- 71 -

# B.2 Calculatlon and Discussion of Efficiency Prices

9. There was virtually no discussion of efficiency prices in the SARs reviewed in this sector. LAnd was owned by government in all but one case. In half of the government owned cases, the basis for calculating the sales price of the land was not specified. In the other three cases, it was stated to be based on market values. Generally no breakdown of the total sales price was provided between the cost of the land and that of the house or improvements. Cost minimization was often discussed, but only in terms of the size of plot and type of improvements, not in land values due to location.

10. Economic rates of return in six of the seven cases were based on the difference between project infrastructure costs and the incremental rental value of the land. This calculation does not take into account the economic cost of the land itself. 11. Interest charges to beneficiaries ranged from 8 to 15 percent. Two of the projects provided no comparative information on the cost of those funds or the inflation rate. In four other cases, such information seemed to be contradictory. In Malawi, both **the** cost of funds and the inflation rate were said to be 10%, while the onlending rate to beneficiaries **was** 13%. Similarly in Madagascar, the cost of funds and inflation rate were stated to be the same while the onlending rate was two percentage points higher. In the Ganbia the cost of funds was given as 7% while the inflation rate **was** 8 and fund were onlent **at** 9%. In Mexico, the cost of funds was given as 52%, the average inflation rate was 60% and the onlending rate was 9 to 15%. An explicit discussion of the interest subsidy incorporated in housing projects would help to clarify the real costs incurred.

# B.3 Discussion of Adiustments to Efficiency Prices

12. Although the discussion is not couched in terms of adjustments to efficiency prices, SARs contain extensive information on the income levels of target beneficiaries and the proportion of their incomes expected to be devoted to housing. Five of the seven projects reviewed reported the percentile of the income distribution curve above which the project output would be affordable. This went as low as 7% in the case of home improvement loans, and generally fell within the 20-30% range for site and service components. The fraction of total household income spent on housing generally ranged from 10-30%.

13. Such figures appear to be treated as targets rather than as the result of housing demand studies in the target areas. Clearly by raising the proportion of income assumed to be spent on housing, the qualifying income level will fall. At the same time, due to-extreme housing shortages in many of these cities, the demand for low cost housing far exceeds what the project is able to supply. Price rationing is not used because that would presumably exclude the target population. Instead criteria are generally developed for beneficiary selection and restrictions are introduced on the sale of property within the first few years of ownership. The efficacy of such measures in restricting project benefits to the target population should be explored through income surveys during project supervision.