ECUADOR'S TARGETED CASH TRANSFER AND HOUSING SUBSIDY

UNCLAS QUITO 000830

SIPDIS
SENSITIVE

TREASURY FOR MEWENS

E.O. 12958: N/A
TAGS: ECON EAID EFIN PGOV EC
SUBJECT: ECUADOR'S TARGETED CASH TRANSFER AND HOUSING SUBSIDY
PROGRAMS MORE SUCCESSFUL THAN OTHER SUBSIDIES

Ref. Quito 815


1. (SBU) SUMMARY. The GOE has two targeted subsidy programs,
direct cash transfers and a housing bond, that aim to improve food
security, assist in human capital development through child
education, and provide financing for housing to low and
middle-income families. The Correa Administration doubled the cash
transfer program shortly after taking office, and the GOE has
dramatically expanded the housing program. Given their targeted
structure, these remain two of the most effective subsidy programs
administered by the GOE, and both have been very popular with the
electorate in Ecuador's frequent elections. In contract, most of
the other GOE subsidy programs, including expensive subsidies for
fuel and electricity, are poorly focused, and likely unsustainable.
END SUMMARY.

Human Development Bond (BDH)
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2. (U) Ecuador's Ministry of Economic and Social Inclusion
administers the Human Development Bond (Bono de Desarrollo Humano,
or BDH) through direct cash transfers of $30 per month. Upon taking
office in January 2007, the Correa Administration almost immediately
doubled the monthly payment from $15. Eligibility is determined by
a government beneficiary selection database called SELBEN (System to
Identify and Select Beneficiaries of Social Programs). The program
targets individuals in the lowest two quintiles of income. Those
over 65 years of age and those with disabilities receive an
unconditional cash transfer. Mothers in this economic bracket are
eligible to receive a conditional cash transfer, dependent upon
proof of school enrollment for children between the ages five and
16, among other required documentation.


3. (SBU) In 2007, over 1.2 million Ecuadorians received BDH
assistance, and the number of recipients is on track to grow nearly
4% this year. Research indicates that BDH recipients spend 25% more
on food than non-recipients of comparable income, which indicates
that the program is successful in providing additional food
security. 72% of direct cash transfers went to mothers, and
although individuals in the lowest two economic quintiles are
eligible for assistance, program evaluations indicate that only the
lowest quintile group significantly benefit from BDH assistance.


4. (SBU) Expenditures under the BDH have doubled since it was
introduced in 2003. A former program coordinator, Daniela Oleas,
noted that the program allows mothers in indigenous Ecuadorian
communities greater independence from their husbands and increased
control over their resources. An evaluation of BDH by the German
development corporation, GTZ, indicates that children in
participating families are 10% more likely to be enrolled in school
and 17% less likely to be working. BDH assistance thus appears to
be helping to close the gap in school attendance between rich and
poor Ecuadorians. Oleas noted, however, that many families feel
that the poor quality of secondary education in Ecuador prevents
their children from realizing meaningful gains by not working. In
her view, BDH will not achieve its goals without accompanying
educational reforms. Some observers believe the BDH should also be
reformed to exclude second quintile recipients and place greater
emphasis on lowest-quintile recipients. However, this reform is
unlikely given the upcoming constitutional referendum and possible
general elections in early 2009.

Urban and Rural Housing Bonds
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5. (U) Housing bonds are provided by Ecuador's Ministry of Urban
Development and Housing to low and middle-income Ecuadorian citizens
for the purchase of a new home, housing improvements, or new housing
construction. A few months after taking office, the Correa
Administration expanded the coverage of the program. Single
individuals who are at least 35 years of age are eligible for
housing bonds, as well as heads of households and disabled
Ecuadorian citizens who are at least 18 years of age. Urban housing
bond beneficiaries must also have a savings account with a
participating financial institution with a balance of at least 10%
of the cost of new home. Bond values range between $1500-$3600.
Beneficiaries must either be in SELBEN's three lowest quintiles of
income (a monthly family income of less than or equal to $600),or,
if not registered in SELBEN, they must have an income of $800 or
less and must be purchasing housing worth between $12,000 and
$20,000.


6. (U) The program's market-based approach brings together

individuals, private sector firms, communities, international
donors, and the Ecuadorian government. Urban housing bonds are
often called the ABC program because they depend upon 1) Ahorro
(individual household savings); 2) Bono (the direct transfer from
the government); and 3) Credito (a financial institution loan at the
local interest rate to support the difference between the subsidy
and the cost of home construction). In practice, however, many
families cannot take advantage of the credit option due to tight
credit requirements. The program is also characterized by heavy
bureaucratic requirements. According to the Inter-American
Development Bank (IDB),the estimated time from the receipt of an
application until completion of a new home is five years.


7. (SBU) From 2006 to 2007 the GOE increased the number of housing
bonds awarded from 15,502 to 60,114, an increase of 387%. GOE
investment in housing bonds rose from $10 million to $179 million in
the same period. Despite the apparent success of the program, some
observers believe it is unsustainable. The program was previously
managed under IDB auspices, but the GOE ended continued funding from
the bank in an effort to increase local management of the country's
social programs. As a result, the IDB claims that the program's
transparency has suffered, as well as its strategic focus on the
poor. Due to lower interest rate ceilings (reftel),the IDB says
that banks will no longer lend credit to families in the program,
significantly hurting the construction sector. Even so, the GOE is
trying to rapidly expand the program. Under IDB management, only
6,000 housing projects per year were inaugurated, as opposed to the
GOE's 60,000.

Comment
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8. (SBU) The cash transfer and housing subsidy programs are the two
most focused and cost effective in the growing and increasingly
expensive stable of GOE subsidy programs. Capitalizing on existing
programs was an effective way for the Correa Administration to
achieve its expressed goal of meeting the needs of the poor. In
contract, most of the other GOE subsidy programs are poorly focused.
The Correa Administration inherited a very expensive subsidy
program for refined fuel products, which now costs several billion
dollars a year, and largely benefits well-to-do consumers. The fuel
subsidies also encourage smuggling to neighboring countries. The
government has also begun an untargeted electricity subsidy, which
will cost an estimated $200 million, to lower electricity rates for
consumers outside of Quito and Guayaquil. This follows
implementation last year of a more targeted subsidy program for low
volume electricity users. The Correa Administration has also
implemented subsidy programs for key products such as fertilizers,
flour and rice that are, at best, loosely targeted.

HODGES