Governmentguarantees minimumpurchaseMOCHPlanning riskDelays in obtaining planningpermissionsMMM

Confidential
Meeting the Iraqi Housing Challenge: Policy

Options and Development Scenarios
7th Meeting of the Working Group on Infrastructure Finance in Iraq
Organised by the MENA-OECD Investment Programme
Intercontinental Hotel, Amman, Jordan
13 November 2012
Contents
Section
Page
1 Current State of the Housing Sector in Iraq
2 Segmentation of housing demand
3 Scenarios
10
4 Sequencing
22
Current state of the housing

sector in Iraq
Housing Government - Markets
Government always needs to play a strong role in the provision of affordable housing
And government cannot meet the housing challenge on its own
The questions are:

1.
What role for government?
2.
How much private sector involvement?
3.
How to engage with the private sector?
Housing is the hardest test for government
Confidential All Rights Reserved

Ernst & Young 2012
Meeting the Iraqi Housing Challenge: Policy Options and Development Scenarios
Supply
Price increase
Government land not being

developed for housingspeculative land holding
Unprecedented level of housing

demand as demographic bulge
reaches economically active age
Affordability decline
Supply gap
Challenges constraining the Iraqi housing sector
Demand
Housing finance not readily

accessible to all households
or property developers
Housing and planning laws

not in place

Ernst & Young 2012
Contractor sector & building

materials constrained
Unprecedented level of housing demand driven by demographics

Male
Female
Iraqi Population
Iraq age
pyramid,
2011
Population (Millions)
80
70
60
50
40
30
20
10
0
1950
3,000,000 2,000,000 1,000,000
2000
2050
2100
2150
2200
2250
2300
1,000,000 2,000,000 3,000,000
80
70
60
50
40
30
20
10
0
1950
Ernst & Young 2012
0
2000
2050
2100
2150
2200
2250
2300
6
Fertility - Children per woman
Population (Millions)
Iraqi Population and Fertility Rate
Why is housing such as issue in Iraq now?

Demographic Window is approaching for Iraq in 2035
Will it be a demographic dividend? Or will it lead to social unrest? Will Iraqs greatest cities be
competitive engines of growth in the regional and global economy?
Affordable housing in sufficient quantity and quality is a key to converting the opportunity dividend
1970-80
UAE
Qatar
1980-90
1990-00
2000-10
2010-20
2020-30
50 Years
1975
1985
Kuwait
Bahrain
2040-50
2050-60
2000
2040
40 Years
Start date
Libya
2005
40 Years
2045
Iran
2005
40 Years
2045
Lebanon
2005
2035
30 Years
2010
35 Years
2045
Algeria
2010
35 Years
2045
Syria
2020
30 Years
2050
Jordan
2020
30 Years
2050
Egypt
2020
30 Years
2050
2025
2030
35 Years
2035
2065
2065
30 Years
2045
Mauritania
2045

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2060
35 Years
Palestine
Yemen
End date
2035
30 Years
Morocco
Iraq
2080-90 2090-100
2030
35 Years
2005
Oman
2070-80
2025
Tunisia
KSA
2060-70
2025
40 Years
1995
2030-40
25 Years
35 Years
2060
2070
2080
35 Years
2095
Segmentation of demand
Segmentation of demand
Government plays a stronger role in the provision of housing amongst the lower income
households and less of a role amongst the highest income households
Share of housing need by income (%),
2006 MOCH Housing Market Study
Private sector
High income (81% to 100% of

households)
Middle income (21% to 80% of
households)
Low income (lowest 20% of
households)
Government
0% 10% 20% 30% 40% 50% 60% 70%

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0%
100%
Scenarios
Current scenario # 1
Housing system component
Supply
Regulatory framework
Land planning system
Demand
Housing supply
Key facts
Rent control
Rental income tax
Real estate transfer tax
Tax on vacant land (not collected)
Land registration title ownership disputes
Sale of government land administratively allocated
1995-2004: 80%-90% of housing production by households with small

contractors; remainder by government
2006 onwards: household sector producing about 5% of annual housing

need. Government looking to be majority supplier at about 10% of annual
housing need with different government bodies contracting contractors
National Housing Fund (and Real Estate Bank) interest free loans
Commercial banks dominated by State banks (89% of commercial bank

deposits in Dec 2011)
Low level of financial intermediation (bank deposits 27% of GDP in 2011

Egypt 71%)
Commercial bank credit to housing finance almost zero
Housing finance

Ernst & Young 2012
11
Government housing delivery model: Current

MOCH deals with many contractor organisations under this delivery Model
Housing production constrained by MOCH capacity
Government handles and pays for all the risks
MOCH
Consultancy
Agreement
Construction
Contract
Design
Architect

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Build
Contractor
Operation &
Maintenance
Contract
Finance
Finance
MOF
Operate
Operator
12
Risks
High
Reduction
of risk on
build
completion
Risk
Low
Planning
Operational risks
include ability to
deliver service levels
within budgeted
cashflows
Operation
Build
Demand Side Risk
Bedding in of
operational
relationships
between the
MOCH and PSP
Supply Side Risk
Market demand / volume risk Minimum service standards

Political risk
Utilities risk
Planning risk
Financial risk
Completion risk
Resource/ input risk
Technology risk
Cost over-run risk
Title to land
Insurance
Tax rate change
Interest rate risk
Design & construction risk
Latent defects
Payment mechanism
Unforeseen events
Exchange rate
Regulatory risk
Ground risk
Early termination
Residual value
Interface risk
Political risk
Identify
Ernst & Young 2012
Quantify
Mitigate
Carried by
Government of Iraq
13
Scenario # 2: partial regulatory reform

Supply
Demand
Housing supply
Housing finance

Ernst & Young 2012
Key facts
Rent control eliminate 5 year leasehold on housing in event of loan default
Keep rental income tax + Standardise real estate transfer tax at 1.5%
Collect tax on vacant land (1.5 million vacant plots in cities)
Introduce fixed annual property tax with banding based on dwelling size
Land registration title ownership disputes continue
Sale of government land by auction to highest bidder with zoning for

affordable housing
Alternative government private sector delivery models to provide scale of

housing needed
National Housing Fund relax current criteria of 7 years employment and

detached dwelling
Encourage bank deposit taking for loans savings and loans schemes
Develop collateral law and reform rule that prevents govt. enterprises
dealing with private sector banks
14
Government housing delivery model: Delivery Partner

MOCH capacity significantly increased through the provision of resources and expertise to
help ensure the housing program is delivered on time and on budget
Government continues to handle all the risks
Delivery Partner
MOCH
Consultancy
Agreement
Construction
Contract
Design
Architect

Ernst & Young 2012
Build
Contractor
Employment /
O&M
Finance
Finance
MOF
Operate
Operator
15
Government housing delivery model: Public Private Partnership

Create SPV company with private sector shareholders Private Sector Partner
Concession agreement which allocates most of the supply side risks to the PSP private finance
Government guarantees to buy all or a proportion of the dwellings carries demand side risk
MOCH
Concession Agreement
Private Sector
Partner
Consultancy
Agreement
Construction
Contract
Design
Architect

Ernst & Young 2012
Build
Contractor
Employment /
O&M
Finance
Finance
PSP Equity
Bank Loan
Operate
Operator
16
Risks
High
Reduction
of risk on
build
completion
Risk
Low
Planning
Operational risks
include ability to
deliver service levels
within budgeted
cashflows
Operation
Build
Demand Side Risk
Bedding in of
operational
relationships
between the
MOCH and PSP
Supply Side Risk
Market demand / volume risk Minimum service standards

Political risk
Utilities risk
Planning risk
Financial risk
Completion risk
Resource/ input risk
Technology risk
Cost over-run risk
Title to land
Insurance
Tax rate change
Interest rate risk
Design & construction risk
Latent defects
Payment mechanism
Unforeseen events
Exchange rate
Regulatory risk
Ground risk
Early termination
Residual value
Interface risk
Political risk
Identify
Ernst & Young 2012
Quantify
Mitigate
Allocate between
MOCH & PSP
17
Allocation of some of the risks

Risk
Description
Impact
Likelihood
Significance
Mitigation
Allocation
Market demand
/ volume risk
Fluctuating demand with the

international economic cycle
H-M
H-M
Effective marketing
MOCH/PSP
(Private Sector
Partner)
Utilities risk
Enable site for operation
H-M
H-M
Early enablement of site
MOCH
Planning risk
Location correct for optimal

market demand capture and
efficient operation
H-M
H-M
Consideration of planning ahead

of going to tender
MOCH
Financial risk
Ability to raise finance at an

appropriate cost of capital
Concession length
PSP
On time, budget and scope
H-M
Completion risk
Long term contracts
Debt / equity mix

M-H
LDs
PSP
Contractor selection
Resource/ input Inability to secure skilled staff
risk
and materials
M-H
PSP selection
PSP
Local / international partnering
Political risk
New legislation changes project M

objectives
High Committee Project

endorsement
MOCH
Technology risk
Ability to keep pace with

technology improvements
International JVs
PSP
Cost over-run
risk
Capex / opex underestimated

by PSP
Index linked payments
PSP
Interface risk
Inefficient operational
interaction with each of the
stakeholders
H-M

Ernst & Young 2012
Scope for variations

M-L
Draft interface agreements

between PSP, MOCH and other
stakeholders
Appoint competent expertise

Shared
18
18
Scenario # 3: fuller regulatory reform

Supply
Demand
Housing supply
Housing finance

Ernst & Young 2012
Key facts
Eliminate rent level control and replace with ceiling on rent increases
Eliminate rental income tax + real estate transfer tax
Collect tax on vacant land (1.5 million vacant plots in cities)
Introduce fixed annual property tax with banding based on dwelling size
Land registration create right to buy land plot occupied continually for 5
years, giving clear title at stipulated price per m2
Sale of government land by auction to highest bidder with zoning for

affordable housing
Private Sector Partners take most of the supply side risks and the demand
risk
National Housing Fund replace universal interest free loans with a tapered
interest rate subsidy.
Privatise state commercial banks
Develop collateral law and reform rule that prevents govt. enterprises
dealing with private sector banks
19
Scenarios and housing need

Cumulative numbers
Estimations
5
Housing need
Millions of Dwellings
Supply Current Scenario # 1
3
Supply Scenario # 2 Delivery
Partner
2
Supply Scenario # 2 PSP

with private finance
matching govt budget
Supply Scenario # 2 PSP

with private finance 69%
govt budget 31%
2006
2010

Ernst & Young 2012
2015
2020
2025
20
The cost of subsidy

2010-14 National Development Plan 17% of investment on housing US$ 31.6 billion
Economic cost could be 5 times larger because of subsidy and risk
Economic Cost
Budget Cost
20%
Land opportunity
cost
Budget Cost
15%
50%
Demand Risk
Supply Risk
5%
10%

Ernst & Young 2012
Loan interest
opportunity cost
21
Sequencing
Delivery models deliver quickly
The National Housing Policy will take several years before it starts producing housing on the
scale currently required
Delivery of first house
Short
2012
National Housing Policy
2013
Medium
2014
Implement strategy
2015
Long term
2020
2025
2030
Delivery of housing
Develop legal frame

Develop subsidies
Reform land market
Reform finance market
The MoCH needs some immediate solutions that deliver housing quickly and in volume

Ernst & Young 2012
23
Delivery models deliver quickly (contd)
Delivery Partner and PPP would enable the MoCH to announce award housing contracts to private
sector developers in 6 to 7 months and start delivering the scale needed sooner
Delivery of first house
Award housing contract
A. Delivery Partner
Short
2012
2013
19-25 months
Medium
2014
2015
Long term
2020
2025
2030
Delivery of housing
Develop framework
Contractor bids & review
Build housing units
B. PPPs
24 to 30 months
Delivery of housing
Develop Framework
Tender and select
Build housing units

Ernst & Young 2012
24
Confidential
Meeting the Iraqi Housing Challenge: Policy

Options and Development Scenarios
7th Meeting of the Working Group on Infrastructure Finance in Iraq
Organised by the MENA-OECD Investment Programme
Intercontinental Hotel, Amman, Jordan
13 November 2012

Governmentguarantees minimumpurchaseMOCHPlanning riskDelays in obtaining planningpermissionsMMM

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Confidential

Meeting the Iraqi Housing Challenge: Policy

1 Current State of the Housing Sector in Iraq

2 Segmentation of housing demand

Current state of the housing

Housing Government - Markets

And government cannot meet the housing challenge on its own

The questions are:

What role for government?

How much private sector involvement?

How to engage with the private sector?

Housing is the hardest test for government

Confidential All Rights Reserved

Government land not being

Unprecedented level of housing

Challenges constraining the Iraqi housing sector

Housing finance not readily

Housing and planning laws

Confidential All Rights Reserved

Contractor sector & building

Unprecedented level of housing demand driven by demographics

3,000,000 2,000,000 1,000,000

1,000,000 2,000,000 3,000,000

Fertility - Children per woman

Iraqi Population and Fertility Rate

Why is housing such as issue in Iraq now?

Confidential All Rights Reserved

High income (81% to 100% of

Confidential All Rights Reserved

Land planning system

Rental income tax

Real estate transfer tax

Tax on vacant land (not collected)

Land registration title ownership disputes

Sale of government land administratively allocated

1995-2004: 80%-90% of housing production by households with small

2006 onwards: household sector producing about 5% of annual housing

Commercial banks dominated by State banks (89% of commercial bank

Low level of financial intermediation (bank deposits 27% of GDP in 2011

Commercial bank credit to housing finance almost zero

Confidential All Rights Reserved

Government housing delivery model: Current

Confidential All Rights Reserved

Demand Side Risk

Supply Side Risk

Market demand / volume risk Minimum service standards

Scenario # 2: partial regulatory reform

Land planning system

Confidential All Rights Reserved

Rent control eliminate 5 year leasehold on housing in event of loan default

Collect tax on vacant land (1.5 million vacant plots in cities)

Land registration title ownership disputes continue

Sale of government land by auction to highest bidder with zoning for

Alternative government private sector delivery models to provide scale of

National Housing Fund relax current criteria of 7 years employment and

Government housing delivery model: Delivery Partner

Confidential All Rights Reserved

Government housing delivery model: Public Private Partnership

Confidential All Rights Reserved

Demand Side Risk

Supply Side Risk

Market demand / volume risk Minimum service standards

Allocation of some of the risks