33353 World Bank Social Safety Nets Primer Notes 2003 No. 3 Demand-Side Subsidies for Housing The Rationale for Government Intervention beneficiary. Once appropriated, however, they can Several governments in developing countries have be used to assist a given pool of beneficiaries, been using demand-side programs to increase making the program attractive to some politi- access to housing services among the poor. From cians. To protect against fraud and waste, house- the perspective of a social safety net, the main holds may be given their grants in tranches justification for providing housing assistance is according to what progress has been made or how that adequate shelter is a basic need that govern- much work has been completed. The amounts ments have a responsibility to help to fulfill, espe- involved can range from the modest to the price cially during times of hardship. In transition of an entire dwelling. countries, assisting the poor with their housing- related expenditures can mitigate the hardship Capital grants have been popular in South caused by planned price increases. The introduc- America where several governments followed the tion of housing assistance in such cases makes it so-called `Chilean model'. This emphasizes gov- possible to implement reforms such as price ernment policies that: increases or deregulation. (i) shift the responsibility for housing produc- tion away from the government to the pri- Housing assistance programs can satisfy other vate sector; important policy goals like promoting homeown- (ii) provide one-time grants for home purchase ership and developing the market-based housing while curtailing all indirect subsidies; and sector. Housing and housing-related infrastruc- (iii) institute transparent mechanisms for select- ture programs can also support economic devel- ing beneficiaries based on household income opment by helping people to set up home-based and a savings contribution. businesses and encouraging community develop- ment or neighborhood revitalization initiatives. Housing Allowances. A housing allowance is a regular ongoing subsidy provided to owners or Program Descriptions renters to offset some of the costs of their hous- The two kinds of demand-side subsidies that are ing and housing-related services. Allowances can most likely to be recommended and implement- take two forms. Under one approach, the house- ed today in the housing sector are capital grants hold receives a fixed subsidy based on the typi- and allowances. These are subsidies that are cal prices prevailing in the housing market and given directly to households or directly paid to must pay the difference between this amount service providers on behalf of the households. and the total rent (or total housing-related expenditures) of its housing unit. As a result, Capital Grants. Capital grants are one-time sub- each household's contribution will vary depend- sidies that households can use to purchase, build, ing upon how successful it is in finding an eco- or complete (new or existing) units or to rehabil- nomical unit. This `norm-based' approach gives itate existing units. The grants are usually funded households a powerful incentive to shop for the via an explicit appropriation process within the best housing deal. government's budget, which makes their cost transparent to the public. Under the second approach, the government specifies a fixed amount of money that a house- Sometimes capital grants are difficult to justify as hold must pay towards its own housing costs they often involve sizeable amounts of money per (usually a percentage of its income) regardless of Carlo del Ninno prepared this note based on Katsura, Harold M. and Romanik, Clare T. 2002. "Ensuring Access to Essential Services: Demand-Side Housing Subsidies." Social Protection Discussion Paper No. 0232. World Bank. Washington, D.C. the total amount of its rent. The government households to make contributions, the subsidy pays the difference between what it deems the level of the capital grant can be reduced. household able to pay and the rent (or total hous- ing-related expenditures). Under this system, Allowance. A housing allowance program is most sometimes called a `burden limit', the size of the likely to be acceptable in a relatively well-off subsidy varies depending on the household's con- country with a solid institutional capacity, secure tribution. There is little incentive for a household tenure, and a relatively sound, high-quality hous- to shop for a good deal because it pays the same ing stock. An allowance program is unlikely to be amount under any scenario. appropriate in a very poor country where the gov- ernment may have trouble sustaining recurring A housing allowance, in spite of its name, repre- subsidy payments and where there is not much sents one way to subsidize a variety of housing- support for providing cash assistance to renters or related expenditures such as utilities and mainte- owners who remain in the substandard or infor- nance fees. In fact, many housing allowance pro- mal housing that may make up a large share of grams are based on the concept of `gross housing the total housing stock. Also, housing allowances expenditures', which, in addition to a rent com- probably will not work well in tight housing mar- ponent, usually includes fees for energy, water, kets as they are not as effective as capital grants sewage, and solid waste disposal. Given these in directly encouraging new construction. The attributes, it is not surprising that housing norm-based allowance is preferable because of the allowances have primarily been used in transition price distortions introduced under the burden- countries in the past decade. In these countries, limit approach. allowances form a part of the social safety net and are often intended to help protect households Conclusions. If economists and policymakers were from reform-related increases in the prices of to have their choice they would probably avoid maintenance fees, utilities, and rent. programs earmarked for housing altogether in favor of a general means-tested cash benefit in What is the Appropriate Approach? which the subsidy is partly based on housing con- Policymakers have to weigh the strengths and lim- sumption norms. If a government already has a itations of each approach in deciding which one cash benefit program they may want to consider to use, taking into account the different circum- the possibility of using it to deliver housing-relat- stances. ed subsidies, especially if the subsidies are not large. However, the desire by society or govern- Capital Grants. The main drawback of capital ment to encourage consumption of these goods grants is that they are often administratively com- and the potentially high expense of these pro- plex and require considerable institutional capac- grams often makes this option impractical. ity (although less than an allowance program and they can be put into operation fairly quickly). In low-income countries the high cost of capital- They have proven to be particularly useful in the grant and housing-allowance programs might aftermath of natural disasters, in supporting relo- limit the coverage to poor households. Upgrading cation efforts, and in complementing housing existing housing and infrastructure may be a finance programs. Because they can be used to more cost-effective way to improve the living con- purchase or rehabilitate existing units or to build ditions of large numbers of poor households occu- new units, capital grants can be effective in both pying informal housing with insecure tenure. tight and loose housing markets. A capital-grant program works best where there is a well-devel- Perhaps one of the best uses of capital grants and oped private sector that can readily supply and allowances is to ease the phasing out traditional rehabilitate units. If a country has a housing supply-side programs, by helping governments to finance system, a capital-grant program can make reduce their involvement in the direct production market-rate loans affordable to households (by of housing and to encourage the development of lowering the principal on loans). By requiring the private sector. 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