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Implementation Completion Report (ICR) Review - Special Structural Adjustment Loan

1. Project Data:   
ICR Review Date Posted:
Project Name:
Special Structural Adjustment Loan
Project Costs(US $M)
 151.52  151.52
Loan/Credit (US $M)
 151.52  151.52
Sector, Major Sect.:
Central government administration, Compulsory pension and unemployment insurance, Banking, Housing finance and real estate markets, Other social services,
Law and justice and public administration; Law and justice and public administration; Finance; Finance; Health and other social services
Cofinancing (US $M)
L/C Number:
Board Approval (FY)
Partners involved
Closing Date
12/31/2004 12/31/2004
Evaluator: Panel Reviewer: Group Manager: Group:  
Jorge Garcia-Garcia
Yvonne M. Tsikata Kyle Peters OEDCR

2. Project Objectives and Components:

a. Objectives
1. To maintain a satisfactory macroeconomic policy framework.

2. To refocus Banco Hipotecario de Uruguay's (BHU) function solely on granting mortgages to individuals for housing finance;
3. To develop a secondary market of mortgages as part of a market of long-term financing instruments. BHU is to finance its lending activities only through the sale of mortgages;
4. To improve BHU's governance and management, to improve efficiency and to curtail current losses; and
5. To improve transparency of public banks and strengthen their supervision.

b. Components (or Key Conditions in the case of Adjustment Loans):
1. Macro/fiscal. Contain wages of public sector employees and public company workers.
2. Actions to restrict the scope of BHU operations and to develop a secondary market of mortgages;
3. Actions to restructure and improve the efficiency of BHU;
4. Actions to impose discipline on public banks through improved supervision.

c. Comments on Project Cost, Financing, Borrower Contribution, and Dates
The Board of Directors approved the loan on August 8, 2002, and the first tranche of US$101,520,000 was released on August 9, 2002. The second tranche, US$50 million, was released on October 4, 2004; the Board waived one of the conditions. This loan complemented the Structural Adjustment Loan of US$151.52 million, with which it was processed simultaneously (including the Memo to the President).

3. Relevance of Objectives & Design:

The Argentine banking crisis that spread to Uruguay caused a run on the highly dollarized Uruguayan banking system. The situation in Banco de la Republica Oriental del Uruguay (BROU) and BHU (both public banks) deteriorated rapidly despite receiving over $1.2 billion of liquidity support , but because the Central Bank held limited amounts of dollars it could not act as an effective lender of last resort.

BHU, the main banking institution specialized in mortgages and the vehicle to support construction activity, had a vulnerable balance sheet. Forty one percent of its loans were non-performing, 77 percent of its deposits were denominated in dollars, 94 percent of its loans were denominated in pesos and indexed to wages, its loans had an average term of 15 years, and the maturity of its liabilities was 8 months. BHU was overstaffed and lacked qualified finance and credit managers. After the devaluation BHU became insolvent. During 2002 BHU received capital injections of about US$1.4 billion, and in 2003 and 2004 it received US$165 million.

Given that the government wanted to keep BHU operating, the objectives and design of the loan were relevant.

4. Achievement of Objectives (Efficacy) :

1. Macro/fiscal. The primary balance changed from a deficit of 1.2 percent of GDP in 2001 to a surplus of 3.8 percent of GDP in 2004; this was achieved by restraining expenses in wages and social security and increasing revenue from taxes and state enterprises. Sovereign debt with private creditors was restructured in May 2003, and risk premia fell from around 2000 basis points to around 500-600 basis points after the debt swap. The run on deposits was virtually stopped after the creation of a bank stabilization fund (with IMF and World Bank support), and the rescheduling of foreign currency deposits at BROU and BHU into three tranches of 1, 2 and 3 years maturity. The economy recovered and grew 15 percent in 2003-2004. The objective has been fully achieved.
2. BHU as mortgage bank. Virtually all dollar deposits in BHU have been transferred to BROU and it cannot take new deposits, except those for the housing savings plan ("ahorro previo"). BHU has become a non-banking housing institution, and it can issue mortgages up to a total of US$50 million.
While restrictions in the operations of the BHU made sense to avoid repeating financial problems, it is unclear if a stand-alone mortgage bank can compete in the market with other commercial banks that can fund part of their loans more cheaply. Up to now, BHU has not been able to grant new loans because the securitization plan has not been carried out. The objective has been partially achieved.
3. Secondary market for mortgages. With the assistance of Price Waterhouse Coopers (PWC) BHU completed the work to make the first commercial securitization of its loan portfolio (about US$30 million worth of loans were selected) , but the securitization has not taken place yet. The objective has not been achieved yet.
4. Governance and efficiency of BHU. Congress approved an organic charter for BHU in December 2002, but effective restructuring began only after a new Board was selected in October 2003. The total number of employees fell from 1,384 in December 2001 to 998 in December 2003, and personnel expenses decreased from US$48.9 million to US$23.5 million; costs reductions and employee retrenchement continued in 2004, but they fell short of the intended objectives. Some of the laid-off workers were transferred to other areas of the public administration, so that the net fiscal impact of laying-off workers was smaller than it appears. Other actions helped to increase efficiency; among others, BHU has suspended overtime payments and charitable donations, has redefined the overall organizational structure separating business functions, and defined an evaluation process for the nomination and appointment of management.
BHU increased revenues from payments by mortgage borrowers and "promitentes compradores" (those who occupy housing but do not have formal mortgage agreements) and practically achieved its target -97 percent of target in 2003 and exceeded the target in 2004.
BHU did not put in place a management and information system, a step critical for following the status of each loan. The loan condition referring to this action had to be waived.
The objective has been partially achieved.
5. Supervision of public banks. A law was passed in December 2002 that removes the differences in supervision powers that Banco Central del Uruguay (BCU) had over state-owned and private banks. The law has been enacted, regulated, and implemented. The Superintendency of Financial Institutions at BCU evaluates public banks regularly, and has already imposed fines. The objective has been fully achieved.

5. Efficiency:

While BHU generated a profit (after provisions) of US$89 million in 2004, it is not clear yet if these benefits and the expected future benefits will surpass the more than US$1.6 billion of capital the government injected into BHU. It is unfortunate that the ICR overlooks these comparisons, as they would convey a better sense of the net benefits of the program.
6. M&E Design, Implementation, & Utilization:

None to report
7. Other (Safeguards, Fiduciary, Unintended Impacts--Positive & Negative):

None to report

8. Ratings:
OED Review
Reason for Disagreement/Comments
SatisfactoryModerately SatisfactoryThe secondary market for mortgages has not developed, some of the expected improvements in efficiency in BHU have fallen short of targets, and it is not clear whether the benefits of keeping BHU operating will offset the more than US$1.6 billion cost of the capitalization.
Institutional Dev.: 
LikelyNon-evaluableWhile the macroeconomic achievements are likely to be sustained, it is not clear that BHU can compete effectively as a mortgage bank with other banks that have a lower cost of funding
Bank Perf.: 
Borrower Perf.: 
Quality of ICR: 

- When insufficient information is provided by the Bank for OED to arrive at a clear rating, OED will downgrade the relevant ratings as warranted beginning July 1, 2006.
- ICR rating values flagged with ' * ' don't comply with OP/BP 13.55, but are listed for completeness.

9. Lessons:

Having a public bank to simultaneously fulfill a social mission and to remain liquid and solvent is difficult to achieve. The social function should be tackled directly through the budget and the lending function should be operated on a commercial basis.

The system of "promitentes compradores" made it clear that public banks should operate as banks, not as landlords. By that system, individuals rented properties with a promise to purchase in the future, but they lacked incentives to maintain and repair the properties or even buy them; moreover, foreclosing was more difficult, because this was not a regular judicial procedure, as was the case of mortgage executions.

10. Assessment Recommended?  Yes

          Why?  The loan should be assessed with other loans granted to Uruguay during the crisis, to establish their impact. Such an assessment should be done in four or five years, when sufficient time has passed to gauge the medium-to-long-term impact of the programs.

11. Comments on Quality of ICR:

The ICR is frank and candid, and provides most of the relevant information to evaluate the performance of the loan. The ICR could have been improved by discussing and comparing the benefits of keeping it in operation with the costs of bailing it out and capitalizing it.
Some editing would have helped to catch inconsistencies and find where the information is missing (key dates, and value of loan in cover page and annex). On inconsistencies (a) the rating for outcome in page one of the text is not supported by the ratings in annex 5 (page 56); (b) the report has two issue dates: June 15 and June 30; and (c) the report was sent to the government on June 21 (after one of the issue dates), which may explain why the government did not comment on time.
It should be noted that nowhere in the ICR can the reader find the value of the loan. OED strongly urges the Region to fill the gaps in information and file the revised ICR with SECBO

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