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INTRODUCTION
Housing banks are government-backed home lending entities that usually have subsidized fund sources and usually lend at subsidized rates. With the possible exception of the Housing Bank of Thailand, their performance has been uniformly poor. Subsidized funds have protected them against the discipline imposed by markets, which encourages inefficiency. Subsidized loan rates have often resulted in the intrusion of politics and favoritism into the borrower selection process. Credit losses have been high because of reluctance to enforce liens, along with a tendency of borrowers to confuse loans from a government entity with grants.
In recent years the failures of housing banks have become increasingly evident while the availability of subsidized funds has declined. The result has been a search for new directions and new mandates. The Housing Authority of Fiji (henceforth "HA") has been one of those caught up in this ferment. Visiting HA as an advisor in 1997, I had an opportunity to evaluate their existing reorganization program and to recommend the more radical changes that seemed to me to be required. This article is based on my report to HA.
CURRENT APPROACH TO A NEW MANDATE
HA was originally established "to enable workers to purchase or lease dwelling-houses at a reasonable cost." The Public Enterprise Act of 1996, however, requires HA"to operate as a successful business and, to this end, be as profitable and efficient as comparable businesses which are not owned by the state."
This new mandate created a conflict between the social objective of HA and the new requirement of profitability. The 1996 law recognizes the potential for such conflict and states that the agency "will be appropriately compensated for its non-commercial obligations and any funding will be made apparent"
In response to its new mandate, HA has taken the position that the cost of its "social and welfare-related tasks" consists mainly of the larger provision for bad debts than would have been needed had HA made all loans on a commercial basis. In 1997 it estimated the incremental provisioning cost and billed the government accordingly.
Blurring Commercial and Non-commercial Lending
If HA distinguished operationally between commercial and non-commercial lending, then loss provisions could be estimated separately for non-commercial lending, and this approach might be workable. Even in this...