its strategy by increasingly incorporating

policy reform objectives and providing several hundred million dollars in

technical assistance to complement the guarantied loans. However,

despite these modifications, the Housing Guaranty Program has not met

congressional expectations, as established in the Foreign Assistance Act.

Although the Congress authorized USAID to assess borrowers fees to cover

program expenses, the program’s total cost to the U.S. government is

likely to be about $1 billion (in 1995 dollars). Loan defaults (especially in

Latin America, where the program had been concentrated) have been high,

and program costs have escalated. The program has incurred at least

$542 million in default costs. Future default costs are likely to total about

$600 million. To limit the U.S. government’s liability under the program,

the Congress established a $2.6 billion ceiling on loan guaranties; however,

loan guaranties and debts to USAID resulting from this program have totaled

about $2.8 billion.

While the Housing Guaranty Program has sponsored demonstration

projects and helped persuade recipient countries to adopt policy reforms,

it has not succeeded in convincing local entrepreneurs and institutions to

increase private investments in lower income housing projects. Thus, the

program’s anticipated long-term impact on the availability of capital for

lower income shelter is not evident. Furthermore, USAID has not ensured

that the actual shelter projects financed by this program necessarily

benefit below-median income families. USAID has not designed its

indicators to measure the direct impact of this program on private sector

investment and on below-median income families.

Matters for

Congressional

Consideration

The Congress may wish to deauthorize guaranties for undisbursed loans,

where feasible, and terminate the Housing Guaranty Program because

(1) the program is now primarily benefiting borrowers in more

creditworthy and advanced developing countries that have access to

comparable loans from other international lenders; (2) the program

annually costs millions of dollars more than anticipated; (3) loans

previously guarantied under the pre-1992 legislated ceiling continue to be

disbursed, even though USAID has not collected over $400 million in

defaulted debt; and (4) there is no evidence that the program has

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measurably increased the availability of private domestic capital for

low-income shelter.

Other actions are warranted if the Congress believes that the goals of

(1) stimulating domestic investment in the recipient countries (particularly

private investment) and (2) targeting shelter assistance to below-median

income families are possible to achieve and are of sufficient priority.

Before authorizing additional loan guaranties, the Congress may wish to

require USAID to submit a comprehensive plan to the appropriate

congressional committees on how it plans to achieve the stated program

goals, reduce losses, and return the program to a viable financial

condition.

Recommendations If the Congress does not terminate the Housing Guaranty Program, we

recommend that the USAID Administrator take the following actions to

(1) minimize the financial impact of the Housing Guaranty Program on the

foreign assistance budget and the U.S. government budget deficit and

(2) bring the program in line with the objectives of the Foreign Assistance

Act:

• Withhold future loan disbursements and related technical assistance from

borrowers that have repeatedly rescheduled debt repayments to USAID.

• Increase program revenues by adopting a fee structure designed to offset a

larger portion of the program’s costs.

• Ensure that performance indicators measure the extent to which (1) local

investors replicate the program’s low-income shelter projects using private

sources of long-term financing and (2) project benefits accrue to the

below-median income target population.

Agency Comments

and Our Evaluation

The report has been revised, where appropriate, to reflect USAID’s

concerns. The comments and our evaluation of them appear in 

appendix II.

In commenting on a draft of this report, USAID strongly disagreed with our

findings, arguing that the Housing Guaranty Program was a cost-effective

method for pursuing development assistance and that the program had

achieved the goals established by the Congress. USAID criticized the report

for failing to adequately consider alternative program goals and

congressional directions. USAID also asserted that the report was based on

a flawed financial analysis and a distorted portrayal of program costs

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because of the use of 1995 dollars. Furthermore, USAID maintained that we

did not adequately consider evidence that the program had successfully

stimulated private investment and reached below-median income target

populations. USAID suggested that termination of this program and

deauthorization of guaranties might interfere with legally binding

agreements and congressionally supported activities. USAID did not address

the report’s specific recommendations, since it contended that they were

based upon incorrect information and a flawed analysis.

As a result of these comments, we modified our matters for congressional

consideration and recommendations to (1) recognize that it may not be

feasible to deauthorize all loan guaranties and (2) indicate that USAID

should increase its guaranty fees to cover more of its costs. However, our

evaluation of these comments revealed that USAID had not credibly

supported any of its broad and strongly worded criticisms. USAID did not

identify any specific legislated program goals that we overlooked or any

legal provisions that contradict the goals we focused on. USAID’s criticism

of our financial analysis is unfounded and even disregards its own most

recent audited financial statements regarding probable losses from loan

defaults. Our use of 1995 dollars reflects the true cost of the program more

accurately than the use of then-year dollars, especially for costs incurred

over many years. We denominated figures in both 1995 and then-year

dollars, except in cases, such as the discussion of legislated ceilings,

where it was not meaningful or possible to use 1995 figures. Furthermore,

the additional data USAID provided (most of which we had already

reviewed) were misleading and did not undermine our conclusions.

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Page 55 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Appendix I 

Housing Guaranty Program Debts as of

September 30, 1994

This appendix lists the countries and regional banks with outstanding

guarantied loan balances and debts to the U.S. Agency for International

Development (USAID) under the Housing Guaranty Program as of

September 30, 1994.

Country/regional bank Loan balance Debt to USAID

Botswana $9,565,714 $134,169

Ethiopia 0 1,878,010

Cote d’Ivoire 50,319,092 31,853,835

Kenya 43,206,224 3,996,380

Senegal 0 4,718,552

Mauritius 4,000,000 0

Zaire 2,384,974 18,392,795

Zimbabwe 65,000,000 0

Subtotal 174,476,004 60,973,741

India 144,000,000 0

Indonesia 120,000,000 0

Korea 53,321,406 0

Pakistan 25,000,000 0

Philippines 35,000,000 0

Sri Lanka 56,010,000 0

Thailand 9,750,000 0

Subtotal 443,081,406 0

Poland 10,000,000 0

Subtotal 10,000,000 0

Israel 520,500,536 0

Jordan 55,858,833 1,827,825

Lebanon 28,428,904 0

Morocco 43,459,684 0

Portugal 100,000,000 0

Tunisia 93,728,115 0

Subtotal 841,976,072 1,827,825

Argentina 4,148,611 42,451,775

Barbados 7,600,000 0

Belize 1,950,000 0

(continued)

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Housing Guaranty Program Debts as of

September 30, 1994

Country/regional bank Loan balance Debt to USAID

Bolivia 17,445,882 19,272,776

Central American Bank for

Economic Integration 109,062,899 153

Colombia 0 10,914

Chile 62,821,782 437,036

Costa Rica 30,983,229 4,295,015

Dominican Republic 737,257 6,241,941

Ecuador 54,438,827 12,619,483

El Salvador 13,770,659 3,478,405

Guatemala 10,000,000 0

Guyana 0 1,303,527

Honduras 58,793,468 21,749,898

Interamerican Savings and

Loan Bank 5,365,967 0

Jamaica 100,327,044 29,564,332

Nicaragua 2,620,496 22,284,013

Panama 69,322,973 27,520,864

Paraguay 3,036,032 0

Peru 72,060,131 154,888,134

Venezuela 2,388,688 140,784

Subtotal 626,873,945 346,259,050

Total $2,096,407,428 $409,060,616

Note: Totals may not add due to rounding.

Source: Housing Guaranty Program Financial Summary

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Comments From the U.S. Agency for

International Development

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

See pp. 7-8 and 53-54.

See comment 1.

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See pp. 7-8 and 53-54.

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See comment 2.

See comment 2.

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See comment 3.

See comments 1 and 4.

See comment 4.

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See comment 5.

See comment 6 and p. 40.

See comment 7.

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See comment 8.

See comment 9.

See comment 10 and 

pp. 7 and 53.

See comment 11.

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See comment 12 and

p. 19.

See comments 12 and 13.

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See comments 14 and 15.

See comments 14 and 15.

See comment 12.

See comment 15.

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See comment 14.

See comment 16.

See comment 17 and

p. 44.

See comment 16.

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See comment 16.

See comment 18.

See comment 18.

See comment 18.

See comment 18.

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See comment 19.

See comment 19.

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The following are GAO’s comments on USAID’s letter dated May 8, 1995.

GAO Comments 1. In nearly every case, the report shows monetary amounts in both

nominal and 1995 dollars. We did not convert amounts to 1995 dollars in

cases where it was not meaningful to do so or where doing so would

distort the presentation of the financial situation; this includes our

discussion of the legislated ceiling. USAID’s claim that it may ultimately

collect 27 percent more than the program has cost (see p. 66, section

1(b)(4) of USAID’s letter) reveals the flaws associated with using nominal

instead of 1995 dollars. USAID’s calculation does not take into account over

$150 million in interest that the U.S. government has foregone by using its

funds to pay default costs for this program—a real cost that has impacted

the federal deficit. Furthermore, portraying costs in only nominal dollars

would inflate our projection of future default costs to nearly $1.2 billion,

which would be misleading because it would not reflect the decreased

purchasing power of the dollar over time.

2. Section 221 of the Foreign Assistance Act sets forth the policy

statement for the Housing Guaranty Program. It declares that the long-run

goal of the program “should be to develop domestic construction

capabilities and to stimulate local credit institutions to make available

domestic capital and other management and technological resources

required for effective low-cost shelter programs and policies.” (See

22 U.S.C. 2181.) In 1978, the Congress amended sections 221 and 222 of the

act to rewrite the policy statement to consolidate separate housing

guaranty programs into one program. The legislative history indicates that

“[t]he new policy statement does not represent a change in focus of the

program, but merely updates and clarifies the purposes of the program . . .

that the focus of the program should be on improving the shelter facilities

of the poor.” (See H. Rpt. No. 1087, 95th Cong., 2d Sess. 28 (1978).) The

Committee included language in the report reiterating that the long-run

goal of the program as set forth in section 221 remained unchanged. (See

H. Rpt. No. 1087 at 29.)

USAID suggests that there is a “disconnect” between the long-run goal in

section 221 and the activities emphasized in section 222. According to

USAID, the new activities shifted the focus away from formal credit

institutions and toward basic infrastructure needs.

However, the language of the Foreign Assistance Act, along with the

legislative history accompanying the changes made to sections 221 and 222

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in 1978, indicates that, at the time, the Congress saw no inherent

contradiction between these two sections of the act. Section 222 of the act

sets forth the means “[t]o carry out the policy of section 221.” (See 

22 U.S.C. 2182(a).) It identifies the types of activities that the Congress

intended to be emphasized in the program, including slum upgrading,

community facilities and services, and institution building. These activities

are not, in and of themselves, the “long-run goals” of the program but

simply the types of activities the Congress intended to be emphasized to

achieve the program’s goals. As noted above, the legislative history shows

that in prescribing the activities the Congress intended to retain the

long-run focus reflected in section 221.

USAID believes that the activities in section 222 will not, within the time

periods we considered, achieve the long-run goals of section 221.

Nevertheless, some more positive indicators of progress should be

expected after 30 years (and 17 years since the enactment of 

section 222(b)). We believe that USAID is accountable for either meeting the

long-run goals of the program or, alternatively, reporting to the Congress

within a reasonable period of time its inability to meet them.

3. USAID’s reference to two “separate and distinct” Housing Guaranty

Programs—pre- and post-Credit Reform—is an artificial distinction, which

obscures the program’s overall financial condition and the total U.S.

government liability. While the financing of the program has changed

because of Credit Reform budgeting rules for new loan guaranties

beginning in fiscal year 1992, the operation of the program has continued

under the same authorizing legislation and guidelines. In fact, as we point

out, USAID continues to authorize disbursement of pre-Credit Reform

guarantied loans without any reserve for defaults. While it is true that the

post-Credit Reform portion of the portfolio has experienced no defaults or

write-offs, the loans in this category represent a very small portion of the

program’s portfolio and are currently in a grace period in which no

principal is due.

4. Contrary to USAID’s assertion, neither the Office of Management and

Budget (OMB) nor the Congressional Budget Office have ever challenged

the validity of the method upon which we based our projection of default

costs. In fact, OMB and other executive agencies recognized the validity of

increasing the use of market price to derive better assessments of default

costs when assessing sovereign risk—a key component of our

methodology. However, OMB indicated that estimating default costs for 167

countries using this method would be overly burdensome. Moreover, our

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Appendix II 

Comments From the U.S. Agency for

International Development

calculations are comparable to those presented in USAID’s most recent

audited fiscal year 1993 financial statements; both sets of calculations

indicate that the cost of the program is about $1 billion. USAID

mischaracterizes our projection of default costs and the one contained in

its own financial statements as “worst case scenarios.” In fact, both

projections represent likely costs, based on two independent assessments

of country credit risks.

5. USAID dismisses our observations about the legislated ceiling,

indicating that this ceiling is no longer applicable to the program.

However, this ceiling does still apply to those loan guaranties authorized

prior to fiscal year 1992.

6. We recognize that, as USAID indicates, defaults and debt rescheduling

under this program occur within the larger macroeconomic context of

debt rescheduling that USAID describes. We continue to believe that the

program’s poor financial condition has been aggravated by (1) repeated

rescheduling by program borrowers, (2) USAID’s provision of additional

loan guaranties to rescheduled borrowers, and (3) the waiver of

administrative fees on rescheduled debts. However, we have revised the

language in our report relating to USAID’s influence on a country’s decision

to reschedule its debts.

7. USAID asserts that it has collected 95.6 percent of payments due from

rescheduled borrowers. However, this is not because these borrowers

have been repaying their debt to USAID. In fact, most of these borrowers

have rescheduled their payments on uncollected debt, an average of five

times each so far, repeatedly deferring repayment. Thus, only about

5 percent of the debt has technically come due and has been repaid.

8. Although, as USAID indicates, loans to previously rescheduled

borrowers amount to about 1 percent of all guarantied loans, the

rescheduled borrowers involved in these cases now collectively owe USAID

about $96 million, or 23 percent of all uncollected debt.

9. USAID claims that the program was never intended to be

self-sustaining. We do not assert that the program was intended to be

self-sustaining. However, as we indicated in our report, on a number of

occasions, presidential budget documents represented the program to the

Congress as being totally self-sustaining “consistent with the intent of the

Congress.” Such representations were made even up to 5 years after USAID

first received a substantial reserve account to cover missed loan

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Appendix II 

Comments From the U.S. Agency for

International Development

payments. Furthermore, USAID’s assertion that it is owed and intends to

collect 27 percent more than the government’s contribution seriously

underestimates the cost of this program to the U.S. government. It does

not consider the foregone interest on U.S. funds as we have done by

converting dollar amounts to 1995 dollars where appropriate (see

comment 1).

10. The Credit Reform Act does not prohibit the recovery of

administrative costs through fees. Rather, it allows fees to be applied

against probable default costs, thereby reducing the necessary subsidy

appropriation and administrative costs to be funded separately through

appropriations. Thus, the act does not negate USAID’s authorization under

the Foreign Assistance Act to collect fees to cover program expenses. We

acknowledge that it may be difficult to recover all program costs and still

charge affordable fees, although, as our report indicates, USAID could raise

its fees and still be competitive with other international donors. We have

revised our report to recommend that program fees be increased to cover

a greater portion of program costs.

11. We defined a closely-linked cross subsidy as cash or assistance

provided to participants of a subsidized credit program that decreases the

likelihood that borrowers will default by either increasing the likelihood of

income for the borrowers or decreasing the borrowers’ costs. In the

countries we visited, USAID’s technical assistance, assuming it achieved its

objectives, clearly met this definition. The World Bank recognizes the

financial value of technical assistance and often includes the cost in the

principal amount of its loans to developing countries.

12. USAID contends that its program overwhelmingly reaches the targeted

poor population in those countries where it operates. However, USAID does

not provide credible evidence to support its contention. As we indicate in

chapter 4, after analyzing USAID’s documentation, including that described

in USAID’s comments, we found that the mechanisms USAID employed did

not ensure and in some cases were not intended to ensure that 90 percent

of the program funds are used to finance projects that benefit

below-median income families.

13. USAID cites our earlier reports to support its position that it has

reached the target population. While we have in the past, as we have in

this report, acknowledged some of USAID’s successes under this program,

we have also pointed out serious shortcomings, including the potential

inadequacy of the program’s reserves and difficulties reaching the target

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Appendix II 

Comments From the U.S. Agency for

International Development

population. None of our earlier findings contradict our current

conclusions. Interestingly, USAID also points to recent favorable statements

we made on USAID’s housing sector reform project in Russia. While, as we

reported, the program achieved its reform objectives, it did so without the

use of a Housing Guaranty Program loan.

14. We believe the fact that host governments have invested in projects

intended to benefit below-median income families does not relieve USAID

from its responsibility for ensuring that the projects it finances benefit the

target population.

15. In several cases, USAID presented inaccurate and misleading

information to support its criticism of our report. For example, with

regard to the pay toilet for tourists in Indonesia, our interviews with local

workers at this site revealed that they did not use this facility, despite

USAID’s claims to the contrary. USAID also inaccurately indicates that only

below-median income families are eligible for Chile’s subsidy program,

when, in fact, there are no income restrictions. We were unable to verify

USAID’s claim that 100 percent of the beneficiaries in the most recent

program in Chile had incomes below the median, because these funds

were disbursed after our field work in Chile was completed. At the time of

our visit, however, USAID officials indicated that they did not intend to

check family income for this program.

16. USAID provides statistics and other information contending that its

programs have stimulated private investment we did not consider. We had

already reviewed virtually all of the data USAID provided and found that it is

not germane to the conclusions of our report. For example, USAID cites

statistics on investments in India, Indonesia, and Ecuador which benefit

essentially upper-income not low-income families. USAID also describes a

$10 million Housing Guaranty Program investment in Chile that has

produced over $45 million worth of housing. As we explain in our report,

this does not represent an increase in long-term private investment for

housing but rather private construction of housing largely financed by the

government of Chile. In addition, USAID refers to shelter sector

developments that cannot be directly attributed to Housing Guaranty

Program activities. For example, increased private shelter construction in

Chile is driven by that country’s government-funded housing subsidy

program, for which USAID cannot take credit.

17. We revised our report to reflect information provided on short-term

construction financing raised from private sources in Tunisia.

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Appendix II 

Comments From the U.S. Agency for

International Development

18. USAID criticizes our review for overlooking private investment by

homeowners. We acknowledge that formal investment in shelter can have

a multiplier effect on homeowner consumption and the economy in

general, as USAID’s data illustrate. In fact, the program is predicated on this

fact. However, we focused on investment from credit institutions and

entrepreneurs, as this is the type of investment the program was

specifically intended to stimulate, according to the Foreign Assistance Act.

Such investment would sustain and expand the multiplier effect USAID

describes. Also, since USAID has not ensured that 90 percent of the program

beneficiaries have below-median incomes, it likewise cannot ensure that

all of the homeowner investments it cites benefit the target population.

19. USAID generally acknowledges that improvements are needed in its

performance measurement system but criticizes our review for having

overlooked pertinent information on project level indicators and

monitoring activities. Our review was specifically aimed at reviewing all of

USAID’s monitoring and evaluation activities, and, accordingly, we

conducted an exhaustive review of the agency’s records on this subject. In

addition, despite our extensive file review, we specifically requested the

program staff to provide any pertinent documents we may have missed.

We found that the data USAID provided generally did not demonstrate

achievement of the program’s private investment goal or the assurance

that projects suitable for below-median income families actually benefited

those families.

Page 79 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Appendix III 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Benjamin F. Nelson

Ronald A. Kushner

Caroline V. Harper

James B. Michels

European Office Bettye J. Caton

Neyla Arnas

Far East Office Kathleen M. Monahan

Kimberly M. Gianopoulos

Office of General

Counsel, Washington,

D.C.

Mark C. Speight

Accounting and

Information

Management Division,

Washington, D.C.

Roger R. Stoltz

Page 80 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Appendix III 

Major Contributors to This Report

Page 81 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Appendix III 

Major Contributors to This Report

Page 82 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Appendix III 

Major Contributors to This Report

Page 83 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
Related GAO Products

General Counsel Opinion (GAO/OGC-93-2, Nov. 3, 1992).

Israel: U.S. Guaranties for Immigrant Absorption (GAO/NSIAD-92-119, Feb. 12,

1992).

Foreign Assistance: The Solanda Housing Guaranty Project in Ecuador

(GAO/NSIAD-86-120, May 1986).

AID’s Management of the Housing Guaranty Program (GAO/NSIAD-84-75,

Apr. 25, 1984).

Agency for International Development’s Housing Investment Guaranty

Program (ID-78-44, Sept. 6, 1978).

The Challenge of Meeting Shelter Needs in Less Developed Countries

(ID-77-39, Nov. 4, 1977).

Low-Income Groups Not Helped by Agency for International

Development’s Housing Investment Guaranty Program (B-171526, Nov. 25,

1974).

(711059) Page 84 GAO/NSIAD-95-108 Foreign Housing Guaranty Program
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