STRENGTHENING PERFORMANCE A HONDURAS - … CONADEH Comisionado Nacional de Derechos Humanos (Human Rights Commissioner) CONATEL Comisión Nacional de Telecomunicaciones (National Commission

INSTITUTIONAL GOVERNANCE REVIEW

“STRENGTHENING PERFORMANCE ACCOUNTABILITY IN

HONDURAS”

VOLUME I (In Two Volumes)

Executive Summary

Main Report

March 9, 2009

Latin America and the Caribbean Regional Office

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53517 v1

HONDURAS IGR – VOLUME I

2

ABBREVIATIONS AND ACRONYMS

ADEL Local Development Association

AIN-C Atención Integral a la Niñez en la Comunidad (Comprehensive Community

Child Health Services)

AMHON Association of Municipalities of Honduras

Sida Agencia Sueca para el Desarrollo Internacional (Swedish Agency for

Internacional Development)

CBOs Community-based organizations

CCERP Consejo Consultivo de la Estrategia para la Reducción de la Pobreza

CEB Centro de Educación Básica (Centre of Basic Education)

CEPREB Centro de Educacion Prebasica (Centre for Prebasic Education)

CESAR Centro de Salud Rural (Rural School Centre)

CEIMSA Commission for the Modernization of the Customs System

CGR Accountant General’s Office

CMH Honduras Medical Association

CNA Consejo Nacional Anticorrupcion (National Anticorruption Council)

COHEP Consejo Hondureño de la Empresa Privada (Honduran Council for Private

Business)

CONADEH Comisionado Nacional de Derechos Humanos (Human Rights

Commissioner)

CONATEL Comisión Nacional de Telecomunicaciones (National Commission for

Telecommunications)

CONEANFO National Commission for the Development of Non-Formal Education

CPME Comision Presidencial de Modernizacion del Estado (Presidential

Commission for State Modernization)

DEI Dirección Ejecutiva de Ingreso (Executive Directorate of Revenues)

DGSC Dirección General de Servicio Civil (General Directorate of the Civil

Service)

EFA Programa Educación para Todos (Eduation for All)

ENEE Empresa Nacional de Energía Eléctrica (Electricity Company)

ERP Estrategia para la Reducción de la Pobreza (Poverty Reduction Strategy)

FONAC Foro Nacional de Convergencia (National Convergence Forum)

GDP Gross Domestic Product

GoH Government o f Honduras

HONDUTEL Empresa Hondureña de Telecomunicaciones (Honduran

Telecommunication Enterprise)

HR Human Resources

IDB Inter-American Development Bank

INE Instituto Nacional de Estadistica (National Institute for Statistics)

INFOP Instituto Nacional de Formacion Profesional (National Institute of

Vocational Training)

Lps Lempiras

MLps Million Lempiras

MOE Ministry of Education

MOF Ministry of Finance

MOH Ministry of Health

NAS Nueva Agenda de Salud (New Health Agenda)

NGOs Non-governmental organization

PIU Project Implementation Unit

PNS Plan Nacional de Salud (National Health Plan)

PN Plan Nacional (National Plan)

PROHECO Programa Hondureño de Educación Comunitaria (Honduras Community

Education Program)

SE Secretaría de Educación (Ministry of Education)


3

SEFIN Secretaría de Finanzas (Ministry of Finance)

SIAFI Sistema Integrado de Administración Financiera (Integrated Financial

Management System)

SIARH Sistema Integrado de Administración de los Recursos Humanos (Integrated

System for the Administration of Human Resources)

SIARHD Sistema Integrado de Administración de los Recursos Humanos Docentes

(Integrated System for the Administration of Human Resources in

Education)

SIERP Sistema de Información para la Estrategia para la Reducción a la Pobreza

(Poverty Reduction Strategy Information System)

SMEs Small & Medium Enterprises

SGPR Sistema de Gerencia basado en Gestión por Resultados (Results-based

Management System)

SS Secretaría de Salud (Ministry of Health)

TSC Tribunal Superior de Cuentas (Supreme Audit Institution)

UECF Coverage Extension and Financing Unit

UMCE External Unit for Measuring Education Quality

UNAH Universidad Nacional Autónoma de Honduras (National Autonomous

University of Honduras)

UNAT Unidad de Apoyo Técnico

UPEG Unidad de Planificacion y Evaluación de la Gestión (Planning and

Evaluation Unit)

WB World Bank


4

INDEX

VOLUME I - MAIN REPORT

ACKNOWLEDGEMENTS

EXECUTIVE SUMMARY

MAIN REPORT – STRENGTHENING PERFORMANCE ACCOUNTABILITY IN HONDURAS

VOLUME II - BACKGROUND CHAPTERS AND ANNEXES

CHAPTER 1: OVERVIEW OF THE POLICY-MAKING PROCESS

CHAPTER 2: THE CHALLENGE OF PROFESSIONALIZING THE PUBLIC ADMINISTRATION

CHAPTER 3: JUSTICE AND PUBLIC SECURITY IN HONDURAS

CHAPTER 4: TRANSPARENCY AND ACCOUNTABILITY IN THE EDUCATION SECTOR

CHAPTER 5: TRANSPARENCY AND ACCOUNTABILITY IN THE HEALTH SECTOR

CHAPTER 6: ACCOUNTABILITY FRAMEWORK FOR MUNICIPAL GOVERNMENTS

CHAPTER 7: CORPORATE GOVERNANCE OF HONDURAN PUBLIC ENTERPRISES


5

INDEX - VOLUME I

EXECUTIVE SUMMARY ................................................................................................................................... 8

MAIN REPORT - HONDURAS AT A CROSSROADS .................................................................................. 12

OVERVIEW OF THE POLICY-MAKING PROCESS ................................................................................................... 15 THE CHALLENGE OF PROFESSIONALIZING THE PUBLIC ADMINISTRATION ......................................................... 20 JUSTICE AND PUBLIC SECURITY IN HONDURAS .................................................................................................. 23 TRANSPARENCY AND ACCOUNTABILITY IN THE EDUCATION SECTOR ............................................................... 26 TRANSPARENCY AND ACCOUNTABILITY IN THE HEALTH SECTOR ..................................................................... 29 ACCOUNTABILITY FRAMEWORK FOR MUNICIPAL GOVERNMENTS..................................................................... 32 CORPORATE GOVERNANCE OF HONDURAN PUBLIC ENTERPRISES ..................................................................... 36

List of Tables, Graphs, Boxes and Figures

Table 1. Characteristics of public policies in Latin America. ................................................................ 15

Table 2. Tax Exemptions ....................................................................................................................... 15

Table 3. Characteristics of the party system. ......................................................................................... 17

Table 4. Quantity and cost of personnel by staff category Honduras Central Government .................. 22

Table 5. Judicial Workload, Selected Countries .................................................................................... 24

Table 6. Evolution of criminal cases, from filing to resolution, 1999-2006 .......................................... 25

Table 7. Performance of sixth grade students in mathematics and Spanish ......................................... 27

Table 8. Health Outcomes and Outputs, 2001 and 2005/06 ................................................................. 29

Table 9. Health Expenditures in Central America, 2005 ....................................................................... 30

Table 10. Municipal Budget vs. Central Government Budget ............................................................... 33

Graph 1. Confidence in the Public Administration, Honduras 1996 and 2005 ..................................... 13

Graph 2. Public spending on interest payments and salaries, 1997-2002 .............................................. 16

Graph 3. Human Resource Management in the Public Sector in Latin America .................................. 20

Graph 4. The Impact of the Increase in Administrative Efficiency ....................................................... 21

Graph 5. Budget execution of the Ministry of Education, 2001-2007 ................................................... 27

Graph 6. Budget distribution in the municipal sector ............................................................................ 34

Graph 7. Submission of Municipal Accounts to the Tribunal Superior de Cuentas .............................. 35

Graph 8. ENEE Financial situation and losses, 2004-2007, millions of Lempiras. ............................... 36

Box 1. The case of Comayagua ............................................................................................................. 19

Box 2. Transparency, trust in government, and willingness to pay taxes. ............................................. 33

Figure 1. The accountability framework ................................................................................................ 14

Figure 2. Diagram of responsibility and accountability relationships in the electricity sector .............. 38


6

ACKNOWLEDGEMENTS

From the beginning of this project, the World Bank and the Honduran Government agreed that the

method used in creating this study was going to be a key element to its success. In order for it to

be of benefit to those who fight against poverty in the country, and contribute to the national

debate, it would have to be carried out in a participatory manner, by involving national and

international specialists working together with government representatives in each of the relevant

institutions, in addition to considering input from Honduran citizens.

Following these guidelines a Steering Committee was created to lead the process of elaboration

and discussion of the study. This Steering Committee was led by Rodolfo Pastor Fasquelle,

Secretary of Culture, Art and Sports and Coordinator of the Social Cabinet; Ricardo Arias,

Subsecretary of the Presidency; and Hugo Castillo, Subsecretary of Finance; with representatives

from the following government agencies – the Poverty Reduction Strategy Commission, the

Minsitries of Health, Education and Interior and Justice.

The study has been carried out in collaboration with the following actors from the international

community, who contributed with financial support and/or technical specialists: DFID, ASDI,

AECI, IDB, and GTZ. Other actors from the international community that participated in the

process as a part of the Steering Committee were the UNDP and USAID.

On the part of the World Bank, this report has been prepared by a team led by Ana Bellver

(LCSPS) and comprising, in alphabetical order: Cristian Aedo (LCSHE), Antonio Blasco

(LCSFM), Henri Fortin (LCSFM), Lidia Fromm (LCSHE), Linn Hammergren (LCSPS), Martin

Hessel (LCCHN), Christine Lao Pena (LCSHH), Alberto Leyton (LCSPS), Fabienne Mroczka

(LCSFM), and José Rezk (LCSFM). The group of national and international consultants that

worked in the different chapters included: Pedro Antman, Eva Caballero, Ana Cristina Barrios,

Miguel Cálix, Marco López, Israel Mandler, Roberto Martínez, Víctor Meléndez, José Luís

Méndez, Napoleón Morazán, Joaquín Oviedo, Mark Payne, Sandra Pineda, Hernán Pflucker,

Hector Silva, and Miguel Braun and Gabriel Filc from CIPPEC, and Helmis Cárdenas, Rafael del

Cid, Marco Moncada and Ramon Romero from ESA Consultants.

The principal authors of the separate background chapters are as follows:

Chapter 1: Ana Bellver, Martin Hessel and, Mark Payne.

Chapter 2: Alberto Leyton and Martin Hessel.

Chapter 3: Linn Hammergren and Miguel Cálix.

Chapter 4: Cristian Aedo and Lidia Fromm.

Chapter 5: Christine Lao Pena and Lidia Fromm.

Chapter 6; Antonio Blasco, Fabienne Mroczka and, José Rezk.

Chapter 7: Henri Fortin, Ana Bellver and Ana Cristina Hirata Barros.

The team also benefited from the collaboration of Dante Ariel Mossi (LCCHN); Phil Keefer and

Cesi Cruz from DEC; Alexander Berg and Sunita Kikeri from the IFC; Edgard Restrepo from IFC

Honduras, and Jonathan Halpern (ETWWA).

The team would like to thank Laura Frigenti, LCC2C country director; Geoffrey Bergen,

Honduras country manager; Nick P. Manning, public sector manager, Humberto López, lead


7

economist, and the three peer reviewers – Ian Walker, Steve Webb and Yasuhiko Matsuda – for

their support during the elaboration of this study and their valuable comments.

It is not possible to name all of the Hondurans who have contributed in some way to this study,

but we would particularly like to thank government counterparts from the Office of the

Presidency, the Ministry of Education, the Ministry of Finance, the Ministry of Interior and

Justice, the Ministry of Health, the Public Ministry, the Judicial Branch, the Ministry of Public

Security, the General Directorate of the Civil Service, the Technical Support Unit of Presidency,

the Honduran Social Security Institute, the Poverty Reduction Strategy Commissioner, and the

Association of Municipalities of Honduras, for their involvement, both through the participation

of their senior officials in the Steering Committee and the knowledge and valuable contributions

of their technical teams.

We also want to express our gratitude to the representatives of civil society organizations,

universities and the private sector for their time and dedication. Their willingness to participate in

the numerous meetings, and the contributions they made, greatly enriched the study.

The guiding principles that were established with the Government at the beginning of this project

were that the document should:

Have a practical focus: the selection of priority areas and the identification of the questions

that should be considered in each area were performed pragmatically with the aim of

implementing gradual advances and solutions which would achieve intermediate results.

Be policy oriented: each chapter should conclude with concrete and viable proposals.

Be informed by a participatory process: decision-makers, heads of institutions and technical

teams should be involved in the design and elaboration of each one of the chapters.

Build on existing practices and accumulated knowledge in the sector: the analysis begins with

existing studies and advances already made, and reflects the current beneficial practices and

ongoing initiatives in the country.

We hope that we have fulfilled these objectives and that this study becomes a useful instrument

both for the departing administration to consolidate its achievements, as well as for the new

administration that will assume power in 2010 and for all of the different actors involved in the

fight against poverty in the country


8

EXECUTIVE SUMMARY

i. Having achieved fundamental milestones in terms of representative democracy

and institutional modernization, Honduras continues to face important challenges in its

bid to provide public services with coverage and quality commensurate with the

resources available to the country. Honduras has come a long way in its democratic

development, with seven free elections held since 1981 and the military subordinated to

civilian control. Since the 1980s, the country has undertaken key public sector management

reforms and has all of the formal components of a modern democracy. However, its average

rate of economic growth and its degree of progress in reducing poverty over the past two

decades have been low relative to most other Latin American countries –– at this growth rate,

Honduras will reach the current income per capita of El Salvador ($2,530) in 2050. Efficiency

of public spending continues to be very low compared to regional standards, and the capacity

of the public administration insufficient for ensuring the minimum goal of universal coverage

of basic services.

ii. These difficulties in improving citizens‟ quality of life have a negative impact on

their confidence in public institutions and undermine the process of democratic

consolidation. Hondurans do not question democracy as the preferred political system, but

they are dissatisfied with its capacity to respond to the problems that confront the country and

provide services that benefit the majority of the population. The high level of absenteeism in

the most recent presidential elections (45 percent in 2005 compared with 16 percent in 1985)

was a wake up call in this sense. The upcoming elections provide a unique opportunity to

regenerate citizens’ trust in public institutions and, in the capacity of the democratic system,

to respond to their main concerns, which include poverty, unemployment, and public security.

iii. The quality of public policies in Honduras is an important factor behind these

poor development outcomes. A few broad characteristics of public policies can be

observed across a variety of sectors. Public resources in Honduras are often inefficiently

allocated; policies tend to benefit the groups with strongest bargaining power rather than the

general interest, and in general, policy implementation is poor. To understand why the policy

process is so prone to the influence of interest groups it is necessary to consider the incentive

structure that stem out of three salient features of the party system: the high level of

institutionalization of the two main parties, their internal fragmentation and weak

programmatic orientation. In a context such as this, political actors have little incentive to

prioritize policy reforms that impose immediate costs on specific well-organized groups,

while the benefits for the wider population may be more evenly spread and uncertain.

iv. The analysis of reform trajectories in the sectors included in this study support

the argument that poor sector performance is related to weak implementation and to the

incentive structure that policymakers face. Some of the initiatives that have been proposed

to enhance sector performance are already contemplated within the current legal and

institutional framework (as in the cases of civil service, education, and public enterprises) and

yet, the policy discussion in the country has focused on designing further reforms rather than

on enforcing already approved initiatives. Even in the cases where major reforms have been

passed (such as the justice sector), performance has not improved accordingly. With few

exceptions, the lack of reform champions that have emerged from the Honduran political

landscape it is striking which is related to the incentive structure mentioned earlier. The


9

successful reform of the Executive Directorate of Revenues (DEI) shows however that it is

possible to make significant advances in politically sensitive areas, such as human resource

management, if there is a champion behind them that is able to mobilize sufficient political

support. In such context there is a need to be opportunistic to take advantage of entry points

and champions when they emerge.

v. Honduras is making advances towards a stronger institutional framework, but

less rapidly than would be expected in a country with its trajectory of institutional and

democratic reforms. International comparisons reveal that Honduran institutions perform

relatively worse than their counterparts in other democratic countries with similar levels of

development. Three factors are highlighted in this report that, if addressed, could help the

country to improve its institutional framework and the quality of the policy-making process:

the lack of transparency around decision-making and lack of available information to assess

performance that makes it difficult for citizens to hold policymakers for their decisions and

their impact on institutional performance; the shortage of mechanisms to punish or reward

good performance so it can be translated into political capital; and the weak organizational

capacity of groups representing public interest What follows are specific recommendations to

improve the quality of the policymaking process in sectors which are key for the functioning

of the state machinery (such as the public administration and the justice sector), or for the

growth of the country (such as education, health and public enterprises) and for deepening the

decentralization process (subnational governments).

vi. A general conclusion, highlighted throughout the study, is the need to strengthen

the country‟s accountability framework and in particular, the accountability of

policymakers towards citizens and tax payers, and to focus the policy discussion on

performance. In order to make some improvements to the quality of policy-making in the

short term, the following recommendations should be considered. First, to focus public and

political attention on a few key stages in the policy-making process, such as the legislative

passing of the budget, the process for agreeing public service salaries and the electricity tariff

regime. Second, to focus policy discussion on performance, increase the visibility of good

policy outcomes and strengthen the accountability of political actors. Honduras has made

progress in this regard with the implementation of the Results-Based Management System

(Sistema de Gerencia por Resultados, SGPR), developed by the Presidency and managed by

UNAT, and the Transparency Law. Although these instruments still need further

improvements, they represent country-led efforts to enhance transparency and performance

accountability of public institutions. Third, provide support to the groups representing the

broader public interest so they can participate in policy discussions.

vii. To address weaknesses in the implementation of public policies a new approach

towards the professionalization of the public administration needs to be adopted in

order to ensure that reforms take into consideration the country context and become an

integral part of public sector management reforms. Despite its importance for service

delivery and the effectiveness of public policy, management of human resources continues to

be one of the weakest areas within Honduran public administration. Previous reform attempts

failed, partly due to an excessive emphasis on the control of salary expenditures and the wide-

ranging legal reforms which aimed to radically alter the structure of public employment. In

order to increase its chances of success, any reform needs to take into account the co-

existence of different employment regimes in the public administration (i.e. the civil service


10

regime, special statutes and contractual employment) and should be implemented as part of

broader institutional reforms.

viii. Honduras has undertaken important reforms since the early 1980s to strengthen

the justice sector as a key element in good governance, and its role in improving public

security, but the large increase in funding for the sector has not yielded the expected

performance improvements. Compared to regional and international standards, the

productivity of all sector institutions is very low. In a country with one of the highest crime

rates in the region, the performance of all actors in the criminal justice chain is

disappointingly poor. Less than ten percent of reported crimes reach some kind of resolution

and it is estimated that roughly 90 percent of these are minor infractions in which the

defendant is apprehended on the spot (in flagrante). Although the number of judges has

doubled since 1986, output per judge has not increased and is among the lowest in the region.

It is doubtful that offering more resources to the sector will improve the situation. The first

step should be to use performance information and set productivity goals to hold each

institution accountable for the resources it receives and the services it provides. In addition, a

high priority for policy dialogue should be to avoid a qualitative deterioration in the Supreme

Court at the upcoming renewal. The new selection process implemented in 2000-2001 to

restrict political interference was an important achievement for the country that needs

continuous support so there are not major setbacks. The next step on the Supreme Court is to

move a rolling renewal process so a couple of judges are replaced every year, instead of

having a big bang replacement.

ix. The comparison between the reform trajectories of the two key sectors for

achieving the Millennium Development Goals – education and health – is striking and

reflects differences in the bargaining power of the actors involved. During the 1990 to

2007 period, Honduras substantially increased its expenditure on education, but this increase

in resources has not been translated into better educational outcomes. The country now

invests more per unit of learning achieved, due mainly to the share of spending on teacher

salaries, which, though already high, has increased sharply in the last eight years. The main

factor responsible for such poor educational outcomes is the opposition of the teachers’ to any

attempt to reform the sector and introduce performance measures. Meanwhile, the health

sector is an interesting case in the Honduran context because in general its performance with

regard to advancing reforms has been superior to other sectors. This relative success is mainly

due to the different power structure of the sector and the “bottom-up” reform approach

adopted that generated a constituency for reform at the local level. An important exception is

the procurement of pharmaceuticals where strong vested interests oppose any reform.

x. In education, the main recommendations include the need to empower other

actors to participate in policy discussion, acting as counterweight for the teacher‟s

unions, and to focus the discussion on learning outcomes. The establishment of a National

Education Council that leads the reform process is a critical step to unblock the discussion

around the General Education Law with the unions. Such Council should include

representatives from parent associations, universities, municipal governments, the private

sector and the PRS Council as actors that can represent the broad interest in the sector. In

addition, the development of performance indicators at the departmental, district and school

level would be a critical input for enhancing accountability of the actors involved in the

service delivery chain. Same as the full implementation of the recommendations arising from


11

the Teacher Census and Auditing of Post conducted by the TSC. If no action is taken, it would

have devastating consequences on government’s credibility. In the case of health, the main

recommendations are to develop performance information for decision-making and

accountability, to set up service standards and to improve continuity of key health staff

appointments to minimize disruptions in the implementation of sector reforms.

xi. An effective accountability framework for municipal governments is critical not

only to enhance the effectiveness of poverty reduction programs at the local level, but

also to raise public support for the decentralization process. However, the accountability

framework currently in place is not exercising an effective control on the financial

management of municipal governments. The main recommendations in this regard are: to

ensure the framework is applied to all funds that are executed at the municipal level and not

only to the funds executed by municipal governments, to incorporate incentives for

municipalities to comply with the reporting requirements and to better leverage on social

monitoring initiatives at the local level. Given that the level of international assistance

executed at the municipal level is significant – both in terms of the number of initiatives and

the amount of funding – donors should be more proactive in strengthening the control

framework and promoting social accountability, by insisting that municipal budget execution

reports be appropriately registered, requesting that annual financial reports be submitted to the

TSC, and that budgetary information be provided to the Transparency Councils.

xii. Strengthening the corporate governance framework of public enterprises is key

to improving the performance of these companies. Honduran public enterprises

predominate in sectors that are integral to the socioeconomic development of the country. Yet

the three largest public enterprises, ENEE, SANAA, and HONDUTEL, have experienced

serious operational and financial difficulties over the recent period. Many of the weaknesses

observed in the institutional framework arise from: (a) the lack of separation of policy-making

functions from those related to regulation and provision of services, which undermines the

effectiveness of the counterbalance system; and (b) the lack of transparency and available

information regarding the management and performance of these companies, thereby

undermining accountability. The lack of empowerment from consumer and citizens as key

stakeholders in improved management of these enterprises is also a contributing factor to

weak accountability. In the short term, a priority should be to (a) establish a specialized

oversight entity to fulfill the Government’s “ownership” function – either strengthening

existing units at SEFIN or Presidency, or establishing an independent commission that would

report first to the Government and then to Congress – and (b) enforce the provisions in the

organic laws of ENEE and HONDUTEL that require the General Manager to be appointed by

the Board of Directors. To improve performance accountability, the priorities are to set up

performance targets to be monitored periodically through the SGPR, ensuring compliance

with the requirements of the Transparency law, and develop service standards. Lastly, to

ensure appropriate financial accountability, public enterprises should be required to publish

their audited financial statements each year.


12

STRENGTHENING PERFORMANCE ACCOUNTABILITY IN HONDURAS

- THE KEY CHALLENGE AHEAD

1. Honduras has come a long way in its democratic development, with seven free

elections held since 1981 and the military subordinated to civilian control. Since the

1980s, the country has undertaken key reforms and has all of the formal components of a

modern democracy, including: one of the most institutionalized and stable party systems in

the region; an electoral system which is becoming more representative over time; a congress

that acts as a counterbalance to the executive branch; a framework that provides the basis for

judicial branch modernization; a budget operating under a single account that is executed

through an integrated financial management system (SIAFI); an independent central bank;

and a tax agency that has proven to be an efficient instrument for collecting revenues for the

state.

2. However, having achieved fundamental milestones in terms of representative

democracy and institutional modernization, it continues to face important challenges

with regard to providing a level of services commensurate with the resources available

to the country. The efficiency of public spending continues to be very low compared to other

democracies with similar levels of development, and the capacity of the public administration

is insufficient for ensuring the minimum goal of universal coverage of basic services.

Honduras’ average rate of economic growth and degree of progress in reducing poverty over

the past two decades has been low relative to most other Latin American countries. Although

its performance has improved recently, this is more likely a reflection of the favorable

international context than a reduction in long-term obstacles to growth. Even if Honduras

maintains the average annual per capita growth rate of the last four years (1.7 percent),

income per capita will barely double over the next 40 years, reaching $2,500 in 2050 –

approximately the current per capita income of El Salvador ($2,530) – and it is unlikely that

the country will reach the Millennium Development Goals established for 2015 (PER, 2007).

3. The lack of progress witnessed by citizens with regard to improvements in their

quality of life, has led to a downturn in confidence in public institutions and is

undermining the process of democratic consolidation. In spite of all of the reforms carried

out in the previous decade, the confidence in the public administration has not improved (see

Graph below). Hondurans do not seem to question democracy as the preferred political

system, but they are dissatisfied with its capacity to respond to the problems that the country

faces and to provide services that benefit the majority of the population1. The high level of

absenteeism in the most recent election (45 percent in 2005 compared with 16 percent in

1985) was a wake up call in this sense, with one third of citizens who did not vote citing

1 According to Latinobarómetro, while levels of satisfaction with democracy hovered around 45 percent from

1997 to 2000, they fell to 31 percent in 2007 and the two surveys carried out by LAPOP in the last five years

show a decrease in satisfaction with democracy from 64 percent in 2004 to 54 percent in 2006. Similarly, the

levels of dissatisfaction with democracy have increased. According to surveys carried out by the Latin

American Public Opinion Project (LAPOP), dissatisfaction with democracy increased from 36 percent in

2004, to 46 percent in 2006 (Cruz, Argueta and Seligson, 2006).


13

reasons related to their attitude toward the political system2. The upcoming elections provide

a unique opportunity to regenerate the trust of citizens in public institutions and in the

capacity of the democratic system to respond to their main concerns, which include poverty,

unemployment, and citizen security.

Graph 1. Confidence in the Public Administration, Honduras 1996 and 2005

28.0%

65.0%

0

10

20

30

40

50

60

70

High/Some Seldom/None

27.5%

66.0%

0

10

20

30

40

50

60

70

High/Some Seldom/None

Source: Latinobarómetro, 1996 and 2005. The sample for each survey comprised approximately 1000 persons

with 66 and 68 persons either not responding or saying that they did not know.

4. Previous analytical studies (Development Policy Report 2004; Poverty

Assessment 2006; Public Expenditure Report 2007), looked into the developmental

challenges that Honduras faces and provided technical recommendations. Many of the

reforms that are needed for improving the provision of basic services and placing the

economy on a path of sustained growth that can have a lasting impact on poverty reduction

are well-known, and yet no government has been able to successfully implement them. The

Development Policy Report (2004) emphasizes four policy areas that are especially important

for accelerating growth in Honduras: human capital, public infrastructure, financial market

development, and governance. Lack of progress in most of these areas does not rest in the

technical content of the proposed reforms but around constraints for decision-making. Using

the conclusions of those reports as a foundation, this study aims to contribute to this

discussion by analyzing the incentives behind decision-making provided by the institutional

framework, thereby contributing to a better understanding of the structural limitations that

each government confronts when assuming office.

5. This study does not try to evaluate any particular administration but rather to

offer recommendations that can facilitate the adoption of some of the reforms that are

needed for accelerating growth and reducing poverty. The first part of the report provides

an overview of the policy-making process; that is, the process of formulation, approval and

implementation of public policies, in order to identify the incentives they provide that affect

the behavior of the actors involved. The second part of this study analyzes the institutional

framework in sectors which are key for the functioning of the state machinery (such as the

bureaucracy and the justice sector), or for the growth of the country (education, health, public

enterprises) and for the decentralization process (the subnational governments). Each

chapters aims to contribute to the debate in that specific area and foster a discussion about

2 That is to say, “lack of interest,” “I do not like any of the candidates,” “I do not believe in the system.”

Another third do not vote because of problems with registration, and the remaining third do not vote for a

variety of personal reasons.


14

The State

Politicians Policymakers

Providers

Administrators

Front-line

Providers

Citizens

Users

Voice

Compact

Client Power

Services

possible reform options. An effort has been made to identify with the relevant national

counterparts and development partners, the areas where value could be added to the efforts

already being made in the country.

6. A general conclusion, highlighted throughout the study, is the need to strengthen

the country‟s accountability framework and in particular, the accountability of

policymakers towards citizens and tax payers. The reports applies the analytical framework

developed by the World Development Report (2004) that emphasizes the relationship between

citizens, politicians, service-providers or public institutions and the legal-institutional

framework that governs them (see Figure 1), and Spiller, Stein and Tommasi (2003)

framework to analyze the quality of the policymaking process. In general, recommendations

are geared towards strengthening the electoral connection between voters and decision makers

by altering the incentive structure and increasing the reward for good performance. On the

one hand, there is a need to enhance transparency around decision making and clarify

institutional mandates, so citizens can evaluate their representatives in terms of the decisions

they take on their behalf. On the other hand, the provision of information about institutional

performance can assist citizens in assessing the consequences of those decisions, translate

good performance into political capital and improve the quality of the policy debate.

Figure 1. The accountability framework

Source: World Development Report, 2004

7. The analysis of reform trajectories in the sectors included in this study support

the argument that poor sector performance is related to weak implementation and to the

incentive structure that policymakers face. Some of the initiatives that have been proposed

to enhance sector performance are already contemplated within the current legal and

institutional framework (as in the cases of civil service, education, and public enterprises) and

yet, the policy discussion in the country has focused on designing further reforms rather than

on enforcing already approved initiatives. Even in the cases where major reforms have been

passed (such as the justice sector), performance has not improved accordingly. With few


15

exceptions, the lack of reform champions that have emerged from the Honduran political

landscape it is striking which is related to the incentive structure mentioned earlier. The

successful reform of the Executive Directorate of Revenues (DEI) shows however that it is

possible to make significant advances in politically sensitive areas, such as human resource

management, if there is a champion behind them that is able to mobilize sufficient political

support. Therefore, in such context there is a need to be opportunistic to take advantage of

entry points and champions when they emerge

OVERVIEW OF THE POLICY-MAKING PROCESS

8. A few broad characteristics of public policies in Honduras are important factors

in accounting for the poor development outcomes and poor use of resources. A

comparative perspective is provided using the index developed by Stein et al., that is then

backed up with country evidence. Compared to the Latin American and Central American

averages, Honduras performs comparatively well with regard to the stability of the system,

but scores lower in three characteristics that are critical for the allocation of resources and

effectiveness of public policies: public regardedness or orientation to the public good,

efficiency, and the quality of implementation and enforcement. That is, public resources in

Honduras are not allocated to activities that could give the greatest return, policies tend to

benefit the groups with strongest bargaining power rather than the general interest, and in

general, policy implementation is poor.

Table 1. Characteristics of public policies in Latin America.

Adaptability Stability Enforcement Coordination

Public

Regardedness Efficiency

LAC 2.36 2.50 2.08 2.05 2.10 1.85

Centroam 2.30 2.46 2.04 1.91 2.05 1.81

HON 2.43 2.60 2.01 2.14 1.99 1.67

Source: Stein et al. (2005)

9. How public resources are collected and spent is at the core of the policy-making

process and illustrates well these three characteristics, as it is the result of the interaction

between policy-makers and different groups in society and reflects the overall priorities of

public policies, translated into tax measures and spending programs by the bureaucratic

machinery. Based on existing analytical work, the most salient features of resource collection

and allocation are analyzed in order to provide some evidence of these characteristics of

public policies.

Table 2. Tax Exemptions

Exemptions

(MLps)

Exemptions/

Collected Revenues

Exemptions/

GDP

2002 2047.4 11.7% 1.9%

2003 6387.2 32.3% 5.3%

2004 7844.5 33.4% 5.7%

2005 9419.6 35.4% 6.0%

2006 11909.5 37.7% 6.9%

Source: DEI, 2007


16

10. The few studies available suggest that the preponderance of taxation on goods

and services makes the Honduran tax system regressive. As in many other countries in

Latin America, Honduras relies to a large extent on tax revenue from indirect taxes, although

important efforts have been made to increase the share of direct taxes during recent years. In

addition, Honduras relies on a large number of tax exemptions, which are not necessarily a

problem in themselves, but their opaque nature – their costs are not reflected in the budget and

they are not consistently subject to any public discussion that allows for weighing their costs

against their benefits – facilitates the extension of tangible favors to specific groups.

11. With regard to the composition of public expenditure in Honduras, the most

notable characteristic is the large quantity of resources devoted to salaries compared,

for example, to capital expenditures. The health sector and, to an even greater extent, the

education sector have absorbed the bulk of the increases into the public wage bill. However,

this has not necessarily manifested into improvements in their respective public services, but

it is a consequence of the bargaining power of these groups. Only a very small share of the

spending increases can be attributed to an increase in the number of teachers, doctors and

nurses. Moreover, these salary increases have not been linked to performance criteria and

have not brought about improvements in the quality of education. Honduras spends more on

education than other countries in the region, while the educational quality is lower than in

neighboring countries.

12. Honduras also stands out for devoting an important share of public expenditure

to subsidies. If all of the subsidies – direct, indirect and hidden – are considered, their

estimated value in 2006 was $320 million (3.5 percent of GDP). In many cases, the argument

used to justify subsidies is that they make public services affordable to poor consumers (such

as the cross-subsidies in the water sector) or that they are a second-best solution to

compensate low-income groups for other disadvantages (as in the case with Bono 80, given to

the urban population to compensate for high transportation costs, but paid through the

electricity bill). However, subsidies tend to be rather blunt instruments for reaching this policy

objective, as they are of disproportionate benefit to well-off groups.

Graph 2. Public spending on interest payments and salaries, 1997-2002

0

2

4

6

8

10

12

1997 1998 1999 2000 2001 2002

Perc

en

tag

e o

f G

DP

Salaries

Interest

Source: SEFIN.


17

13. To understand why the policy process is so prone to the influence of interest

groups, it is necessary to consider the salient features of the party system: the high level

of institutionalization of the two main parties, their internal fragmentation and weak

programmatic orientation. Honduras has one of the most institutionalized party systems of

the region with two principal parties, the Liberal Party (PL) and the National Party (PN) that

have alternated in power for much of the period since 1930. However, political parties exhibit

a high degree of internal fragmentation. Each party is comprised of different internal factions

that control the selection of the candidates and provide votes that are necessary for the party

to win. The dynamic between these factions and the party is critical to understanding

Honduran politics, and it has important consequences for the electoral connection and

executive-legislative relations. In addition, the high level of internal fragmentation and the

weak programmatic orientation of the parties create incentives for the parties to attract support

on the basis of tangible benefits for specific groups, instead of basing their appeal on

improvements in public policies over the long term. Even though one observes a tendency

towards programmatic competition in Honduras, clientelistic practices continue to be strongly

rooted, especially at the local level. The recent electoral reforms provide an opportunity to

strengthen democracy from the bottom-up and increase the ties between the deputies and their

constituencies, but they may also reinforce clientelistic practices and lead to further

fragmentation of the parties.

Table 3. Characteristics of the party system.

Party system

Degree of

institutionalization

Effective number

of parties

Programmatic

competition

Uruguay 2.72 3.02 7

Honduras 2.67 2.15 2

Mexico 2.32 2.37 2

Chile 2.30 5.27 8

El Salvador 2.27 3.17 7

Source: Payne et al.(2007) and Stein et al. (2005)

14. In this context, political actors have little incentive to prioritize policy reforms

which impose immediate and clear costs on well-organized groups and provide benefits

which are uncertain and diffuse. Given the comparative weakness of large groups

(consumers, parents, the private sector as a whole, etc.) it is very challenging to implement

reforms with such payoff structures. In the context of clientelist representation, the incentive

for politicians to avoid taking on such risks is even greater, since such reforms are less likely

to be successfully implemented and even if they do, it is less probable that policymakers will

get political recognition for the passing of the reform from voters. This helps to explain why

key decisions are passed from government to government without any of them being able to

absorb the political cost associated with them, such as the salary negotiations related to the

employment statute for teachers; the rationalization of the finances of the electric company

ENEE or of SANAA, whose debts continue to accumulate; the professionalization of public

servants; or a fiscal reform that reduces exemptions.

15. Independent institutions play a fundamental role in the democratic system,

placing some restraints on the executive and the legislative branch and leveling the

playing field for actors to participate in policy discussion. An independent and effective


18

judicial system, as well as other independent check and balance institutions, are fundamental

since they provide guarantees that agreements reached will be respected and their associated

policy changes implemented fully and fairly. The democratic system is based on the division

of powers principle, whereby checks and balances are established, so that one set of

institutions controls the others and prevents one branch of government from dominating the

others. Thus, the legislature has the power to formulate public policies and to supervise the

work of the executive in implementing them. Aside from guaranteeing the individual rights

of citizens, the judicial branch performs a fundamental role in the political system; that of

impartial arbiter responsible for ensuring the effective and fair application of policy decisions

and the rules of the game. The considerable gap between the formal powers of the Honduran

legislature and its effective capacity to carry out the assigned policy-making and oversight

functions, creates uncertainty in respect to the interpretation and enforcement of the basic

rules of the game, as well as with regard to whether potential public policy reforms will be

implemented fairly and completely.

16. Honduras is making advances towards a stronger institutional framework, but

less rapidly than would be expected in a country with its trajectory of institutional and

democratic consolidation. International comparisons reveal that Honduran institutions

perform relatively worse than their counterparts in other democratic countries with similar

levels of development. Three factors are highlighted that, if addressed, could help the country

to improve its institutional framework and the quality of the policy-making process: i) the

lack of transparency with regard to policy-making; ii) the shortage of mechanisms to punish

or reward good performance; and iii) the weak organizational capacity of groups representing

public interest. What follows is a brief description of each factor with some recommendations

for the short-term.

17. Greater transparency in the policy-making process would increase accountability

and level the playing field for participation in policy discussion. Access to information

about the process to formulate, discuss and approve public policies, together with information

about the performance of the three branches of government – congress, executive and the

judiciary – with an emphasis on the division of powers, would increase accountability, and

reduce the undue influence of interest groups, thereby providing the opportunity for different

social actors to participate in policy discussions under more equal conditions, whether directly

or through their political representatives in congress. The implementation of the Transparency

Law in public institutions, and especially in the congress, entails an advance in this direction

and its implementation should continue to be supported. The recent initiative to approve a

Public Hearings Law for the congress’ appointment of high level officials – like the Supreme

Court judges – is another effort of this type.

18. Focusing the policy discussion on performance would also provide positive

incentives for policy-makers. An important feature of the Honduran context is the absence

of mechanisms to allow good performance to be translated into political capital, whether for

candidates or for the party, which means that no actors have sufficient incentive to confront

powerful groups and make decisions that generate uncertain outcomes in the medium term.

For this reason, any initiative that increases the visibility and benefits associated with these

types of decisions could alter this political calculation. Three recent initiatives – the Results-

Based Management System, the Transparency Law, and the social monitoring mechanisms –

are helping to change these incentives and will facilitate public awareness of who is


19

responsible for decisions and what the outcomes achieved from them are. In this way political

representatives can be rewarded with political support for their efforts to enhance

performance. Examples like the municipality of Comayagua illustrate well how the electoral

dynamic can be a good instrument for rewarding good management.

Box 1. The case of Comayagua

Carlos Miranda has been Mayor of the municipality of Comayagua for three consecutive terms.

During his administration he has managed to increase municipal revenues by 20 percent and

improve the services offered to citizens and businesses. Among other reforms, the municipality

has implemented the Integrated System of Municipal Information (SIIM); has established a

Multimedia Kiosk and One-stop Shop for Administrative Procedures whereby the maximum

length of administrative procedures has been reduced to three days; and has increased the

number of permits for business operation issued by the municipality by 45.7 percent and the

revenues collected for construction permits by 74.7 percent. Comayagua is in the top three

municipalities in the municipal scorecard ranking of the IFC in respect to operating licenses for

businesses and construction permits (IFC, 2007). The web page of the municipality

(www.municomayagua.com) is one of the most complete and, among other services, offers

online facility for the payment of taxes and the resolution of procedures, bidding opportunities,

information about projects and public works in progress in the municipality, and a service

window for citizens. In addition, according to the Human Rights Commission, Comayagua is

one of the municipalities that obtain the best social audit reports of its Transparency

Commissions.

19. A third element that would assist in altering the incentive structure is addressing

the collective action problem. Political actors have little incentive to prioritize policy

reforms which impose immediate and clear costs on well-organized groups and provide

benefits which are diffuse and uncertain (since under clientelistic incentives the reform is

unlikely to be implemented or it may not produce the expected benefits). Given the

comparative weakness of large groups, reforms with such payoff structures are very

challenging to implement. Compared with the organizational capacity demonstrated by

certain interest groups in the country, other groups representing more general interests – such

as consumers, parents of school children, and small and medium-sized enterprises – have

great difficulty in organizing themselves effectively. This imbalance of power, in favor of

narrow interests, reduces the political rewards to those who support the implementation of

reforms that pursue the common good. The report issues recommendations in each chapter in

order to supporting the organizational capacity of groups representing the public good in that

particular sector and strengthening their capacity to participate in policy discussion.

20. In a context of scarce resources and urgent demands, prioritization is essential. It

is not possible to change the whole system at the same time, but it is possible to build up some

key institutions or functions and achieve some results with a significant impact in the short

term. The following are some recommendations in this regard:

With the basic machinery of transparency and access to information now in place, focus

public and political attention on a few key stages in the policy process such as the

legislative passing of the budget, the process for agreeing public service salaries and the

electricity tariff regime.

http://www.municomayagua.com/


20

Make use of two existing country instruments (Results-Based Management System and

Transparency Law) to center the policy discussion on performance, increase visibility

(and therefore political capital) of good policy outcomes and strengthen accountability

of political actors.

Support the organizational capacity of groups representing the larger interest – such as

consumers of public services, parents, beneficiaries of social programs, small and

medium-sized enterprises, and farmers – and enhance their ability to participate in

policy discussions.

THE CHALLENGE OF PROFESSIONALIZING THE PUBLIC ADMINISTRATION

21. Despite its importance for service delivery and the effectiveness of public

policies, the management of human resources continues to be one of the weakest areas

within the Honduran public administration. Cross-country comparisons show that

Honduras is one of the countries in Latin America that spends most on public employment,

but also one of the countries where human resource management is the weakest. While having

the second highest salary expenditure in terms of GDP in Latin America (10.3%), Honduras

scores below average on all the qualitative indicators developed by the IDB 2006, indicating

serious deficiencies in most areas of human resource management (e.g. planning, job

organization, employment management, performance management, compensation, career

development, and human and social relations).

Graph 3. Human Resource Management in the Public Sector in Latin America

0%

5%

10%

15%

20%

25%

30%

35%

40%

Efficiency

Merit

Structu

ral C

onsistency

Functional C

apacity

Capacity to

Harm

onize In

terests

% o

f M

ax

imu

m V

alu

e

Honduras

Average LAC

Source: IDB (2006)

22. There have been various failed attempts to address some of these challenges

through broad legal reforms aimed at containing the wage bill. Under pressure posed by

an increasing wage bill, Honduran governments have tried to implement wide-ranging

reforms of the public employment regime to reduce the threat to public finances. However,

these reforms did not pass the approval stage. The failed reform attempts of 2003 and 2004


21

show that an excessive emphasis on the control of salary expenditures and wide-ranging legal

reforms that radically alter the structure of public employment lower the chances for success.

23. While these attempts to implement changes across the board failed because of

strong opposition from organized interest groups, there are examples of successful

reforms of individual institutions that may provide important lessons for the

development of a more gradual approach. The Executive Revenue Authority (DEI) has

implemented a merit-based recruitment process as a first step towards a new human resources

management model within the institution. Three factors contributed decisively to the success

of the reforms possible: strong political backing, the implementation of a transparent and

clearly-defined recruitment process under external oversight, and the fact that these HR

reforms were conducted as part of an overall institutional reform process. The experience of

the DEI shows that it is possible to carry out human resource management reforms in the

Honduran public sector and that such improvements have an impact on the efficiency of the

institution.

Graph 4. The Impact of the Increase in Administrative Efficiency

0%

5%

10%

15%

20%

25%

In

cre

ase i

n R

even

ue

co

llecti

on

2003 2004 2005 2006 2007

Inflation GDP Growth Efficiency DEI

Source: DEI.

24. This study calls for a change in approach in order to ensure professionalization

becomes an integral part of state modernization reforms. Over the years, Honduras has

implemented numerous reforms to modernize the public administration by introducing

modern legislation and new public expenditure management systems. However, one of the

weaknesses of these reforms is that they have not been conceived, programmed and

implemented together with improvements in human resource management. The sustainability

of these institutional modernization reforms, and the new public management systems,

depends crucially on the existence of a critical mass of skilled and professional staff within

the public administration. Therefore, professionalization needs to be an integral part of

ongoing public sector management reforms. In addition to guaranteeing the sustainability of

public sector institutional and management reforms, this new approach would help to focus

the efforts in areas where other reforms are being implemented, instead of spreading them

thinly across the entire public administration, and it would ensure that the professionalization

process is tailored to the needs of each institutions. Linking improvements of human resource

to other public sector reforms within specific institutions could also facilitate the emergence

of reform champions within these institutions


22

25. An important conclusion from the analysis of the structure of public employment

in Honduras is that any reform attempt must take into account the fragmentation of the

Honduran public service and the co-existence of different employment regimes (i.e. the

civil service regime, special statutes and contractual employment). Although the civil

service regime still includes an important group of professionals responsible for the key

functions and the direction and management of public policies, around 70 percent of public

sector employees belong to special statutes that have surged as a result of pressure exercised

by sector specific unions. On the other hand, there is a significant number of persons

employed under fixed-term contractual arrangements, in many cases paid for by external

funding, that have become the backbone of important functions of the public administration,

but that cannot be absorbed by the regular structures of the State because of the high salaries

they are often paid. Given that this fragmentation cuts across institutions, professionalizing

key functions requires adopting an approach that starts with identifying the key functions of

public administration that need strengthening, rather than starting by identifying positions

under a certain regime or salary scale to be professionalized..

Table 4. Quantity and cost of personnel by staff category, Central Government, 2008

Category

Number

of

employees

Total Salary

Expenses

Average

Salary

(MLps.) (Lps)

Civil Service 26,077 2,924 9,343

Special

Statutes 63,036 13,635 18,025

By contract (1) 6,642 n/a. n/a.

Other (Defense

and Security) 24,160 2,874 9,914

Total 119,942 n/a n/a

Source: General Directorate of the Civil Service and SIARH..

26. Despite the many challenges facing Honduras, the Government has already put

in place key building blocks to continue advancing towards a professional public

administration: a generally acceptable legal framework; a concrete plan to gradually

professionalize a limited number of key positions, already approved by the executive; a

modern system to support most human resource management processes under consolidation

(Integrated System of Human Resources Administration – SIARH); and a well-

institutionalized Results-Based Management System. Hence the recommendations provided

by this chapter do not require any major legal reforms or institutional engineering, but rather

that the laws, systems and instruments already in place are fully articulated and applied.

27. Among the most important recommendations to advance gradually with the

professionalization process outlined in the Professionalization Program for the Public

Servant are:

To centre the reform on the key functions of the public administration by: (i) starting

with the identification of the key technical functions that need strengthening within each

institution, rather than by identifying positions under a certain regime or salary scale to be

professionalized; (ii) applying a universal set of basic principles to all public sector


23

employees, irrespective of their employment regime; and (iii) allowing for a significant

amount of flexibility to adapt the process to the needs of the line functions.

To strengthen transparency in human resource management it will be important to: (i)

consolidate the SIARH; (ii) make sure that all obligated institutions publish information

on human resources in accordance with the Transparency and Access to Information Law;

and (iii) allow for external scrutiny of the implementation of the professionalization

program by a Validation Committee.

To introduce a performance focus in the three human resources regimes (i.e. the civil

service regime, special statutes and contractual employment) by enforcing the

performance-related provisions in each legal framework and strengthening the links

between the Results-Based Management System and human resource management by:

(i) introducing regular reviews of each employee’s performance against previously

identified performance targets; (ii) linking individual performance targets to the

institutional targets established in the Results-Based Management System; and (iii)

developing indicators for the Results-Based Management System that measure the

progress of the professionalization process.

28. In the very short term, the recommendations are to: (i) in its first phase, apply the

Professionalization Program in the DGSC, the Human Resource Departments within Central

Government, the UPEGs and to functions and positions that are necessary to provide

sustainability beyond the next change in government, to the state modernization reforms

currently under implementation; (ii) establish the external Validation Commission, to ensure

rigorous oversight of the professionalization process from the outset; and (iii) consolidate the

SIARH in order to establish a modern system that provides the information necessary to

monitor the professionalization program and structure the human resource management

processes in a transparent way.

JUSTICE AND PUBLIC SECURITY IN HONDURAS

29. Since the early 1980s, Honduras has undertaken important reforms to strengthen

the justice sector as a key element in good governance and its role in improving public

security. The problems addressed, while doubtless worsened by the prior two decades of

military control, were not dissimilar from those found in much of the region – inaccessibility

of services, outdated procedures, insufficient judicial independence, corruption, and general

inefficiency and inefficacy. Starting even before the 1982 Constitution, but emphasized in that

document, changes were introduced to modernize the legal framework and the criminal justice

proceedings in particular: to create a judicial career, depoliticize judicial appointments and

mandate merit-based recruitment; restructure existing institutions and create new ones (the

Public Ministry and Public Defense in particular, as part of the transformation of the criminal

justice system); and remove the police from military control. Financing for the sector also

increased and the Constitution guaranteed the judiciary an earmark of three percent of the

national budget.

30. However, implementation of the reforms has been slow, partly due to the

opposition of traditional elites who feared their impact on their privileged status. During

the 1990s civil society organizations (including business, labor, minority parties, and


24

independent jurists) continued their demands for full implementation and further changes.

With backing from the donor community, their campaigns produced: the creation of the

Public Ministry and a Public Defenders’ Office (1993); the formation of a civilian police

force (1998) and the transfer of the Public Ministry’s police investigators to its ranks (a

measure that remains controversial); the passing of a second Criminal Procedures Code (2002,

replacing a code enacted in 1984, but considered insufficiently different from the prior

“inquisitorial system”); and in 2001-2002, a constitutional amendment altering the system for

selecting Supreme Court justices, lengthening their terms, and increasing their number, as a

means of combating the continued politicization of the Court. By 2008, the reforms had thus

provided the sector with a more modern structure, and a clearer definition of the processes

and of responsibilities of the key institutional actors, larger budgets, and perhaps a higher

degree of transparency in its activities.

31. Despite this progress and the increase in the funding channeled to the sector,

improvements in performance have not materialized accordingly. Compared to regional

and international standards, the productivity of all sector institutions is very low; for example,

although the number of judges has doubled since 1986, output per judge has not increased and

is among the region’s lowest. In a country with one of the highest crime rates in the region,

the performance of all actors in the criminal justice chain is disappointingly poor. Less than

10 percent of reported crimes reach some kind of resolution and it is estimated that roughly 90

percent of these are minor infractions in which the defendant is apprehended on the spot (in

flagrante). All institutions demonstrate a variety of management weaknesses that contribute to

the low productivity– an inefficient allocation of resources, inadequate monitoring systems

and the lack of attention paid to existing systems (e.g. management statistics), absence of

institutional planning, and structures and processes that tend to duplicate efforts and create

intra- and inter-institutional conflicts.

Table 5. Judicial Workload, Selected Countries

Country Incoming cases

per 100,000

Inhabitants

Judges per

100,000

inhabitants

Incoming

cases per

judge

Honduras (2006) 1,089 10.1 108

Ecuador (2006) 1,802 6.7 269

El Salvador (2006) 2,375 9.2 258

Colombia (2006) 2,893 10.2 283

Peru (2006) 3,919 7.7 509

Argentina (2004) 10,225 11 930

Chile (2004) 12,305 5.0 2461

Costa Rica3 (2004) 22,911 17.4 1316

France (2004) 4,411 10.1 436

Italy (2004) 8,611 10.4 828

Spain (2004) 14,000 9.8 1428

3 After 2004, the litigation rate and number of cases per judge decreased by half as transit cases were transferred

to administrative forums.


25

USA (2004) 33,848 10.2 3351

Sources: Unidos por la Justicia, 2006; CEPEJ, 2006; and official country data. See

Background Chapter 3 for the complete table

32. Critical milestones have been achieved to reduce political interference but it is

still a challenge, especially with regard to the selection of personnel, and compliance

with the new legal framework needs to be a priority for policy dialogue. The reform

carried out in 2000-2001 aimed to restrict political interference through a new process of

selecting the judges and the separation of judges’ terms from the electoral cycle, by

lengthening their terms from four to seven years. The establishment of this new selection

process in which actors can veto any candidate who is considered incompetent or corrupt is an

important achievement that needs continuous support so there are not major setbacks. The

selection of the members of the nominating board, like the members of the Court, was

politicized and the new judges are all identified with one party or the other. However, there

are now certain professional standards that candidates need to fulfill and there is an open

process where other actors can participate. However, it is critical that due process is followed

according to the new legal process. In 2002, in apparent contradiction to the Law, the

Supreme Court majority voted to delegate all its personnel functions to the Chief Justice,

thereby ending further progress in instating competitive merit appointments. The intervention

of the Prosecutor General in the processing of cases involving members of government is

notorious, and in both the courts and the Public Ministry it is claimed that appointments and

assignments of professional and administrative staff are usually based on political criteria.

The public defenders are spared that charge, but their appointment and placement seem

determined more by political criteria than need – and their extraordinarily low productivity

suggests a perverse incentive system.

Table 6. Evolution of criminal cases, from filing to resolution, 1999-2006

Criminal cases 1999 2001 2003 2005 2006

Complaints received 56,845 51,700 52,965 62,463 63,537

Complaints referred for

investigation

31,977 35,336 26,104 48,507 49,198

Complaints investigated DGIC 15,633

(48.89%)

12,749

(36.08%)

8,005

(30.67%)

7,825

(16.13%)

9,213

(18.73%)

Prosecutor appearances (during

summary stage) 1984 Code

9,931 10,525 9,407 5,157 3,367

Formal accusations filed (2002

Code)

--- --- 6,390 6,732 7,181

Formal order of Commitment 3,306 4,634 3,700 4,745 4,621

Preventive detention --- --- 2,463 2,678 2,643

Sentences 4,582 4,969 982 1,317 1,347

Convictions 1,844

(40.25%)

2,208

(44.44%)

759

(77.29%)

996

(75.63%)

1,015

(75.35%)

Total formal and alternative

resolutions

4,582 4,969 5,952 4,748 5,091


26

Source: M. Cálix (2008) based on data from the Public Ministry (Anuarios Estadísticos). See Background

Chapter 3 for the complete table.

33. There are numerous explanations for these problems and for the resulting lack of

progress in implementing the reforms such as: the number of initial deficiencies to

overcome; technical errors in the design of laws and new structures; budgetary constraints

(although the organizations could clearly do better with existing resources); the poor quality

of personnel recruited by the sector; the low level of inter-institutional coordination; and the

power of interested parties both within and outside the sector whose agendas are particularly

conflicted with the proposed changes. The reforms have complicated the political situation by

creating another set of interested parties. Changing established practices, even when those

practices are not very effective, has become more difficult, as this is viewed as a threat not

only by the elite, but also by those in receipt of lesser privileges by virtue of working in the

“reformed” structures.

34. It is doubtful that simply adding more resources would improve the situation.

What is required is first an initial, broad-based consensus on the need for change and on

the objectives to be pursued (preferably expressed as quantitative goals – e.g. a 100 percent

increase in the number of completed investigations or a 50 percent decrease in the time taken

to resolve a civil case), and subsequently, a high-level agreement to reduce political

interference in the operations of the various institutions. It would be unreasonable to expect

that all political control will be relinquished, but a strong and well-defined demand for

specific improvements in performance could mitigate its effects by ensuring that those chosen

for high positions have the qualifications and the incentives to respond to that demand. On the

basis of this consensus, several concrete steps should be taken, including: the enactment and

effective implementation of laws to establish a Judiciary Council and judicial career; the

adoption of meritocratic principles in the selection and promotion of all sector personnel,

based on job profiles for all positions, and especially, but not exclusively for professional

staff; and the development of transparent processes for the appointment of Supreme Court

justices and senior positions in the remaining institutions.

35. In the meantime, the first step would be to acknowledge the poor level of

performance within the sector, and setting productivity goals to hold each institution

accountable for the resources it receives and the services it provides. All those committed

to change will have to reexamine some of the policy choices they have made, especially as

regards the organization and internal processes of the sector institutions. Many of these

choices seem destined – even without political intervention – to produce suboptimal results.

Donors can assist by providing information on, and technical assistance from, better-

performing judiciaries (and other institutions) within and outside the region. Finally,

Honduras needs to pay more attention to the performance statistics it already generates for the

sector, and to interpret them in light of international trends. In Honduras, indicators are very

poor. Even taking into account the poverty of the country, the lack of resources and the

shortage of qualified human resources, the sector could perform much better. Comparative

analysis might clarify the gap between resource inputs and product outcomes, and thus

demonstrate that the citizens do not have to settle for so little.

TRANSPARENCY AND ACCOUNTABILITY IN THE EDUCATION SECTOR


27

36. During the 1990 to 2007 period, Honduras substantially increased its expenditure

on education but this increase in resources has not been translated into better

educational outcomes. During that period, education spending rose from 5.0 percent to 8.6

percent of GDP. Although the country made important advances in terms of literacy rates,

enrolment rates at each level of education, and the rate of completion of sixth grade, it has not

been able to improve student learning achievements, as scores on standardized tests in

Spanish and mathematics in third and sixth grades have not improved since 1997.

Table 7. Performance of sixth grade students in mathematics and Spanish

(Percentage of correct responses)

Subject 1997 2002 2004 2007

Spanish 42.0 42.5 42.6 45.0

Mathematics 35.0 38.5 38.5 38.8 Source: UMCE.

37. The country now invests more per unit of learning achieved, due mainly to the

high and growing share of spending on teacher salaries, which have increased sharply in

the last eight years. The available information on salaries and public sector employment,

even though limited, suggests that the growth in the real salaries of health care workers and

other public sector workers (who are not teachers) stabilized between 2002 and 2006.

However, it is estimated that the real salary rate of teachers increased by 18 percent during the

same period, reflecting their comparative power in terms of union organization and influence.

In constant 1990 Lempiras, the average teacher salary has increased from 912.1 to 1073.8

Lempiras in 2007. These salary increases were negotiated without any requirement to

improve performance, and as a result the gap between the payments to teachers and their

performance is considerable, and teachers and schools, in general, are not accountable for the

meager achievement of their students.

Graph 5. Budget execution of the Ministry of Education, 2001-2007

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

2001 2002 2003 2004 2005 2006 2007

Lem

pir

as M

illi

on

s

0

2000

4000

6000

8000

10000

12000

2001 2002 2003 2004 2005

Le

mp

ira

s M

illi

on

s

Capital

Other current

Salaries

Source: SEFIN.

38. The main contributing factor to the poor education outcomes is the strong

bargaining power of the teachers‟ unions that oppose any attempt to reform in the

sector. The teachers’ unions in Honduras have an unprecedented organizational and financial

capacity and have learned to negotiate with political actors exchanging political support for

salary gains. In this government as well as in previous ones, the Secretary of Education has

made important efforts in introducing reforms aimed at improving the quality of education


28

and linking public spending with outcomes (salaries with teacher performance), but these

reforms have failed because of the opposition of the teachers’ unions.

39. Other factors contribute to these poor results, but the insufficient accountability

of all of the actors and problems related to collective action are at their core. Besides the

importance of the teachers’ unions, the education sector is characterized by: (i) the lack of

information about inputs and outcomes, which makes it difficult to hold actors accountable

and to know who is responsible for poor performance; and (ii) disperse and poorly organized

beneficiaries who have little voice in the discussions about education policy.

40. Recommendations are provided to improve the quality of education focus on

strengthening the accountability of the different actors involved in the provision of

services. In line with the accountability framework (Figure 1) the recommendations have

been structured according to the areas of Voice, Compact, and Client Power – Accountability.

The State needs to be accountable to clients-citizens; organizations that provide the services

through the management pact need to be accountable to the State; the teachers need to be

accountable to the providers and education institutions and those responsible for the sector

need to be accountable to clients-citizens.

41. But the main recommendation in the short term is the need to empower other

actors who represent the general interest to participate in policy discussion, and to focus

such discussion on performance and quality of education.

i. To facilitate the participation of other actors in policy discussion, the most important

action in the short term is the establishment of a National Education Council that leads

and supervises the process of sector reform. While the creation of this council is

considered in the General Education Law proposal, it is not necessary to wait until the

Law is approved to create it. Moreover, the Government has the power to provide the

council with broad representation and its first mandate would be to obtain a national

consensus for the approval of the General Education Law4 .The participation of the

municipal governments, the private sector and the Poverty Reduction Strategy Council

is specially relevant as those are two strong actors that have also an interest in the

sector

ii. Similarly, other immediate priorities are to continue with the support for community

participation throughout the school networks, AECOs (Community Education

Associations), ADELs (Associations of Local Education Development) to enhance the

accountability of the education service providers; to strengthen the process of

institutionalization of PROHECO within the formal national, departmental, and

district structures; to continue supporting the social audit initiatives carried out by civil

society organizations; and to empower parents with simple tools and standards to

measure quality of education.

iii. To enhance performance accountability of service providers, the priority in the short-

term is the implementation of performance indicators at the departmental/district and

school level. These indicators could be monitored systematically through the SGPR

4Other actors that are not considered and could be key in the generation of a consensus of this nature, are the

Honduran Council of Private Enterprise (COHEP), the Advisory Council of the Poverty Reduction Strategy

(CCERP) and representatives of the principal political parties.


29

and displayed at the school as a social monitoring tool. Table 4.9 presents

recommended indicators. Parents, through the Parent Associations, should be involved

in producing and monitoring these key indicators.

iv. The other priority in this regard is the full implementation of the recommendations

arising from the Teacher Census and Post Audit conducted by the Tribunal Superior

de Cuentas. If no action is taken against those teachers that are receiving collaterals

unduly, this would have devastating consequences on government’s credibility. The

Ministry of Finance and Education need to jointly lead this process.

v. Full disclosure by the Secretary of Education of revenues collected by Teachers’

Unions is also needed.

vi. In addition would be critical as well to revise the economic clauses of the Teachers’

Statute that are most harmful to public spending. The full application of the Teachers’

Statute was agreed with the teachers starting in 2010. The fiscal implications of the

application of the Teachers’ Statute should be analyzed, with the purpose of advising

the future government if it should be applied fully or if a compromise proposal should

be offered. In this analysis the Teachers’ unions should be invited to participate. If by

2010 there remain differences in the vision of the problem and its possible solutions

with the Teachers’ unions, the convenience of convoking a national plebiscite should

be considered. The implementation of the evaluation of teacher performance

established in the Teachers’ Statute should also be considered.

TRANSPARENCY AND ACCOUNTABILITY IN THE HEALTH SECTOR

42. In the last two decades, Honduras has experienced notable progress in most

national health, nutrition and population indicators. Since the 1990s, the country has

succeeded in reducing neonatal, infant and child mortality, and to some degree, chronic

malnutrition. Nevertheless, in spite of the progress achieved, serious challenges remain in the

sector. Approximately 17 percent of the population still does not have access to any type of

health service. Significant gaps in access persist between rural and urban areas, as well as

between low- and high-income households. The quality of service in terms of the availability

of adequate staff, equipment and medicines remains an issue, with only a very small

percentage of health centres and hospitals being accredited. Inequality in the distribution of

financing is another problem, with a large share of health expenditures funded through out-of-

pocket payments.

Table 8. Health Outcomes and Outputs, 2001 and 2005/06 Indicator* 2001 2005/06

Life Expectancy at birth (years)** 70.7 72.1

Infant Mortality Rate (per 1000 live births) 34 (1996-2001) 23 (2001-2005)

Under 5 Mortality rate (per 1000 live births) 44 (1996-2001) 30 (2001-2005)

Total fertility rate 4.4 3.3

Prenatal care coverage 83 92

Percent of women who received their 1st prenatal visit before 4

th

month of pregnancy

56 69

Percent of institutional births 52 67

Percent of women who received post natal care 34 73

Underweight (low weight-for-age) 17 11


30

Sources: ENDESA 2006*, MOH Statistical Bulletin 2005**. Based on PER (2007: Table 14).

43. Health expenditures have increased in real terms since the late „90s, but remain

relatively low compared to the rest of the Latin American region. However, since there is

limited potential to increase funding, there needs to be greater focus on more efficient

allocation and use of existing resources, enhancing the performance accountability of policy-

makers and service-providers.

Table 9. Health Expenditures in Central America, 2005 Total health

expenditures

as a % of

GDP

Per capita

total health

expenditures

US$

Government

expenditure as

% of total health

expenditure

Private

expenditure as

% of total

health

expenditure

External

resources as

% of total

health

expenditure

Costa Rica 7 684 76 24 0.2

El Salvador 7 364 54 46 2.2

Guatemala 5 244 38 62 1.1

Honduras 7.5 226 51 49 6.8

Nicaragua 7.9 240 54 45 9.7

Panama 7.3 660 69 31 0.2

Average 7.0 403.0 57 43 3.4

Source: WHO Core Indicators 2008

44. The health sector is an interesting case in the Honduran context because in

general its performance with regard to advancing reforms has been relatively better

compared to other sectors analyzed in this report. This is partly due to: (i) a certain

continuity in some policies and strategies, particularly those related to involving local levels

in improving access to services; (ii) the process followed in undertaking some reforms in the

sector (for example, gradually establishing a consensus among stakeholders with regard to

regional reorganization, as well as emphasizing a bottom-up approach in the case of the

decentralized models of service delivery, and also holding a discussion with unions to gain

sufficient support to continue and to avoid large scale opposition); (iii) the relative power

structure in a sector where there are 30 unions, syndicates, and groups representing various

types of health workers, making it more difficult for them to unite in opposition to reforms

compared to teachers; and (iv) the sector has also benefited from having some committed

Ministers of Health who have championed reform initiatives despite strong pressures from

unions and other interest groups.

45. On the other hand, the challenges faced by the sector underscore the fact that it

still has significant institutional weaknesses that impede reforms and that, in turn,

impact its performance. These institutional weaknesses include: (i) a lack of clearly-defined

policies and strategies and well-articulated, budgeted operational plans to guide the

implementation of reforms; (ii) an institutional framework that does not have adequate

accountability mechanisms to motivate policy-makers and traditional service-providers to

meet sector objectives, (iii) poor human resource management, that is characterized by the

lack of incentives and sanctions to encourage good performance, and high rotation of key

personnel, including the Minister and the technical staff at the Planning and Management

Evaluation Unit (UPEG). The provisions of the Estatuto Médico also make it difficult to fire

underperforming health staff; (iv) duplication of interventions, lack of coordination, and some


31

confusion of roles and responsibilities among different sector institutions, agencies, and

administrative levels; (v) lack of access to timely information to guide management decision-

making, as well as to inform citizens about sector performance so they can hold service

providers and policymakers accountable; and (vi) little awareness of users rights and service

standards, and relatively few well-organized citizen associations, especially at the local level,

who promote users’ welfare.

46. Priority recommendations for the short-term emphasize the importance of (1)

strengthening the existing decision-making/consultative bodies and empowering other

stakeholders, especially civil society to effectively participate in these processes; (2)

enhancing and expanding the current Results-Based Management System; and (3) improving

continuity of key health staff appointments to minimize disruptions in the implementation of

sector reforms. These include:

Reviewing the experiences of key decision-making and consultative bodies especially the

Advisory Council for the Health Secretariat (CONCOSE), the IHSS Board of Directors,

and National Health Council (CONSALUD), improving their decision-making process by

providing incentives to increase the likelihood of their members reaching consensus for

the common good, while minimizing party/interest group politics. As part of this review

process, undertake a stakeholder survey to obtain recommendations on how to better

engage civil society representatives in the different forums for dialogue (for example, at

the sector table (mesa sectorial), CONSALUD, Consultative Council for the PRSP, etc.)

Developing and disseminating performance information along the service delivery chain,

improving and leveraging on the existing Results-Based Management System by (i)

expanding it to include the regional and local levels; (ii) standardizing indicators used

(e.g. age groups, number of visits, dosage of immunizations, etc.) across different

administration levels (central to local); (iii) establishing a mechanism for independent

verification of reported results; and (iv) making the results available through various

channels of information in addition to the internet.

Enhancing consumer awareness by developing service standards and simple indicators to

assess service quality and expanding the social audit initiative that was initiated in two

main hospitals in collaboration with the Tribunal Superior de Cuentas (TSC) to include

other health facilities and agencies. Establish a formal process in which audited facilities

have to formally respond to the social audit findings in public forums.

Improving the duration/stability of appointments of key personnel, including the Minister

and the technical staff at the Planning and Management Evaluation Unit (UPEG). Include

the health UPEG in the first phase of the Professionalization Program for the Public

Servant.

Improving accountability and transparency in the procurement of pharmaceuticals. The

MOH should (i) resolve concerns raised in June 2008 regarding the Inter-institutional

Commission on Medicine’s (CIM) role in awarding direct contracts to 13 ineligible firms.

The findings of the investigation should be made public and appropriate actions taken; (ii)

review CIM’s role in technical evaluations – if allowed to continue – based on the profile

of its members, and (iii) systematically disclose the complete results of bidding processes

for the procurement of medicines and ensure that the results are audited.


32

47. In the medium term, other recommendations to address the above issues are as

follows:

Reaching a consensus on a strategic vision for health reform based on a budgeted

operational plan. The MOH needs to confirm based on the work being done by the review

committee assigned by the new Minister of Health to what extent the draft health sector

reform framework, presented by the National Health Council (CONSALUD) in a public

forum in September 2008, will continue to be the basis for health sector reform.

Clarifying and possibly redefining roles and responsibilities of sector institutions and

administrative levels. This also needs to be based on a review of the regulatory issues that

affect the sector financing, service provision, and insurance functions performed by each

sector entity, as they relate to the proposed health reform framework. In this review

process, for example, (i) the MOH and IHSS should agree on which activities they should

undertake jointly (e.g. the procurement of medicines) and which ones they should

undertake separately; and (ii) the MOH should also clarify how the stewardship function

will be implemented across the different administrative levels. The central and regional

levels should perform their official roles and functions. Efforts must be made to ensure

that each level is provided sufficient resources and training to do so, particularly in the

case of the new regional health administrations.

Reviewing and updating the sector’s human resource strategy (e.g. hiring and retaining

qualified administrative and technical staff, staff deployment, and managing health staff,

including performance evaluations, incentives, and application of sanctions). This also

includes identifying provisions of the Estatuto Médico that should be changed.

Consultations should be held with unions and syndicates to achieve a consensus on

proposed changes and to minimize strikes.

Improving the management and distribution of pharmaceuticals in the sector. Develop

and implement specific guidelines on storage, distribution, transportation, formulation of

therapeutics guides, inventory control, and quality control.

ACCOUNTABILITY FRAMEWORK FOR MUNICIPAL GOVERNMENTS

48. Since the passing of the Municipal Law in 1990, the Government of Honduras

has taken a series of steps to promote and strengthen the decentralization process.

Municipal management has been bolstered recently with the adoption of a state procurement

law, the reorganization of budget management, the regulation of the reporting and

accountability of municipal funds, the creation of the Superior Tribunal of Accounts (TSC)

and the establishment of a model for the supervision and control of public management,

including municipal management.


33

Table 10. Municipal Budget vs. Central Government Budget

Year

Overall Budget of Municipal

Governments*

(Approved, MLp.)

Central Government Budget

(Approved, MLp.)

Municipal Budgets

vs. Government

(%)

2004 4,738 34,520 13.7%

2005 5,517 39,288 14.0%

2006 6,291 42,996 14.6%

2007 N/A 49,383 N/A

Sources: National Budget SEFIN, Municipal Budget SGJ-SINIMUN

* Includes municipal taxes and transfers from the Central Government

49. However, the further advancement of the decentralization process depends on

strengthening the institutional capacity of municipal governments to ensure they can

fulfill their new responsibilities and manage the resources transferred in an efficient and

transparent manner. In this respect, important deficiencies in the laws and/or their

application remain. For example, the 1990 Law of Municipalities has lagged behind with

respect to various aspects of current management, including the definition of “municipal

autonomy,” the conditions for the creation and operation of municipal associations, and the

incorporation of different modalities of citizen participation.

50. Building institutional capacity within the municipal governments to manage

funds and increase their accountability is not only key to the effectiveness of poverty

reduction programs at the local level, but also to raising citizen‟s support for the

decentralization process. The survey conducted by the Latin American Public Opinion

Project (LAPOP)5 shows that support for decentralization is limited in Honduras, which may

be interpreted as an indication of the low level of confidence that the population has, that the

additional transfer of resources will truly translate into better services. As Box 2 shows,

enhanced transparency and accountability in municipal management has a direct impact on

citizens’ trust in the sound use of public funds, and their willingness to channel additional

resources to the local government.

Box 2. Transparency, trust in government, and willingness to pay taxes.

According to the survey carried out by LAPOP, Honduran public perception of municipal

management is characterized by low confidence in the management of funds (60 percent of

respondents say that they have no or little confidence in the good management of funds on the

part of the municipal government) and little disposition to pay local taxes (79 percent believe

that it is not worth paying taxes to the municipality). The survey also shows that few citizens

receive information about how municipal resources are invested. Seventy-six percent say that

the municipal government does not provide this type of information and that citizens that receive

information about the allocation of public resources tend to have more confidence in the

management of funds by the municipality.

To investigate how these two variables – trust and transparency – affect the disposition to pay

taxes to the municipality, a Logit regression analysis was done. Variables for controlling the

level of satisfaction with municipal services, as well as for various socioeconomic characteristics

(not shown) were also included. As can be seen in the table below, information about the use of

5 The 2006 LAPOP Survey on Honduras was performed by Vanderbilt University. The survey is statistically

representative at the national level; the sample consists of 1,585 households.


34

resources increases the probability of being disposed to paying more taxes by nine percent.

Citizens that responded that they have a lot of confidence in the management of funds are 57

percent more likely to be disposed to paying taxes compared with those that have no confidence.

Little or some confidence increases the probability by 14 percent.

Results of the Logit Regression – Disposition to pay more taxes

The municipality informs about how it invests its

resources

0.09

(2.90)

Little or some confidence in the management of funds 0.15

(5.28)

A lot of confidence in the management of funds 0.57

(8.13)

Observations 1223

Pseudo R2 0.17

Note: t-statistics in parenthesis. Coefficients of control variables and the constant not shown.

These results show that good management of municipal funds, that inspires the confidence of

citizens, is key for convincing tax payers of the value of paying more taxes for investment in the

municipality. It also shows that greater transparency in the management of resources contributes

to generating this confidence.

Source: Hessel and Moller (2008) with data from Honduras 2006, Latin American Public Opinion Project

(LAPOP), Univeristy of Vanderbilt.

51. An important conclusion of this study is that the distribution of funds in the

municipal sector is not evenly dispersed, and a large proportion of municipal

expenditure is concentrated in only a small number of municipalities. More than 50

percent of the funds that are executed at the municipal level is concentrated in five

municipalities, and 18 percent of municipalities receive 80 percent of the executed funds.

Even though this study does not specifically focus on this aspect of municipalities, any

municipal financial management modernization or improvement program must take this

factor into account, in order to benefit overall public financial management at the municipal

level by considering larger municipalities as the primary objective.

Graph 6. Budget distribution in the municipal sector

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 31 61 91 121 151 181 211 241 271

Perc

enta

ge of

Tot

al B

udge

t

Number of MunicipalitiesSource SGJ - Municipal Budget2006

Budget Distribution in the Sector

52. The level of international assistance that is executed at the municipal level is

significant, both in terms of the number of initiatives and the amount of funding, which

are not always adequately reflected in the municipalities’ budget execution reports. This is


35

particularly true in the case of aid channeled through mancomunidades. International

cooperation agencies may establish and agree on simple and effective rules in order to create

incentives to promote compliance with control framework and strengthen social

accountability at the municipal level.

Graph 7. Submission of Municipal Accounts to the Tribunal Superior de Cuentas

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2000

2001

2002

2003

2004

2005

2006

% of Municipalities (Source: TSC)

Submission of Municipal Account to TSC

Submitted to TSC Not submitted to TSC

53. The current control framework does not effectively exercise control on financial

management in the municipalities. A large percentage of municipal governments do not

submit their financial statements to the TSC nor do they present complete budget information

to the SGJ. Since budget execution reports are not reviewed or verified in detail against other

sources of information, they are not necessarily complete or accurate. The current control

system does not include incentives for those municipalities that comply with the norms,

differentiating them from those that do not, nor does it reward municipalities that consistently

apply accountability mechanisms. In general, the most important factor in the quality of

municipal financial management appears to be the attitude of authorities, especially the

attitude and management capacity of the Mayor. This also appears to be the key factor in

accounting for the efficacy of citizen participation instruments for the supervision of

municipal operations.

54. The three key recommendations for the short-term are to provide incentives for

the municipalities to comply with the legal framework and to strengthen nascent social

accountability initiatives at the local level:

i. To reward municipalities that comply with reporting requirements, develop

indicators on compliance with institutional and social control mechanisms at the municipal

level together with other indicators about the quality of financial management, and publish

them.

ii. To promote effective enforcement of the control framework at the local level,

international cooperation agencies may agree on simple and effective rules to create

incentives to ensure that the current accountability framework is enforced. For instance,

requiring that their assistance they provide to the municipalities is appropriately incorporated

in the municipal budget execution reports and the annual report presented to the TSC and

Transparency Councils, and is conditioned to the timely submission of those reports.

iii. To strengthen control systems at the local level, promote the participation of

community organizations in the audit process of the Tribunal Superior de Cuentas at the local

level. As seen from the audit pilots, the collaboration between the TSC and the social


36

monitoring mechanisms at the social level can strengthen the control framework for municipal

financial management in the short term.

55. In addition, it is recommended that the Municipal Law be updated so that it

coordinates with the Law on Citizen Participation, thereby providing further

clarification of the concepts concerned, and facilitating the enforcement of both laws. Donors should be more proactive in strengthening the control framework and promoting

social accountability at the municipal level by securing the adequate registry of municipal

budget execution reports, and requesting that annual financial reports be submitted to the

TSC, and that budgetary information be provided to the Transparency Councils. It would be

beneficial to train the Citizen Transparency Councils in social auditing procedures, to enhance

their capacity to oversee public finances. Internal control functions should be strengthened

either by linking these to the Transparency Councils or by separating out the internal auditors

from core-line activities. There is also a need to identify and quantify the funds that are not

administered by the municipalities, but that generate contributions in financial resources,

goods and services for the community.

CORPORATE GOVERNANCE OF HONDURAN PUBLIC ENTERPRISES

56. Honduras has a relatively large state-owned enterprise sector. This includes some

of the most important entities in the country‟s economy that are facing serious

operational and financial difficulties, which in turn has negative consequences for the

economy and the tax payer. Public enterprises predominate in sectors such as water,

electricity, ports and telecommunications, that have strategic importance for the

socioeconomic development of the country. Yet the three largest public enterprises ENEE,

SANAA, and HONDUTEL have recently experienced serious operational and financial

difficulties. ENEE’s financial losses currently amount to two percent of GDP, while

HONDUTEL’s income went from covering 15.3 percent of public spending in 2005 to 7.4

percent in 2007. This situation is posing a financial burden on Honduran taxpayers,

undermining the provision of efficient services for citizens and local enterprises, and having a

potential impact on macroeconomic stability and the country’s capacity to attract foreign

investment.

Graph 8. ENEE Financial situation and losses, 2004-2007, MLps.

(3,500)

(3,000)

(2,500)

(2,000)

(1,500)

(1,000)

(500)

0 0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2004 2005 2006 2007

Debt Net equity Annual loss

Sources: Audited financial statements (2004-06) and ENEE Website (2007).


37

57. In order for public enterprises to continue playing a key role in these strategic

sectors and improve their performance, it is crucial to improve corporate governance

and quality of management. Managing public enterprises faces a series of challenges that

are inherent to the very nature of this type of enterprise. Public enterprises frequently have

multiple objectives that are sometimes contradictory. The State is the owner, provider of

goods and services, and regulator all at once, which creates conflicts of interest and

opportunities to discriminate against private sector enterprises. Accountability is hampered as

the principals (citizens, or the Government on their behalf) are dispersed and poorly

organized, while agents are large in number (for example, managers, Boards of Directors,

politicians, and regulatory bodies) with objectives that are frequently different. In addition,

when State-owned enterprises enjoy a monopoly in the market, potential monopoly rents

create incentives for using enterprises to generate visible rents for the State, jobs, and

subsidies, rather than to provide efficient services to citizens and companies. These

characteristics do not imply that public enterprises inherently function poorly, but rather that

they pose particular challenges that need to be tackled with practical solutions, many of which

lie in designing a set of appropriate corporate governance arrangements.

58. Corporate governance involves the array of relationships between company

management, its board of directors, its owners (mainly the State, on behalf of its citizens,

in the case of public enterprises) and other stakeholders such as customers, employees,

business partners, etc. A good corporate governance framework results in a system of checks

and balances in the rights and responsibilities of these groups, and provides the structure

though which a company’s objectives are set. A sound corporate governance framework for

state-owned enterprises is based on four pillars: (i) an adequate legal framework; (ii) efficient

government bodies; (iii) a robust, high quality financial management system, based on sound

accounting principles and reliable internal controls; and (iv) a rigorous accountability

framework.

59. The institutional framework of public enterprises suffers from serious

weaknesses that are affecting their performance. Most of these weaknesses arise from: i)

failure to observe the fundamental principle of separating policy-making functions, from

those related to regulation and provision of services, which undermines the effectiveness of

the counterbalance system; and ii) the lack of transparency and available information about

the management and performance of these companies, thereby undermining accountability. In

addition, the legal framework applicable to state-owned enterprises is highly fragmented,

which has a negative impact on its enforcement.

60. The absence of influence from consumer and citizen stakeholders – i.e. those with

a direct interest in improving the management of the enterprises – is also a contributing

factor which weakens the accountability framework further. Even though this study has

not addressed the relationship between enterprises and these two stakeholders (consumers and

citizens), both are key to the accountability framework as illustrated by Figure 1 in relation to

the electricity sector, and therefore attention should be paid to this issue in the medium term.

61. Two areas are highlighted as key for improving the corporate governance

framework of public enterprises in the short-term: i) the need to strengthen the division of

policy, regulatory and service provision functions as envisioned in the legal framework; and


38

Representatives

Organizations

ii) the need to enhance accountability and transparency of these enterprises and focus the

policy discussion on performance. Below are some recommendations for the short term in

these two areas.

Figure 2. Diagram of responsibility and accountability relationships in the electricity sector

62. The roles of policy-making, regulation and service-provision overlap in many

Honduran public owned enterprises, with detrimental effects on their performance.

Most public enterprises operate in key socioeconomic sectors where the State plays a natural

role as policy-maker and regulator – ensuring public goods and services are properly

delivered and accessible to all, protecting citizens and consumers, while providing a level

playing field for competition whenever possible, and providing incentives for the company to

be as efficient as possible. To perform these two functions properly and to exert the necessary

checks and balances, it is important that they are conducted independently from the provision

of services. In that regard, a priority for the short term in this regard should be to strengthen

the policy and planning function, designating the institution within the executive branch

responsible for the formulation of policies and sectoral plans in each sector, and ensuring it

has the necessary technical capacity to undertake its obligations.

63. The State‟s role and responsibilities as owner of these public enterprises, which

needs to be clearly separated from policymaking and regulatory functions, should be

both clarified and reinforced. The “ownership” function naturally lies with the Executive

(i.e., Government), which is responsible for ensuring that public sector entities – including

public enterprises – are properly and efficiently managed. This in turn requires that

appropriate objectives, organizational structures, operational policies are put in place for each

of these enterprises, in compliance with relevant laws. Recommended actions to strengthen

the ownership function with respect to public enterprises include:

(a) Establishing a specialized oversight entity to fulfill the ownership function. An option

would be to strengthen the existing units either within SEFIN (Dirección General de

Instituciones Descentralizadas, DGID), or within the Presidency (Comisión

Honduran State

CNE SEFIN, SERNA, SOPTRAVI

Users

More advantaged sectors

Less advantaged

sectors

Coalitions/Communities Administration

Services

Voice Long Route of

Responsibilities

Short Route of

Responsibilities

Responsibility

ENEE

Client Power


39

Presidencial de Modernización del Estado, CPME), or to establish an independent

commission that would report to the Executive and to Congress.

(b) Strengthening the role of the Board and improving the quality of Board deliberations.

The above-mentioned commission would be in charge of appointing Board Members

according to pre-established technical requirements, to ensure that they have the

necessary technical capabilities, independence and time to perform their board duties;

and

(c) Enforcing the provisions in the organic laws of ENEE and HONDUTEL that require

the General Manager to be appointed by the Board of Directors, in order to improving

the accountability of the General Manager to the Board and reducing political

interference in the management of the companies.

64. In addition, Government has the responsibility of setting up performance targets

for these companies, monitoring progress over time and holding the Board and the

General Manager accountable for their performance. Honduras has made progress in this

regard with the implementation of the SGPR and the Transparency Law. These instruments

could be used to enhance the transparency and accountability of public enterprises to the

Government and the public at large, by setting up performance targets to be monitored

periodically through the SGPR, and ensuring these companies publish their audited financial

statements, external audit reports and performance information as required by the

Transparency Law. The introduction of modern financial management and accounting

systems is critical to ensure that timely and reliable information for decision-making and

accountability is available.

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