World Bank Document€¦ · 12.1 Telecommunications Operators Supervised by CONATEL, 1996 and 2000 119 12.2 Private Investment in Public Telecommunications Services, 2000 122 12.3

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Private Solutions for Infrastructure in

Honduras

Private Solutions for Infrastructure in

Honduras

A Country Framework Report

The Public–Private Infrastructure Advisory Facility and the World Bank Group

The findings, interpretations, and conclusions expressed herein are those ofthe author(s) and do not necessarily reflect the views of the Board of Execu-tive Directors of the World Bank or the governments they represent.

The World Bank does not guarantee the accuracy of the data included inthis work. The boundaries, colors, denominations, and other informationshown on any map in this work do not imply any judgment on the part ofthe World Bank concerning the legal status of any territory or the endorse-ment or acceptance of such boundaries.

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Library of Congress Cataloging-in-Publication Data

Private solutions for infrastructure in Honduras / Public–Private InfrastructureAdvisory Facility.

p. cm.Includes bibliographical references.ISBN 0-8213-5366-7

1. Infrastructure (Economics)—Honduras. 2. Public-private sectorcooperation—Honduras. I. Public–Private Infrastructure Advisory Facility.

HC145.Z9C36 2003338.97283’05—dc21 2002044903

Copyright © 2003The International Bank for Reconstruction

and Development/THE WORLD BANK

1818 H Street, NWWashington, DC 20433

Telephone 202-473-1000Internet www.worldbank.org

E-mail [email protected]

All rights reserved.

First printing July 2003

1 2 3 4 05 04 03

v

Introduction xiAcknowledgments xiiiAcronyms and Abbreviations xvOverview of Infrastructure in Honduras 1

Part 1. A Cross-Sector Vision of Infrastructureand Development

1. Country Background and the EconomicImportance of Infrastructure 19The Economic Modernization Program 19Growth and Poverty: Recent Trends 20Infrastructure and Poverty Reduction 21Infrastructure, Growth, and Competitiveness 24Infrastructure and the Investment Climate 25

2. The Organization of Infrastructure Servicesand the Role of Private Participation 28The Traditionally Predominant Role of the Public Sector 28Modernization Efforts and the Growing Role of the

Private Sector 28The Lack of Political Support for the Process of

Modernization and Privatization 30

3. Infrastructure Performance: An Overview 31Indicators of Service Access and Coverage 31Indicators of Quality and Efficiency 32Sustainability Indicators 33

4. The Impact of Hurricane Mitch and theProgress of Reconstruction 35Damage Incurred 35Lessons Learned from Hurricane Mitch 36

Contents

5. Consumer Opinions 39Opinions about Access 39Opinions about Quality 40Opinions about Subsidies 42Opinions about Consumer Rights 43Opinions about Privatization 43

6. Legal, Institutional, and Regulatory Framework forInfrastructure Development 45Transportation 45Electricity 46Telecommunications 47Water and Sanitation 47General Laws and Regulations Relevant to the Infrastructure Sector 48The Lack of Satisfactory Definition of the Sector Policy Function 48The Multiplicity of Regulatory Entities 49Conclusion 51

7. Infrastructure Financing 53Private Financing 53Public Expenditure and Investment in Infrastructure 54

8. Conclusions 60

Part 2. Sector Summaries9. Transportation 65

Summary 65Main Sector Institutions 66Sector Performance and Key Themes for Modernization 68Opportunities and Priorities for Private Investment in the

Transport Sector 81

10. Water and Sanitation 83Summary 83Principal Institutions of the Sector 84Sector Performance and Key Themes for Modernization 86Opportunities and Priorities for Private Investment in the Water

and Sanitation Sector 95

11. Electricity 97Summary 97The Sector’s Principal Institutions 99Sector Performance and Key Themes for Modernization 100Opportunities and Priorities for Private Investment in the

Electricity Sector 112

12. Telecommunications 116Summary 116Principal Institutions of the Sector 118Sector Performance and Key Themes for Modernization 121Opportunities and Priorities for Private Investment in the

Telecommunications Sector 129

References 131

Contents

vi

Appendixes (Maps)1. Political Divisions and Main Population Centers 1352. Road Networks, Ports, and Airports 1373. Access to Potable Water 1384. Production and Usage of Electricity 1395. Distribution and Density of Fixed Line Telephone Coverage 140

Boxes5.1 Situation of the Poorest 405.2 Telephone Access 405.3 Quality of the Water Service 415.4 Public Transportation Quality 415.5 Subsidies 425.6 Consumer Rights 425.7 What Do Hondurans Think about Privatization of Infrastructure

Services? 43

9.1 The Dry Canal 679.2 The Vicious Circle of the Decline in Public Transportation

and Increased Urban Congestion 75

10.1 The Benefits of Expanding Access to Drinking Water 8810.2 Regulation,“Municipalization,” and Autonomy 9310.3 The San Pedro Sula Water Concession 9410.4 Economizing Public Investment in Water Systems:

The Colombian Experience 95

11.1 The Contractual Calvary of the PPA Bidding Process 10711.2 The AES Project in Puerto Cortés: Opportunity or Threat? 114

12.1 The Failure of the HONDUTEL Auction 11912.2 The “Capture” of HONDUTEL 120

Figures1.1 Gross Capital Investment and Changes in Inventory, 1987–98 201.2 Trends of Poverty and Income, 1991–99 211.3 Lack of Basic Infrastructure Services, by Decile of Income, 1999 221.4 Increasing Coverage, by Decile of Income, 1990–99 231.5 Percentage of Households with Telephones in the Home,

by Decile of Income, 1998 24

10.1 Real Price of Water, SANAA 92

11.1 Correlation between Electricity Coverage and Per Capita Incomeat Department Level 102

11.2 Indicators of ENEE’s Labor Productivity 104

TablesO.1 Priorities for Public Investment and Subsidies 11O.2 Recommended Priorities for Private Investment in Infrastructure 12

1.1 Average Annual Growth Rates in Percentages 211.2 Access by Households to Infrastructure Services, 1990 and 1991 221.3 Percentage of Households with a Telephone, 1998 231.4 Principal Means of Personal Transport by Household

Income Decile, 1998 24

Contents

vii

1.5 General Index of Competitiveness, 1999 251.6 Foreign Direct Investment in Central America and Chile, 1992–98 252.1 Principal Agencies Involved in Infrastructure Services in Honduras 29

3.1 Performance of Honduran Infrastructure Compared withLatin America 31

4.1 Infrastructure Damage in Honduras from Hurricane Mitch 354.2 Infrastructure Programs in the PMRTN 364.3 Progress in the Reconstruction of the Road Sector,

to December 2000 36

6.1 The Labyrinth of Infrastructure Sector Regulation 50

7.1 Private Investment in Honduran Infrastructure Supportedby Public International Financial Agencies, 1990–2000 54

7.2 Infrastructure Investment in Honduras by CABEI, 1990–2001 547.3 Public Spending on Infrastructure, 1990–99 557.4 Public Investment in Infrastructure, 1990–99 557.5 Financial Resources for Infrastructure, 1990–99 567.6 Trends in Personnel Employment in Autonomous Enterprises 577.7 Current Spending by Public Corporations 58

9.1 Functional Classification of the Official Road Network 689.2 Condition of the Official Network, October 1999 699.3 Trends in the Condition of Primary and Secondary Paved Roads,

1992–99 699.4 Public Spending on Road Investment and Maintenance 709.5 Comparative Costs of Road Maintenance 719.6 Road System Costs and Fuel Consumption Tax Revenues

by Vehicle Type, 2000 729.7 Distribution of Traffic Volume on the Official Road Network 739.8 Traffic by Vehicle Type 749.9 Annual Traffic in the Principal Ports, 1992–99 779.10 Performance Indicators for Puerto Cortés, 1999 779.11 Growth in Traffic of Passengers and Freight in the

International Airports 80

10.1 Water and Sanitation Coverage in Central America 8710.2 Water and Sanitation Coverage by Percentage of Households,

March 1999 8710.3 Trends in Urban and Rural Access to Water and Sanitation 8810.4 Operating and Financial Indicators of Water Service Operators 9010.5 SANAA Tariffs Compared with Inflation, 1990–2001 9210.6 Indicators of Financial Performance for Nonmetropolitan Water

Systems, 1997 92

11.1 Formal Electricity Coverage, 1989–2001 10011.2 Formal Coverage of Electricity in Central America

and Panama, 1999 10111.3 Access to Electricity by Income Quintile, 1999 10111.4 Supply and Demand in the Electricity Sector, 1980–99 102

Contents

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Contents

ix

11.5 Projection of Supply and Demand, 2000 10311.6 Capacity, Generation, and Plant Factor, 1999 10311.7 Trends in ENEE Labor Productivity 10411.8 Comparative Indicators of Operating and Financial Efficiency

in Electricity in Central America, 1999 10511.9 ENEE Costs, March 2000 10511.10 Energy Costs under PPAs, June 2001 10611.11 Structure of the Domestic Rate A, 2001 10711.12 Structure of Residential Consumption, June 2000 10811.13 Distribution of the Electricity Subsidy per Consumption, 2000 10811.14 Investment in Social Electrification, 1997–2000 10911.15 Estimated Cost of Providing 100 Percent Electrical Coverage 10911.16 Projection of the Energy Balance, 2000–10 11311.17 Energy Sector Investment Needs, 2000–04 114

12.1 Telecommunications Operators Supervised by CONATEL,1996 and 2000 119

12.2 Private Investment in Public Telecommunications Services, 2000 12212.3 Trends in Telephone Density in Central America, 1980–99 12212.4 Indicators of Access to Telecommunications in Honduras,

1995–99 12312.5 Percentage of Households with a Telephone in the Home, 1998 12312.6 Indicators of Metropolitan Concentration of Telephone Access,

1998 12312.7 Indicators of HONDUTEL Efficiency 12412.8 Tariff Rebalancing Program of 1999–2005 and Its Effect on the

Consumer 12512.9 Analysis of HONDUTEL Billing 12612.10 Cellular Tariffs in Central America, 2000 12712.11 Use of Personal Computers and Internet Access, 1998 128

xi

This document is designed to promote the develop-ment of infrastructure services in Honduras, with theaim of improving the country’s competitiveness andcontributing to poverty reduction. Its central argumentis that Honduras needs a significant increase in privateinvestment in infrastructure services, which shouldtake place in a more competitive environment and besubject to an adequate legal and regulatory framework.

The study details the progress to date in Honduraninfrastructure sectors, identifying the principal prob-lems that exist and outlining a strategy for their solu-tion. It proposes a general set of principles that shouldguide the provision of infrastructure services. In addi-tion, it recommends specific policies for each sector.The document’s scope includes the following ser-vices: transportation, water and sanitation, electricity,and telecommunications. The study was financed bythe Public–Private Infrastructure Advisory Facility(PPIAF), an organization dedicated to identifying pos-sibilities and priorities for private investment in thesesectors.

The report has two major parts. Part 1 presents anoverview of general themes related to the developmentof infrastructure services and to private participation inall the subsectors, covering the following points:• The country background and the economic importance of

the infrastructure. This section reports on recenttrends in economic growth and poverty reduction.It analyzes the relationship between infrastructureand poverty (the themes of access and paymentcapacity for the poor and rural communities), aswell as the relationship between infrastructure and

growth (the effects of quality, reliability, and cost ofthese services on the country’s competitiveness andinvestment climate).

• The organization of infrastructure services and the progressof private participation. This section provides a sum-mary of the principal actors in the infrastructuresectors and describes the most important aspects ofprivate sector involvement in recent years. It alsocomments on the limitations of that involvement.

• Infrastructure performance: access, quality, and cost. Thissection describes achievements to date regardingaccess, quality, and cost compared with interna-tional standards (benchmarking).

• The effect of Hurricane Mitch on infrastructure.This sec-tion describes the damage done and the reconstruc-tion process to date and outlines the lessons learned.

• Consumer opinions about infrastructure services. Thissection presents the findings of a focus group studyaimed at identifying the public’s attitudes regardinginfrastructure services and the strategies to mod-ernize them.

• The legal and regulatory framework. This section de-scribes the laws and regulatory systems applying topublic and private providers in the infrastructure sec-tors and discusses their limitations and weaknesses.

• Financing of the infrastructure sectors.This section ana-lyzes the limited current role of private financingsources and describes the pattern of public expen-ditures in the infrastructure sectors during the pastdecade. It presents budgetary details and discussesthe wisdom of the transfer mechanisms and subsi-dies currently in place.

Introduction

• Conclusions. This section summarizes the principalconclusions of the section.Part 2 presents an analysis of the current situation of

the four infrastructure services covered in this study.Each section is organized in the same way:• Summary• Principal institutions in the sector• The sector’s performance, government policy, and

key themes for modernization • Opportunities and priorities for private investment.

The report includes many tables that support the report’s findings. Figures in these tables have beenrounded.

One of the major recommendations of this report isthe need to establish participative and transparent plan-ning and policy development processes so that policiesare given legitimacy.This type of planning and devel-opment requires that current and potential consumersbe placed at the center of the process.

The report also calls for strengthened regulationand a rethinking of how to execute regulation, suggest-ing the creation of a sole regulatory entity. It suggeststhat increased access is the key to reducing poverty andthat any subsidies should be oriented toward this end.It discusses the potential role of private agents inachieving the improvements in quality and service thatare needed to promote competitiveness. It emphasizesthe need to recoup the costs of services so that they aresustainable.

In this context, the report proposes a general frame-work to define the respective future roles of public andprivate agencies, as well as public and private financing,in Honduras’s infrastructure sectors and suggests prior-ities for using public funds in the future developmentof the services. Finally, specific policy recommenda-tions for each sector are studied and summarized in thesectoral sections in part 2 of the report.

Introduction

xii

xiii

This Country Framework Report (CFR) for Hon-duras is one of a series of country reviews aimed atimproving the environment for private sector involve-ment in infrastructure. Prepared at the request of thegovernment concerned, Country Framework Reportshave three main objectives:• To describe and assess the current status and per-

formance of key infrastructure sectors• To describe and assess the policy, regulatory, and in-

stitutional environment for involving the privatesector in those sectors

• To assist policymakers in framing future reform and development strategies, and to assist potentialprivate sector investors in assessing investmentopportunities.This report is being published jointly by the Public–

Private Infrastructure Advisory Facility (PPIAF) andthe World Bank. PPIAF is a multidonor technical assis-tance facility aimed at helping developing countriesimprove the quality of their infrastructure through pri-vate sector involvement. For more information aboutthe facility, see its Web site, <http://www.ppiaf.org>.

The design and preparation of this report was ledby John Henry Stein and Jyoti Shukla of the WorldBank.The supervisory team within the World Bank in-cluded José L. Guasch, Clemencia Torres, GuillermoRuan, Eloy Eduardo Vidal, and Manuel Sevilla. Themain counterpart on the part of the Government ofHonduras was the Ministry of Finance. PPIAF and theWorld Bank wish to acknowledge the strong and sus-tained support and commitment of the Government ofHonduras during the preparation of this report. Prepa-

rations began in July 2000, and the report’s main con-clusions were discussed at a high-level workshop inFebruary 2002.

The report was prepared by the consulting firm ofESA Consultores Internacional under the leadership ofIan Walker. The sector teams included Luis MoncadaGross and Max Velasquez (water and sanitation); IanWalker and Mauricio Mossi (electricity); Mindel de laTorre and Luis Rivera Moran (telecommunications);and Bill Thornhill, Bengt Bostrom, and Roberto Or-doñez (transportation). An ESA Consultores team, ledby Rafael del Cid, carried out the focus group work.

The study team benefited enormously from the co-operation and insights of a large number of people inHonduras, including members of the government,private citizens, and staff members of bilateral andmultilateral donors, who gave up their time to attendworkshops, seminars, and focus groups and patientlyreviewed earlier drafts of this document. It would havebeen impossible to produce this study without theirhelp. Interim analysis and drafts of this report were dis-cussed in numerous sectoral roundtables, as well as atthree high-level multisectoral workshops in July 2000,July 2001, and February 2002.The contents and rec-ommendations of the report are the exclusive respon-sibility of the study team and do not represent theofficial position of either the Government of Hondurasor the World Bank.

This report is an English translation of the originalreport, which was prepared in Spanish. Any errors orinconsistencies that may have emerged in the transla-tion are regretted.

Acknowledgments

xv

Acronyms and Abbreviations

AMHON Association of Municipalities ofHonduras (Asociación deMunicipios de Honduras)

BCH Central Bank of Honduras (Banco Central de Honduras)

BOT build, operate, and transferCABEI Central American Bank for

Economic IntegrationCAPRE Regional Coordinating Committee

of Potable Water and SanitationInstitutions of Central America,Panama, and the DominicanRepublic (Comité CoordinadorRegional de Instituciones de Agua Potable y Saneamiento de Centroamérica, Panamá y República Dominicana)

CARIFA Caribbean Basin Projects FinancingAuthority

CDMA code division multiple accessCEL electrical energy service in El

Salvador (Comisión EjecutivaHidroeléctrica del Río Lempa)

CELTEL cellular phone service (TelefónicaCelular)

CEPAL Latin American EconomicCommission (Comisión Económicapara América Latina)

CIEL Legislative Information and StudiesCenter (Centro de Informática y Estudios Legislativos)

CNBS National Commission for Bankingand Insurance (Comisión Nacionalde Bancos y Seguros)

CNE National Energy Commission(Comisión Nacional de Energía)

CNEE National Commission onElectricity (Comisión Nacional de Energía Eléctrica)

CNSSP National Supervisory Commissionfor Public Services (ComisiónNacional Supervisora de los ServiciosPúblicos)

COHDEFOR Honduran Forestry DevelopmentCorporation (CorporaciónHondureña de DesarrolloForestal)

COHONDETEL Honduran TelecommunicationsCorporation (CorporaciónHondureña de Telecomunicaciones)

CONATEL National Commission forTelecommunications (ComisiónNacional de Telecomunicaciones)

DGAC General Directorate of CivilAeronautics (Dirección General de Aeronáutica Civil)

DGT General Directorate ofTransportation (DirecciónGeneral de Transporte)

ELCOSA thermal plant in Puerto Cortés(Electricidad de Cortes, S.A.)

xvi

EMCE Maintenance, Construction, andElectricity Company (Empresa de Mantenimiento, Construcción yElectricidad, S.A.)

ENEE National Electricity Enterprise(Empresa Nacional de EnergíaEléctrica)

ENIGH National Survey on HouseholdIncome and Expenditures(Encuesta Nacional de Ingresos yGastos de los Hogares)

ENP National Port Enterprise (EmpresaNacional Portuaria)

EPHPM Household Survey for MultiplePurposes (Encuesta Permanente de Hogares de Propósitos Múltiples)

ERP Poverty Reduction Strategy(Estrategia de Reducción de Pobreza)

FDI foreign direct investmentFHIS Honduran Fund for Social

Investment (Fondo Hondureño de Inversión Social)

FIAS Foreign Investment AdvisoryService

GDP gross domestic productGWh gigawatt-hourHDM Highway Design and Maintenance

ModelHIPC heavily indebted poor countryHONDUCOR Honduras Mail (Correos de

Honduras)HONDUTEL national telecommunications

monopoly (Empresa Hondureña deTelecomunicaciones)

ICE electricity and telecommunicationsservice in Costa Rica (InstitutoCostarricense de Electricidad)

IDB Inter-American Development BankIFC International Finance CorporationIHCAFE Honduran Coffee Institute (Instituto

Hondureño del Café)IHSS Honduran Institute of Social

Security (Instituto Hondureño deSeguridad Social)

IIC Inter-American InvestmentCorporation

IMF International Monetary FundINCAE-HIID Harvard Institute for International

Development (InstitutoCentroamericano de Administraciónde Empresas)

INDE Guatemala’s electricity service(Instituto Nacional de Electrificación)

INHFA Honduran Institute of Childhoodand the Family (InstitutoHondureño de la Niñez y laFamilia)

INJUPEM National Institute for Retirementand Pensions of PublicEmployees (Instituto Nacional de Jubilaciones y Pensiones de losEmpleados Públicos)

ISP Internet service providerITU International Telecommunication

UnionJICA Japan International Cooperation

Agencykm kilometerkWh kilowatt-hourLIBOR London interbank offered rateLUFUSSA San Lorenzo Light and Power

Company (Luz y Fuerzade San Lorenzo)

m meterMIF Multilateral Investment FundMW megawattNGO nongovernmental organizationOLADE Latin American Energy

Organization (OrganizaciónLatinoamericana de Energía)

PAHO Panamerican Health OrganizationPCS personal communication systemPCU passenger car unitPMRTN Master Plan for National

Reconstruction andTransformation (Plan Maestro deReconstrucción y TransformaciónNacional)

PPA power purchase agreementPPIAF Public–Private Infrastructure

Advisory FacilityPRAF Family Allowance Program

(Programa de Asignación Familiar)


xvii

PRASSAR Rural Water, Sanitation, and HealthProgram (Programa de Agua,Sanemaiento y Salud Rural)

PROHECO Honduran Community EducationProject (Proyecto Hondureño deEducación Comunitaria)

ROM rehabilitation, operation, andmaintenance

SAG Secretariat of Agriculture andLivestock (Secretaría de Agriculturay Ganadería)

SANAA Autonomous National Service forWater and Sewer (ServicioAutónomo Nacional de Acueductos y Alcantarillados)

SECOPT Secretariat of Communications,Public Works, and Transport(Secretaría de Comunicaciones, ObrasPúblicas y Transporte)

SERNA Secretariat of Natural Resourcesand the Environment (Secretaríade Recursos Naturales y Ambiente)

SIEPAC Interconnected Electrical Systemfor Central American Countries(Sistema Interconexión Eléctrica paralos Países de América Central)

SINFASH Honduran System of Water andSanitation Information (Sistemade Información de Agua ySaneamiento de Honduras)

SOPTRAVI Secretariat of Public Works,Transportation, and Housing(Secretaría de Obras Públicas,Transportes y Vivienda)

SRMC short-run marginal costTELGUA telephone service in Guatemala

(Telecomunicaciones de Guatemala)TEU 20-foot equivalent unitTOM operation and maintenance

technician (técnico en operación y mantenimiento)

UNAH Autonomous National Universityof Honduras (Universidad NacionalAutónoma de Honduras)

UNICEF United Nations Children’s FundUPEG Planning and Management

Evaluation Unit (Unidad dePlanificación y Evaluación de laGestión)

USAID U.S.Agency for InternationalDevelopment


1

The purpose of this study is to promote the develop-ment of infrastructure services in Honduras. Thestudy’s central argument is that poverty reduction,economic growth, and competitiveness could all be ad-vanced through competitive markets and increased pri-vate sector participation in infrastructure services withan appropriate legal and regulatory framework. Thestudy was financed by the Public–Private InfrastructureAdvisory Facility (PPIAF), which promoted optionsfor private investment in infrastructure.

The study reviews the primary infrastructure sec-tors, identifies the main issues, and suggests strategiesfor addressing them. It describes general principles foreffectively providing services and recommends specificpolicies for each of four sectors: transportation, waterand sanitation, electricity, and telecommunications.

This report has two parts: part 1 presents a generaloverview of infrastructure development and the role ofprivate sector participation; part 2 presents a detaileddiagnosis of each of the four infrastructure sectors cov-ered in the study.

The executive summary first presents a cross-sectoranalysis of general themes related to infrastructure de-velopment. It then outlines the cross-sector policy rec-ommendations, as well as the policy recommendationsfor each specific sector.

Infrastructure and Development:A Cross-Sector Vision

The development of infrastructure sectors is a decisivefactor for reducing poverty, increasing economic

growth, and encouraging competitiveness in Hon-duras. This section reviews recent outcomes of thedevelopment process and highlights their linkages toinfrastructure issues.

Infrastructure and PovertyDuring the past decade, Honduras has made a consid-erable effort to modernize and open its economy.Thateffort contributed favorably to its macroeconomic sit-uation and investment performance. Although thetrend is positive, however, economic growth remainstoo low to significantly increase per capita income (seetable 1.1 in part 1).

As a result, the number of households below thepoverty line has decreased only slowly over the pastdecade. In 1999, 66 percent of households were stillbelow the poverty line, while 49 percent were definedas being in extreme poverty (their income was insuffi-cient to purchase the basic food basket).

Nonetheless, income sufficiency is only one measureof poverty. On other indicators, Honduras has registeredbetter outcomes.For instance, the number of householdswith unsatisfied basic needs has declined sharply since1990. Improved access to basic infrastructure servicessuch as water and sanitation or electricity—especially forhouseholds in the bottom half of the income distribu-tion—is an important factor in that achievement.

As can be seen in table 1.2 in part 1, important gapsin coverage remain among low-income households.The poor have little or no access to telephone services(only in the top three deciles do more than 20 percentof households have a phone), and most poor people do

Overview of Infrastructure in Honduras

not have effective access to any kind of public transport(see table 1.4 in part 1).

In such a setting, it is not surprising that increasingthe coverage of basic infrastructure services constitutesa central plank of the Poverty Reduction Strategy (Es-trategia de Reducción de Pobreza—ERP). The ERP hasestablished the following goals:• Establish a stronger institutional framework for

maintaining and upgrading rural roads.• Increase water and sanitation coverage to 90 per-

cent in 2005, 95 percent in 2010, and 100 percentin 2015.

• Promote a national electrification fund and “solarvillages” to improve electricity coverage.

• Install public phones in towns with populations ofmore than 500.

Infrastructure and Economic Growth Overall investment levels in Honduras in recent yearshave been sufficient to make it possible to significantlyincrease real incomes. During the 1990s, the formationof aggregate fixed capital remained comfortably above20 percent of gross domestic product (GDP), and insome years it reached 30 percent. However, incomeshave stagnated.The low growth rate of GDP reported intable 1.1 in part 1 results mainly from low returns to thisinvestment. In turn, those returns are at least partly asso-ciated with the low level of foreign direct investment(FDI), which is linked to a poor investment climate.

Infrastructure and CompetitivenessAccording to competitiveness indices, the investmentclimate in Honduras compares unfavorably with thoseof neighboring countries.Although FDI increased sig-nificantly in 1998–2001,Honduras still attracts less FDIthan do other countries in the region.And there is lit-tle doubt that—as stressed in a recent Foreign Invest-ment Advisory Service (FIAS) study of the investmentclimate—the slow and incomplete reform of infra-structure services has been an important factor inHonduras’s lagging competitiveness (see tables 1.5 and1.8 in part 1).

Organization of the Infrastructure Sectors:Growth of Private Investment

The predominant provider of infrastructure serviceshas traditionally been the public sector. Historically,

private agencies have assumed an important role onlywhen public supply has not been available. Often, suchprivate agencies provided only inefficient “copingsources,” such as privately operated tankers to deliverwater to communities without a piped service.

During the past decade, however, modernizationefforts have begun in the infrastructure sectors aimed atseparating the functions of policy, operation, and ser-vice regulation.Thus, Honduras has promoted increasedprivate participation in providing service, subject to anappropriate regulatory framework and geared to thepossibilities for competition in the various sectors.

Toward that goal, Honduras passed new frameworklaws for electricity in 1994 and for telecommunicationsin 1995, as well as a general concessions law in 1998.Ef-forts to modernize the regulatory environment duringthe past decade resulted in creation of the National Su-pervisory Commission for Public Services (ComisiónNacional Supervisora de los Servicios Públicos—CNSSP),the National Energy Commission (Comisión Nacional de Energía—CNE), the National Commission for Telecommunications (Comisión Nacional de Telecomunica-ciones—CONATEL), and the Superintendency of Con-cessions and Licenses (Superintendencia de Concesiones yLicencias).Those reforms have significantly increased theprivate sector’s role in the Honduran infrastructure:• In transportation, highway maintenance has been

carried out through contracts with private agenciessince the beginning of the 1990s. The country’sfour international airports were awarded throughcontracts to concessionaires in 2000.

• In water and sanitation, a public–private cooperationmodel has produced important advances in ruraland urban marginal coverage.The first step towardprivate investment was taken in 2000 when themunicipal water and sanitation system of San PedroSula was awarded in a concession contract to anItalian company.

• In electricity, power purchase agreements (PPAs)with private generators have expanded the supplyof electricity since the energy crisis of 1993–94. By2000, PPAs accounted for 45 percent of capacityand 37 percent of total generation. In 1999, thereading of meters plus billing and collecting wereoutsourced.

• In telecommunications, private agencies supply thecellular phone service, cable television, data con-nectivity, and Internet services.

2

Private Solutions for Infrastructure in Honduras

However, other initiatives to promote private in-volvement have failed, in large part because of politicalresistance.Although laws passed in 1994 and 1995 pro-vided, respectively, for privatization of the distributionof electricity and for sale of a majority share of thenational telecommunications monopoly, Empresa Hon-dureña de Telecomunicaciones (HONDUTEL), to a pri-vate investor, neither law has been implemented. Anew framework law covering water and sanitation—which would promote more private involvement toprovide that service—has been held up for almost 2years in the National Congress of Honduras (CongresoNacional de Honduras).

Overview of Infrastructure Performance

An analysis of the recent performance of Honduras’sinfrastructure services reveals a mixed bag of outcomes.

As mentioned earlier, important advances havebeen made in access to infrastructure services, andthose advances have contributed to reducing poverty.During the past decade, 18 percent of the populationhas benefited from increased water coverage, and 15percent has benefited from increased sanitation cover-age. Furthermore, 21 percent of the population hasbenefited from increased electricity coverage and 8percent from expanded telephone coverage.The bene-ficiaries of increased water and sanitation coveragewere mainly in the poorest deciles, while those of theincreased electricity coverage were in the middledeciles. Improved telephone coverage benefited mainlyhouseholds in the higher income deciles.

Some progress has been made in improving effi-ciency of services. Electricity service has seen improvedlabor productivity and reduced distribution losses.Thewater sector, however, has registered limited improve-ments in performance linked to the regionalization ofthe Autonomous National Service for Water and Sewer(Servicio Autónomo Nacional de Acueductos y Alcantari-llados—SANAA). In some water systems, such as PuertoCortés, which was transferred from SANAA to munic-ipal control in the middle of the decade, significantimprovements have been recorded in loss levels and in commercial efficiency. HONDUTEL recently hasbegun to improve labor productivity, and the Secretariatof Public Works,Transportation, and Housing (Secretaríade Obras Públicas, Transportes y Vivienda—SOPTRAVI)has greatly reduced staffing during the past decade.

The quality of services has improved in some ways.Most notably, private investment to expand the capac-ity of electricity services has led to greater reliability.Also, the quality of road maintenance is generally bet-ter than it was a decade ago, thanks to both outsourc-ing and increased funding. However, in most cases,service quality remains poor. Public transport ser-vices are inadequate because of regulatory failure, andtraffic management remains weak in most of the coun-try. Telephone services in Honduras remain poor be-cause of limited capacity, with a high proportion ofcalls uncompleted. The lack of investment over the past 5 years has exacerbated that problem. Also, waterdelivered to users is generally of low quality in terms of pressure, frequency, and potability. In addition, a very low coverage of wastewater treatment is pervasivenationwide.

Although the economic sustainability of infrastruc-ture services has improved in some respects, the situa-tion remains unsatisfactory:• Road transport.A Road Fund (Fondo Vial) has been

set up to finance and administer road maintenance,but the formula for calculating its transfers from thenational budget is not being used, and no nationalfunding is available to maintain urban roads.

• Ports. High tariffs are damaging to Honduras’scompetitiveness; 13 percent of the resulting revenuegoes to national and local governments.

• Water and sanitation. Tariffs are systematicallybelow costs, and there are long periods without ad-justment for inflation. The regionalization ofSANAA has improved revenue collection, but thisinfrastructure sector remains severely underfunded.

• Electricity. The financial position of the NationalElectricity Enterprise (Empresa Nacional de EnergíaEléctrica—ENEE) has improved since 1994 becauseof relatively stable real tariffs and a strengthenedregulatory function. But the tariffs paid by users arestill insufficient, especially for transmission and dis-tribution, and the low cost of generating electricityfrom the state-owned hydroelectric system windsup offsetting the high costs of some of the PPAs.

• Telecommunications.This sector generates consid-erable fiscal surpluses that average US$20 million ayear (US$80 million in 2000).Very high interna-tional long-distance tariffs are responsible for thesurplus. Tariff rebalancing has started but has ad-vanced slowly.


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As the preceding data show, Honduras has yet toestablish a vital central principle that user tariffs forinfrastructure services should reflect the total cost ofproviding an efficient service. In some cases, the statecontinues to use its monopoly status to impose hightariffs and to obtain surpluses from the users while ad-ministering the service inefficiently. Examples includeinternational telephone calls and port services. In othercases, public enterprises charge insufficient tariffs anddepend on both subsidies and consumption of theirown capital (applying depreciation provisions to coveroperating costs).This tendency is especially notable inthe water sector.

Effect of Hurricane Mitch on HonduranInfrastructure

Hurricane Mitch battered the country’s infrastructurein October 1998, especially highways, bridges, andwater supply systems, thereby revealing inadequate de-signs and poor construction quality and highlightingendemic institutional weaknesses. Among the key les-sons learned are the following:• It is important to upgrade the design and supervi-

sion of civil works to minimize losses caused bynatural disasters. An estimated 1 percent increase in investment in the original works, judiciouslyapplied, can reduce disaster damage by up to 50percent.

• It is important to be insured against catastrophicrisks that cannot be prevented by design changes.

• It is important to have proper watershed manage-ment to reduce infrastructure vulnerability.The Master Plan for National Reconstruction and

Transformation (Plan Maestro de Reconstrucción y Trans-formación Nacional—PMRTN), which was preparedfollowing Hurricane Mitch, proposed (a) to reinforceinstitutions in the infrastructure sectors through an ac-celerated reform process and (b) to tackle engineeringweaknesses by strengthening specifications for the de-sign and supervision of works. Reconstruction progressin roads was rapid, but that in bridges and in water andsanitation systems was slower. Nevertheless, by the endof 2001, reconstruction was substantially completed.However, the jury is still out on the quality of the de-sign and of the supervision of some works.

Consumer Opinions

As part of this study, utility consumers, who were con-sulted in focus groups in different parts of the country,expressed a uniform desire for increased access to basicinfrastructure and telephone services. Many partici-pants described the well-known problem of getting ac-cess, which led to obtaining illegal connections and tousing political influence to solve both their individualproblems and those of entire communities that hadbeen excluded from services.

Hondurans who have services installed report anabundance of complaints about poor service quality,inadequate responses to user concerns, and—in somecases—the amounts charged.The problem of contestedreadings of electricity meters is a particular source ofirritation and deserves urgent attention.

The focus groups showed little support for subsidiesthat are now applied to the urban transport service inTegucigalpa and to domestic consumption of electric-ity up to 300 kilowatt-hours a month. Users com-plained that bus owners in Tegucigalpa get the subsidyregardless of the service proffered, and users also toldstories of large consumers of electricity who split theirconsumption between two meters so that they couldqualify for the subsidy.

But despite widespread dissatisfaction with presentlevels of access and service quality, users expressed con-siderable skepticism as to whether privatization is thesolution. Many people associate privatization with tar-iff increases and view it as a policy intended to favorthe contracted enterprise rather than the users.

Legal, Institutional, and Regulatory Framework

The legal, institutional, and regulatory framework forinfrastructure services in Honduras reflects the in-complete state of reform. Recent governments havegenerally promoted the creation of modern legal andinstitutional frameworks that separate the functions of planning, regulation, and service operation. Suchframeworks would give private investors an importantrole in service operation and would generally promotethe maximum possible amount of competition in orderto improve quality and reduce costs.


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However, both the legislative process itself and theimplementation of reforms after new laws are passedhave proved difficult.The cause, in part, is a lack of clar-ity in policymaking and in legislative circles regardingthe purpose of reform. In particular,widespread confu-sion exists about the regulation and about sector policyfunctions. In several cases, this confusion has led tomisplacement of such functions, thereby weakeningsector governance.

Other important factors that impede reform in-clude public mistrust of privatization (noted in the pre-vious section) and interventions of vested interests thatbenefit from the status quo (for example, recipients ofthe existing, inequitable subsidies or owners of lucra-tive contracts outsourced from poorly regulated publicsector monopolies).

The absence of strong, well-defined policy entitieshas resulted in a lack of clear, strategic vision for each ofthe four infrastructure sectors reviewed in this study.Sector policy entities are generally weak, and their rolesand responsibilities are defined loosely. In the cases ofports, water and sanitation providers, and telecommu-nications organizations, a policy entity simply does notexist. In the case of electricity, the policy entity is theGeneral Directorate of Energy (Dirección General deEnergía), which is part of the Secretariat of NaturalResources and the Environment (Secretaría de RecursosNaturales y Ambiente)—SERNA); however, that policyentity is weak and underfunded. Similarly, the Planningand Management Evaluation Unit (Unidad de Planifi-cación y Evaluación de la Gestión—UPEG) of SOP-TRAVI is weak and tends to be dominated by theGeneral Directorate of Roads (Dirección General de Ca-rreteras) and the Road Fund. In all cases, at least some ofthe policy functions have been assumed on a de factobasis by an inappropriate entity such as the regulator,the Consultative Commission on Privatization,1 or thestate company that operates the service.

Regulatory functions tend to be poorly defined,weakly administered, and subject to political interfer-ence.Although numerous regulatory entities exist,mostlack the independence and technical capacity necessaryto carry out their functions properly, and most havebeen subjected to a politically motivated rotation ofstaff members with each incoming government.

The CNSSP regulates SANAA, the port sector, andthe postal services. Its purview is limited to publicly

owned entities. Thus, if any service is privatized,CNSSP automatically loses authority over it.There aresector-specific regulators for electricity and telecom-munications. Finally, the Superintendency of Conces-sions and Licenses covers any arrangement outside thepurview of one of the sector-specific laws.

Funding for all these agencies is poorly allocated.CONATEL receives two-thirds of all resources forpublic service regulation (US$2 million out of a total ofUS$3.16 million) because of its control of the licensingrevenues from broadcast frequencies. Other regulatorsgenerally lack the resources needed to operate withoutdepending on information supplied by regulated com-panies.And many service providers are de facto unreg-ulated—including, for example, operators of municipalwater service.

In this confused and unsatisfactory institutional set-ting, it is hardly surprising that restructuring and pri-vate participation have advanced slowly.

With respect to the legal framework, in the trans-portation sector, the 1998 Concessions Law (Ley deConcesiones—Decree 283-98) provides a framework forthe concession of services and was successfully appliedin the concession of the international airports.Terms ofreference have also been prepared for a study regardinga strategy for the port subsector. Doubts still existabout the constitutionality of highway tolls, a problemthat could hinder concessions in that subsector.

A new framework law for water and sanitation hasbeen 7 years in development, but it has not yet beenapproved.

The 1994 Framework Law of the Electricity Sub-sector (Ley Marco del Subsector Eléctrico—Decree 158-94) proposed privatizing distribution of electricity, butthe proposal has not been implemented. In 2001, a newframework law, which was designed to facilitate theprivatization of distribution and to introduce a com-petitive wholesale market in generation, failed to beapproved in the National Congress.Currently, the gov-ernment is reviewing its reform strategy for this sector.

The 1995 Framework Law of the Telecommunica-tions Sector (Ley Marco del Sector de Telecomunicaciones—Decree 185-95) proposed a focus on private capital forthe sector’s development. The proposal included thesale to a private partner of a majority interest in HON-DUTEL, but the sale has not taken place.The govern-


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ment now plans to commission a new strategy studyfor the telecommunications sector.

Funds for Developing the Infrastructure

As a result of limited advances to date in participationby private investors, Honduras faces a significant fiscalburden in its infrastructure sectors. Public agenciesremain the principal source both of capital and of the subsidies needed to cover the utilities’ operatingdeficits. During the past decade, total public expendi-ture in the four infrastructure sectors (financed eitherfrom their own revenues or from government transfersor loans) exceeded 14 percent of GDP,with investmentspending alone at approximately 7 percent.

To lessen the budgetary pressure caused by in-vestment in infrastructure development, the govern-ment seeks, whenever possible, to finance investmentsthrough private capital. A central plank of its policy isto mobilize FDI. Besides providing private financing,FDI allows Honduras to take advantage of increasedoperational efficiency and effectiveness by attractinginternational infrastructure service companies that aresubject to appropriate regulation. In that setting, theloan component of the funding package remains a lia-bility of the private investor and does not add to thepublic external debt.

The financial situation of the four infrastructuresectors covered by this study is not uniform. Most fi-nancial resources used by the National Port Enterprise(Empresa Nacional Portuaria—ENP) and HONDUTELare generated by user fees, and both companies covertheir debt-service obligations and generate significantcash surpluses on revenue account that are then trans-ferred to the central and local governments. HON-DUTEL, in particular, has become an important piecein the country’s fiscal jigsaw puzzle. It routinely gen-erates annual transfers worth as much as 2 percent of GDP.

In contrast, the customers of ENEE and SANAAreceive significant subsidies from the central govern-ment. Until 2000, when the Road Fund was set up,SOPTRAVI was completely subsidized by centralgovernment resources taken from the general taxationfund. The Road Fund receives earmarked fundingfrom a tax on fuel consumption.

To date, FDI in infrastructure has been limited.Theexpansion in generating electricity during the 1990swas completely financed by private investment (throughPPAs), although it was accomplished mainly with na-tional capital. Outside of the PPA context, several for-eign enterprises have studied investing in large thermalor hydroelectric generating plants; however, no invest-ments have yet been made. The concessionaire of thecellular phone service, Telefónica Celular (CELTEL), hasmade an accumulated investment of more than US$55million. In telecommunications, the long-awaited capi-talization fell through in 2000.

Nonetheless, the approval of concessions for Hon-duras’s international airports and for the water systemof San Pedro Sula in 2000 will result in significantforeign investment. In San Pedro Sula, the Italian con-cessionaire will invest US$200 million over a 30-yearperiod, including US$51 million during the first 5years.The U.S. concessionaire of the airports will investUS$19 million in the short term, with further sums tobe negotiated with the government.

National capital markets do not offer favorable op-tions for financing long-term investment in the Hon-duran infrastructure. Bank financing is available forrelatively short terms and at high interest rates for bothlocal currency and U.S. dollar–denominated funds.Thestock exchanges in Honduras are in a state of collapseand are not now an option for mobilizing funds.

In general, private enterprises interested in investingin the Honduran infrastructure seek their financingabroad. The private financial arms of the multilateraldevelopment banks represent an important option.The International Finance Corporation (IFC), Inter-American Development Bank (IDB), and CentralAmerican Bank for Economic Integration (CABEI)have provided support for the private generation ofelectricity through PPAs. The Private Sector Depart-ment of the IDB is negotiating to get backers who willinvest in the water system concessionaire in San PedroSula.The IFC is also studying the possibility of backinga large investment proposed by AES Corporation for athermal generation plant in Puerto Cortés.The multi-lateral development banks would doubtless be inter-ested in backing other strategic operations that wouldincrease private participation to finance the Honduraninfrastructure.


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General Policy Recommendations for Infrastructure Sectors

Create Strong Sector Policy Agencies; Adopt Open and Participatory Planning ProceduresSector policy is concerned with the way that eachsector is organized, including (a) the extent of marketliberalization and the basic principles of the market ar-chitecture (that is, how the market will work on a day-to-day basis); (b) the extent and modality of the privatesector’s participation in providing services; (c) the roleof public and private funds in supplying capital; (d) theprinciples of service pricing and cost recovery; (e) therole (if any) of publicly funded subsidies and how theyshould be financed and administered; (f) the determi-nation of norms for service coverage and quality; and(g) the determination of what regulatory institutionsneed to be created to compensate for market imperfec-tions so the stated goals for coverage and quality can beachieved at reasonable costs. Sector policy also definesthe dynamics of the reform process.

In network infrastructure services, all of these issuesrequire policy decisions. In any given geographicalarea, there can be only one network, and in any givensegment of the network, there can normally be onlyone service quality specification (for example, shouldthere be continuous service or a rationed service).Therefore, all parties concerned must reach an agree-ment regarding what the scope of the network is, whoshould operate it, and what service quality is required.Because the local network is usually a natural monop-oly, agreements must be made regarding what can becharged and how payment should be made. In all ofthese matters, consumer satisfaction guides informeddecisionmaking.

The weakness of policy entities is a characteristicfailing of unreformed infrastructure services. Normally,the state monopoly company that provides services isalso the policymaker. This misplacement of functionsleads to the setting of undemanding targets. Often, inpractice, the interests of the company displace those ofthe consumers when determining what should be done.

In Honduras—even in sectors that have made someheadway in reforming legal and institutional frame-works—the unsatisfactory definition of the policy en-tities and the lack of clarity concerning their roles

remain a great weakness. Indeed, such confusion is per-haps the most important reason for a lack of legitimacyin the reform and modernization processes.To correctthis problem,policymakers should give high priority toestablishing strong policy entities that have clear man-dates. Such entities would replace both the de factopolicymaking function of the state enterprises (that is,the ENP, SANAA,ENEE, and HONDUTEL) and theweak policy entities (for example, SERNA’s GeneralDirectorate of Energy) created under recent reforms.

The planning process must also be more open andparticipative. At present, public participation is usuallylimited to discussions with special interest groups andlabor unions about legislative changes that affect thoseinterested parties. However, public participation hasbeen glaringly absent during critical decisions aboutcoverage and quality goals and their consequences onthe tariffs to be charged to users.To ensure the legiti-macy of their policies, decisionmakers should be opento participation by interested parties, especially con-sumer representatives.

The contents of concession contracts, which em-body a set of policy decisions about the scope, quality,and cost of the services to be provided during the con-tract’s life, are often a closely guarded secret until suchcontracts are actually signed. This practice shouldchange. Contracts should be seen by the public forcomment before the call for bids and should include anexplanation of their purposes and goals. A periodshould then be allowed so the public can respond andsuggestions can be taken into account.

Strengthen Regulation; Reduce the Multiplicity of Regulatory EntitiesIn the past, unnecessary regulations often caused in-efficiencies in the economy. The liberalization andmodernization process seeks, in general, to end dys-functional state intervention and, wherever possible, toopen competitive markets that will foster private in-vestment and will benefit consumers through widerchoices and lower prices. Nonetheless, when condi-tions for the efficient operation of competitive marketsdo not exist, it is essential to establish a credible regula-tory framework to protect the consumer, the govern-ment, and the investor. Such action is usually necessaryin the case of infrastructure services.


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In this context, increased private agency participa-tion in both operating the service and financing it doesnot necessarily imply deregulation or the liberalizationof market architecture. On the contrary, the success of private participation in infrastructure services willnormally be based on stronger regulation than thatobtained in the old world of “self-regulated” state mo-nopolies.Therefore, care should be taken not to preju-dice viable proposals for greater private participation(which can help increase operational efficiency andhelp mobilize private resources for financial invest-ments) by linking such contracts to deregulation pro-posals that are not credible, given the structure and sizeof the market in question.

The role of the regulator in imperfect markets is (a) to supply policymakers with proxies for the infor-mation that the market would normally supply (for in-stance, what is the minimum efficient cost of differentpossible service levels?) and (b) to supervise the variousparties involved (the operators, the government, andthe users) so they comply with contractual agreementsabout providing service. Where market mechanismsplay a role in regulating the system, the regulator is alsocharged with supervising the market and with prevent-ing collusive behavior or the unfair exercise of marketpower.

To this end, the reform and modernization processshould create strong, technically capable regulatory en-tities that are independent of political pressures. Suchentities should have a mandate to ensure compliancewith the laws, the concession contracts, and the otherprovisions that define the rights and obligations of allparties.The entities should justify their independenceto make decisions under the framework of the law byaccepting increased public accountability for their ac-tions. Their decisions should be both reasonable andpublic knowledge.

That goal could be more effectively achieved ifHonduras reduced its number of regulatory entities byconsolidating related sectors, as both Panama and Bo-livia have done. The regulation of the transportationsector should be streamlined and consolidated. Also, anew multisector entity might cover water and sanita-tion, telecommunications, and all aspects of energy (notonly electricity but also petroleum and natural gas).Regulatory agencies should, in general, cover bothpublic and private operators in any given sector. For

example, as mentioned previously, the CNSSP’s man-date is currently limited to dealing with public agen-cies; hence, when a service is privatized, the CNSSPautomatically loses its authority.

Arguments in favor of establishing multisector reg-ulators include the scarcity of qualified professional andtechnical resources, the existence of scope economies,and the reduced risk of a multisector entity being“captured” by the service operators. However, multi-sector agencies also present some risks. For example,there is a greater prize if they are captured. Also theestablished technical strengths of the sector-specificregulatory agencies created in recent years (such asCONATEL) may be undermined. Such risks can beminimized by adopting a sectoral structure within themultisector entity and by establishing suitable mecha-nisms for hiring and replacing staff members.

Regardless of the sectoral structure of the regula-tors, it is critical to require a high level of professionalcompetence and experience for senior staff membersand to offer salaries that are commensurate with theirabilities. Service periods should be immune from polit-ical influence. For continuity, members’ terms shouldoverlap rather than changing simultaneously.

Reduce Poverty through Increased Access Increased coverage of the basic infrastructure service iskey to reducing poverty in marginal urban and ruralcommunities.

In urban areas, access problems often arise from tar-iffs that are insufficient to finance the expansion of ser-vices and that are below the consumers’ willingness topay. This problem, which is often exacerbated by theerosion of tariffs in real terms because of inflation, oc-curs throughout the country in the water and electricitysectors, as well as in public transportation in Tegucigalpa.

One part of the problem is the inability of the cash-strapped operators to build new production and trans-mission capacity because of low revenues from users.This situation works against allowing new consumersinto the system because to do so would aggravate theshortages and rationing already faced by existingclients.To overcome this problem, policymakers mustensure that user tariffs cover the full cost of efficientlyproviding the service, including the marginal capitalcosts of expanding the supply.The tariffs should be in-dexed to correct automatically for cost increases.


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Another part of the problem is how to cover thecost of the local distribution networks for water, sani-tary drainage, and electricity supply (and for that mat-ter the local road networks) in marginal communities.In many urban housing developments, such networksare built by the developer and are included in the costof the houses.Thus, the capital cost of the local distri-bution network is not normally covered by servicecharges. However, even communities that are willingto pay the cost of such works do not necessarily haveaccess to capital to finance them.This problem can beovercome by funding the network construction inmarginal communities—perhaps on a partially sub-sidized basis—and by recovering the cost through asurcharge on basic service charges. It is important toestablish credible mechanisms for collecting servicecharges and for maintaining the local network in suchcommunities, where often a culture of using “free” im-provised services (sometimes stolen from the officialnetwork) must be overcome. Establishing user com-mittees that purchase services on a bulk basis from theoperating company and that administer the billing lo-cally is one such mechanism. Similar strategies havebeen successfully applied by SANAA and United Na-tions Children’s Fund (UNICEF) in their joint waterproject in marginal communities in Tegucigalpa.

Another problem affecting service expansion inmarginal urban communities concerns land squatters,who create legal obstacles to providing services. Ser-vice providers can sidestep this problem by usingcommunal connections for such users, pending thelegalization of their being on the land. ENEE is usingthis approach successfully.

In rural areas, the high per-household cost of net-works in areas with low population density presents anobstacle to expanded coverage. Honduras has recentlyexpanded rural and semirural electricity coverage ag-gressively on a fully subsidized basis, but the costs ofthat strategy are not sustainable. In the future, expan-sion should be supported using capital subsidies thatare distributed in an efficient and competitive mannerthrough an electricity development fund. However, itshould not be presumed that the government willbankroll the full cost of putting infrastructure servicesinto any area, however remote.A good option is to de-fine a global amount available for subsidy in any periodand then to assign concessions for new service areas to

the suppliers that require the lowest subsidy. Such aplan would help reduce the costs of expanding elec-tricity and telecommunications in rural areas. Subsidiesshould also be available on an even-handed basis foroff-network solutions.

Increase Competitiveness through Quality, Efficiency,and Fair Tariffs Where services already exist, the most important goalsof modernization are (a) to improve operational effi-ciency by creating quality services at an efficient costand (b) to secure sustainability by setting tariffs thatcover those costs.The result will be a major boost forcompetitiveness.

Increased participation by the private sector plays acritical role in this regard. Private enterprises that oper-ate services subject to appropriate contracts and regula-tions can greatly improve efficiency, in contrast to theperformance of state entities.At the same time, serviceproviders in Honduras should stop charging tariffsabove the cost of services to finance cross-subsidies to other users or to generate surpluses for the gov-ernment. ENP is an example of such a service pro-vider.Tariffs paid for electricity by large users and tariffsfor international telephone calls also exceed the costs of those services, to the detriment of the country’scompetitiveness.

Ensure SustainabilitySome of Honduras’s infrastructure sectors have seriousproblems in financially sustaining the services.To en-sure service sustainability, the providers must chargetariffs that reflect the cost of efficiently providing goodservice,which will include capital costs less the amountof any assigned subsidy.

Introducing a private operator should not in itselfcause tariff hikes. Other things being equal, introduc-ing private operators should increase efficiency and,thus, minimize the need to raise tariffs.When tariff in-creases are necessary, such adjustments should not bepostponed until privatization is implemented (as was to be done, for example, in the case of HONDUTEL’sfailed capitalization). When privatization and tariffhikes occur simultaneously, the political viability ofprivatization can be harmed.

One reason that tariffs often need to rise sharplywhen concessions are awarded is that the contract re-


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quires the concessionaire to correct accumulated in-vestment deficits quickly. Hence, tariffs must be highenough to allow the concessionaire to finance its pri-vate investment.To prevent tariff increases that exceedthe customers’ willingness to pay, policymakers shouldtake into account the users’ opinions about servicespecifications that define the investment plans builtinto concessions. If engineers are allowed to dominatethe planning process, they will often insist on schedul-ing heavy investments, thereby creating a need for po-litically untenable tariff increases.The successful leasingof the water concession in San Pedro Sula demon-strates that political support for privatization can begenerated when this principle is respected.

The absence of incentives for routine and periodicmaintenance has caused a lack of technical sustain-ability in Honduras’s infrastructure services.When op-erators receive their capital resources in the form oftransfers or grants, they have little interest in selectingappropriate technologies or in implementing mainte-nance programs. The water and highway sectors havehistorically been the most vulnerable in this regard.Tocorrect this problem, policymakers should require op-erators to cover their own capital costs, and concessioncontracts (both for public and private entities) shouldrequire that the concessionaire implement preventivemaintenance and keep the infrastructure in good order.Introducing maintenance and improvement contractsfor the major highways, which should be financed bytolls, would be a positive step in this direction.

Establish Priorities for Public InvestmentUsing the foregoing analysis, the study recommendspriorities for using public and private resources in theinfrastructure sectors. It argues that the financing of in-vestments should generally be private, and that publicfunds should be reserved for situations in which privatefinancing is not an immediate option (transportation,some parts of the water and sanitation sector, and ruralelectrification). In this framework, priority should begiven to investments that will most greatly reducepoverty. The most effective investments for reduc-ing poverty usually involve increasing coverage and ac-cess, rather than improving service quality in existingsystems.

Even when public agencies supply all or part of thecapital to finance an investment, the total capital costs

should, as a rule, be recovered from the tariffs chargedto service users.The government’s loans for infrastruc-ture capital should, therefore, be offered with positivereal interest rates and with an appropriate indexing ofcapital balances. Loans with such terms would reducethe fiscal burden on the state of financing the infra-structure and would begin to accustom the serviceoperators and users to the terms that private capitalmarkets will require in the future.

Streamline Subsidies; Focus Them on AccessSubsidies should be an option only when they clearlyreduce poverty.They should be well focused, transpar-ent, and demand based. The study recommends thatthe resources available for subsidies under the frame-work of the ERP should be concentrated in programsfor increasing access.This use of resources helps com-pensate for the poor communities’ lack of access to thecapital needed to finance the initial installation ofservices. It also has the advantage of preventing a re-current commitment of revenue funds for the samebeneficiaries. In determining how many resources toapply to infrastructure sector subsidies, policymakersshould systematically compare the costs and benefits ofthe subsidies to other possible uses of the same re-sources under the ERP.

In this context, two existing subsidies for infrastruc-ture services merit reconsideration. First, the electricityconsumption subsidy costs US$18 million per year andis poorly focused. It benefits mainly households that arenot poor.Additionally, it threatens to become a signifi-cant fiscal burden because coverage is increasing amonghouseholds that consume less than the cutoff level forsubsidy (300 kilowatt-hours per month). Ideally, thissubsidy should be abolished. If abolishing the subsidy ispolitically impossible, it should—at the very least—belimited to households consuming less than 100 kilo-watt-hours per month.

Second, the public transport subsidy in Tegucigalpacosts US$8 million a year and is paid directly to the op-erators, regardless of the service actually delivered tousers. This subsidy program erodes the crucial nexusbetween operators’ incomes and service provision. Itshould, therefore, be discontinued. The same fundscould benefit poor communities far more if they wereapplied to improving access routes in poor neighbor-hoods or to supporting an organizational and regula-


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tory reform of urban transport services.Table O.1 sum-marizes the recommended priority areas for public in-vestment and subsidies.

The Role of Private Financing

In transportation, ports and airports can be privatelyfinanced. A short-term priority should be to grant aconcession for expanding the port facilities at PuertoCortés. Maintaining and expanding the capacity of pri-mary roads and highways should be at least partially fi-nanced through tolls charged by private concessionaires.

In urban water and sanitation, the San Pedro Sulaconcession shows what can be achieved when theconcession design takes community preferences intoaccount. Priority should be granted to increasing effi-ciency and to avoiding medium-term tariff hikes.Tegucigalpa would also benefit greatly from a privateconcession in water and sanitation. However, given thegreater capital needs of Tegucigalpa’s system, the con-cession design should include an element of public fi-nancing to prevent tariff hikes on a scale that wouldmake it politically difficult to obtain approval for thetransformation. Honduras needs to develop models toincorporate private operators into its smallest systems,where the first goal should be to improve operational

efficiency, rather than to mobilize investment funds ona large scale.

In electricity and telecommunications, the privatesector can finance most of the necessary investment(see table O.2).A great need exists for an investment intelecommunications services and for an increase in thecapacity of electricity networks that generate, transmit,and distribute power. Financial support from the statein these sectors should be limited to funds for ruralelectrification and for public telephones in rural areas.

Sector Recommendations

TransportationRecent advances in the transportation sector includeestablishing the Road Fund, which finances the main-tenance of the official highway network through a fuelconsumption tax, plus creating SOPTRAVI’s UPEG.The government has recognized the importance ofmaintaining the unofficial network and, as a prelimi-nary step, is carrying out an inventory. The PMRTNrecognized the importance of improving road engi-neering to minimize future storm damage. With thetechnical assistance of IDB and the Government ofDenmark, the Honduran government is preparing aroad safety study.The air transport subsector has seen


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Table O.1 Priorities for Public Investment and Subsidies

Ports and Roads airports Water and sanitation Electricity Telecommunications

Priorities for publicinvestment

Priorities for publicsubsidies

Implementreconstruction

Improve specificationand supervision ofcontracts to ensurequality and durabilityof the roads

Rationalize thenetwork

Improve trafficsecurity

Abolish the urbantransport subsidy inTegucigalpa

None

None

Implementreconstruction

Expand rural water andsanitation coverage

Expand urban marginalwater and sanitationcoverage

Provide capital financingfor urban systems onquasi-market terms

Set priorities for ruralwater and sanitationsubsidies

Expand ruralelectricity coverage

Limit the demandsubsidy to thoseconsuming under100 kilowatt-hoursper month

Establish a nationalelectrification fund

None

Establish atelecommunicationsdevelopment fund

important advances, including the concession of theinternational airports and the introduction of an OpenSkies Law (Ley de Cielos Abiertos—Decree 23-2000).However, several important topics have not yet re-ceived sufficient attention. The government must ur-gently consider the following issues:• The Master Plan for Transportation should be up-

dated to provide an intermodal framework for de-cisionmaking. The plan should specify the goals,objectives, and criteria for selecting investments andfor ensuring congruence with the goals for eco-nomic development and poverty reduction.

• The formulation and execution of transport invest-ments should be restructured to strengthen suchinvestments technically and to reduce their vulner-ability to political influence. Planning proceduresshould be reformulated to increase openness and topromote the participation of local governments andcivil society.They should also ensure a more com-prehensive consideration of economic and techni-cal factors.

• The Road Fund should upgrade its monitoring ofhighway quality and its supervision of contractors.Local governments should be involved in suchmonitoring.

• A financial and institutional solution is urgentlyneeded for the urban road system. Urban roadsmake up a large proportion of the country’s trans-portation system, and their users pay a high pro-portion of the fuel consumption tax. However,municipalities receive no financial support for roadmaintenance.

• Enforcement of highway safety law should bestrengthened. This change requires improving thetechnical framework of the law and its regulations,as well as improving the equipment, training,wages,and administration of the traffic police.

• Highway designers must consider general publicsafety and provide for nonmotorized traffic. Hon-duras is currently implementing a new highwaymanual, which includes improved technical and en-vironmental standards.

• The regulatory functions of the transport sectorshould be consolidated into a single entity. Com-mission members should be appointed for 5 years,with overlapping terms to ensure continuity.Theyshould be removed only for justified causes relatedto carrying out their duties.

• The regulation of public transportation should berestructured so it operates in the interest of theusers.By using the pilot project in San Pedro Sula asa model, municipalities should have the option toregulate their own public urban transportation.Theurban transport subsidy in Tegucigalpa should beeliminated.

• The regulation of interurban cargo transport shouldbe reformed to improve its efficiency. SOPTRAVI’slicensing system and the regulation of fuel trans-portation charges should be dropped. Procedures atfrontier posts and at intermodal exchanges shouldbe streamlined to eliminate unnecessary delays andcosts. Compliance with weight and axle limits onthe main road network should be stringently en-forced using recently acquired weigh stations.

• The port subsector needs restructuring (a) to pro-vide efficient services at competitive prices and (b) to obtain a reasonable return on the country’shistorical investment in port infrastructure. Re-structuring should seek to achieve the maximumcompetition possible at each port and between dif-ferent ports. It should also seek to attract privatecapital and administrative experience, which wouldimprove the port capacity and the quality of ser-vices. Puerto Cortés urgently needs a new con-


12

Table O.2 Recommended Priorities for Private Investment in Infrastructure

Ports and Roads airports Water and sanitation Electricity Telecommunications

Award maintenance andupgrading concessionswith user tolls that willincrease the capacity andsafety of main highways

Seek private investmentto increase the capacityof ports and airports onthe basis of concessions

Award concessions inSan Pedro Sula andTegucigalpa

Establish improvedefficiency as a key role ofthe private contractor

Award distributionconcessions

Seek private investmentsto generate electricity

Award concessions andlicenses for all types ofcommunications

tainer terminal and greater dry bulk cargo capacity.Those expansions should be made with private fi-nancing under a concession framework.

Water and SanitationThe reform and the modernization of the water andsanitation sector have progressed slowly and remain in-complete. The institutional framework remains con-fused because it lacks a clear definition of responsibilityfor sector policymaking and financing, for providingservices, and for regulating operators.A framework lawthat seeks to clarify these issues was presented to theNational Congress in 2000.

That law proposes creating a subsecretariat of pub-lic health, which would be in charge of the water andsanitation sector policy. It also proposes transferringSANAA’s systems to the municipalities, which wouldthen be responsible for such services. In this context,the proposed law promotes the adoption of indirectmodes of providing service through concessions, leases,operation and maintenance contracts, and other similarmethods, as appropriate.The law would create a regu-latory entity under the Secretariat of the Interior andJustice (Secretaría de Gobernación y Justicia),which directsmunicipal agencies. SANAA would become a techni-cal support agency and would be in charge of develop-ing rural coverage.

In this context, specific recommendations for thewater and sanitation sector are the following:• It is important to pass a new framework law to

strengthen the sector’s institutionality, to clarifywho is responsible for ensuring that service is pro-vided and for granting concessions in this sector,and to establish a legal framework to separate thefunctions among sector policy, service operation,and regulation.

• A national development plan for water and sanita-tion is urgently needed.The first step should be todevelop adequate systems through informed deci-sionmaking. The plan should specify the servicecoverage and quality goals, the allocation of publicfunds, and the role of private financing to achievethose goals.There is concern that the Secretariat ofHealth (Secretaría de Salud) tends to view water andsanitation as an appendage of its health programsinstead of its focusing on the water and sanitationsector as a provider of commercial services.There-fore, Honduras should consider transferring sector

planning and policy functions to a new secretariatof energy and water.

• A new approach toward tariffs is essential. Tariffsshould recover the full cost of operating an efficientservice, and the technical specification of servicesshould take into account the users’ preferences andwillingness to pay.

• Municipal agencies are sensitive about being regu-lated by the central government. It is important thatthe municipalities perceive regulation as a source oftechnical support in determining efficient costs andthe tariffs needed to cover those costs.The regula-tor should not impose minimum tariffs, but rathershould set the maximum tariffs necessary to guaran-tee users’ rights and to protect users against “polit-ical capture.” If this study’s recommendation tocreate a multisector regulator for water, electricity,and telecommunications is adopted, the regulationof water and sanitation should be reassigned to thatentity.

• Honduras should develop a plan to expand waterand sanitation coverage to rural areas as it identifiesappropriate sources of financing. Ownership of therural water systems built by SANAA should betransferred to the communities, and resourcesshould be assigned to maintain technical assistancefor those systems. In the past, technical assistance ofthis sort was financed through investment programs(for example, the operation and maintenance tech-nicians of the Rural Water, Sanitation, and HealthProgram [Programa de Agua, Sanemaiento y SaludRural—PRASSAR]).

• Services for large cities should be operated by pri-vate companies through concessions and should besubject to modern regulation. The strategy mostlikely to succeed is one that offers significant im-provements in service without severe tariff increases.This strategy implies taking a cautious approachwhen designing capital programs. Investments thatare cofinanced with private capital and with public(World Bank or IDB) or quasi-public (IFC or Inter-American Investment Corporation) funds, whichare supplied to the operator at a nonsubsidized in-terest rate (similar to what would be paid if a mu-nicipal bond market were in the country) wouldhelp to keep rates at an acceptable level.

• The best option for Tegucigalpa is granting a con-cession to an international operator.The city has a


13

very large investment deficit in water productionand in the collection and treatment of wastewater.That deficit was caused, in part, by HurricaneMitch.

• Models need to be developed to administer systemsfor both small and medium-size cities. One optionis multimunicipal systems that are centered aroundlarge cities where there is an established interna-tional operator. This kind of system is now a realpossibility in the Sula Valley. Another option is touse contracts that combine investment packageswith service operation during a specific time pe-riod.The contractor would derive part of its com-pensation from tariffs and would assume the corre-sponding commercial risk. This type of contractcould be assigned on the basis of the minimum sub-sidy required.

• IDB and the government have agreed on a programfor medium-size cities that links loan amounts tothe system’s ability to pay.This program will providecommunities with an incentive to choose technol-ogy and service characteristics that are congruentwith the operator’s financial capacity and the users’ability and willingness to pay.

ElectricityWith the backing of the International Monetary Fund,the World Bank, and the IDB, the Flores governmentproposed a new framework law that would facilitateprivatization by creating regional distribution enter-prises and would foster a private supply of electricityby creating a wholesale market in generation. How-ever, after 2 years of attempts to pass the new law in theface of strong opposition, the government abandonedits effort in July 2001.

The new government,which took office in January2002, must restart the reform process while taking into account the recent experience.This study recom-mends giving priority to strengthening the sector pol-icy and regulatory functions, privatizing distribution,rationalizing subsidies, and streamlining the strategy toexpand coverage. The following concrete guidelinesare suggested:• It is urgent for Honduras to strengthen the institu-

tional arrangements for sector policies. At present,ENEE still plays an important de facto role in thepolicy field in the joint context (a) of the intermit-tent interventions in the sector by the Energy Cab-

inet (Gabinete Energético) and (b) of the weakness bythe General Directorate of Energy.The directorateis located in SERNA and arguably has a conflict ofinterest with SERNA’s functions in environmentalcontrol. For stronger sector leadership, a secretariatof energy should be created to cover both electric-ity and fossil fuels. Its scope could even be increasedto cover the water sector.

• As stated earlier, Honduras should create a multi-sector entity that covers water and sanitation, elec-tricity, and telecommunications so it can establishstronger regulations.The entity would be financedthrough a regulatory tariff levied on service users.The procedures for appointing commissionersshould be designed to insulate the entity from polit-ical interference.To this end, commission membersshould be appointed for 5 years, with overlappingterms to ensure continuity. Members should be re-moved only for justified causes related to a defi-ciency in carrying out their duties.Regulators shouldreceive intensive training in the modern methods ofenergy regulation.

• Honduras should privatize distribution in the shortterm so it can move forward with restructuring thesector. At the same time, ENEE’s hydroelectricplants, transmission grid, and dispatch center shouldbe corporatized and separated into independententerprises.

• With respect to generating electricity, it is impor-tant for Honduras to ensure an adequate expansionof capacity to meet the growing demand at theminimum possible cost to consumers.To reduce thehigh costs previously incurred in some PPAs andrental contracts, Honduras should ensure that thebidding processes are transparent and competitiveand should solicit plant sizes that are consistent withlower unit costs.The contracting of 210 megawatts,which was under way in the first half of 2002, au-gured well in this regard.After distribution is priva-tized, various options will be available for managingthe future expansion of generation capacity. Oneoption is to oblige the privatized distributors toform an association to issue PPAs for additional ca-pacity and to issue competitive public bids underthe purview of the regulator.The costs of such con-tracts—along with those of the existing PPAs—would be passed on to the users pro rata with theirconsumption of electricity. This method would


14

avoid the risk of unstable consumer tariffs related to disequilibrium in wholesale generation markets,which have undermined reform sustainability inother countries.

• Honduras should continue to have a single buyer inthe generation market so it can minimize the costof meeting the demand in each period.The avail-able plants should be dispatched in order of eco-nomic merit. Plants with capacity contracts wouldcontinue to have a specified maximum price that isbased on their short-run marginal cost.They wouldbe allowed to charge up to that maximum for dis-patching power. For other plants, the bid pricewould be free. In each period, total dispatch costswould be passed to the consumers pro rata accord-ing to their energy consumption so they would col-lectively pay exactly what was necessary to meettotal demand.

• Honduras should require distributors to develop amarket for the temporary suspension of energy sup-ply so it can introduce responsiveness between de-mand and prices in real time. It should issue contractsto pay large consumers for decreasing their demandat peak hours.This program would reduce the aver-age generation cost and would provide an objectivebasis for determining the value of unmet demand.

• Honduras should postpone implementing a fullyliberalized wholesale market (that is, one with nocentral planning of capacity expansion and withprices paid by consumers and received by genera-tors that would be determined by a spot marketwith multiple buyers) until the Central Americanmarket has been consolidated. It is important to waituntil competitive conditions prevail to avoid therisk of price distortions. Ideally, before Hondurasimplements a wholesale spot market, it should pri-vatize the publicly owned generation and transmis-sion assets so it can avoid a conflict of interest withthe state’s regulatory function.The new frameworklaw should not rule out this possibility. However, inthe short term, privatizing state generation andtransmission assets can be dispensed with in order toadvance reform along the lines suggested above.

• Honduras should establish an electrification fundand should give priority to proposals with the least-required subsidy per connection so the country cancontinue to increase coverage with reduced subsidycosts.To prevent distortions in the choice of tech-

nology, Honduras should make the subsidies avail-able for off-grid solutions. The newly establishedsecretariat of energy should prepare a coverage ex-pansion plan in which it identifies communitieswithout service, as well as considering possibletechnical options and their costs. The budgetedamount available for subsidies in each period shouldalso be designated.

• Honduras should abolish the demand subsidy andshould apply the available resources to the coverageexpansion program. If eliminating the subsidy is po-litically unacceptable, the demand subsidy should—at the very least—be limited to those who consumeless than 100 kilowatt-hours per month, whichwould improve its targeting and would reduce costs.

TelecommunicationsThe reform process in telecommunications came to ahalt when the capitalization of HONDUTEL failed inOctober 2000. The new government will have toreinitiate the process. The main policy lines recom-mended by this study are the following:• Honduras should place responsibility for sector pol-

icy at the ministerial level and should not give thisrole to the Secretariat of Finance. Ongoing sectorpolicies should not be a de facto function of theState Modernization Commission (Comisión deModernización del Estado),whose role should be lim-ited to defining and promoting the reform, or ofCONATEL, which is the regulator. One option isto assign the policy function to SOPTRAVI.

• CONATEL should provide support and informa-tion for forming sector policies and should help, asappropriate, in implementing them, but it shouldnot determine them. Honduras should considermerging telecommunications regulation into amultisector regulatory agency, which would alsocover water and sanitation plus energy.

• Political pressures on CONATEL would be re-duced if its members were appointed for 5 yearsand had overlapping terms to ensure continuity.Members should be removed only for justifiedcauses related to the performance of their duties.Pressures linked to assigning broadcast frequenciescould be reduced if an auction mechanism were es-tablished with zero regulatory discretion.

• CONATEL should reevaluate the rebalancing pro-gram for HONDUTEL tariffs to ensure that the


15

tariffs for national calls reflect the real costs of an ef-ficient service.Those charges should not be inflatedsolely to compensate for reductions in internationalcall tariffs or to increase the potential value of a con-cession sale. After the tariff adjustment program isset, HONDUTEL should immediately put it intopractice without waiting for the implementation ofa concession.

• HONDUTEL should also immediately implementa program of cost restructuring by reducing its staffwithout waiting for a concession.The governmentshould authorize the use of the enterprise’s financialsurpluses to make severance payments.The confu-sion surrounding liabilities of the enterprise’s retire-ment fund should also be clarified.

• HONDUTEL should be privatized as soon as pos-sible by granting a concession to an enterprise witha majority of private capital.The concession shouldnot be exclusive.The monopoly in voice-switchingservices through 2005,which was previously offeredto the Honduran Telecommunications Corporation(Corporación Hondureña de Telecomunicaciones—CO-HONDETEL), a new telecommunications enter-prise, should be dropped.

• Rather than defining “build-out requirements” interms of rigid amounts of investment or in numbersof lines to be installed, the concession contractshould emphasize performance norms and servicequality in the established service areas. It should alsoinclude response times for the installation of lines,repairs, call completions, and similar needs.The in-creased coverage requirements in new areas shouldbe handled by an independent program (as de-scribed next).

• Before bidding begins, the concession contractshould be made public on the Internet and in thenational media. Feedback should be requested fromthe public and from potential bidders before thebases for bidding are finalized.

• After the content of the concession contract andthe norms for regulating tariffs have been deter-mined, Honduras should assign the concession tothe highest bidder. No reserve price should be set,because the main purpose is not to generate re-sources for the Treasury (Tesorería).The objective isto create a new framework to provide services that

both will be favorable to users and will promote thecountry’s competitiveness. The future income forthe Treasury will come from increased dividends onthe shares retained by the state.

• The government should support establishing publicphone services in remote communities. However,this program should be handled by the sector policyentity, rather than being an integral element of ob-ligations placed on the concessionaire. It is recom-mended that Honduras assign US$15 million to thisfund, which would be financed from the value ofthe HONDUTEL concession.This amount wouldpay for public telephones in approximately 3,000communities. The resources should be distributedthrough a competitive mechanism (seeking to min-imize subsidies) and should be open to all providersof telecommunications services.

• Honduras should establish two additional conces-sions in the short term through public internationalbidding so it can make the wireless telephone mar-ket competitive.This bidding process should be sep-arated from the HONDUTEL concession. How-ever, the HONDUTEL investor should be allowedto bid, subject to the requirements that the enter-prises be independent of each other and that accessto switching be given to all mobile operators on the same terms. CONATEL should define the feesfor interconnection between the mobile and fixedservices as soon as possible.

• The sector framework law should be reformed toestablish more flexible technical definitions that arecongruent with a rational administration of the sec-tor in the context of rapidly changing technologies.The distinction between switching and other ser-vices, in particular, should be eliminated in favor ofgeneral purpose licenses to offer telecommunica-tions services. This change would be possible ifHonduras were to abandon its plan to maintain amonopoly on switching in favor of HONDUTELor its successor until 2005.


16

Note

1. The Consultative Commission on Privatization was fused withthe State Modernization Commission by the Maduro administrationin early 2002.

PART 1A Cross-Sector Vision of

Infrastructure and Development

19

Infrastructure services affect the development processin two critical ways. On the one hand, lack of access tobasic infrastructure constitutes a fundamental cause ofpoverty in households and communities. On the otherhand, deficiency in quality and in access to infrastruc-ture services or unreasonably high charges for thoseservices can negatively affect the country’s competi-tiveness, can make it difficult to attract investment, andcan discourage economic growth. Obviously, a stronglink exists between low economic growth and povertyin households and communities.This part outlines therecent economic performance of Honduras, both interms of poverty reduction and growth, and it com-ments on the role of infrastructure in those results.

The Economic Modernization Program

Since Honduras initiated a program of structural ad-justment and liberalization in 1990, its economic per-formance has improved significantly. Among the mostimportant economic modernization measures adoptedare the following:• A reduction in import tariffs and export taxes,

which radically reduces the protection of domesticproducers and opens the way for the participationof Honduran producers and consumers in globalmarkets

• The liberalization of exchange rates and the estab-lishment of a more competitive exchange rate inreal terms, compared with the overvalued levels ofthe 1980s

• The modernization of banking and insurance regu-lation with new laws and the creation of the Na-tional Commission for Banking and Insurance(Comisión Nacional de Bancos y Seguros—CNBS) as aregulatory entity

• Reforms to the legislation governing the CentralBank of Honduras (Banco Central de Honduras—BCH) to focus its functions on monetary and ex-change rate administration and a large reduction inthe minimum reserve requirement

• The liberalization of the bank lending rate• Reductions of corporate and personal income taxes

to a maximum rate of 25 percent (compared withthe previous maximum of 42 percent)

• The creation of fiscal incentives (free zones andspecial regimes) for key sectors, such as duty-freeindustrial zones (maquilas) and tourism

• Reforms in the legislation of the agricultural, min-ing, and forestry sectors.As part of this program, Honduras has promoted

modernization measures in the infrastructure sectors,including transportation, water and sanitation, energy,and telecommunications. Under this framework, astrategic vision for infrastructure sector developmenthas been adopted, which is based on the followingprinciples:• The future development of the infrastructure sec-

tors will be led by the private sector to harness theresources necessary to expand coverage, improve ef-ficiency, and serve poor users with the minimumsubsidy necessary.

1 Country Background and the EconomicImportance of Infrastructure

• The markets will be liberalized to promote the entryof private capital.To achieve maximum benefits forconsumers at the lowest possible cost, policymakerswill ensure ample competition among operators, in-cluding competition among different operators in aliberalized market. Alternatively, when, because ofscale economies, it is necessary to grant a monopoly,competition among different bidders will determinewho obtains the concession contract.

• Taking into account the limitations to competitionin the infrastructure markets, the government willcreate strong regulatory entities.These entities willhave the mandate, where feasible, to strengthen anddefend competition.Where this is not possible, theywill establish rules for tariffs that are based on ananalysis of the providers’ efficient costs.The regula-tor’s fundamental role is to seek the best possible re-sult for the consumer and, at the same time, ensurejust treatment for the other participants (operatorsand investors).

Growth and Poverty: Recent Trends

Investment and GrowthAs a result of this reform program,Honduras has main-tained an investment level greater than 20 percent ofgross domestic product (GDP) for every year since

1993, and private investment has normally been greaterthan 15 percent of GDP (see figure 1.1).This has alsoled to a significant increase and diversification in ex-ports.This result, together with a successful renegotia-tion of the external debt, has significantly strengthenedthe country’s external macroeconomic balance, per-mitting the accumulation of international reservesgreater than 3 months of imports.

However, the macroeconomic results in terms ofgrowth have been less promising. In spite of the intro-duction of modern technologies in some of the moredynamic sectors, such as maquilas and aquaculture, theaverage productivity of investments has been disap-pointing.From 1990 to 1997,Honduras had an averageannual GDP growth of 4 percent, barely 1.5 percenthigher than the population growth rate (see table 1.1).The years 1998 and 1999 were severely affected byHurricane Mitch, but in 2000 there was an importantrebound in growth, with a 4.7 percent rise in the GDP.For 2001, the forecast is for lower growth, of 4 percent,because the economy is expected to be negatively af-fected by the U.S. recession and by continued high in-ternational prices for fuels and low ones for coffee.

PovertyIn addition, Honduras still has a high level of poverty.Nearly 66 percent of the country’s households (ap-

20


Figure 1.1 Gross Capital Investment and Changes in Inventory, 1987–98

Percent

121413

9 1012

16 1714 15

1923

77

6

55

10

12 11

10 8

6

64

631

46

5

10

87

6

1

0

5

10

15

20

25

30

35

40

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998/e

Change in stock

Private capital investment

Public capital investment

proximately 747,000 households) were below thepoverty line in 19991 (see figure 1.2). Even more wor-risome is the high level of extreme poverty—with al-most 49 percent of households below the extremepoverty line in the same year.

Data indicate an improvement in the poverty situa-tion during the past decade, with a reduction of 9 per-centage points in the number of households below thepoverty line (from 75 percent in 1991 to 66 percent in1999). Similarly, the percentage of households living in extreme poverty reduced by 5 percentage points,from 54 percent in 1991 to 49 percent in 1999. None-theless, this rate of improvement cannot be consideredacceptable.

Given the persistence of such a high level ofpoverty, the Honduran government has developed aPoverty Reduction Strategy (Estrategia de Reducción dePobreza—ERP).The ERP has received the support of

the World Bank and was prepared as part of the nego-tiations for participation in the debt reduction initia-tive for heavily indebted poor countries (HIPCs).TheERP proposes a series of macroeconomic, microeco-nomic, sectoral, and social policies aimed at reducingthe extremely poor proportion of the population to 25 percent and the poor population to 42 percent by 2015.

Infrastructure and Poverty Reduction

With regard to poverty reduction, access to basic infra-structure in rural and marginal urban communities is acritical issue. Lacking access to running water, poorhouseholds pay high sums for water brought by tankersor family members invest their time carrying water totheir houses. In communities where the roads do notpermit the entry of regular buses, people pay signifi-

Country Background and the Economic Importance of Infrastructure

21

Figure 1.2 Trends of Poverty and Income, 1991–99

Percent

0

10

20

30

40

50

60

70

80

90

100

1991

74.8

69.9

67.5

67.2

67.8

68.7

65.8

63.1

65.9

1992 1993 1994 1995 1996 1997 1998 1999

Extreme poverty Poor Poverty line

Table 1.1 Average Annual Growth Rates in Percentages

1978–80 1980–85 1985–90 1990–95 1995–97 1998 1999 2000 2001

Population 2.8 2.8 2.9 2.9 2.6 2.6 2.6 2.6 2.6Real GDP 2.6 1.7 3.1 3.6 4.3 2.9 –1.9 4.7 2.6Real per capita GDP –0.2 –1.1 0.2 0.7 1.7 0.3 –4.5 2.1 0Note: Hurricane Mitch had a negative impact on the GDP in 1998 and 1999.The real GDP figures for 2000 and 2001 are provisional.Source: BCH.

cant sums to use the services of minibuses or pickups(called taxis mixtos) or walk to the main highway.Households without access to electricity are unable touse basic home appliances, and many families cookwith wood, which they must carry from nearby foreststo their homes. Where fixed-line telephones are un-available, people must either do without communica-tion facilities or pay the much higher tariffs for cellularphone service if it is available in their zone. It is note-worthy that in most cases the alternatives used whenthere is no network connection tend to be much morecostly than an efficient network service.

A strong correlation exists between access to basicinfrastructure services and income level (see table 1.2and figure 1.3). In 1999, in the decile of poorest house-holds, 28 percent did not have running water, 32 per-cent did not have sanitary facilities, and 68 percent didnot have electricity. Similar levels were observed in thesecond poorest decile. In contrast, in the least poordecile, barely 2 percent did not have running water, 3percent did not have sanitary facilities, and only 5 per-cent lacked electricity.The respective national averagesare 12 percent, 17 percent, and 33 percent.

In the past decade, coverage for each of these ser-vices has risen significantly.The proportion of house-holds without water fell from 30 percent to 12 percent;

the proportion without sanitation, from 32 percent to17 percent; and the proportion without electricity,from 53 percent to 33 percent. As can be observed intable 1.2 and figure 1.4, the progress in water and san-itation coverage has mainly benefited the five poorestdeciles. However, the increase in electricity coverage


22

Figure 1.3 Lack of Basic Infrastructure Services, byDecile of Income, 1999

Percent without service

01 2 3 4 5

Decile

6 7 8 9 10

No electricity

10

20

30

40

50

60

70

No sanitary sewer

No water

Table 1.2 Access by Households to Infrastructure Services, 1990 and 1991

Households per decile of per capita income a (%)

Average1 2 3 4 5 6 7 8 9 10 (%)

1990Without waterb 54 47 43 38 37 32 25 22 14 9 30Without sanitationc 54 52 48 44 38 35 25 19 15 9 32Without electricity 86 82 75 74 66 59 46 35 26 16 53

1999Without waterb 28 21 16 15 13 10 8 5 3 2 12Without sanitationc 32 29 28 22 19 13 11 6 3 3 17Without electricity 68 64 52 38 32 26 19 14 7 5 33

Increase in coverage, 1990–99Water 26 26 27 23 24 22 18 17 10 8 18Sanitation 22 23 20 21 19 22 14 13 12 6 15Electricity 18 18 23 35 35 33 28 21 19 11 21a. Deciles are based on monetary income from work (1 = poorest; 10 = wealthiest). Households with unknown income are excluded.b.Without water = without access to a public or private network service, inside or outside the property where they live.c.Without sanitation = without sanitary service or a latrine where they live.Source: EPHPM, May 1990 and March 1999.

has primarily benefited the fourth, fifth, sixth, and sev-enth deciles.

Data from the National Survey on Household In-come and Expenditures (Encuesta Nacional de Ingresos y Gastos de los Hogares—ENIGH) 1998–99 clearlydemonstrate the concentration of telephone service inhouseholds with the highest incomes (see table 1.3 andfigure 1.5). On a national level, barely 14 percent ofhouseholds have a telephone in the home, but in thepoorest decile only 0.1 percent have this service.Thefigure is 52.1 percent for the wealthiest decile.

According to Empresa Hondureña de Telecomunicacio-nes (HONDUTEL), the national telecommunicationsmonopoly, more than 100 of the 298 municipalities inHonduras have no access to any type of telecommuni-cations service, and 50 are limited to telex or radio

service. In a similar fashion, access to means of trans-portation is strongly correlated with the household’spoverty level (see table 1.4). Data from ENIGH revealthat in the three poorest deciles, the great majority ofHondurans simply do not have access to transporta-tion. In contrast, in the wealthiest decile, only 15 per-cent have no means of transportation.

As would be expected, the most important meansof transportation for the poorest Hondurans is the bus.However, it is important to note that other Honduransuse bus service more than the poor do, the reasonbeing a lack of access to bus service in rural areas.Theuse of private cars is definitely a privilege of those whoare not poor. In the first, second, and third deciles, nomore than 1 percent of Hondurans have access to thismeans of transportation.


23

Figure 1.4 Increasing Coverage, by Decile of Income, 1990–99

Percent increase in coverage

1 2

0Water Sanitary sewer Electricity

5

10

15

20

25

30

35

3 4 5 6 7 8 9 10 Total

Table 1.3 Percentage of Households with a Telephone, 1998

Households per decile of per capita income a (%)

Average1 2 3 4 5 6 7 8 9 10 (%)

Households with telephone 0.1 0.7 1.6 2.2 7.4 9.6 13.4 23.1 30.9 52.1 14.1a. Deciles are based on monetary income from work (1 = poorest; 10 = wealthiest).Source: BCH. ENIGH 1998/99.

Infrastructure Proposals in the ERPFor these reasons, it is understandable that the Hon-duran government’s ERP has prioritized improvingthe coverage and access of poor communities to basicinfrastructure services. Among the most importantgoals and strategies to achieve this improvement, asoutlined in the ERP (November 2000 version), are thefollowing:

• To raise potable water and sanitation coverage to 90percent in 2005, 95 percent in 2010, and 100 per-cent in 2015 by implementing basic water and san-itation programs in rural and marginal urban areas

• To strengthen the institutional framework for theconstruction and maintenance of rural highways

• To establish a national fund for rural electrifica-tion and extend the coverage of the Solar VillageProgram

• To establish public telephones in all towns withpopulations greater than 500.

Infrastructure, Growth, and Competitiveness

In the medium and long term, it is impossible to separatepoverty reduction from economic growth. It has beenestimated that for Honduras to reach the per capita in-come levels that are currently reported for Costa Rica,Honduras must achieve annual real economic growthon the order of 6 percent to 7 percent (ESA Consultores2000). This achievement will be possible only with ahigh level of private investment and with significant im-provement in the productivity investments.

The availability, quality, and cost of infrastruc-ture services affect not only the decision to invest, butalso the probable productivity of the investments.Thatis why these services are critical for the country’scompetitiveness.


24

Figure 1.5 Percentage of Households with Telephones inthe Home, by Decile of Income, 1998

Percent with telephone

01 2 3 4 5

Decile6 7 8 9 10

10

20

30

40

50

Table 1.4 Principal Means of Personal Transport by Household Income Decile, 1998

Households per decile of per capita income (%)

AverageMeans most useda 1 2 3 4 5 6 7 8 9 10 (%)Car 1 0 1 2 4 3 9 9 16 40 9Motorbike 0 0 0 0 0 0 0 0 1 1 0Bus 25 21 31 36 38 48 51 54 47 31 38Collective taxi 0 0 1 2 3 3 6 9 15 16 5Individual taxi 0 0 0 3 0 1 1 2 2 4 1Bicycle 2 3 6 5 7 9 11 9 7 5 6Horse or other animal 9 6 7 4 2 3 2 3 1 2 4School bus 0 0 0 0 0 0 0 0 1 3 0Company bus 0 0 0 1 1 0 1 0 1 0 1Vehicle of another households 2 3 5 5 5 2 1 2 3 4 3Shared taxi 0 0 0 0 0 0 0 0 0 0 0Otherb 2 1 2 2 2 1 1 1 2 0 2None 60 67 56 46 44 39 30 25 23 15 41a. Respondents were allowed to mention more than one means so columns may not sum to 100 percent.b. Includes boat, railway, and others.Source: BCH. ENIGH 1998–99.

Competitiveness ranking indexes indicate that Hon-duras is not advancing as rapidly as its competitors. Forthat reason, it runs the risk of losing its position in thecompetition to attract foreign investment. Table 1.5shows Honduras’s position in the index prepared annu-ally in the Global Report by the Instituto Centroameri-cano de Administración de Empresas–Harvard Institute forInternational Development (INCAE-HIID 1999).2

Honduras has the worst index in the region,with an av-erage of 30, compared with Costa Rica’s average of 52.

It is worth noting that the infrastructure compo-nent has a negative effect on Honduras’s rating, withthe lowest level in the region (22), much lower than allthe other countries with the exception of Nicaragua.This rating reflects the slow pace of modernization ofservices, such as transportation, water and sanitation,electricity, and telecommunications. In the Index ofMicroeconomic Competitiveness, also prepared byINCAE-HIID, Honduras is placed 58th of 59 coun-tries evaluated. The ranking by sector was electricity,58; ports, 59; internal transportation logistics, 58; high-

ways, 54; airports, 50; and telecommunications, 44.3 Ina similar fashion, in the Heritage Foundation’s Index ofEconomic Freedom, Honduras is second to last amongthe region’s countries, surpassing only Nicaragua.

The flow of foreign direct investment (FDI) is an-other good barometer of the investment climate in thecountry. In FDI, Honduras’s performance is also disap-pointing (see table 1.6).Among the Central Americancountries in 1992–98, Honduras had the lowest figurefor total FDI, for the amount of FDI per capita, andgrowth.

Infrastructure and the Investment Climate

The results documented in the previous paragraph re-flect that, although the country has made significantachievements in macroeconomic management andsectoral reforms, there remain many obstacles to in-vestment. A recent report of the Foreign InvestmentAdvisory Service (FIAS 2000) noted the followingconstraints to private investment:


25

Table 1.5 General Index of Competitiveness, 1999

Costa Rica El Salvador Guatemala Honduras Nicaragua

Commercial openness 77 56 63 46 64Job market 86 34 40 64 43Technological development 48 n.a. 12 5 16Finances 33 46 26 22 26Governance 40 64 66 56 55Business and marketing 55 22 31 11 33Infrastructure 34 38 43 22 24Institutional quality 43 32 16 15 30Average 52 42 37 30 36Note: (0 = worst; 100 = best).n.a. = Not available.Source: INCAE-HIID 1999.

Table 1.6 Foreign Direct Investment in Central America and Chile, 1992–98

Population AverageTotal, 1992–98 Annual average 1999 per capita Growth(US$ million) (US$ million) (US$ million) (US$ million) 1992–98 (%)

Chile 22,001 3,143 15.0 210 496Costa Rica 2,576 368 3.6 102 247El Salvador 978 163 6.2 26 5,701Guatemala 1,211 173 11.1 16 715Honduras 456 65 6.3 10 176Nicaragua 623 89 4.9 18 1,225Source: Based on FIAS 2000.

• Weakness in the legal system and in the administra-tion of justice

• The high cost of starting a business and the persis-tence of bureaucratic state regulations that presentobstacles for commercial activities

• Weakness in property registries and the constitu-tional prohibition of foreigners from owning prop-erties near the coasts or borders

• The lack of modernization in labor markets • The low quality of the labor force because of the

education system’s weakness • The deficiency of financial and capital markets and

high active interest rates, which limit investmentdemand

• The lack of modernization and privatization of in-frastructure services.Those problems of a structural nature have been

made more acute as a result of circumstantial factors.For example, the lapse in fiscal discipline in 1993 led to a severe structural adjustment the following year,which destabilized the macroeconomic climate. Evenmore important was the impact of Hurricane Mitch inOctober 1998, which caused greater macroeconomicdislocations and severely damaged the country’s alreadydeficient infrastructure (see “Infrastructure Perfor-mance: An Overview” later in this part).

Some of the problems mentioned by FIAS havebeen gradually corrected in recent years. One impor-tant advance was the constitutional reform of theSupreme Court of Justice (Corte Suprema de Justicia),which was ratified by the National Congress of Hon-duras (Congreso Nacional de Honduras) in April 2001.That measure will tend to depoliticize the court and

strengthen the credibility of the country’s administra-tion of justice.The legal system has also been strength-ened by a new penal code and the introduction of oralhearings in criminal law.There has also been progressin simplifying paperwork and eliminating red tape forinvestors.With the support of the World Bank, the gov-ernment has initiated a program to register real estatein rural areas in order to avoid overlapping titles for thesame land.The coverage and quality of primary educa-tion is improving with greater participation of parentsunder the Honduran Community Education Project(Proyecto Hondureño de Educación Comunitaria—PRO-HECO) model and a more comprehensive educationalreform process has been initiated. Banking regulationhas also been significantly strengthened with the appli-cation of the Basle norms and a new insurance law.

Thus Honduras is moving ahead to improve the in-vestment climate on various fronts that were identifiedin the FIAS report as priority areas needing reform to attract investment. Unfortunately, however, of all of those areas, infrastructure is the one where leastprogress has been made. Without doubt, this laggingprogress has a highly negative effect on the investmentclimate in Honduras.The postponement in reformingthe framework laws for the energy and water sectorsand the delays in the privatization process in energy,telecommunications, and ports creates an unattractivesituation for investors: uncompetitive services in termsof cost, reliability, and quality.The limited progress inincreasing private investment in those sectors contrastssharply with the situation in neighboring countriesand is a negative signal for investors regarding thecountry’s commitment to modernization.


26

Notes

1. According to the government’s House-hold Survey for Multiple Purposes (EncuestaPermanente de Hogares de Propósitos Múltiples—EPHPM) of March 1999, the average num-ber of people per household was 5.2, com-pared with 5.4 in the May 1991 survey.2. The global index of competitiveness isthe result of the average of eight factors: (1)Degree of commercial openness measuresthe depth of a nation’s integration into theglobal economy in terms of its export orien-

tation and the degree of liberty in whichcommerce and foreign investment are han-dled. (2) Government performance measuresto what point the state supports or hinderscompetitiveness and evaluates the degree towhich fiscal policy and the state apparatusfacilitate or limit the resources available forprivate investment, as well as judging thequality of the public services. (3) Financialmarket development evaluates the role ofcapital markets in facilitating savings, savings

behavior, and the efficacy and efficiency ofthe financial intermediaries to provide re-sources for productive investment. (4) Stateof infrastructure measures the quantity andquality of the transportation system, thetelecommunications network, the genera-tion and distribution of electricity, the portand warehouse facilities, and any kind ofphysical infrastructure that can affect theproductivity of private investment positivelyor negatively. (5) Technological development


27

evaluates the development and intensity ofresearch, the management level of technol-ogy, and the quality of technological knowl-edge available to the investors. (6) Manage-ment behavior measures the quality ofmanagement resources, competitive strate-gies, product quality, quality control, andhuman resources, as well as the marketinglevel of private enterprise. (7) Efficiency ofthe labor market evaluates, first, the real effi-

ciency and potential of human resourcesand, second, the flexibility of the labor mar-ket. (8) Institutional quality measures the re-liability of the legal and social institutionsthat serve a market economy, competition,the application of the law, and the protectionof intellectual property rights. Each of theseeight factors is a weighted average of a quan-titative indicator and an index of the surveyresults of business executives’ perceptions.

3. These indicators are based, in part, onsubjective perceptions of the people beinginterviewed. The authors of the presentstudy believe that an objective measurementof the quality of the port and highway ser-vices in Honduras compared with othercountries in the Central American regionwould indicate a better ranking than the one reported by this HIID index. See part 2under “Transportation.”

28

This section identifies the principal agencies involvedin providing infrastructure services in Honduras. Theprincipal changes in the institutional framework andthe progress of private sector participation in recentyears are outlined, and the policy limitations in theprogress of this process are discussed.

The Traditionally Predominant Role of the Public Sector

Traditionally, the public sector has been the predomi-nant provider of every variety of infrastructure servicein Honduras, including the construction of the infra-structure (capital works) and its subsequent operationand maintenance. The only important exceptions tothis rule have been transportation services (passengersand cargo) and television and radio.Those services areall private, but they are subject to state regulation interms of assigning bus routes and radio and televisionbroadcasting frequencies.

Apart from these cases, private agencies have tradi-tionally played an important role only in remote orpoor regions, where public services are not availableand people rely on coping sources. Examples of thesesources are the cistern trucks that provide water or theprivate diesel generators that provide electricity.

Modernization Efforts and the Growing Role of the Private Sector

However, during the past decade, the government hasmade an institutional modernization effort in the infra-

structure sectors.That effort is oriented at separating thefunctions of sector policy, service operation, and regula-tion. Its purposes are to depoliticize decisions about tar-iffs and charges, to strengthen cost recovery, and to laythe groundwork for the privatization of electricity dis-tribution and of the telephone system.Toward that end,Honduras passed framework laws for electricity (1994)and telecommunications (1995), as well as a concessionlaw for transportation (1998).Two framework bills areunder consideration in the National Congress: a law forwater and sanitation and an improved law for electricity,which is aimed at facilitating the privatization of distri-bution and strengthening the energy market. In terms of regulation, the past decade saw the creation of theNational Supervisory Commission for Public Services(Comisión Nacional Supervisora de los Servicios Públicos—CNSSP), the National Energy Commission (ComisiónNacional de Energía—CNE), the National Commissionfor Telecommunications (Comisión Nacional de Telecomu-nicaciones—CONATEL), and the Superintendency ofConcessions and Licenses (Superintendencia de Conce-siones y Licencias).

These reforms have permitted a significant increasein the role of the private sector in the operation of in-frastructure services in the past 10 years (see table 2.1).• In transportation, private agents have carried out

highway maintenance under contract since the be-ginning of the 1990s. Previously, government em-ployees performed the maintenance. More recently,in 2000, the international airports were given inconcession.

2 The Organization of Infrastructure Services and the Role of Private Participation

29

• Since the 1993–94 energy crisis, private generatorshave carried out under contract the expansion of theelectricity supply. The National Electricity Enter-prise (Empresa Nacional de Energía Eléctrica—ENEE),a state enterprise, continues to be the most impor-tant generator because of its hydroelectric systemsand has a monopoly on transmission and distribu-tion. Nevertheless, in 2000, the private sector pro-duced 39 percent of total generation and 98 percentof thermal generation. In 1999, meter reading andbilling were outsourced, reducing collection costs.

• In telecommunications, the sale of 51 percent of thestate enterprise HONDUTEL failed in October2000 because the reserve price was too high, giventhe requirement on the concessionaire to expandservice and given the programmed tariff schedule.The bidding process is expected to be repeated. In1994, the development of cellular phone servicewas given in concession to a private company, andcable television, data networking, and Internet ser-vice provider (ISP) services are privately providedunder state regulation.

The Organization of Infrastructure Services and the Role of Private Participation

Sector Private agencies Public agencies

SOPTRAVI (General Directorate for the Conservation ofRoads and Airports), municipalities, FHIS, SAG, COHDEFOR

Road Fund, municipalities

SOPTRAVI (General Directorate of Transportation)

Secretariat of Security, municipalities

ENP

SOPTRAVI (General Directorate of Civil Aeronautics)

Superintendency of Concessions and Licenses

National Railway of Honduras

SANAA, municipalities, FHIS

SANAA, Secretariat of Health, municipalities, FHIS

CNSSP, Secretariat of Health, SERNA

Secretariat of Health (collaborative group), SANAA,municipalities

ENEE

ENEE

ENEE

CNE

Energy cabinet

HONDUTEL/COHONDETEL (fixed lines, wireless phoneservice, data networking, access to the international Internetbackbone); National Radio of Honduras

CONATEL and HONDUTEL

Table 2.1 Principal Agencies Involved in Infrastructure Services in Honduras

TransportationRoad construction

Road maintenance

Regulation of transportation

Transit management

Ports

Airports

Railways

Water and sanitationUrban water

Rural water

Regulation

Planning and policies

ElectricityProduction

Transmission

Distribution

Meter reading/collection

Regulation

Policies

TelecommunicationsOperation

Regulation and policies

National Coffee Fund (recentlyprivatized)

Contractors

Inter-Airport (private concessionaire)

Waters of San Pedro Sula (privateconcessionaire), NGOs, privatecommunal committees

NGOs, private communal committees

Private generators

SEMEH (private contractor)

CELTEL (cellular); data networking; ISPs;radio and television (broadcast andcable)

• In water and sanitation, a model of public–privatecooperation has generated important progress inrural and marginal urban coverage.The central gov-ernment, through the Autonomous National Ser-vice for Water and Sewer (Servicio Autónomo Nacionalde Acueductos y Alcantarillados—SANAA) and theSecretariat of Health (Secretaría de Salud ), and bilat-eral agencies, such as the U.S. Agency for Interna-tional Development (USAID) and Spanish andJapanese cooperation agencies, among others, havefinanced the construction of rural systems, which are promoted by nongovernmental organizations(NGOs) and operated by community water boards.In the marginal urban sector, water distribution sys-tems have been constructed and administered bycommunity entities that buy water in bulk from theSANAA’s metropolitan aqueduct in Tegucigalpa.The first important step for private investment in theformal sector took place in 2000, when the munici-pal water and sanitation system of San Pedro Sula—the country’s second biggest city and industrial cap-ital—was given in concession to an Italian company.

The Lack of Political Support for the Process of Modernization and Privatization

Without any doubt, the concern of political leadersabout the unpopularity of privatization constitutes animportant obstacle to the reform process of the infra-structure sectors.The skepticism of politicians towardprivate participation also constitutes a risk factor forinvestors because it can create pressure on officials tointerpret the legal and regulatory framework in a waythat is prejudicial to the investor. Among the mostnoteworthy events of recent years are the following:• During 1995–97, the National Congress sidelined

the water and sanitation framework legislation, in

part because the legislators feared that it would beunpopular in that it would lead to tariff hikes.

• The privatization of HONDUTEL was stalled be-cause of legislators’ fears that it would be unpopu-lar. For that reason, the original proposal was not forprivatization per se, but for capitalization of the en-terprise, with private investors holding a minorityshare. Only when it proved difficult to interest buy-ers in such a scheme was a proposal put forward thatincluded a majority interest for the private investor.

• Similarly, in 2000, when faced by the privatizationproposal for electricity distribution, the NationalCongress entered into prolonged negotiations witha self-appointed “Popular Block” (Bloque Popular),which claimed to represent the popular and orga-nized labor interests in the country.This activity ef-fectively stalled the reform process.As emphasized by the above-mentioned FIAS re-

port on the investment climate, these reform processesare difficult in part because decisionmaking in Hon-duras is highly consensual, to the point that virtually allthe actors have a de facto right of veto. Changes arerarely imposed in the face of interest group opposition,even if these groups do not represent the majority.Nonetheless, it is not clear that only minority interestgroups lack confidence in privatization (see chapter 5,“Consumer Opinions”).

It seems improbable that privatization proposalsthat lead to stiff tariff hikes will gain political accep-tance. This likelihood underlines the importance ofseparating the processes of tariff adjustment from thoseof restructuring the provision of services.The success-ful negotiation of the water service concession in SanPedro Sula in 2000 indicates what can be achievedwhen this principle is applied.


30

31

This section reports on the performance of the infra-structure sectors to date, in terms of service coverage,access, quality, efficiency, and financial and technical sus-tainability.Table 3.1 presents the principal indicators foreach sector; other data are cited in part 2 of this report.

Indicators of Service Access and Coverage

TransportationThe percentage of the road network that is paved inHonduras is similar to that of its neighboring countries(more than 20 percent), except for Guatemala, wherethe figure exceeds 27 percent. Precise data are unavail-

able for the proportion of the population without ac-cess to bus service. However, it is indicative that of thepeople in the bottom fifth of the population, 63 per-cent say they have no available means of transportationand only about 25 percent say they use the bus as theirprincipal means of transportation (see table 1.4).Thesedata indicate that access to transportation is a signifi-cant problem for poor Hondurans.

Water and SanitationDuring the past decade, Honduras made significantprogress in service access and sustainability as a result ofthe activities of water and sanitation committees in

3 Infrastructure Performance:An Overview

Table 3.1 Performance of Honduran Infrastructure Compared with Latin America

LatinAmerica,

Costa El average,Year Honduras Rica Salvador Guatemala Nicaragua 1995a,b

Water coverage(% of households) 1995 77 99 80 54 55 73

Sanitation coverage(% of households) 1995 82 98 65 49 n.d. 80

Formal electricity coverage(% of households)b 1999 56 95 73 65 47 82

Per capita energy consumption (kWh)c 1996 350 1,349 516 364 256 n.a.Losses in electricity distribution (%)b 1996 27 12 13 13 28 n.a.Fixed telephone lines

(per 100 population) 1999 4.4 20.4 7.6 5.5 3.0 8.5Paved roads (%)b 1998 20.3 21.0 19.8 27.6 10.5 26.0d

n.a. Not available.a. Simple average (not weighted) of 22 countries.b. From the World Development Report 2000.c. CEPAL 1999.d. Figure is for 1998.

rural and marginal urban communities.These commit-tees have received capital and technical assistance frompublic agencies and NGOs.Those institutional arrange-ments have made it possible to increase coverage with-out incorporating new customers into the traditionalurban services (run by SANAA and the municipalities).As a result, potable water coverage in Honduras (77percent in 1995) compares favorably with that of its re-gional neighbors. It is higher than the Latin Americanaverage (73 percent) and much higher than that of itsneighbors Guatemala (54 percent) and Nicaragua (55percent). In a similar fashion, sanitation coverage has in-creased rapidly because of latrine building programssupported by agencies like the Honduran Fund for So-cial Investment (Fondo Hondureño de Inversión Social—FHIS).The estimated figure of 82 percent in 1995 ex-ceeds the Latin American average (80 percent) and thatof the neighboring countries in the region, except forCosta Rica.

Electricity The electricity sector also has registered rapid growthcoverage in recent years. According to ENEE’s statis-tics, coverage (individual and legal connections) rosefrom 33 percent of households in 1989 to 52 percentin 1999.1 However, official coverage is the second low-est in the region, exceeding only that of Nicaragua.Ac-cording to the EPHPM, if illegal and collective con-nections are taken into account, coverage reached 69percent in 1999. ENEE has embarked on programs tobring electricity to rural areas and to formalize infor-mal services. According to ENEE’s projections, theprograms will raise formal coverage to 62 percent ofthe population by the end of 2001. It is probable thattotal coverage is close to 80 percent of households,which is near the Latin American average (82 percent).However, per capita electricity consumption is still thelowest in the region, with the exception of Nicaragua.

TelecommunicationsTelecommunications coverage has grown notably inrecent years, but it continues to be less than that in themajority of neighboring countries. The number oflines rose 15 percent per year in the last 5 years of the1990s, from 160,800 in 1995 to 279,200 in 1999, andthe number of fixed lines per hundred citizens in-

creased from 2.7 in 1995 to 4.42 in 2000. That wasgreater than Nicaragua’s level and close to the achieve-ment of Guatemala. Nonetheless, it was much lowerthan the levels of El Salvador and Costa Rica. Still, only14 percent of households have a telephone. A highlevel of unsatisfied demand is manifested by long wait-ing lists (estimated at 425,000 in 1999), as well as theexplosive growth of the cellular market since 1996.Even though the rate per minute is greater (by a factorof 15) than that of fixed telephones, at the beginning of2001 there were 172,000 cellular telephones in service.

Indicators of Quality and Efficiency

Water and SanitationIn spite of the achievements in access produced princi-pally by community agents, the water and sanitationsector does not show good performance in quality andefficiency of the formal services. Both SANAA and themajority of the municipalities offer low-quality servicebecause of the lack of adequate regulation.The servicein most areas is heavily rationed and few consumers feelthat the water is of potable quality. Although it hasshown some improvement, SANAA still suffers fromtoo many employees and too much inefficiency. Formetropolitan Tegucigalpa’s aqueduct, SANAA has aratio of 9.4 employees (compared with 13 in 1995) perthousand connections. In municipal systems, this figuredrops radically, but only because such systems lackprofessional, commercial, and technical personnel. Nosystem in Honduras provides 24-hour-a-day service.Rather there is continual rationing, especially in themetropolitan centers and intermediate cities—whethersystems are operated by SANAA or directly by the mu-nicipalities.The level of physical and commercial losses(unaccounted-for water) easily exceeds 40 percent. Interms of the quality of water emerging from the pro-duction systems and treatment plants, significant im-provement has occurred in the SANAA-managedsystems. However, the state of the distribution networksand storage systems is not adequate to ensure that waterof acceptable quality reaches the final consumer. In themunicipalities, there are simply no data on the subject,but serious problems with supply and distributionsystems generally lead to consumers receiving poor-quality water.


32

ElectricityIn the electricity sector, labor productivity has im-proved, with a reduction from 739 to 478 employeesfor every 100,000 clients between 1994 and 1999.Nonetheless, the figure is still high compared withGuatemala (341) and with private enterprise norms.Even though distribution losses have dropped from 27percent in 1996 to 18.5 percent at present, that figureis still much higher than those of Costa Rica (10.6 per-cent), El Salvador (12.1 percent), and Guatemala (12.5percent).The improvements registered in the latter twocountries following privatization of distribution high-light possibilities for correcting this problem throughprivate sector involvement.

TelecommunicationsIn the telecommunications sector, service efficiencyand quality are low. Technical failures are reported in36 percent of the lines annually, and only 60 percentare repaired within 24 hours. Only 67 percent of localcalls are completed, and the completion rate for inter-national calls is 52 percent. The number of lines peremployee has risen from 34 in 1995 to 66 in 1999, butHonduras has lagged behind Costa Rica (179) andGuatemala (147). Even though a process of tariff rebal-ancing has started, international and long-distanceservice continues to be relatively expensive to thedetriment of commercial users.

TransportationEfficiency and quality indicators for transportationservices are mixed. In the road sector, importantprogress was made in the efficiency of highway main-tenance, a service that was outsourced to private con-tractors at the beginning of the 1990s.The conditionof highways improved significantly in the early 1990sand, because of the good maintenance, has remainedstable. For 1999, 37 percent of the principal networkwas in good condition, and only 24 percent was classi-fied as bad. However, the unit costs of the maintenancecontracts are high compared with those of neighboringcountries.

Public transportation service for passengers is bad,and that problem has caused greater use of private ve-hicles and a rapid decline in bus use. For trips under-taken in Tegucigalpa and San Pedro Sula, bus use has

dropped from 80 percent in 1990 to 65 percent in1997, thus contributing to urban congestion. Overlandcargo transportation services cost twice the interna-tional norm. Traffic management is deficient, withsaturation flows at intersections in the range of 900 to1,200, compared with international standards of be-tween 1,800 and 2,400. All of these problems have anegative effect on the costs and competitiveness of pri-vate businesses, especially those in the export market.

Compared with international standards, port ser-vices are relatively inefficient, with containers waitingat docks four times longer than the norm.The volumehandled per hour is 25 percent of that of internationalstandards for general cargo and dry cargo in bulk.Theport sector faces rapidly growing demand that is pro-gressively aggravating the consequences of inefficientuse of existing capacity. Cargo volume is growing at 8percent annually and will soon outgrow the physicalcapacity of Puerto Cortés. It is conceivable that withimproved management the port can handle the de-mand for a few more years, but after that there will bea bottleneck that will represent a significant obstaclefor the export sector.

Sustainability Indicators

Water and SanitationBoth types of providers (SANAA and the municipali-ties) tend to charge less than needed to operate waterand sanitation systems efficiently, and neither of themrecovers its capital costs through its tariffs.This situationthreatens the financial sustainability of the services.Thepoliticization of SANAA’s tariff regulation causes greatincome instability in real terms. CNSSP habitually au-thorizes adjustments every 5 years, and during this in-terval SANAA can suffer an inflationary erosion of itsincome of close to 100 percent in real terms. In spite ofbeing unregulated, the municipalities have tariffs thatare generally lower than those of SANAA,a sure sign ofpolitical capture of the services. In 1995, SANAA un-derwent administrative decentralization. Income is nowretained in the regional centers, a change that has im-proved collection rates. As a result of decentralization,SANAA has more engineers and qualified personnelthan the municipal systems, but both are weak in theirprogrammed maintenance programs. This fact reflects

Infrastructure Performance: An Overview

33

the practice—common to both types of providers—offinancing works with capital transfers from foreigndonors and the central government.

Road TransportationIn terms of financial sustainability, the formation in2000 of the Road Fund (Fondo Vial )—financed withfunds earmarked from the contribution for road con-servation, social programs, and tourism (fuel consump-tion tax)—will provide new impetus to institutionalizethe allocation of funds for routine, periodic mainte-nance of the national road network.This maintenanceshould reduce the percentage of the network in poorcondition to below the current figure of 24 percent.Nonetheless, more financing will be necessary to coverall the system’s needs, and the problem of financingmaintenance has yet to be resolved.

PortsThe port sector has no problem with sustainability; onthe other hand, it charges too much for its services,which negatively affects its competitiveness.The tariffscharged by the National Port Enterprise (Empresa Na-cional Portuaria—ENP) are sufficiently high to generateconsiderable surpluses, in spite of ENP’s internal inef-ficiencies.The surpluses, which, in the 1990s, averaged13 percent of current expenditures, are transferred tothe central and local governments.

ElectricityIn spite of the express intention of the legislation gov-erning electricity, consumer tariffs are, on the average,low relative to the system’s economic costs.The aver-age domestic tariff is US$0.073 per kilowatt-hour.Al-though the tariffs have been restructured according tomarginal cost calculations, the tariff paid by the userstill includes significant cross-subsidies. In addition, thegovernment provides two important direct subsidies.

There is a direct subsidy for consumers who use nomore than 300 kilowatt-hours per month, amountingto L 280 million (2001). ENEE receives grants fromthe central government and foreign donors to financeexpansion of coverage to rural areas (US$23.5 millionbetween 1997 and 2000). ENEE’s financial solvencyhas improved notably since 1994.The enterprise gen-erally covers its financial costs and has reduced its ac-cumulated debt with the government. However, tariffsare still insufficient to cover the service’s real costs—especially the components of distribution and trans-mission.According to data from CEPAL, ENEE’s aver-age income per kilowatt-hour generated is US$0.064,barely above the marginal generation cost in 2000(US$0.062), without taking into account transmission,distribution, and administration costs.

TelecommunicationsThe telecommunications sector generates excellentsurpluses because of the high tariffs charged for inter-national and long-distance calls.The resulting incomeis partially used to finance a cross-subsidy for the con-sumers and partially used to finance transfers to thestate. During the 1990s, the average annual transferamounted to 10 percent of the sector’s current expen-ditures.There was a transfer of US$20 million in 1999,and one of US$80 million in 2000.This is detrimentalto the country’s competitiveness.A process of tariff re-balancing is under way as part of the program of priva-tizing HONDUTEL.


34

Note

1. Note that the Latin American Economic Commission (ComisiónEconómica para América Latina—CEPAL) data, which is used for re-gional comparison purposes is 56 percent.

35

Damage to the country’s infrastructure was one of themost profound effects of Hurricane Mitch in October1998. Most affected were the road and the water andsanitation sectors.This section presents an overview ofthe damage, the progress of reconstruction, and the les-sons learned.

Damage Incurred

According to CEPAL estimates, the cost of direct dam-age to the infrastructure amounted to US$343.7 millionand the indirect costs of temporary emergency solu-tions and production losses were projected at US$321.8million, for a total of US$665.5 million (see table 4.1).The greatest damage was to the road system, whichamounted to 78.9 percent of the total damage. Waterand sanitation suffered 8.7 percent of the total damage.

The Master Plan for National Reconstruction andTransformation (Plan Maestro de Reconstrucción y Trans-formación Nacional—PMRTN) presented to the inter-national donor community in Stockholm in 1999,estimated the cost of repairing the damaged infrastruc-ture at US$756 million (Government of Honduras1999, p. 5).The plan called for total investment in theinfrastructure sectors of US$1.01 billion, including thecost of activities aimed at correcting systemic weak-nesses that preexisted the hurricane (see table 4.2). It isnoteworthy that the plan calls for strengthening sectormanagement and disaster mitigation in every sectorand not simply physical rehabilitation of the damagedworks.The two sectors where the greatest expendituresare planned are (1) the road network and (2) water andsanitation, with 45.9 percent and 35.5 percent of thetotal, respectively.

4 The Impact of Hurricane Mitch and the Progress of Reconstruction

Table 4.1 Infrastructure Damage in Honduras from Hurricane Mitch

Type of Damage (US$ million)

PercentageDirect Indirecta Total of total

Roads 236.6 288.6 525.2 78.9Ports 1.9 0.7 2.6 0.4Airports 2.6 0.5 3.1 0.5Communications 41.8 6.5 48.3 7.3Energy 9.9 18.5 28.4 4.3Water and sanitation 50.9b 7 57.9 8.7Total 343.7 321.8 665.5 100Total (%) 51.6 48.4a. Indirect damage refers to production losses and the costs of temporary emergency solutions.b. SANAA’s estimate was higher, US$108 million.Source: CEPAL 1999.

In the road sector, the progress to date in recon-struction has been considerable.According to govern-ment progress reports, by December 2000, the Secre-tariat of Public Works, Transportation, and Housing(Secretaría de Obras Públicas, Transportes y Vivienda—SOPTRAVI) reported repair of 3,858 kilometers inthe road construction and reconstruction program, fin-ishing 80 percent of the total of 4,800 kilometers (seetable 4.3).That total represents 35 percent of the offi-cial Honduran road network of 13,603 kilometers.Fifty-five percent of the total US$133.6 million in theplan had been disbursed for these works.

In terms of road maintenance, during 1999 and2000 approximately 3,231 kilometers received mainte-nance, or 33 percent of the part of the road networkclassified as maintainable (9,712 kilometers). For 2001,the maintainable proportion of the network is ex-pected to increase to 11,635 kilometers and to extendthe reach of maintenance programs after the hurricaneto 6,322 kilometers.

In terms of bridges, progress has been slower. Nine-teen bridges have been built totaling 1,376 linear me-

ters (39 percent of the planned total in linear meters),with 12 bridges pending to total 1,919 meters (61 per-cent of the planned total).These bridges are to be fin-ished in September 2001. In terms of bridge repairs,776 meters were completed (41 percent of the plannedtotal).

In the port sector, for October 2000, Puerto Cortéshad been completely repaired and had undertaken aprogram of modernization works and enlargement ofits installations. Dredging had been completed at LaCeiba and Puerto Cortés, and lighthouses damaged bythe hurricane at various points on the north coast hadbeen repaired.

In the water and sanitation sector, the damage totalreported by CEPAL (US$60.9 million) was surely anunderestimation, and it is significantly below theUS$358 million earmarked for the reconstruction andtransformation of this sector in the PMRTN. None-theless, progress in the sector has been relatively slow.At the end of 2000, SANAA reported executing proj-ects with a value of US$22.1 million. FHIS had im-plemented works amounting to US$37 million, andthe Secretariat of Health executed projects valued atUS$1.8 million.

The reports on the government’s progress on thePMRTN do not provide physical details regarding thereconstruction of the energy and telecommunicationssectors; however, it is noteworthy that both systemswere functioning normally without service outageswithin several months after the hurricane.

Lessons Learned from Hurricane Mitch

Design and Supervision of Civil WorksHurricane Mitch highlighted the great vulnerability ofmany of the civil works, especially the roads, bridges,and water delivery systems.The experience showed thenecessity of revising the specifications of future invest-ments to reduce the expected damage from tropicalstorms and hurricanes.

In this regard, it is worth emphasizing that the dam-age to bridges and loss of sections of roads in certainsectors had become an annual event, easily provoked bystorms much smaller than Mitch was. This repeateddamage produces great direct and indirect costs (be-cause of the disruption of the economy) that are muchhigher than the cost of specifications necessary to


36

Table 4.2 Infrastructure Programs in the PMRTN

Cost US$ million Percentage

Road network 463.1 45.9Ports 92.2 9.1Airports 13.2 1.3Water and sanitation 358.2 35.5Energy 74.0 7.3Telecommunications 9.1 0.9Total 1,009.8 100.0

Table 4.3 Progress in the Reconstruction of the RoadSector, to December 2000

Total Percentagecompleted completed

Reconstruction of principal roads (km) 1,121 79Construction of principal roads (km) 33 70Construction and repair of rural

roads (km) 2,704 81Total, road construction and

repairs (km) 3,858 80Road maintenance (km) 3,231 78New bridges (m) 1,376 39Repaired bridges (m) 776 41Source: Government of Honduras 1999.

withstand the predictable flooding. However, there isno point to improving the specifications without en-suring, through efficient supervision of the works, thatthey will be complied with.

Recent studies on the Caribbean (Pollner 1999, ascited in Banco Mundial 2000b) estimate that an in-crease of 1 percent in initial costs could reduce the costof replacing the infrastructure after natural disasters by50 percent. A study carried out in Honduras (IIASA,Freeman, and others 2000, as cited in Banco Mundial2000b) estimates the annual exposure of the nationalcapital stock in infrastructure at US$82 million—theequivalent of 0.63 percent of the total.1

The Role of InsuranceThe experience of Hurricane Mitch also demonstratesthe importance of purchasing adequate insurance,which is duly reinsured2 to cover those catastrophicrisks that can submit the infrastructure to conditionsbeyond those arising from design specifications.Thereis little probability that Hurricane Mitch will repeat it-self—it has been called a hundred-year storm. Hence,it would not necessarily be advisable to change the de-sign specifications of all works so that they could with-stand a natural disaster of this nature. In certain cases, itwould be more reasonable to buy insurance.A system-atic analysis of the probability of natural disasters andthe cost of making design adjustments to withstandthem is needed.The cost of adjusting the design shouldbe compared to the cost of insuring the work, plus theindirect cost of loss of services during the reconstruc-tion process (adjusted for the probability of the event).

Watershed ManagementThe experience of Hurricane Mitch clearly showedthat infrastructure vulnerability is partly a function ofthe quality of watershed management.To improve themanagement of key watersheds, the government is ne-gotiating a US$70 million loan with the Inter-Ameri-can Development Bank (IDB) for the watersheds ofthe Ulúa and Chamelecon (both tributaries in the SulaValley) and Nacaome (to the south of Tegucigalpa).

Also, the World Bank has approved a loan ofUS$10.8 million for disaster management.That loan isaimed at reducing vulnerability through the analysis of available information and through the provision of

technical assistance to local actors to help them use the results.Through the Association of Municipalitiesof Honduras (Asociación de Municipios de Honduras—AMHON), the project will also assist 60 municipalitiesthat are vulnerable to flooding and landslides.The as-sistance is intended to improve their capacity to re-spond to disasters by use of advance warnings andemergency responses. The project will support riskanalysis and vulnerability mapping, the development ofmanagement plans aimed at reducing risks, and thepreparation of feasibility studies of priority works forrisk mitigation.

Multiuse Dams as Instruments of ControlOne important option for mitigating flood damage invarious sectors of the country is the construction ofmultiuse dams that can play a role in flood control.Thebest example of this option is the Francisco MorazánDam, which protected the Sula Valley during Hurri-cane Mitch.At the height of the storm, the dam (witha surface of 95 square kilometers and considered mul-tiannual in hydrological terms—that is, capable of ab-sorbing several years’ rainfall before it is full) rose at theextraordinary rate of 7 meters per hour. Doubtless,without the dam, flooding in the Sula Valley wouldhave been much more serious. It was fortunate that, onthe eve of the storm, the level of water behind the damwas way below its design level.The low level was dueto a 7-year-long drought associated with El Niño(1989–96), from which the dam still had not recovered.After the storm, the reservoir was full. It had replacedthe strategic energy reserve in a matter of days; in nor-mal conditions, this would have taken several years.

This experience underlines the multiple uses ofdams as sources of energy, water, and flood control. Italso demonstrates the importance of considering thesebenefits separately in the feasibility evaluations of proj-ects of this type (for example, the Los Llanitos, ElTablón, and El Cangrejal hydroelectric works, which iscurrently in the planning stage). Not taking such ben-efits into account could result in erroneous decisionsabout the economic feasibility of the projects. Insteadof financing the project exclusively through user tariffsfor energy and water, part of the cost could be chargedto the beneficiaries of flood control (the communitiesand the owners of the protected areas).

The Impact of Hurricane Mitch and the Progress of Reconstruction

37


38

Notes

1. This paragraph is based on the economicevaluation done for the World Bank’s Nat-ural Disaster Mitigation project in Honduras(Banco Mundial 2000b, p. 13).As part of theproject’s preparation, a study is being done ofwhat would have been the expected eco-nomic benefit of mitigation measures thatcould have been implemented before Mitch.This study will identify factors that raise the

expected benefits of mitigation measures,and it will provide a simple methodology forclassifying the probable benefits and analyz-ing specific measures that are presented. Seethe following section on “Watershed Man-agement” for a description of this project.2. HONDUTEL’s insurance company, In-tercasa, had not bought the necessary rein-surance, thereby causing the bankruptcy of

the insurance company after HurricaneMitch and also causing HONDUTEL de-lays in collecting the insurance payout. In theelectricity sector, some doubts exist con-cerning whether the international reinsur-ance of the policy covering the FranciscoMorazán Dam was sufficient. However, thedam resisted the storm and it was neverfound out if the policy would have sufficed.

39

Part of this study included a series of focus groups,which involved infrastructure service consumers fromdiverse socioeconomic strata in the country. The pur-pose of the focus groups was to evaluate consumers’ ex-periences with the services and determine their attitudestoward modernization and cost.1 (See boxes 5.1–5.7.)

Opinions about Access

The focus groups confirmed that differences in accessto the services of potable water, electricity, telecommu-nications, and public transportation represent one ofthe most important determinants of socioeconomicdifferences in Honduras.A scale of access problems wasdeveloped, starting with the almost total privation ex-isting in the smallest rural communities, followed bythe conditions in marginal areas (or new or informalcommunities), in the cities, in the poor and middle-class neighborhoods, and finally in the best-served areasof the upper classes.

In some communities there is not even runningwater, causing the population to rely on hand-dugwells.There is no electricity, and communication is in-adequate or simply does not exist (access roads are al-most impassable, and there are no telephone, radio, oreven telegraph services). These communities experi-ence problems because development resources areoften absorbed by the county seat, with little or no re-sources destined for the smaller outlying communitiesthat surround it.

But even in the county seats, medium-size towns,and metropolitan areas, one can see how difficult it isfor the indigent or recently arrived residents, who areprincipally from rural areas, to obtain access to services.Both Tegucigalpa and San Pedro Sula have poor com-munities that lack basic services.Water is obtained fromwells, carried by women and children from nearby lo-cations, or bought directly from trucks.The price of a55-gallon drum of water is between 12 and 15 lempirasin Tegucigalpa (the equivalent of US$4.6 per cubicmeter).Electricity is more accessible.Communities canmake arrangements with ENEE (a fixed payment es-tablished per household).Alternatively, individuals mayrequest a hookup from a neighbor who charges for theservice and then pays ENEE or may simply install aclandestine line. The telephones that exist tend to bepublic. Public transportation does not reach theseplaces because they are inaccessible or because of thedanger of attack by delinquents or gangs. These areasalso lack other services including gutters, sewage pipes,and trash collection.

Access to services is better in older poor neighbor-hoods and in lower-class neighborhoods. There arefewer problems of access to water and electricity, buttransportation problems persist.The reasons mainly arebad road conditions and, in some cases, the low de-mand for public transportation. Basic sanitation prob-lems, such as the lack of sewers and trash collectionservice, frequently exist. In these communities, one canalready observe some cellular phone clients, who gen-

5 Consumer Opinions

40


Box 5.2 Telephone Access

• It would be better if we had access to public telephones, buteverything is politics here.

Genaro, extreme poverty group,Tegucigalpa• HONDUTEL has been postponing a project for telephones in

our community for 3 years.Esteban, lower-middle-class group,Tegucigalpa

• [There is a great demand for telephone service, but] it’s onlyfor people who have pull. In some houses they have twophones because they bribe the HONDUTEL employees.

Gustavo, consolidated poor group,Tegucigalpa• If you are a friend of Marco Antonio Andino [a prominent

politician in Tegucigalpa], you can get a phone. He processes itthrough his wife, and instantly you have a phone. Really, thegovernment should put in apolitical people.

Timoteo, upper-middle-class group,Tegucigalpa• You have to bribe the HONDUTEL people to get a phone.

There are people who do business with telephone lines.José, lower-middle-class group,Tegucigalpa

• The price for a line was going up daily, so I bribed someoneand they solved the problem.

Jorge, upper-middle-class group,Tegucigalpa

Box 5.1 Situation of the Poorest

• Cablotales is a place forgotten by the mayors. We live on amountain.We don’t have a road plan.We cross others’ prop-erties because we don’t have roads.There is no electricity, andthose who have it are stealing it. There are no sewers orpotable water.The school hasn’t been repaired since Mitch.

Gilberto, extreme poverty group in San Pedro Sula• We only have provisional electricity. We have the connections,

but the posts are lacking.Antonio, extreme poverty group,Tegucigalpa

• We don’t have transportation and have to use that of otherneighborhoods.We walk to the gasoline station.

Genaro, extreme poverty group,Tegucigalpa• I pay, but the majority steal electricity.

Gilberto, extreme poverty group, San Pedro Sula• At night taxis won’t go to the neighborhoods because there

are gangs and because the roads are bad.We’re in a bad waywith transportation.

Santos, extreme poverty group,Tegucigalpa• If a commissioner came to our community, we would feel

ashamed because the situation is lamentable.There are peoplewith no water or electricity. There is no public lighting, andthere have been murders.

Arely, La Esperanza

erally explain their use of this service as work related,although they complain about the high cost of theservice.

Opinions about Quality

In middle-class residential areas, the problem of exclu-sion from access ceases completely, and there is a greaterdegree of concern about service quality. Nonetheless,the representative focus groups did report certain prob-lems. In Tegucigalpa, Hurricane Mitch caused devasta-tion in some upper-middle-class neighborhoods, andthe situation has still not returned to normal; hence,those residents suffer some of the problems mentionedfor poor communities. In San Pedro Sula, some upper-middle-class neighborhoods lack sufficient access roadsand experience resulting traffic problems.

A common denominator for these middle-class met-ropolitan sectors, as well as the rest of the social groups,is the difficulty of getting a telephone line from HON-DUTEL, whether for a private or a public telephone.

Complaints about service quality seem to be uni-form, irrespective of social class.The water service doesnot satisfy upper-middle-class consumers because theydoubt that it is potable, especially when it appears dirtyor milky because of excessive chlorine. At the sametime, they resent the lack of regularity of service, espe-cially in the dry season when it is rationed.This socialgroup compensates for these deficiencies by installingdifferent kinds of filters or by buying bottled water andalso by building cisterns.The same complaints exist inthe lower economic strata, but poorer people have lesscapacity to compensate for the problems. In the city’spoorest communities, the water quality is even worsebecause it comes from wells or springs, and its quality isdoubtful because of the presence of garbage, latrines,agrochemicals, and other pollutants. In many house-holds, chlorine is not added to the water for lack ofeconomic resources.

Electricity service receives similar criticism. Poweroutages and sudden voltage fluctuations are frequent,which causes various problems and economic losses forthe population. Public lighting is charged to all consu-mers, although it is generally provided only to better-

off neighborhoods. The new meter-reading system isunconvincing, as evidenced by multiple complaintsabout overcharges, the irregularity of meter reading,and the poor quality of the bills (poorly printed on ex-cessively small pieces of paper, thereby making the billseasy to lose and difficult to read). In the poorest popu-lations, there are persistent problems with the ability tosatisfy demand. Some of these problems are of a legalnature related to illegal land occupancy. Those prob-lems have led to uncontrolled clandestine connections.

Focus groups reserved the highest level of criticismfor HONDUTEL because of its high level of unsatis-fied demand.People see the process for obtaining a lineas influenced by politics and corruption. Focus groupparticipants mentioned waits of 3 or more years to ob-tain a line. The majority of poor and indigent con-sumers stated that they were unable to pay for privateservice but expressed their desire to have access to pub-lic telephones, especially for medical emergencies orfor security reasons.

Cellular telephones have evolved from being a con-venience of the upper middle classes to being morewidely used by many people from less-privileged back-grounds. The complaints about cellular service are oftwo kinds.The first is the high service cost,which is as-cribed to the monopoly status of the provider.The sec-ond is that the service does not have sufficient reachand that signals are lost at a determined distance fromthe principal cities. The poorest people primarily usecellular service for work-related purposes, but once theservice’s problems are resolved, more of this populationwill take advantage of its convenience, especially whendealing with health and security emergencies, to com-pensate for the disadvantages of fixed telephones.

Public transportation service competes with fixedtelephone service in terms of unpopularity.The poorbear the inconveniences of bus services. Further up thesocial scale, people use collective taxis and, then,privatetaxis. The upper middle class practically never usesthese services. They possess their own automobiles,which, in many cases, they have acquired to escape theinadequacies of public transportation.

Bus service users describe an array of problems,such as lack of security; the dilapidated state of many ofthe buses; crimes committed against passengers; thedirtiness and rudeness of bus drivers and their assis-

tants; and their lack of respect for regulations in termsof road signs, driving courtesy, schedules, routes, andbus stops. In areas of high population density or duringpeak hours, it is common to see buses completely fullwith a dangerous number of people standing. How-ever, in places or at times when there are few users,

Consumer Opinions

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Box 5.3 Quality of the Water Service

• Normally we used to have water but not now. It comes tosome people’s houses at around 3 a.m.We pay for the waterbut we don’t have it.

Gabriel, consolidated poor group, San Pedro Sula• We have water problems. People had to dig 2 feet down to fill

their buckets because the pressure is very low.Javier, consolidated poor group, San Pedro Sula

• If you put the water we have under a microscope, you can seesome big bugs moving around. People who can buy purifiedwater to so.

Isidro, extremely poor group, San Pedro Sula• The water pump is near to where the municipal slaughter-

house throws its waste.And this enters our water system.Javier, lower-middle-class group, San Pedro Sula

Box 5.4 Public Transportation Quality

• The people from Suyapa and Villanueva never ride seated.There are buses with a capacity for 20 people, and they carry40 passengers standing; one rides on top of other people.Thedrivers and their assistants are rude. . . .The buses don’t haveseats, and I think they even have bugs. In the terminal, if thereis one empty seat, the bus doesn’t depart.

Antonio, indigent group,Tegucigalpa• I stopped using the bus because of the insecurity and the bad

treatment; that’s part of the corruption.They assault you onthe bus.They used a knife to steal from my wife.

José, lower-middle-class group,Tegucigalpa• They cheat people. They cut the three-passenger seats so

more people can stand.Esteban, lower-middle-class,Tegucigalpa

• In the routes Carrizal-Lomas Norte, Cerro Grande-Mercado,La Flor 1 y 2, there is no transportation. In the Centro Américaneighborhood, there are only microbuses that are junk.

Jesús, lower-middle-class group,Tegucigalpa• I am a route controller, and I can see that the authorities have

given bus operation permission left and right. I’ve been a con-troller for 3 years, and they’ve never asked me about the situ-ation of routes and permissions.

Javier, lower-middle-class group, San Pedro Sula

buses delay leaving the bus stops or engage in freneticraces with their competitors.

There are generalized complaints about the earlyhour at which bus service is discontinued,with the op-erators giving security threats as the reason for this.Taxi

service is unpopular for almost the same reasons, al-though the taxis’ lower passenger capacity and speedmake them attractive to those who can afford theirservice. Also, taxis refuse to go to certain areas, citingthe poor state of the roads or fear of crime.

In terms of the services that have a priority for im-provement, the groups’ opinions depend on the partic-ular problems that they face. Water service is almostalways mentioned as a priority, except among theupper-middle-class groups. The next focus is sewers,especially among the representatives of the extremelyand moderately poor, the lower middle class, and thosein medium-size cities. Next mentioned was electricityby the communities that do not have it (in the indigentsector); telephone service by all groups, from poor toupper middle class; and public transportation, particu-larly in Tegucigalpa and San Pedro Sula, while isolatedrural populations demanded improved roads to thenearest city.

Opinions about Subsidies

People are aware of the subsidies to electricity andurban transportation in Tegucigalpa. Regarding elec-tricity, the people consulted knew, in a general way, thatall consumption under 300 kilowatt-hours receives asubsidy.They have conflicting feelings about it. On theone hand, they see the benefit—although some doubtthat it is being applied correctly. On the other hand,they are conscious of irrational and unjust situations inthe service’s administration, such as widespread illegalconnections by both rich and poor, and wealthy peo-ple receiving subsidies.There were various complaintsthat the fieldworkers of the meter-reading companyexceeded the 30-day period, resulting in consumptiongreater than 300 kilowatts-hours. Others voiced suspi-cion that the meter was not read at all and that the oldaveraging system continued.

Regarding the subsidy for urban transportation inTegucigalpa, the general opinion is that the bus ownersare the greatest beneficiaries because they do not com-ply with the established schedules, nor have they im-proved the quality of bus service. In this situation, itwould be preferable if the subsidy were direct, as in thecase of the student transportation vouchers.

People who are economically better off oppose anykind of subsidy. Finally, it is worthy of attention that


42

Box 5.5 Subsidies

• The bus owners never keep the promises that they make tothe government. They stop operation early and still receivethe subsidies. . . . The subsidy is the cause of the bad trans-portation service.

Esteban, lower-middle-class group,Tegucigalpa• I’m not in favor of subsidies.The government gave subsidies to

the coffee growers, the bus drivers, and ENEE. At the sametime, there are poor communities that have paid up to a mil-lion to get public service, and they have never received a sub-sidy.This has to change because it’s a kind of corruption. It’sbetter to give direct subsidies like the student transportationvoucher because it’s more effective.

José, lower-middle-class group,Tegucigalpa• In Bella Vista, there are people with money who have put in

two meters so they can enjoy the electricity subsidy. One daythey use one, and the next day the other.The ENEE employ-ees know it but do nothing.

Mario, upper-middle-class group, San Pedro Sula

Box 5.6 Consumer Rights

• We have gone to complain about the bad transportation ser-vice, but in the municipality they don’t listen.They say they’llcheck the situation, but they never do.

Adán, extreme poverty group, San Pedro Sula• I took evidence from a girl who was raped in a bus, but they

didn’t pay any attention to my complaint.Antonio, lower-middle-class group,Tegucigalpa

• I was paying for calls that weren’t mine for around 5 months.There were problems of interference and crossed calls.Theynever dealt with my complaints. I had to pay someone out ofmy pocket to get the line fixed.

Vilma, upper-middle-class group, San Pedro Sula• I have problems with my bill. I used to pay between L 70 and

L 76, and now it’s L 1,000.They said I was stealing electricity,so I paid. But the bills keep coming. I haven’t paid for 2 monthsbecause I have only a candle and a flashlight, and I don’t have abusiness.

Carlos, Danlí

none of the interviewees from outside Tegucigalpa re-quested the application or reapplication of urban trans-portation subsidies. In the case of San Pedro Sula,where the subsidy was discontinued, people merelysaid,“The subsidy did not work here,” thereby suggest-ing that they agreed with its abolition or were, at least,indifferent.

Opinions about Consumer Rights

Consumers—especially those from the moderatelypoor or lower middle classes—are accustomed to deal-ing with several classes of public functionaries. The

general opinion was that the functionaries are inca-pable of resolving their complaints and are slow to re-spond both to service problems and to requests forservice. Most people see the functionaries as involvedin political activism and corruption. Some complain ofmistreatment, especially in the big cities, although themajority say they are treated well but do not obtain re-sults. In the small cities, people dislike the absence ofoffices where they can present their complaints. Thelack of such offices serves as an excuse for local func-tionaries to be out of touch with their problems. Insummary, consumers feel that their cries for improvedservices are falling on deaf ears.They feel that, of late,they are treated more politely and diligently, but withthe same indifference to and ineffectiveness in solvingtheir problems.

Opinions about Privatization

All the focus groups agreed on the need to reform theadministration of public services, but the desired solu-tion involves improving and depoliticizing administra-tion, which logically implies combating corruption.No group, with the exception of the upper middleclass of San Pedro Sula and part of the La Esperanzagroup, favors privatization as a solution.

The generalized fear is that privatization inevitablyleads to higher service tariffs, without necessarily im-plying improved service quality. Presented as examplesare the cement industry, the postal system, and ENEE’smeter-reading system.There were some participants inthe different groups who would willingly pay higherservice prices if the services were effectively improved.

The La Esperanza group enriched the discussion’spanorama by bringing up forms of privatization thatinvolve the communities or micro enterprises in them.Group members mentioned as examples the waterboards and some trash collection companies.The opin-ion there is that people would better accept privatiza-tion if it were not seen as transferring public goods tothe hands of rich business people, who are only inter-ested in profits.

The upper-middle-class group from San Pedro Sulawarned that privatization should be carried out withtransparency and with sensitivity toward the extensivepoverty, which could require some subsidies. Groupmembers also noted that privatization should guaran-

Consumer Opinions

43

Box 5.7 What Do Hondurans Think aboutPrivatization of Infrastructure Services?

• If privatization is like the new meter-reading service, we won’tagree.The people with money can pay the high prices, but themajority of us are poor. Everyone is afraid of privatization be-cause it depresses the poor.

Manuel, Danlí• Service can be improved without privatizing. I don’t agree with

privatizing HONDUTEL because we’re selling the goose thatlaid the golden egg. What we want is improvement withoutprivatization.

Gustavo, poor group,Tegucigalpa• What most concerns Hondurans is the corruption at all levels.

Privatization can favor corruption and make the rich evenricher. The privatization of the cement company raised theprice,and the government has not taken measures to avoid this.

José, lower-middle-class group,Tegucigalpa• If it’s for improving things, let them privatize. But if everything

becomes more expensive and the salaries remain low,we’ll justbe in the same place.

Gilda, lower-middle-class group,Tegucigalpa• I’m not interested in privatization. I’m interested in seeing

HONDUTEL less politicized. SANAA and ENEE would be dif-ferent if there were less political influence.

Jorge, upper-middle-class group,Tegucigalpa• I think we need new ways to privatize or to improve services.

The community itself should own these services. . . . In publicschools, they aren’t committed to the people; they aren’tefficient.The private schools are more demanding.The munic-ipality should create some companies to take care of trashsince some neighbors sell this service to others.

Hipólito, La Esperanza• Someone said that trash collection was better because they

had privatized.Rafael, upper-middle-class group, San Pedro Sula

tee competition among businesses to avoid monopoliesand abuses against consumers.

We can conclude that public opinion about priva-tization reflects the generalized doubts of many peopleabout whether this process will really be oriented to-ward benefiting consumers, especially the poor. Manycharacterize it as a measure to make them pay more forsimilar service in order to benefit private enterprise.Changing these perceptions is an urgent task. Argu-ments for privatization should concentrate on the pos-sibility of providing services to those without them,expanding services, and providing current users withimproved service quality.


44

Note

1. Twelve focus groups were organized: four in Tegucigalpa andfour in San Pedro Sula, covering the very poor (indigent) commu-nities, poor, lower-middle class, and upper-middle class. The re-maining four groups met in the intermediate cities of La Esperanzaand Danlí, and in the rural areas of Chogola (Department of In-tibuca) and Apali (Department of El Paraiso).The issues that werediscussed included access; service quality; formality of service pay-ment; subsidies; users’ rights; attitude toward service reorganizationand modernization, including privatization; and several specific is-sues related to the transportation sector.The findings of the focusgroups are summarized in boxes 5.1–5.7.

45

As for the investment climate in general, the climatefor private investors in the infrastructure sectors hasimproved in recent years but continues to have impor-tant deficiencies that limit the possibility of harnessingprivate capital in various sectors and subsectors.

Major obstacles have deterred the participation offoreign companies. However, the situation has im-proved, and at the beginning of 2001, there were twoconcession contracts with foreign companies in force:cellular phone service and airport administration. Inaddition, there was a private foreign concession forwater and sanitation services in San Pedro Sula. Theairport concession, signed in 2000, was the first inCentral America, as was the San Pedro Sula water andsanitation concession, also signed in 2000.

The main limitation on private investment in all in-frastructure sectors is the legal, institutional, and regula-tory framework. Although there have been initiativesfor new framework laws whose general intention is toend state monopolies and open the possibility of privateparticipation, completing the legislative process has notalways proved possible, and, even when the laws arepassed, they sometimes suffer from weaknesses or arestill awaiting the secondary legislation needed to bringthem into effect.The following paragraphs summarizeeach sector’s current situation regarding the moderniza-tion of its legal and regulatory frameworks and com-ment on the principal obstacles that still lack resolution.

Transportation

The Law for Promotion and Development of PublicWorks and the National Infrastructure (Ley para la Pro-

moción y Desarrollo de Obras Públicas y de la InfraestructuraNacional—Decree 283-98), known as the ConcessionsLaw (Ley de Concesiones), provides a general frameworkfor the concession of roads, ports, airports, and anyother kind of infrastructure not covered by sector leg-islation (currently limited to energy and telecommuni-cations). It creates the Superintendency of Concessionsand Licenses to regulate the provision of the servicesthat are under concession or license, except when thereis a regulatory mechanism established by the munici-pality or the licenser of the concession or license.Thelaw provided the framework for the successful conces-sion of the international airports.

However, there is still some ambiguity related tocharging tolls to recoup costs of investment, operation,and maintenance in the road sector.The MunicipalitiesLaw (Ley de Municipalidades—Decree 134-90) explic-itly excludes the imposition of access charges on mu-nicipal roads.The municipalities that currently operatetoll booths (San Pedro Sula and Puerto Cortés) justifydoing so with the concept of “contributions for im-provements”; however, that stance could be challengedin court.1

In similar fashion, it could be difficult to charge tollson the national highways because Article 81 of the Con-stitution of the Republic guarantees that every personhas the right “to circulate freely … in national territory.”The article might be interpreted as preventing tolls.TheConcessions Law does not provide an alternative inter-pretation; thus investors in this sector face the risk thattolls might be challenged as unconstitutional.

The regulatory framework established in the Con-cessions Law, through the Superintendency of Conces-

6 Legal, Institutional, and RegulatoryFramework for InfrastructureDevelopment

sions and Licenses, is weak. The superintendency isconstituted as a dependency of the National Congressby way of the General Comptroller of the Republic(Contraloría General de la República). This connectiondoes not bode well for avoiding the politicization of itsdecisions, raising the political risk for investors. In ad-dition, those wishing to avoid the superintendency’sregulation could argue that the concession is, in itself, aregulatory instrument.2 In that case, lack of effectiveregulation could be detrimental to the consumers andcould eventually lead to a loss of public credibility forthe concession processes.

Electricity

The Framework Law of the Electricity Sector (LeyMarco del Subsector Eléctrico—Decree 158-94) estab-lished a new institutional framework for the sector.TheEnergy Cabinet (Gabinete Energético) was created as theprincipal entity in charge of proposing expansionplans, and the National Commission on Electricity(Comisión Nacional de Energía Eléctrica—CNEE) wascreated as the regulator, in charge of determining tar-iffs and approving expansion plans for the system.Thelaw stipulates that the tariff should reflect the system’sreal costs but provides cross-subsidies from consumersof more than 500 kilowatt-hours per month to thoseusing less than 300 kilowatt-hours.

With the administrative reforms of 1997, the regu-lator became the CNE. Even though the Energy Cabi-net is maintained formally, the function of sector policyis mainly assigned to the Secretariat of Natural Re-sources and the Environment (Secretaría de Recursos Na-turales y Ambiente—SERNA), which develops systemexpansion plans, including proposals for new generatingcontracts between ENEE and private companies,whichare put to the CNE for regulatory approval.The EnergyCabinet has never functioned well because none of itsministers has assumed leadership. At the same time,SERNA has offered weak leadership because its maininterest is in environmental control—which also raisesthe possibility of a conflict of interest with its role inpromoting expansion in the energy sector.

The framework law facilitated contracts for buyingenergy (power purchase agreements or PPAs) betweenENEE and private companies.The PPAs specify fixed

charges for capacity and formulas for calculating mar-ginal generation cost. The bidding process to awardthese contracts has been difficult, and several have inthe end been awarded directly to local companies orthose with a high degree of national participationunder emergency provisions. However, recently ENEEand the CNE have worked to improve the PPA con-tracting methods by reducing the duration of PPAs andintroducing standard contracts that increase the trans-parency of the process.

The framework law also calls for privatizing distri-bution and developing a wholesale market in whichmultiple generators would deal with the regional dis-tribution companies; however, this change has notcome to pass. Almost all the system’s activity is dealtwith through ENEE, although there are a few directcontracts between private generators and large con-sumers (for example, in the maquila sector).

A new law that more clearly established the frame-work for private participation in the sector was underconsideration by the National Congress in 2000–01.That law would have made Honduran legislation moreconsistent with that of the neighboring countries,thereby facilitating the future regional integration ofthe energy market through the new regional intercon-nection system between Honduras, Guatemala, and ElSalvador, known as the Interconnected Electrical Sys-tem for Central American Countries (Sistema Inter-conexión Eléctrica para los Países de América Central—SIEPAC). However it would not have immediatelyestablished free trade in electricity.

The proposed bill reaffirmed the privatization ofdistribution and established the same conditions for allbidders. Those provisions distinguished it from theframework law of 1994, which contemplated preferen-tial treatment for the offers of the national pensionfunds, a factor that would have made it difficult to mo-bilize offers from private investors.The bill would haveextended the concessions for projects of hydroelectricand geothermal generation, transmission, and distribu-tion and for licenses for thermal energy generation. Itcalled for developing wholesale and spot markets forgeneration with free determination of this price com-ponent by the market. It would have put the DispatchCenter under the control of a nonprofit company madeup of the principal actors in the system. It also called for


46

a tariff system that is based exclusively on cost, withoutrequiring cross-subsidies. Only the distribution andtransmission components would have been regulated,and the regulator would have been strengthened andwould have been given greater independence.

However, the bill had various weaknesses and con-tradictions.The government would have continued asa hydroelectric generator, as well as being the system’sregulator, creating possible conflicts of interest.The billalso contemplated incentives for the generation of re-newable resources, which would have distorted therules of economic dispatch. Even more important, thebill did not formally set forth (a) how the contracts forsupply would work and their relation to the energycontracts, (b) what would be necessary and sufficientconditions to introduce a fully liberalized wholesalemarket, and (c) how the generation market would bemanaged in the transition period.

Faced with these problems in July 2001, the Na-tional Congress suspended deliberations on the bill,considering that it would be preferable to define a com-prehensive reform strategy before passing legislation.The Consultative Commission on Privatization con-tracted a consulting study to revise the country’s strat-egy in this area, with the support of the World Bank and IDB.

Telecommunications

The Framework Law of the Telecommunications Sec-tor (Ley Marco del Sector de Telecomunicaciones—Decree185-95) of 1995, with its reforms, limits the monopolyfor fixed-line service to end in 2005. It stipulates thecreation of a new enterprise to be called the HonduranTelecommunications Corporation (Corporación Hon-dureña de Telecomunicaciones—COHONDETEL) andthe sale to a private partner of 51 percent of the stocksin COHONDETEL. However, to date it has not beenpossible to complete the sale.The bidding process wasdeclared void in October 2000 because no offers ex-ceeded the base price of US$300 million.

The 1995 law created a sector regulator, the Na-tional Commission for Telecommunications (ComisiónNacional de Telecomunicaciones—CONATEL). Sectorplanning for the telecommunications sector was thenassigned to the Secretariat of Communications, Public

Works, and Transport (Secretaría de Comunicaciones,Obras Públicas y Transporte—SECOPT), but whenSOPTRAVI was created in 1997, it was not assigned arole in the telecommunications sector. As a result ofthis lapse, the responsibility for determining modern-ization policies for the sector fell de facto to the Secre-tariat of Finance (Secretaría de Finanzas). It has super-vised the HONDUTEL privatization process, throughan ad hoc commission for privatizing HONDUTEL,with the support of the Consultative Commission onPrivatization.

CONATEL, the regulatory entity, enjoys a relativelylarge degree of autonomy and tends to go beyond itsregulatory role per se to enter the field of policymaking.Although this activity has strengthened CONATEL’sinfluence in the sector, the confusion of functions (be-tween planning and regulation) presents the danger ofpoliticizing the regulatory process. HONDUTEL stillmakes business decisions related to the sector’s expan-sion.The confusion of functions in the sector should beresolved by new legislation, which is currently beingprepared with the support of the World Bank.

Only one cellular license has been issued. TelefónicaCelular (CELTEL), a cellular phone service companythat was originally co-owned by Motorola and Milli-com, was granted a concession for 10 years in 1994,and it began operations in 1996. A previous biddingprocess had been declared void.A bidding process for asecond license, the B Band, is imminent.

Water and Sanitation

It has not been possible to legislate a new frameworklaw for the water and sanitation sector.The sector con-tinues to be governed basically by 40-year-old legisla-tion that created the state enterprise, SANAA, with amandate to provide water and sanitation services toevery town of more than 500 people.Although leader-ship in the sector lies formally with the minister ofhealth, who presides over the SANAA Board of Direc-tors, in practice SANAA has taken the predominantrole in planning.The Concessions Law passed in 1998permits SANAA to concede its operations to privateoperators, though it has not been done in practice.

In contradiction with the law governing SANAA,the 1990 Municipalities Law (amended in 1991) pro-

Legal, Institutional, and Regulatory Framework for Infrastructure Development

47

vides for municipal operation of these services. In factthe great majority of urban water connections andsewers are municipal.The municipalities have the abil-ity under the law to involve the private sector bymeans of leases or concessions, which is what allowedthe San Pedro Sula service concession in 2000 and pro-vided the framework for it.

Nonetheless, it is necessary to define an adequateregulatory framework for the sector. Currently,CNSSP is in charge of SANAA tariff regulation, and inMarch 2001, it authorized the first hike since 1995,permitting an adjustment of 100 percent relative to in-flation over the period, which corresponded to 112percent.The municipal tariffs are not obligatorily reg-ulated and tend to be very low. However, the munici-palities of San Pedro Sula and Puerto Cortés recentlyestablished mechanisms of regulation by contractunder concession or lease in their respective systems.

The National Congress is considering legislationthat would establish a subsecretariat in the Secretariatof Health in charge of sector policies that would createa national regulatory office under the Secretariat of theInterior and Justice (Secretaría de Gobernación y Justicia).The law calls for the gradual transfer of SANAA’s sys-tems to municipal control and promotes the indirectprovision of services through concessions, leases, andoperation and maintenance contracts to improve thesector’s efficiency.

General Laws and Regulations Relevant to the Infrastructure Sector

In some respects, there has been progress in the generallaws related to the infrastructure sector. For example, in2000 Honduras passed a law to permit internationalarbitration findings in contractual disputes—includingthose involving the State of Honduras—to have legalforce in the country (Decree 161-2000,Title II, Chap-ter IX,Articles 84-92).This initiative will be importantfor bidders in concession competitions.

The out-of-date State Contracting Law (Ley deContratación del Estado—Decree 148-85) had been asource of difficulty because it was conceived to dealwith traditional contracts for construction of works,which have little in common with a modern conces-sion contract. However, in September 2001, the Na-

tional Congress approved a new State ContractingLaw, which stipulates that contracts for management ofpublic services, of concession of full property rights, orof concession of public works be governed by speciallegal dispositions, with the general principles of theState Contracting Law being applied only in a supple-mentary fashion (Government of Honduras and Con-greso Nacional 2000c).

The Lack of Satisfactory Definition of the Sector Policy Function

To make progress in any infrastructure sector, it is nec-essary to first define the strategic vision for its develop-ment.The plan should define the state entity that willbe responsible for sector policies and will plan serviceexpansion. It is also necessary to define an organiza-tional model of the sector in general terms (for exam-ple, where there would be a competitive market andwhere there would be exclusive concessions). Further-more, it is necessary to develop a clear vision about thesector’s financing, including the possible use of subsi-dies to benefit poor users. Only when those pointshave been defined will it be possible to successfully de-termine the functions of the regulators.

Unfortunately, Honduras has not been successful indefining those functions.Traditionally, the old state en-terprises (HONDUTEL, ENEE, SANAA) were at thecenter of the sector planning process, even though thatrole presented a conflict of interest with their functionsas service operators. With the introduction in recentyears of partial and incomplete modernization and re-structuring processes, the role of those enterprises hasbeen reduced—but convincing alternatives have notbeen established. In practice the state enterprises—al-though weakened—continue to play an important role.

In telecommunications, when SECOPT ceased toexist, the function of sector policy fell mainly to theSecretariat of Finance, as a result of its leadership in the privatization HONDUTEL. The secretariat dele-gated it in an ad hoc commission with the support ofthe Consultative Commission on Privatization. How-ever, the Consultative Commission on Privatizationwas conceived as a technical entity to support the im-plementation of privatizations when sector policies sodetermine. Such an entity should not, however, be in


48

charge of sector policy. Furthermore, CONATEL (theregulator) and HONDUTEL (the state operator) haveimportant de facto functions in determining policies.

In electricity, the sector policy function was as-signed to SERNA in 1997. However SERNA is aweak secretariat without apparent capacity to assumethe task. In addition, it has a conflict of interest becauseit must regulate both environmental impact and ex-pansion of energy production and distribution. On ade facto basis, ENEE still manages the sector.

In water and sanitation, with SANAA’s decline ininfluence, planning is gravely deficient in the sector,which is very fragmented and without apparent leader-ship. Semiformal mechanisms—such as the collabora-tive group established by the Secretariat of Health—have tried to compensate for this deficiency in a partialway.After lengthy debates about the design of the newframework law, which still has not been approved, aproposal was made to assign the policy function to anew subsecretariat within the Secretariat of Health.This move could be an error, because the Secretariat ofHealth tends to focus on the sector as an adjunct to itshealth programs and not as an economically productiveindustry.

In transportation, SOPTRAVI occupies a leader-ship role and in recent years has strengthened the poli-cies and planning of the road sector. The example ofthe airport concession provides a clear framework ofthe policies in that subsector. However, the policy forports is undefined, and there is no department in SOP-TRAVI that serves that subsector. It is also noteworthythat the diverse subsectors (roads, ports, airports) aremanaged independently. Honduras has yet to establisha multimodal vision of the transportation sector and itslogistical functions in regard to the country’s economicdevelopment. In consequence,Honduras does not havea planning framework or policies under which it canevaluate projects of great importance, such as the cur-rent proposal to establish a dry canal between PuertoCortés and Cutuco in El Salvador.

The Multiplicity of Regulatory Entities

The country’s efforts to modernize its infrastructurehave required the formation of a number of new pub-lic service regulatory entities. However, the regulatory

arrangements lack satisfactory definition. In somecases, the regulator tends to usurp policy functions, asin the case of telecommunications. In others, the regu-lation functions are usurped by the enterprise that isregulated, as in the case of electricity. In the case ofwater and sanitation, the basic regulatory guidelineshave yet to be clearly defined.

Table 6.1 summarizes the principal characteristicsof the four existing regulatory agencies. It should benoted that two more are being formed: one for waterand sanitation and another for the postal service. Intotal, the country spends US$3.16 million annually onthese entities, which have 25 superintendents or com-missioners, as well as 54 technicians. Approximatelytwo-thirds of the resources are dedicated to CONA-TEL, an entity that enjoys income derived from theconcessions and the broadcasting licenses.

In general, the regulatory agencies have been cre-ated in the context of sector reforms that posit a sepa-ration of the functions of planning, regulation, andoperation that had been simultaneously assumed by thestate enterprises. It is hoped that in that way the statecan focus on planning services, as the principal party incharge of defining public welfare. At the other end ofthe spectrum,operation should be in the hands of pub-lic or private enterprises that are technically qualifiedto provide services on a commercial basis and that actunder contract as agents of the state. Mediating this re-lationship are the regulators. They are created by thestate but are called upon to act in a technical and inde-pendent manner to ensure that the social goals of thesector’s development are met, balancing between theinterests of the consumers and the operators.

For the regulators to be effective, they must be in-dependent, and objective criteria should govern thedesign of the institutions and the appointment of theprincipal officers. However, in the case of the regula-tory institutions under study, relative to the generallyrecognized principles for design of regulatory entities(Kerf 1998), there are important weaknesses as outlinedbelow.

Lack of Separation between the Functions of Sector Policyand Economic RegulationThere should be a clear mandate in laws and regula-tions for the regulatory entity and other institutions in


49

the sector. In Honduras, various instances of confusionseem to exist between regulatory activity, on the onehand, and sector planning and reform implementation,on the other. In the case of the electricity sector, forexample, both the operator (ENEE) and the regulator(CNE) assume planning functions in the face ofSERNA’s weakness in this role. ENEE is in charge ofthe Indicative Plan of Development for the sector,while CNE is in charge of defining distribution zones,which is also a planning function. In a similar fashion,in telecommunications, CONATEL (the regulator)and HONDUTEL (the operator) assume planningfunctions on a de facto basis. However, it is widely be-lieved that there should be some political discretion indetermining public service tariffs. Only in the electric-ity sector is there a mandate that creates objective for-mulas for tariff adjustments. However, in this case, the

calculation is performed by ENEE (the operator) andthe regulator only approves it.

Appointment of Commissioners and Their Job SecurityIt is also clear that the regulatory agencies are subject tocapture by politicians.Various sources reported that theCNE (from 1998 to the present) was composed ofcommissioners related to the government.Those com-missioners were put in place in a conscious effort tocalm the tensions that existed in the past (1994–98)when the old CNEE wanted to analyze and approvetariffs in a manner independent from the central gov-ernment.Another example of limited functional inde-pendence is that the posts of the commissions are filledwith ex-functionaries whose personal connectionswith high-level decisionmakers ensure them an “hon-est retirement” in these institutions.The appointment


50

Number offull- or

part-time Annual Service Decision technical budget Source of

Body Year Law regulated structure personnel (US$) budget

Potable water(SANAA), the postal service,ports, tourism, andanthropology

Electricity(generation,transmission,distribution)

Telecommunications

Concessions notgranted underexisting sector law(at present onlyconcessions forairports)

Table 6.1 The Labyrinth of Infrastructure Sector Regulation

CNSSP

CNE

CONATEL

Superintendencyof Concessionsand Licenses

Total

a. The five commissioners are professionals and exercise technical functions.b. Total of 80 employees.

1991

1994

1995

1999

Decree 85-91,revised byDecree 137-91

Decree 158-94,revised byDecree 131-98

Decree 185-95

Decree 283-98

7

3a

40b

4

54technicians

US$200,000

US$430,000

US$2 million

US$533,000

US$3,163,000

ChanneledthroughSOPTRAVI’sannual budget

ChanneledthroughSERNA’sannual budget

Channeledthrough thepresidency’sannual budget

Assigned bythe GeneralComptroller’sOffice and theNationalCongress

Plenary with 14 membersrepresentingdistinct sectors; anexecutive secretary

Plenary of 5commissioners (3 titular and 2 deputy) named by the president

5 commissionersnamed by thepresident

Superintendentnamed by theNational Congress

25 superintendentsor commissioners

of the commissions coincides with the normal admin-istrative periods of the central government (4 years),and reasons for separation are essentially the same as forother functionaries in the public administration.

Financial Dependence and the Lack of AutonomyFinancing of regulatory agencies should be as solid andconstant as possible and should correspond to theirmandates. As a general principle, they should be fi-nanced by charges to the consumers of the regulatedservice.This policy is equitable because the consumerbenefits from the regulation and because it reduces therisk of interference by the executive power in regula-tory functions through budget negotiations.

However, in Honduras, with the exception ofCONATEL, regulators are generally financed throughbudget assignations from the government, not throughservice charges.The regulators are created as decentral-ized entities of the central administration of the stateand, therefore, must present their budgets to the Na-tional Congress for approval—like the other publicinstitutions—through some ministerial department.Subject to this process,without an independent financ-ing source, they are exposed to conditions of expendi-ture of the whole public sector for a given year.

An example of the lack of financial security thatthese regulators face and how a significant drop in theamount of resources can affect regulatory function is thecase of the CNSSP. For various years during the 1990s,faced with the lack of resources to carry out tariff stud-ies in an independent manner, CNSSP found its worklimited to providing technical assistance for tariff studiesdonated to SANAA (the regulated entity) by the Re-gional Coordinating Committee of Potable Water andSanitation Institutions of Central America, Panama, andthe Dominican Republic (Comité Coordinador Regionalde Instituciones de Agua Potable y Saneamiento de Cen-troamérica, Panamá y República Dominicana—CAPRE).

It is important to emphasize, however, that twocases exist of regulators enjoying an important degreeof budget independence, in spite of being constitutedas decentralized entities.They are CONATEL, whosefinancing comes from broadcast frequency user rightspaid by radio and television broadcasters, and theCNBS, whose financing comes from a supervision ratepaid for by the system’s banks. It is not coincidental

that these entities are considered relatively strong andindependent, even though they are decentralized enti-ties (CONATEL is assigned to the Secretariat of Fi-nance, and the CNBS to BCH). Even though bothentities require approval of their budgets as part of thegeneral budget of the Republic, they have a nonbudgetfinancing source, which reduces the political control.

Consumer ProtectionEven though their legal mandates generally stipulatethat they respond to public complaints, none of theregulatory entities mentioned here has an office to re-ceive or respond to complaints from the public. Thislack shows that protection of consumer interests wasnot considered the central mission of any of these en-tities. However, in September 2001, CONATEL estab-lished a Web page for this purpose.

Absence of Clear and Transparent ProceduresThe decisions of the regulators generally seem to belate and subject to a process that is not transparent.Thissituation creates a lack of confidence in the objectivityof their decisions and encourages interested parties touse personal and political contacts to obtain relevantinformation and influence the discretionary decisionsof the regulators. Obviously, measures to increase theautonomy of regulatory agencies should be balancedby the need for accountability.

Conclusion

In summary, it can be concluded that the regulatoryagencies created in Honduras in recent years leave muchto be desired.Their functions are often not clear: theyextend to the area of sector policy, on one hand, but onthe other hand, they are technically dependent on theirregulated companies for calculating tariffs. In variouscases, political influence has affected the appointment ofofficials.Technical competence is normally limited, andfinancial independence is, in the majority of cases, non-existent.The missions of these agencies are generally notdefined in terms of consumer interests, and their actionsare cumbersome and lack transparency.This underminesconfidence in their objectivity and encourages the reg-ulated parties to use their influence behind the scenes toget favorable outcomes.


51

One alternative would be to follow the planadopted in Bolivia of streamlining the regulatory sectorby creating a single regulator for electricity, water, andtelecommunications.The new regulator should be suf-ficiently strong to resist the domination of the enter-prises regulated, with a professional and technical bodyappointed without political criteria and capable of of-

fering authorities of the regulated sectors the informa-tion necessary to make decisions about options in spec-ification and cost of the services.An integral part of thisreformulation should be configuring the policy andplanning sector entities in a way that involves the inter-ested actors and working with greater transparency toarrive at agreements about what strategy to follow.


52

Notes

1. Municipalities Law, Title 3, Article 13,Paragraph 8: “Municipalities have the fol-lowing attributions . . . 8. Maintenance,cleanliness, and control over the publicurban roads, sidewalks, parks and beaches;which include their ordinance, occupation,urban road signs, [and] urban and interurban

transport terminals. The access to theseplaces is free. Therefore, any charge is pro-hibited, except in the case of investment re-covery by means of the contribution systemfor legally established improvements.”2. This argument was made in the case ofthe water and sanitation concession in San

Pedro Sula in 2000. This specific problemwill be corrected by imminent legislation inthe water and sanitation sector. However, inthe future, the same argument could be usedin the road sector, debilitating regulation.

53

Private Financing

Direct InvestmentA principal focus of infrastructure modernization is themobilization of private capital, mainly through FDI.This emphasis is necessary because Honduras is limitedin its indebtedness capacity in that it is currently classi-fied as an HIPC. It is also recommended because of theexpected benefits in service efficiency when duly reg-ulated international companies are involved.

To date, FDI in Honduran infrastructure has beenrelatively limited. Until 1999, only the cellular tele-phone service functioned in this way through an accu-mulated investment of US$55 million of the Motorolaand Millicom companies in the concessionaire, CEL-TEL, of which US$25 million was equity.

However, with the approval in 2000 of the interna-tional airport concession and the San Pedro Sula watersystem, significant amounts of private investment byconcessionaires is expected. In San Pedro Sula, eventhough the concession contract does not stipulate spe-cific investment amounts, it is expected that the Italianconcessionaire will invest approximately US$200 mil-lion in 30 years, with US$51 million planned in thefirst 5 years. Forty-five percent of this amount willcome from the company’s cash flow, 17 percent will bethe company’s new equity, and 38 percent will be aloan. In the case of the airports, the U.S. concessionairewill invest US$19 million in the short term, with addi-tional investments to be determined in negotiationswith the government.

In the electricity sector, private investment to datein generation has involved mostly national capital

through PPAs. Outside of the PPA context, variousforeign companies have studied investments in largegeneration plants; however, none has been carried outyet.This situation could change in the short term be-cause in 2001 the U.S. company AES Corporation pro-posed to invest US$650 million in a 750-megawattthermal plant in Puerto Cortés, based on liquid naturalgas, that would enter into operation in 2004. If this in-vestment takes place, it would represent the most im-portant FDI in the country’s history.

Financial Sources for Private InvestorsThe availability of long-term financing is an importantconsideration for private investors in infrastructure.Typically, a private company seeks to leverage its owncapital with up to three times more in the form ofbank loans.

Some of the most important sources for financingprivate investment in Honduran infrastructure are theprivate investment arms of the development banks,such as the International Finance Corporation (IFC) ofthe World Bank, the Inter-American Investment Cor-poration (IIC) of IDB, and the Private Sector Depart-ment of IDB. These institutions have demonstratedtheir interest in supporting private investment projectsin infrastructure provided that an adequate legal andregulatory framework guarantees the investment.Whenfunds are available from these sources, it is possible toleverage private risk capital to cover the difference.

To date, the activity of these entities in Hondurashas been relatively limited, but that reflects the slowprogress of the privatization processes.There are indi-cations that these institutions would have significant

7 Infrastructure Financing

interest in providing cofinancing for private initiativesin the Honduran infrastructure sectors.

The IFC, together with the Private Sector Depart-ment and the Central American Bank for EconomicIntegration (CABEI) financed an investment by Elect-ricidad de Cortes, S.A, (ELCOSA), amounting toUS$22.5 million in private electricity generation of atotal investment of US$93.4 million in a thermal plantin Puerto Cortés (see table 7.1). In total CABEI has in-vested US$251 million in these sectors in Hondurassince 1990,of which US$73 million has been with pri-vate companies, exclusively in electricity generationprojects (see table 7.2).

Other publicly mandated funds have also played arole in Honduras. For example, the Caribbean BasinProjects Financing Authority (CARIFA) Fund of SanJuan, Puerto Rico (originated in a U.S. governmentmandate to finance the economic development ofPuerto Rico and the Caribbean Basin), loaned US$110million to AT&T for an investment in HONDUTEL’sexpansion of 110,000 lines in 1993. HONDUTEL or-ganized another simultaneous operation with theSiemens Company, for 110,000 lines and for a similaramount, but the financing details are not available.

Unfortunately, the Honduran national financial mar-kets offer little encouragement to the private investor,who must seek financing outside the country.The realinterest rates of the national banking system are high,with active rates in the range of 24 percent to 36 percentcompared with inflation of 10 percent in 2000, and it isdifficult to get financing for more than 5 years.There aresome credit lines available from international institutionssuch as CABEI, denominated in U.S. dollars with activeinterest rates in the range of 12 percent to 14 percent.However, resources are limited, and both the intermedi-ary banks and the CNBS have conservative policies re-lated to the requirement for real guarantees, which alsoconstitutes an obstacle in some cases.

International private banks offer financing for in-vestments in Honduras at interest rates that reflect therisk element in the country, normally at least 5 pointsabove the London interbank offered rate (LIBOR).

Public Expenditure and Investment in Infrastructure

Notwithstanding the recent increase in the role of pri-vate financing, public resources continue to have a pre-


54

AmountTotal project financed by

Sector Description Year amount (US$) Agencies agency (US$)

93,400,000

110,000,000

Table 7.1 Private Investment in Honduran Infrastructure Supported by Public International Financial Agencies,1990–2000

Electricity

Telecommunications

1995

1993

ELCOSA, thermal plant,Puerto Cortés

Expansion 110,000 lines,HONDUTEL, AT&T

9,700,000

12,761,000

110,000,000

IDB, Private SectorDepartment

IFC

CARIFA Fund

Table 7.2 Infrastructure Investment in Honduras by CABEI, 1990–2001

Sector Private sector (US$) Public sector (US$) Total (US$)

Electricity 72,862 39,747,000 112,609,000Ports — 3,253,000 3,253,000Roads — 85,092,000 85,092,000Telecommunications — 50,154,000 50,154,000Total 72,862 178,246,000 251,108,000

dominant role in financing and investing in the infra-structure sectors. Public funds are also assigned to covercurrent account deficits of the public operators, whosetariffs are insufficient to cover total costs. These casesare symptomatic of political capture or capture by theusers, and Honduras assigns an important proportion ofits fiscal resources to cover the resulting gap, throughbudget allocations to SOPTRAVI and SANAA andthe subsidies for electricity and for urban transportationin Tegucigalpa. In other cases, some or all of the usersare overcharged to finance subsidies to other users(cross-subsidies—in the cases of ENEE and HONDU-TEL) or to the state (in the case of HONDUTEL). Inall sectors, in the national institutions, personnel costsabsorb an important proportion of the income, symp-tomatic of improper capture of part of the institution’sincome by the employees of the institutions.

Public Expenditure in InfrastructureDuring the past decade, the expenditures of SOPTRAVI(formerly known as SECOPT), the ENP, HONDU-TEL, ENEE, and SANAA have represented a total of14.3 percent of the country’s GDP (see table 7.3).1

In 1998 (the last year unaffected by the reconstruc-tion after Hurricane Mitch), those agencies carried outtotal expenditures (including current expenses andcapital costs) of L 8.2 billion, which represents 11.7percent of the GDP.

The agency that stands out most in terms of costs isENEE (with 41 percent of the total, equivalent to 4.1percent of the GDP on the average during the decade).HONDUTEL has carried out 29 percent of totalspending in infrastructure, and SOPTRAVI has carriedout 29 percent. The ENP and SANAA are the poor

relatives in this aspect, spending 6 percent and 7 per-cent of the total, respectively.

Table 7.4 analyzes the public investment in infrastruc-ture. On average, the investments of these agencies dur-ing the decade amount to approximately 7 percent of theGDP.SOPTRAVI has been the most important investorduring the past decade,with an average of 2.6 percent ofGDP,2 followed by HONDUTEL (2.2 percent), ENEE(1.6 percent), SANAA (0.7 percent), and the ENP (0.3percent). According to BCH, total public investmentduring the decade represented 8.3 percent of the GDPon the average,which demonstrates clearly that the agen-cies analyzed here generated the majority of public in-vestment in Honduras.3 SOPTRAVI and the ENP regis-tered important increases in their investment throughoutthe decade, and the other agencies significantly reducedtheir investments in real terms (see table 7.4).

Financing Sources in Public Agencies The two key issues in infrastructure financing are (a) the degree to which consumer tariffs cover the costs

Infrastructure Financing

55

Table 7.3 Public Spending on Infrastructure, 1990–99

Percentage of totalspending in Percentage Index of real spending,

Entity infrastructure of GDP 1999 (1990 = 100)

SOPTRAVI 19.7 2.9 134a

ENP 5.9 0.8 187HONDUTEL 28.8 4.0 157ENEE 41.0 5.9 67SANAA 6.6 1.0 82Total 100 14.3 88a. 1998.Sources: Based on data provided by the Secretariat of Finance and BCH.

Table 7.4 Public Investment in Infrastructure, 1990–99

Average investmentEntity (% of GDP) Real growth (%)

SOPTRAVI 2.6 82ENP 0.3 231HONDUTEL 2.2 57ENEE 1.6 –30SANAA 0.7 –26Total a 7.0 –12a. According to BCH estimates, the average of total public spending (includingall the other agencies not represented here) during the decade was 8.3percent of GDP.Sources: Based on data provided by the Secretariat of Finance and BCH.

of the service (including operation and maintenance,depreciation, and capital costs) and (b) the relative im-portance of public, private, national, and foreign fundsin financing capital programs.

Table 7.5 presents the total spending (current pluscapital) for each of the principal infrastructure agenciesby financial source.The four sources were operationalincome (derived principally from user tariffs); other in-ternally generated funds by the enterprise or agency(such as provision for depreciation or movements inthe accounts of short-term net assets); national funds(transfers or loans, both those provided by the govern-ment and those acquired from the private sector); andexternally originating funds (net transfers or loans).

The ENP, HONDUTEL, and ENEE depend exces-sively on user tariffs.Those institutions finance more than70 percent of their total expenditures from this source.However, it is important to emphasize that the electric-ity subsidy, paid by the tax office, is part of ENEE’scurrent income. In 1999, this amount represented ap-proximately 7 percent of its income.Among the publiccorporations, SANAA presents a dramatic contrast, be-cause only 28 percent of its total spending is financed byincome from tariffs. SOPTRAVI does not generate sig-nificant income from user charges.However, it is impor-tant to note that the contribution to the fuel consump-tion tax (the old petroleum differential),which is used tofinance road maintenance, is a form of cost recovery, butit is registered in the table as a transfer of national funds.

The assignations for depreciation (which are regis-tered in the accounting as current expenditures but donot produce cash costs), plus the adjustment in short-term net assets, constitute between 11 percent and 24

percent of the financing of the public corporations’total expenditures. Again, SOPTRAVI receives no fi-nancing this way.

The agencies analyzed over 9 percent of their totalexpenses (current plus capital) with net loans or trans-fers from national funds and 15 percent with loans ortransfers from foreign funds.These funds are mostly ofa public nature and have a sovereign guarantee.

In this aspect SOPTRAVI dominates, dependingon national budget transfers for 47 percent of itsfinancing. For the remaining 53 percent, it depends ontransfers financed by foreign loans contracted by thecentral government or foreign donations.

SANAA is highly dependent on capital transfersfrom the central government, which are principally fi-nanced from outside the country with the governmentassuming the debt service.4 Historically, when the gov-ernment has arranged capital resources for HONDU-TEL and ENEE, they have absorbed the correspondingdebt, assuming the responsibility of paying the debtservice. However, when they have had solvency prob-lems (normally associated with delays in authorizationof tariff hikes), they have at times failed to pay, and thecost has been assumed by the Treasury (Tesorería) withits general resources. Such an assumption occurred in1995 in the case of a loan from the World Bank and theCommonwealth Development Corporation for themunicipal water system in San Pedro Sula. It should bementioned that, in recent years, the government anddifferent external sources have paid for the capital costsof the electricity expansion program in small towns.

During the 1990s, continuous fiscal pressure hasmade it difficult to obtain significant transfers of capi-


56

Table 7.5 Financial Resources for Infrastructure, 1990–99

Percentage of total cost (current plus capital)

Financial source SOPTRAVI ENP HONDUTEL ENEE SANAA Total

Operational income 0 94 84 73 28 60Depreciation and accounting

adjustments 0 11 13 24 13 16

Net transfers and loansa

National funds 47 –2 –1 4 0 9External funds 53 –2 4 0 59 15Total 100 100 100 100 100 100a. The national and external funds include budget transfers from the central government and loans made directly by other public and private financial agencies. Allthese loans have sovereign guarantees.Source: Data are from the Secretariat of Finance.

tal financed with national resources.At the same time,it has been increasingly difficult to negotiate loans frominternational financial organizations, in part because oftheir growing frustration with the slow rate of infra-structure reform and also because of the preoccupationwith the sustainability of the Honduran external debtburden.This situation has resulted in the country’s sus-pension of access to the IDB’s and the World Bank’sordinary capital and explains the relatively low partici-pation of external financing for the public corporations.

The public corporations have shown little capacityto use private national or international financial mar-kets to finance their operations. It is worth pointingout that the laws and norms of fiscal control that gov-ern them generally do not permit their managers tocontract debt to finance their operations. Such an ac-tion would require the approval of the Secretariat ofFinance and BCH. In addition, contracting noncon-cessional debt is expressly prohibited.

However, there are two exceptions where the pri-vate financial markets have played a bigger role.Thesewere detailed in the previous section,“Private Financ-ing.” During the 1990s, HONDUTEL (with a stateguarantee) obtained loans for more than US$220 mil-lion with the private sector to install 220,000 addi-tional lines. Those loans were in large part paid withapplications of operational surpluses generated duringthe period under analysis.Thus, in the average data forthe decade presented in table 7.5, these funds do notappear as a net resource to external financing. In addi-

tion, ENEE has availed itself of private financingthrough the PPAs with private thermal generators,which is not reflected in the table.

Employment and the Personnel Costs of Public CorporationsA notorious problem of the traditional management of public enterprises was the placement of followers ofthe political parties (chamberismo). In the autonomouscorporations, the problem of personnel managementwas further complicated by the establishment of strongunions.The result was a generalized pattern of overem-ployment, especially of people with low levels of tech-nical capacity.

In the face of this problem, one of the most impor-tant goals of the modernization process of the 1990swas the reduction of direct personnel, the profession-alization of remaining personnel, and the transfer of functions to private companies with service con-tracts—for example, electrical meter reading and billdistribution, as well as road maintenance.The result wasa 9 percent reduction in total employment of the fourpublic corporations between 1993 and 1999. ENEEreduced its personnel by approximately 21 percent.TheENP reduced its personnel by nearly 15 percent, andSANAA by more than 12 percent. In contrast, HON-DUTEL increased its personnel by only about 3 per-cent (see table 7.6).

For 1999, the total number of employees of thefour public corporations exceeded 9,900, 80 percent


57

Table 7.6 Trends in Personnel Employment in Autonomous Enterprises

Number of employeesPercent of total Change, 1993–99

Type of employee 1993 1999 employees, 1999 (%)

SANAA: 1,534 1,349 14 –12.1Permanent 1,085 1,170 12Contract 449 179 2

ENP: 1,390 1,184 12 –14.8Permanent 1,135 822 8Contract 255 362 4

ENEE: 3,674 2,913 29 –20.7Permanent 3,274 2,076 21Contract 400 837 8

HONDUTEL: 4,341 4,484 45 3.3Permanent 4,341 3,896 39Contract 0 588 6

Total: 10,939 9,930 100 –9.2Permanent 9,835 7,964 80Contract 1,104 1,966 20

being permanent positions and 20 percent contractworkers. The biggest employer, by a large margin, isHONDUTEL, which had almost 4,500 employees in1999, 45 percent of the total of the four companies.ENEE had about 2,900 employees (29 percent), andSANAA and the ENP employed approximately 1,350and 1,180 people, respectively (14 percent and 12 per-cent of the total) (see table 7.6).

Even with the reductions registered, personnelcosts represent a significant component of the currentexpenses of the majority of the infrastructure agencies(see table 7.7). Personnel costs represented 16 percentof HONDUTEL’s current income.The figure was 24percent for the ENP and 50 percent for SANAA. Atthe same time, ENEE allocated only 8 percent of itscurrent income to the payment of personnel.This factis in part explained by the relatively high proportion ofincome dedicated to debt service in the cost structureof ENEE’s expenditures (32 percent of its income).

SOPTRAVI shows a pattern that contrasts with thepublic corporations but which is typical of the min-istries of the central government. It allocates 75 percentof its current expenditures to personnel remuneration.

Transfers to the GovernmentHONDUTEL and the ENP made significant transfersto the national and local governments.During the 1990s,HONDUTEL’s transfers to the Treasury represented, onaverage, 10 percent of its current expenditures. In 1999,the transfer was L 300 million (a little more than US$20million, equivalent to 0.4 percent of the GDP). Thistransfer will probably be reduced if the sale of 51 percentof HONDUTEL’s stock is carried out.5

Compared with the case of HONDUTEL, theobligatory transfers that the ENP made to the public

sector made up an even greater proportion of it totalspending, with an average of 13 percent during the1990s. However, in absolute terms it was a lesser quan-tity, amounting to L 84 million in 1999.An interestingaspect about the ENP transfers is that local authoritiesin the port cities receive 4 percent of the corporate in-come. Puerto Cortés recently used this funding sourceas implicit collateral for a US$15 million loan from theIDB for the construction of the city’s sewer system.ENEE and SANAA normally do not carry out trans-fers to the government, but in 2001 the nationalbudget contemplated a transfer from ENEE.

Subsidies Apart from the subsidies related to the aforementionedcapital transfers, there are two important current subsi-dies in the infrastructure sectors: the subsidy for elec-tricity and that for public transportation in Teguci-galpa. In 2000, the electricity subsidy was budgetedL 240 million (US$16 million). In 2001, it rose toL 280 million (US$18 million). In 2000, the publictransportation subsidy in Tegucigalpa had a budget ofL 120 million (US$8 million).6

It is important to remember that these subsidies arefinanced with central budget resources (called “central-ized services of the executive power”), instead of appear-ing as a specific item in the budget of the relevantagency.The subsidies,which amounted to approximately2 percent of total spending by the central government,are entered as current transfers to the private sector.

As a result, none of the subsidies appear directly intable 7.5 as part of the budget support to the relevantsector.The electricity subsidy appears indirectly in thattable because it constitutes part of the current incomeas ENEE tariffs.The transportation subsidy, which is a


58

Table 7.7 Current Spending by Public Corporations

Average spending, 1990–99 (% of current cost)

ENP HONDUTEL ENEE SANAA

Personnel 24 16 8 50Interest 2 7 32 1Transfer to government 13a 10 1 0Depreciation 12 10 28 16Other 21 15 37 44Total 86 57 106 111a. ENP transfers to the government equal 13 percent of its current spending (rounded) as follows: central government, 10 percent; local government, 3 percent; andother, 1 percent.


59

Notes

1. Obtaining reliable data on public expen-diture on the infrastructure of Honduras isnot easy. One reason is the number of insti-tutions involved. Some of the sources aredifficult to access, and several sources some-times generate statistics that are inconsistent.The data presented here are from the exe-cuted budget of SOPTRAVI and for thefour autonomous companies: SANAA, ENP,ENEE, and HONDUTEL. The data fromthe Executive Board of Decentralized Insti-tutions were taken from the Secretariat ofFinance.The data do not cover the FHIS in-vestment on road infrastructure and onwater and sanitation. During the 1990s,FHIS invested L 580 million in water andsanitation, and L 552 million on municipalmiscellaneous infrastructure. Central data onmunicipal investment on infrastructure arenot available.

2. In this context, it should be rememberedthat SOPTRAVI classifies the expense ofroad maintenance as an investment.3. The Secretariat of Finance and BCH mayuse different estimates of public investmentfor GDP data, but it is not probable that suchdifferences would affect this conclusion.4. The data that were available did not allowthe transfers from the central government toSANAA to be broken down by the countryof origin. In table 7.5, all of those funds arecategorized under “external financing.”5. In December 2000 it was reported thatHONDUTEL transferred US$80 million to the central government. The operationcaused a temporary liquidity crisis in the na-tional financial system because of reductionsin the company’s bank deposits. The trans-fer’s motive was partially to compensate for adelay in the company’s privatization, which

should have generated a transfer of US$150million to the Treasury.6. Another type of subsidy related to the in-frastructure sectors was dispensations fromimport tax on vehicles.This practice does notconstitute state spending, which is why itdoes not appear in the budget. However, itleads to a considerable loss in tax income forthe state. For example, all members of theNational Congress are permitted to import aluxury vehicle free of tax, and the permit istransferable. In some cases, the National Con-gress has discussed granting such rights tointerest groups. In November 2000, the Na-tional Congress granted the right to import1,300 new vehicles from Spain to three taxigroups in La Ceiba, with an estimated fiscalcost of L 300 million (US$20 million).Afterenergetic protests in the national press, Presi-dent Flores vetoed the bill in January 2001.

transfer from the central government to the bus own-ers, does not appear at all.

The official justification of both subsidies is that theyare a form of compensation for poverty. Therefore, toensure budgetary transparency and to promote a ra-tional comparison with alternative uses of the funds, it isrecommended that they be budgeted under the headingof social compensation, together with other programswith a similar purpose, such as the Family AllowanceProgram (Programa de Asignación Familiar—PRAF),Honduran Institute of Childhood and the Family (Insti-tuto Hondureño de la Niñez y la Familia—INHFA), and

possibly the Honduran Institute of Social Security (In-stituto Hondureño de Seguridad Social—IHSS).

From this point of view, it is noteworthy that thetotal budgeted for PRAF, which is relatively well fo-cused on low-income rural households, was onlyL 185 million in 2000.This amount represents only 51percent of the total subsidy for electricity and trans-portation, which, in a large majority of the cases, ben-efits people who are not poor.The principal benefici-aries are middle-class urban households (in the case ofthe electricity subsidy) and bus owners (in the case of the transportation subsidy).

60

In the past decade, Honduras has begun a significanteffort to modernize and open its economy, which haspositively affected its macroeconomic situation and itsperformance in investment and growth. In this con-text, the infrastructure sectors play a decisive role in thethemes of poverty reduction, competitiveness, andgrowth.

Even though the trend is positive, the economicgrowth achieved has been insufficient to significantlyreduce the country’s poverty level.The reason is partlylow investment productivity and partly low levels offoreign investment (which has a greater tendency tomodernize the economy and involve state-of-the-arttechnology). The investment climate is still relativelyunfavorable compared with neighboring countries,according to published competitiveness indexes, andHonduras attracts less foreign investment per capitathan any other country in the region.

Unfortunately, the slow and incomplete reformprocess of the infrastructure sectors has been an impor-tant factor in this lagging competitiveness. The infra-structure services stand out as an area of limited successin the implementation of key reforms. Honduras hasmade relatively little progress in developing infrastruc-ture services in a competitive framework under appro-priate regulation to mobilize the private investmentthat the country needs if it wants to offer consumershigh-quality services at competitive costs.

In this framework, the overview of infrastructuresectors presented in “Infrastructure Performance”(chapter 3) revealed a mixed picture. In every sector

there has been some modernization effort. In mostcases, efforts are accompanied by corresponding leg-islative reforms and the growing use of private agentsto augment the most deficient aspects of state provi-sion. However, these changes have been limited andpartial, and several of them—like HONDUTEL’s pri-vatization—have yet to be implemented.

Without doubt, the most important achievementsare in coverage and access. Since 1990, the efforts to in-crease coverage and access of basic services, such aswater, sanitation, and electricity, have resulted in a sig-nificant degree of poverty reduction.The coverage oftelephones has also improved significantly.

In the past decade, the increase in coverage of thewater services benefited 18 percent of the population,who were previously without access to that service. In-creased sanitation services benefited 15 percent of thepopulation; expansion of electricity coverage, 21 per-cent; and increased telephone coverage, approximately8 percent. In the cases of water and sanitation, the ma-jority of the beneficiaries were concentrated in thepoorest deciles. For electricity, beneficiaries were con-centrated principally in the middle deciles, and thebeneficiaries of expanded telephone access were in thehighest deciles (not poor).

Some advances also were seen in efficiency. For ex-ample, improvements occurred in labor productivity inthe electricity and water sectors. Less progress has gen-erally been seen in terms of service quality.

In terms of sustainability, there have been notableachievements, such as the establishment of the Road

8 Conclusions

Fund to ensure road maintenance. Nonetheless, Hon-duras has still not established as a central principle thattariffs of infrastructure services should reflect the totalcost of providing efficient service. In some cases, thestate continues using its monopoly situation to imposeexaggerated tariffs and extract surpluses from some ofthe users, without also bringing about an efficient andsustainable management of the service. Examples ofthis situation are the high tariffs for international tele-phone calls and, to a lesser degree, for port services.

However, for other services of public enterprisesthe tariffs charged are insufficient, which makes theminherently insolvent and dependent for their continuedoperation on various kinds of subsidies and consump-tion of their own capital (through the application ofdepreciation provisions to cover part of current spend-ing). This pattern is particularly marked in the watersector.

Hurricane Mitch affected the infrastructure sectors,especially roads, bridges, and water, revealing design andconstruction deficiencies and highlighting institutionalweakness.The PMRTN proposes to attack both prob-lems, reinforcing reform and modernization processesand strengthening design and supervision specificationsfor works so that they can resist future natural disasters.The progress in road reconstruction has been consider-able, but in water and sanitation it has been slower.

Consumer opinions expressed in focus groups indifferent parts of the country showed a universal desirefor access to basic services, in addition to a desire for ac-cess to telephones.The interviewees painted a pictureof difficult access, of the need to resort to illegal con-nections and political influence to solve individualproblems, and of entire communities excluded fromservices.Those who do have installed services complainabout the poor service quality, inadequate response touser concerns, and, in some cases, the sums charged.Theproblem of contested utility bills (to which interest isadded, resulting in apparently ridiculous amounts) is aspecial source of irritation and deserves urgent atten-tion. Even when the authorities have mandates to re-spond to public complaints, these functions are poorlydeveloped, and, normally, they do not have the author-ity to cancel bills, which are considered state assets.

In spite of the dissatisfaction with present accessand quality, the population has a remarkable skepticismto privatization as a solution. Many associate this strat-

egy with tariff increases and view it as a policy in-tended to favor the contracted enterprise rather thanthe users.

The overview of the legal, institutional, and regula-tory framework for investment in infrastructure reflectsthe incomplete state of the reform process in the infra-structure sectors. Generally, the intention of recentgovernments has been to promote the creation ofmodern legal and institutional frameworks, separatingthe functions of planning, regulation, and operation ofthe services, with an important role for the private sec-tor in operation.

However, the legislative processes and later imple-mentation of the reforms have proved difficult. Rea-sons include a lack of understanding about the pur-poses of the reforms and about the nature of regulatoryfunctions and sector policy, which has weakened both.Other important factors include public mistrust re-garding privatization and the intervention of specialinterests that benefit from the status quo and impedereform processes.

In general, sector policies—including the definitionof which government entity is in charge and a clear vi-sion about the form of sector organization, the role ofdifferent types of operators, the appropriate degree ofmarket liberalization, and the role of public financ-ing—are not well defined.

In a similar fashion, the regulatory entities createdin these reform processes have significant weaknesses,including the confused definition of their functionsand insufficient functional independence.This problembecomes particularly acute when, in many cases, theexecutive is also one of the providers to be regulated.

In transportation, there is a lack of an intermodalvision that makes it possible to see how the transporta-tion sector will resolve the logistical problems of thenational economy.With the exception of the road sub-sector, planning functions are weak. In a similar fash-ion, regulatory functions are dispersed and weak.TheConcessions Law provided a general framework for theincorporation of private financing in transportationworks and opened the way for the concession of theinternational airports. However, private investment inroads could prove difficult because of the legal obsta-cles to charging tolls.

In electricity, in 1999 a bill to facilitate the privati-zation of distribution and to implement mechanisms

Conclusions

61

based on competition to regulate the cost of genera-tion was introduced in the National Congress. Its con-troversial nature caused the government to abandonthe legislative effort in July 2001. In telecommunica-tions, a framework law has existed since 1995. It callsfor the sale of a 51 percent interest in HONDUTEL toa private partner, but the process has not been imple-mented yet. In water and sanitation, the process ofreaching an agreement about a new framework law forthe sector has already lasted 7 years.

Without any doubt, the partial progress in terms oflaws and regulations for the modernization of infra-structure sectors is the main reason for the limited par-ticipation of private capital in managing and financinginfrastructure. In this respect, the important advancesinclude the generation of thermal energy through thePPAs, the concession of the international airports, andthe concession of the San Pedro Sula municipal waterand sanitation system.These last two were contractedin 2000.

National capital markets still do not offer very favor-able conditions for financing long-term infrastructureinvestments. Bank financing is available for relativelyshort terms and at high interest rates, both for lempira-and dollar-denominated funds.The stock exchanges arecollapsing and are not at present an option for mobiliz-ing funds. In general,private enterprises interested in in-vesting in infrastructure seek financing abroad.

Private sector financing entities of the multilateraldevelopment banks represent an important option tolack of local financing.The IFC, IDB, and CABEI haveprovided support to the private generation of electric-ity through PPAs, and the Private Sector Departmentof the IDB is negotiating backing for the investment ofthe San Pedro Sula water system concessionaire. TheIFC has also been approached about the possibility ofbacking a gigantic investment of US$650 million pro-

posed by the AES Corporation for a thermal genera-tion plant in Puerto Cortés.There would doubtless beinterest in backing other strategic operations to in-crease the private presence in national infrastructure.

In this context, the public sector continues to bethe principal source of capital and the provider of largesubsidies for the current expenditures of the infrastruc-ture sector. During the past decade, total public expen-diture in these sectors reached 14 percent of the GDP,and investment reached 7 percent.The great majorityof the income of the ENP and HONDUTEL comesfrom user fees. However, the users of ENEE andSANAA receive important subsidies from the govern-ment in the form of capital transfers, and SOPTRAVIhas been totally subsidized.A significant part of the re-sources for SANAA and SOPTRAVI comes from ex-ternal sources (loans or donations from multilateral andbilateral entities).

In sum, Honduras faces an important fiscal burdento cover the current account deficits and to meet theinvestment needs of the entities that provide infrastruc-ture services.To correct this situation, it is necessary toadjust tariffs so that they cover the total costs of theservice provided and to use private markets to financeinvestment when it is possible.

Two subsidies to infrastructure should be urgentlyreconsidered: the subsidy for electricity consumption,with a yearly cost of US$18 million, and the subsidyfor urban public transportation in Tegucigalpa, with ayearly cost of US$8 million. These subsidies are notwell designed.The urban transportation subsidy is paiddirectly to the provider.This method tends to reinforceservice problems and erode service sustainability. Thesubsidy for electricity is poorly focused, benefitingprincipally households that are not poor.This perverseaspect of public infrastructure financing should bechanged.


62

PART 2Sector Summaries

65

Summary

Since 1998, the Honduran government has concerneditself principally with the reconstruction of roads andbridges that were destroyed in Hurricane Mitch.How-ever, it has also made important progress toward im-proving the management of the transportation sector.

In the road sector, the most important achievementhas been the establishment of the Road Fund, an entitythat is currently carrying out a large program of routineand periodic maintenance of the road network.The Secretariat of Public Works, Transportation, andHousing (Secretaría de Obras Públicas, Transportes yVivienda—SOPTRAVI) has established a Planning andManagement Evaluation Unit (Unidad de Planificación yEvaluación de la Gestión—UPEG), which has preparedinventories of roads and bridges as well as annual oper-ational plans for periodic investment and maintenance.An environmental unit has been established under theUPEG, which the Secretariat of Natural Resources andthe Environment (Secretaría de Recursos Naturales y Am-biente—SERNA) considers to be one of the best in anyof the ministries.The government has implemented a re-form program for civil aeronautics. It has privatized thefour international airports, and an Open Skies Law (Leyde Cielos Abiertos—Decree 23-2000) has been passed.

In several other fields, the principal problems havebeen identified, and there is a general commitment toimplementing the respective reforms in the short term.A consulting study to identify restructuring options forthe national railroad has been completed, and a similar

study will shortly be undertaken regarding the port fa-cilities in Puerto Cortés.

In the road sector, the government recognizes theneed to strengthen the Road Fund (Fondo Vial) with agradual increase in funding to enable it to provide rou-tine maintenance for the whole official network. Thegovernment also recognizes the importance of themaintenance of the unofficial network and,as a first step,has completed an inventory of that network.The MasterPlan for National Reconstruction and Transformation(Plan Maestro de Reconstrucción y Transformación Nacional—PMRTN) also recognizes the importance of improvinghydrological and hydraulic aspects of road design tominimize future storm damage.With technical assistancefrom the Inter-American Development Bank (IDB) andthe Government of Denmark, the Honduran govern-ment is preparing a study on road safety.

However, various important issues identified belowstill do not have adequate attention in the govern-ment’s programs and policies, and they merit urgentconsideration:• The Master Plan for Transportation should be up-

dated to provide a framework for decisions aimed atimproving the country’s competitiveness. The planshould be intermodal and should specify the goals,objectives, and criteria for selecting investment proj-ects and ensure that these are congruent with eco-nomic development and poverty reduction goals.

• The formulation and execution of transportationinvestments should be restructured to strengthentechnical aspects and to reduce vulnerability to po-

9 Transportation

litical pressure. Planning processes should be refor-mulated to increase openness and participation bylocal governments and civil society, as well as to en-sure more comprehensive consideration of techni-cal and economic factors.

• The Road Fund should strengthen quality controland supervision of contractors. Local governmentsshould be involved in the monitoring process.

• An institutional and financial solution for the main-tenance of the urban road system is urgentlyneeded.These roads represent a large portion of thecountry’s network, and their users pay a high pro-portion of the fuel consumption tax, but the mu-nicipalities do not receive financial support for theirmaintenance.

• In the area of road safety, it is urgent that existinglaws be fully implemented.This requires improvingthe equipment, training, remuneration, and man-agement of the traffic police.

• Road designs should pay more attention to safetyconsiderations and the needs of nonmotorized traf-fic. A new Road Design Manual with updatedtechnical and environmental norms has been pre-pared and is now ready for adoption.

• The regulatory functions of the road sector shouldbe consolidated on a national level into a single en-tity.The appointment of the commissioners of thatentity should be fixed for 5 years, with overlappingterms to ensure continuity. Commissioners shouldbe removed only where there are justified causes re-lated to their performance in the job.

• The regulation of public transportation should berestructured to benefit the users. The municipalregulation of public urban transportation should bedeveloped on the basis of experience of the pilotinitiative in San Pedro Sula.The urban transporta-tion subsidy in Tegucigalpa should be eliminated.

• Regulation of interurban freight transportationshould be simplified. The SOPTRAVI licensingsystem and the regulation of fuel costs should beabandoned. It is critical to streamline procedures atborder-crossings and in intermodal terminals toeliminate delays and unnecessary costs. It is also im-portant to ensure compliance with axle weight limitson roads, using the recently acquired weigh stations.

• The port sector should be restructured to provideefficient services with competitive prices, allowing

for a reasonable return on the country’s historicalinvestment in port infrastructure.The restructuringshould seek maximum possible competition at eachport and between different ports.An attempt shouldbe made to attract private capital and managementexperience to improve port capacity and servicequality. It is imperative to construct a new containerterminal in Puerto Cortés and to increase the port’sdry cargo capacity.Those expansions should be car-ried out using private concessions.

Main Sector Institutions

Lack of a Global Vision in Transportation PlanningThe transportation sector is marked by the fragmenta-tion of its various subsectors. Planning takes no accountof the interaction between different modes.The last ef-fort to establish a national framework was the MasterPlan for Transportation, prepared in 1989. Currently,even though SOPTRAVI’s planning unit, UPEG, hasformal responsibility to oversee all modes, in practice itsactivities have been limited to roads. In practice, theroad, port, airport, and railroad subsectors are managedindependently.This is unfortunate because the effectiveinteraction of these different modes is critical to meet-ing the needs of the economy and of the users.

This point becomes clear when one considers thepotential interaction between roads, ports, railroads,and airports in the Sula Valley.The airport in San PedroSula and the port in Puerto Cortés are both use formaquila exports and each has experienced huge in-creases in freight volume in recent years.The increasein airport use by the maquila sector is partly due to thelong delays in dispatching in port service at PuertoCortés.The demand for airfreight services would prob-ably be reduced if the port service were improved.Thedevelopment of the labor market in the valley also de-pends on transportation services. Facilitating longercommutes will reduce the need for worker relocation.Hence, urban transportation should be improved witha view to creating a single “travel to work” area in thetriangle between El Progreso, Choloma, and Vil-lanueva. Currently, the railway is in a state of disrepair,and workers depend on the road system for transporta-tion.The possibility of developing a modern mass tran-sit system based on the railway should be analyzed.Such a system would reduce traffic pressure on the road


66

system.All of these considerations argue for integratedtransportation planning in the Sula Valley to optimizeservices and to strengthen the region’s competitiveness.

The failure of Puerto Castilla is another example ofthe failure of integrated planning in the transportationsector.This port, constructed in the Bay of Trujillo inthe 1970s, has excellent depth and capacity for largeships. However, its connections with the nationaleconomy through the road network are very weak, be-cause of long distances and poor roads.The economyof the port’s natural hinterland (places from which theport is easily accessible) is relatively small. Hoped-foreconomic growth in the agricultural and forestry sec-tors in the Aguan Valley and Olancho might have madethe port viable. However, that expectation was not re-alized. Corfino’s gigantic state lumber mill in BonitoOriental was abandoned, and, as a result, the Dole ba-nana production from the Aguan Valley today insteaduses Puerto Cortés, because of the collapse of servicesin Puerto Castilla.

Another example of interaction between subsectorsis the proposed “dry canal” that would link PuertoCortés and Cutuco (in El Salvador) with a four-lanehighway, oriented toward trans-isthmus internationaltrade that is currently channeled through Panama (seebox 9.1).Without doubt, this project would have im-portant consequences for the port and road sectors. Itwould increase demand for services in Puerto Cortés,whose capacity would have to be increased. Therewould be increased traffic of heavy vehicles betweenVillanueva and Puerto Cortés, as well as between Co-mayagua and Villanueva, implying greater congestionand increased road maintenance costs. On the positiveside, enlarging the road from Comayagua to Villanuevawould reduce the travel time between Tegucigalpa andSan Pedro Sula. These complex interactions make itdifficult to evaluate a project of this sort. A nationaltransportation-planning framework would permit ananalysis of the project’s positive and negative effects sothat the government could reach a rational conclusionregarding its suitability.

An important recommendation of this study is,therefore, that Honduras should establish a sector-plan-ning framework in transportation in SOPTRAVI tofacilitate such analyses. In parallel, the study recom-mends that the sector’s regulatory functions be consol-idated into a single entity.

RoadsSOPTRAVI is in charge of designing, constructing,operating, and maintaining roads in the official net-work and of regulating freight and public transporta-tion. Highway maintenance is implemented throughthe Road Fund. Municipalities construct and maintain

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Box 9.1 The Dry Canal

In 2000, President Carlos Flores signed an agreement with theSpanish government for a feasibility study of the project knownas the dry canal, which would link Puerto Cortés to a new portin Cutuco, El Salvador, at a cost of US$580 million. Japan and theCentral American Bank for Economic Integration (CABEI) haveagreed to finance the port facilities in Cutuco.This proposal isthe latest of a series of proposals for dry canals in the north ofthe Central American isthmus that would seek to take advan-tage of part of the Panama Canal’s traffic.

For a decade, the Honduran framework for road planning hasincluded a project for construction of a two-lane highway be-tween La Guama (on Central American Highway 5) and Goas-carán.The project would allow Salvadoran exports destined forPuerto Cortés to bypass Tegucigalpa. However, the currentlyplanned project is more ambitious. It would involve a privatelydeveloped four-lane highway oriented toward transregionalfreight, not just freight from El Salvador. Costs would be recov-ered through a toll system and through income from the ports.Apparently, the income from Puerto Cortés would be incorpo-rated into the financing package.

Honduras would benefit from such a project only if it wereprofitable after all public and private costs were covered. Hon-duras should evaluate the project carefully to ensure that itspremises are reasonable in terms of probable trade flows.Theproject’s financial feasibility should not depend on the port in-comes, which would have existed in any case. It is noteworthythat the project’s preliminary feasibility study, which was re-viewed by the present study team, failed to consider the en-largement of locks, which is currently under way, at the PanamaCanal and the new railroad that runs beside the canal. For thisreason, future demand for the proposed dry canal was likelyoverestimated.

It is also necessary to avoid the temptation to justify theproject on the basis of an expectation of secondary benefits. Forexample, if the strategic goal for Honduras is to improve com-munications between Tegucigalpa and the North Coast, thegovernment should evaluate the convenience of the proposedconcession contract on the basis of that goal. Similarly, if themain goal is improving communications in the sector betweenLa Guama and Goascorán, it is possible that a less ambitiousprogram to improve rural roads in that sector would be themost efficient way to achieve the goal.

the urban road networks. Granting driver’s licenses, de-termining speed limits, and regulating vehicle safety arefunctions of the national transit director in the nationalSecretariat of Security (Secretaría de Seguridad).The mu-nicipalities establish the traffic flow rules for urbanareas and are also involved in defining the routes ofbuses and taxis.

PortsThe ports are operated through the National Port En-terprise (Empresa Nacional Portuaria—ENP), a statemonopoly that combines the functions of planning,operating, and regulating port services. The minister of SOPTRAVI presides over the Board of Directors ofthe ENP; however, there is no entity within SOP-TRAVI that supervises the board or dictates a policyframework for the subsector. In the face of this vacuum,the Consultative Commission on Privatization and theState Modernization Commission have assumed an im-portant role in promoting private investment in theport sector. In coordination with SOPTRAVI and theENP, the Consultative Commission on Privatization,and State Modernization Commission have commis-sioned strategy studies for the sector’s modernizationand privatization, supported by state modernizationprograms of the World Bank and the IDB.

The National Supervisory Commission for PublicServices (Comisión Nacional Supervisora de los ServiciosPúblicos—CNSSP) is responsible for regulating theENP. Its principal activity in this respect has been todefine a new tariff regime, which was implemented in1999. This measure establishes a simplified and trans-parent tariff structure, related to an investment plan,and establishes norms for consultation and dispute res-olution between the ENP and its users.

AirportsSector policy is the responsibility of the General Di-rectorate of Civil Aeronautics (Dirección General deAeronáutica Civil—DGAC) in SOPTRAVI. The fourinternational airports are operated under concession byInter Airports S.A., and the concession contract is reg-ulated by the Superintendency of Concessions andLicenses (Superintendencia de Concesiones y Licencias), adependency of the General Comptroller of the Re-public (Contraloría General de la República).

Sector Performance and Key Themes for Modernization

The Road Network Honduras has an official network of 13,603 kilometersof primary, secondary, and rural roads that are managedby SOPTRAVI (see table 9.1).

In addition, there is an unknown quantity (between7,000 kilometers and 12,000 kilometers) of roads de-veloped by other state agencies, including the Hon-duran Coffee Institute (Instituto Hondureño del Café—IHCAFE), Coffee Fund (Fondo Cafetalero), HonduranFund for Social Investment (Fondo Hondureño de In-versión Social—FHIS), Secretariat of Agriculture andLivestock (Secretaría de Agricultura y Ganadería—SAG),Honduran Forestry Development Corporation (Corpo-ración Hondureña de Desarrollo Forestal—COHDEFOR),and municipalities. Other roads have been constructedby bilateral agencies, such as the U.S.Agency for Inter-national Development (USAID) and Japan Interna-tional Cooperation Agency (JICA), and by privatecompanies and individuals.

Primary roads make up 24 percent of the officialnetwork, secondary roads make up 19 percent, and 58


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Table 9.1 Functional Classification of the Official Road Network

Primary roads Secondary roads Tertiary roads Total

Km % Km % Km % Km %

Asphalted concrete 1,786 56 148 6 0 0 1,934 14Hydraulic concrete 194 6 25 1 0 0 220 2Double treatment 442 14 180 7 0 0 623 5Other material 764 24 2,146 84 6,328 81 9,237 68Earth 13 0 65 3 1,511 19 1,589 12Column total 3,199 100 2,565 100 7,839 100 13,603 100Line total (%) 24 19 58 100

percent are tertiary (rural or community) roads. Also,21 percent of the official network is paved, 68 percenthas a gravel surface, and 12 percent consists of dirtroads.

During the 1980s, the condition of Honduranroads deteriorated significantly as a result of the lack ofpreventive maintenance.This was corrected from 1987onward through a massive program of highway recon-struction, whose cost has been estimated at three timesthat of applying adequate preventive maintenance inthe first place (Figueroa 1997, p. 24).

A recent study found that the paved highways aregenerally in relatively good condition (see tables 9.2and 9.3). Only 8 percent of the roads paved with as-phaltic concrete and 11 percent of those paved withhydraulic concrete were classified as in poor condition.In contrast, 53 percent of superficially treated roads, 19percent of gravel roads, and 65 percent of dirt roadswere in poor condition.

Road PlanningHistorically, development planning for the road net-work has been weak.The latest Master Plan for Roads

dates from 1989 and has been implemented in a partialand uneven manner.1 In consequence, the network isunbalanced. Especially noteworthy is the underdevel-opment of the secondary network. Many roads that,according to their importance, should be secondary arestill tertiary. Moreover, some roads appear to have beenconstructed for political reasons, without adequateeconomic justification. However, the problem of dis-torted priorities is not generalized: in most cases, in-vestments are justified by traffic flows.

The most important problem has been the diffi-culty of managing the investment budget when re-sources are controlled by a multiplicity of actors whosedecisions do not necessarily correspond with the pri-orities announced in official plans. The problem isexacerbated by a lack of modern tools for managinginformation on program implementation and the gov-ernment’s failure to update the Master Plan to providea solid technical point of reference for negotiating withdonors about priorities.

Fortunately, in recent years Honduras has improvedits handling of donors in the framework of the govern-ment’s road plans. An updated version of the MasterPlan for Roads was prepared in 1997. This version isbased on a ranking of the expected rate of return, cal-culated using objective data for road conditions andprojected vehicle flows for every project considered. Itserved as a basis for the road component of thePMRTN prepared in 1999.

The priorities expressed in the PMRTN are wellchosen and could provide the basis for strategic guide-lines for the new Master Plan for Roads.The first goalis to return the road network to its condition prior to Hurricane Mitch, using external resources andpromoting greater private sector participation. The

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Table 9.2 Condition of the Official Network, October 1999

Good Average Bad Total

Type of road Km % Km % Km % Km %

Asphaltic concrete 1,107 57 680 35 146 8 1,933 100Hydraulic concrete 131 60 64 29 25 11 220 100Double treatment 100 16 193 31 331 53 624 100Other material 3,554 38 3,916 42 1,767 19 9,237 100Earth 194 12 365 23 1,031 65 1,590 100Total 5,086 37 5,217 38 3,300 24 13,603 100Source: UPEG.

Table 9.3 Trends in the Condition of Primary and Secondary Paved Roads, 1992–99

Condition 1992 (%) 1994 (%) 1997 (%) 1999 (%)

Good 56 43 40 47Average 29 42 44 35Bad 8 10 14 16Very bad 2 5 2 0Not evaluated 6 0 0 2Total 100 100 100 100Note: Condition is based on roughness.Source: UPEG.

PMRTN also proposes adjusting the constructionspecifications for roads, bridges, and drains to mitigatethe impact of future natural disasters. It states that per-manent attention will be given to road maintenancethrough the Road Fund and through greater decentral-ization toward the municipalities. Finally, the PMRTNproposes coordinating with other Central Americancountries to develop sections of the Central AmericanCorridor through concessions to the private sector.

The formation of SOPTRAVI’s UPEG was an im-portant step in the sector’s institutional modernizationand greatly improves SOPTRAVI’s planning capacity.With the support of the World Bank, the UPEG re-cently completed a georeferenced information systemof the official network.The system is compatible withthe Highway Design and Maintenance Model (HDM)and related models. On that basis, a maintenance planhas been prepared for the next 5 years. That plan isalready being used to orient the Road Fund’s main-tenance programs, as discussed below. A study of un-official roads is also under way and was 30 percentcomplete as of May 2001.The UPEG has also designeda modern system of project monitoring. All of thosetools are available with updated information throughthe UPEG’s internal network.

This technology provides a basis for developing adynamic investment plan, which can be adjusted peri-odically to take into account the progress registered todate and the availability of financing.To fully take ad-vantage of the available tools, Honduras will need tocarry out new origin and destination studies and tostrengthen the UPEG’s transportation-planning capac-ity. It will be important, in this context, to ensure thatthe capacity now provided by foreign consultants isconverted into permanent local capacity in the UPEG.

Work is also under way to improve the govern-ment’s internal coordination of road planning. In thepast, the UPEG has not always been involved in proj-ect selection decisions. For example, after HurricaneMitch, when USAID invested more than US$50 mil-lion in rural roads, it coordinated with SOPTRAVI’sGeneral Directorate of Roads (Dirección General de Ca-rreteras) and with the Road Fund, but the UPEG didnot participate. Similarly, the project to upgrade theroad from Puerto Cortés to the Guatemalan border—which originated in a binational presidential commit-ment—does not fall within the UPEG’s scheme of pri-

orities.To improve coordination, the UPEG, the RoadFund, and the General Directorate of Roads are work-ing jointly to prepare the 2002–07 Investment Plan,which will be based on the road conservation and re-habilitation planning system developed by the UPEG.

Public Spending on RoadsIn 2000, Honduras spent US$76.1 million on road in-vestment and maintenance (see table 9.4).That amountreflects the reconstruction that took place after Hurri-cane Mitch; in previous years, the total was lower (in1995 and 1996, spending averaged only US$30 mil-lion).2 It is noteworthy that the public spending ofUS$76 million represents a minor proportion of thetotal resources absorbed by the road transport sector.Private spending on the purchase and operation of ve-hicles is estimated at more than 10 times that amount,around US$780 million, of which US$330 million isspent on importing vehicles and parts, and the rest isspent on operation and maintenance.3

Road Maintenance There is no doubt that priority should be given to ad-equate highway maintenance. Expanding the nationalnetwork or increasing the capacity of existing roadsshould have lower priority. Historically, the predomi-nant model for road maintenance in Honduras was“build, ignore, and rebuild.” There was little under-


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Table 9.4 Public Spending on Road Investment and Maintenance

1999 real 2000 budgeted Type of work spending (%) spending (%)

InvestmentConstruction 24.3 8.7Paving 11.6 9.4Reconstruction 0.7 5.4Rehabilitation 8.9 8.8Subtotal 45.4 32.3

MaintenanceGeneral 6.6 54.3Periodic 38.8 0.0Routine 0.3 0.0Repairs 7.6 13.4Subtotal 53.3 67.7Not classified 1.2Total (%) 100.0 100.0Total (US$ million) 52.9 76.1Source: SOPTRAVI budgets.

standing of the concept of maintenance as a continu-ous activity, and new construction absorbed two-thirdsof road spending, leaving approximately one-third formaintenance.Without doubt, the lack of routine main-tenance of drains was an important factor in the cata-strophic loss of bridges and stretches of highway result-ing from Hurricane Mitch.

During the past decade,Honduras has made impor-tant progress in this respect. Outsourcing of mainte-nance services in 1990 improved the quality of thework. However, in some cases those contracts were notassigned in a sufficiently competitive form, and the re-sulting costs were high.

Table 9.5 reports unit costs of road maintenance indifferent Latin American countries.The data for Hon-duras are for 1997.Even though the costs for Hondurasare not systematically higher than those of neighboringcountries, there are some alarming figures. For exam-ple, cost of routine maintenance of paved roads(US$1,600 per kilometer per year) is higher than inany other country in the Latin American region (ex-cept Guatemala, which is also at US$1,600). It shouldbe noted that a comparison of unit costs is not easybecause of the different technical specifications of theworks. Possibly, there are more elements of reconstruc-tion in routine maintenance in Honduras and Guate-mala than in the other countries cited. However, it

would be worthwhile to make an in-depth analysis ofthe causes of the differences reported here.

The Road FundAfter several years’ delay, the Road Fund was created in1998, through Decree 286-98,4 as a decentralized en-tity of SOPTRAVI, with a mandate to carry out con-tinuous maintenance of the official network. By law,the fund must spend 90 percent of its income on rou-tine and continuous maintenance and no more than 10 percent on rehabilitation. SOPTRAVI’s GeneralDirectorate for the Conservation of Roads and Air-ports (Dirección General de Conservación de Carreteras yAeropuertos) was closed, and the UPEG retained therole of planning programs for the Road Fund.

The Road Fund has fostered a more competitivecontracting market; up to 66 different companies par-ticipated in a recent bidding process, of which 30 werecontracted.5 It is hoped that increased competition willhelp achieve lower unit costs than those registered his-torically by SOPTRAVI. Establishing a better systemof unit cost estimation as a tool for public officials incharge of estimating the base prices for biddingprocesses would also help ensure that Honduras doesnot pay more than necessary for such works.

In addition to working with traditional construc-tion companies, the fund also works with micro enter-

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Table 9.5 Comparative Costs of Road Maintenance

Type of Work Argentina Bolivia Brazil Chile Guatemala Honduras Nicaragua

Unpaved roadsRoutine maintenance

(US$/km/year) n.a. 960 1,000 100 300 360 326Grading (US$/km/year) n.a. 33 115 43 120 263 418Replacement of selected

material (US$/m3) n.a. 12.3 4.4 17.8 12.0 11.7 24.9

Paved roadsRoutine maintenance

(US$/km/year) 1,200 n.a. 1,120 500 1,600 1,600 434Pothole filling (US$/m2) 28.1 n.a. 4.8 8.2 10.0 17.0 22.2Single treatment (US$/m2) 2.9 2.4 1.8 1.4 n.a. 3.8 3.0Double treatment (US$/m2) 3.8 6.8 3.8 2.7 n.a. 5.0 n.a.Reinforcement (medium)

(US$/m2) 9.6 13.1 8.1 11.1 n.a. 11.8 17.7Reconstruction (type 1)

(US$/m2) 17.6 n.a. 27.4 8.1 n.a. 8.8 20.0n.a. Not available.Source: Cost database of road agencies,World Bank.The data for Honduras were taken by the World Bank from the Master Plan for Roads, updated in 1997.

prises in an effort to maximize job creation.The microenterprises are paid a flat fee of close to US$1,000 perkilometer per year to carry out routine maintenanceon approximately 50-kilometer stretches of the officialnetwork.These micro enterprises have an average of 14members and are capitalized with funds from a WorldBank loan.The fund’s goal is to support 66 micro en-terprises in 2 years, to which it will channel around 8percent of its spending (US$3.3 million).

The Road Fund is financed by part of a tax on fuelconsumption, officially called the contribution for roadconservation, social programs, and tourism.The tax wasestablished by Articles 40 and 41 of the Law to Stimu-late of Production, Competitiveness, and Support ofHuman Development (Ley de Estímulo a la Producción, ala Competitividad y Apoyo al Desarrollo Humano—Decree131-98).The law stipulates that the fund must receive35 percent of the tax in the first year, 38 percent in thesecond year, and 40 percent in subsequent years.6

The fund began work in 2000 with a transfer ofUS$39.6 million, and maintenance spending increasedimmediately. In that year, maintenance spending was67.7 percent of highway spending, compared with 53.3percent in 1999 (see table 9.4).

However, the Secretariat of Finance (Secretaría de Fi-nanzas) has not fully executed the transfers to the RoadFund that are mandated by the law. According to theformula in the law, the income for the Road Fund in2000 should have been US$53.5 million, but onlyUS$39.6 million was transferred, 74 percent of themandated total. In 2001, the gap was greater: the law’sformula indicated US$53.7 million, and the fund’s finalbudget was only US$35.6 million,66 percent of the re-quired total.

It is important to establish the principle that thesefunds—which do not come from the general resourcesof the Honduran government, but rather from an ear-marked tax directly tied to road use—should be as-signed as mandated by the law. Otherwise, Honduraswill not be able to maintain its road network in an ac-ceptable condition.7

Estimate of Total Needs to Finance Maintenance and Investment Table 9.6 presents an estimate of total annual spendingneeded by the Honduran road system for maintenanceand investment and compares it with the total re-

sources currently generated by the fuel consumptiontax. Both the estimated spending and income are bro-ken down by vehicle type.

The total amount needed for maintenance is esti-mated at US$57 million, with investment needs on theorder of US$128 million, amounting to a total of ap-proximately US$185 million. The table reveals thattotal user payments through the fuel consumption taxare insufficient to cover the total cost of required in-vestment and maintenance, and total income from thetax covers only 73 percent of this total (US$135.5 mil-lion). In fact, the table shows that, in 2001, the totaltransfer of US $51 million obligated by law in favor ofthe Road Fund would have been insufficient to covereven the maintenance bill (estimated at US$57 mil-lion).Obviously, the US$35 million actually transferredto the fund in 2001 was well below the necessary level,implying a growing backlog in the maintenance pro-gram. However, if the law’s formula is respected, the


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Table 9.6 Road System Costs and Fuel ConsumptionTax Revenues by Vehicle Type, 2000

Vehicle costs (US$ million)

Light Bus Truck Total

Maintenance costsRoutinea 20.0 2.3 5.8 28.2Periodicalb 7.7 0.9 20.3 29.0Subtotal 27.7 3.3 26.1 57.2

Investment costsa

Improvements andpaving 39.1 4.6 11.3 55.0

Expansion of trafficcapacity 51.5 6.0 14.9 72.5

Subtotal 90.7 10.6 26.2 127.5Total costs 118.4 13.9 52.4 184.7Total income from taxc 80.1 6.6 48.8 135.5Income (as % of cost) 68% 48% 93% 73%Note: This table has been calculated using international parameters for thenecessary maintenance costs, which are slightly less than SOPTRAVI’s reportedfigures. Specifically, US$7,000 per kilometer per year was estimated for pavedroads (versus SOPTRAVI’s estimate of US$10,908), and US$1,500 for officialunpaved roads (versus US$2,609 for official unpaved roads, and US$2,214 forunofficial unpaved roads, according to SOPTRAVI). If SOPTRAVI’s data were tobe used in the table, the estimated necessary maintenance expense would behigher, and the gap between the petroleum differential income and total costswould larger.a. Allocated pro rata per kilometer, without considering vehicle type.b. Allocated 75 percent based on weight and 25 percent by kilometerage.c. Estimated payments of fuel consumption tax during 2000, taking intoaccount kilometerage, consumption, and type of fuel.Source: The authors’ calculations.The costs represented are necessary costs,estimated on the basis of an analysis of the coverage and condition of the roadsystem.They are not the costs actually incurred at present.

Road Fund’s income should increase in future years,because its percentage of the fuel consumption tax willrise from 35 percent in 2000 to 40 percent in 2002and, at the same time, fuel consumption will increase.

Table 9.6 also presents estimates of the contributionof different vehicle types to road maintenance costsand their estimated fuel consumption tax contribu-tions. Ideally, each user class would cover the cost ofmaintenance and investment incurred by its use of thesystem. For example, heavy vehicles should pay for themajority of periodic maintenance because they causethe greatest damage. It is interesting to observe that theonly vehicle group that pays close to the estimated cost(93 percent) is the truck group.

This conclusion is somewhat surprising becauseheavy trucks cause the majority of periodic mainte-nance costs and diesel fuel bears a lower tax rate thangasoline. Nevertheless, trucks consume a large quantityof fuel per kilometer, thus accounting for the greatercontribution. In contrast, buses contribute less thanhalf of the costs they incur to the system (even exclud-ing the cost of the Tegucigalpa urban transportationsubsidy), while passenger vehicles contribute 68 per-cent of their specific cost.

This analysis leads to the following conclusions.First, to finance the road system’s maintenance costscompletely, the transfer to the Road Fund should beraised to approximately US$60 million per year, com-pared with the US$54 million originally budgeted for2001 and the US$35.6 million currently programmed.Second, it would be advisable to increase total user con-tributions by approximately US$50 million, to US$185million, to cover the financial needs of the system (in-cluding investment).8The best option would be the useof private concessions to operate,maintain, and improvethe principal roads, which could recover costs throughtolls (see page 81,“Opportunities and Priorities for Pri-vate Investment in the Transport Sector”).

Financing Maintenance of Urban RoadsTackling the financing of urban road maintenance isurgent.This task is nominally the responsibility of themunicipalities. However, the municipalities receiveonly a modest income from vehicle registration, whichis less than maintenance costs.The result, in the major-ity of cities, is a severe lack of attention to the urbanroad system. Some municipalities have taken the initia-

tive of creating municipal road funds to generate addi-tional income through tollbooths in the principal ac-cess roads, as in San Pedro Sula and Puerto Cortés.However, as mentioned in chapter 6, “Legal, Institu-tional, and Regulatory Framework for InfrastructureDevelopment,” the legal foundation for these tariffs isweak.The government needs to reform the Municipal-ities Law (Ley de Municipalidades—134-90) to specifi-cally authorize charging users for road maintenance.

Honduras should also evaluate the option of allo-cating a portion of the fuel consumption tax for themaintenance of urban roads.Although their use doubt-less generates a high proportion of tax payments, cur-rently none of the funds are allocated to urban roads;instead, all of the funds are destined for the interurbannetwork. In cases where the municipality does nothave the ability to execute the work, it could be carriedout by the Road Fund in coordination with municipalauthorities.

The Vehicle Fleet and Traffic VolumesThe vehicle fleet is growing by almost 10 percent peryear, with an annual increase of almost 40,000 vehicles,and reached 442,000 in 2000.This total represents onevehicle for every 14 people or for every 2.3 house-holds. From the trends of recent years, the total fleet isprojected to double by 2013. As would be expected,traffic volumes are growing at a slower rate than thevehicle fleet, by approximately 5 percent annually.Ta-bles 9.7 and 9.8 provide further information abouttraffic volume.

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Table 9.7 Distribution of Traffic Volume on the OfficialRoad Network

Average daily trafficSurface type (vehicles per day, round trip) Linear km %

Asphalted 0–1,000 440 28concrete 1,000–2,000 458 29

2,000–3,500 488 313,500–5,000 160 10

> 5,000 52 3Total 1,598 100Superficial 0–500 136 24treatment 500–750 159 28

750–1,000 121 211,000–2,000 152 26

> 2,000 9 2Total 577 100Source: UPEG.

Light passenger vehicles (sedans, pickups, and mo-torcycles) make up 82 percent of the fleet, while busesrepresent 5 percent and trucks 14 percent (data nottabulated). The percentage of pickups is inflated be-cause they are considered work vehicles and pay lowerimport taxes than sedans.This makes pickups a cheapalternative for passenger transportation, in spite of thedanger of riding on the open back of these vehicles.During 2000, the Secretariat of Security tried to stopthis practice, but it will be difficult to keep it in checkuntil the tax differential is eliminated.

Freight Transportation ServicesTruck operators are licensed by SOPTRAVI’s GeneralDirectorate of Transportation (Dirección General deTransporte—DGT),which is supposed to regulate com-pliance with axle weight limits. For many years, thatfunction was largely unenforced.However, in 2001, theDGT purchased 12 mobile weigh stations as part of aninitiative to implement an efficient axle-weight controlsystem.

Prices for freight transportation are relatively highcompared with developing-country norms.To send acontainer from Tegucigalpa to Puerto Cortés costsUS$695, equivalent to $1.16 per 20-foot equivalentunit (TEU) per kilometer (Umaña 1999),9 comparedwith the international standard of $0.65 per TEU perkilometer.The causes of these high prices include de-lays in port and airport terminals, delays in customs,high maintenance costs caused by the poor state of theroads, losses from theft and accidents, and price fixingby the government and by the owners’ cartel.

Currently, freight transportation operators aredriven to unsafe practices by the need to compete withtheir rivals in a context where there is neither axleweight control nor a serious effort to prevent the driv-ers from working overextended shifts or driving underthe influence of drugs or alcohol.Adequate regulationof these matters would benefit most of the actors. Ifsuitable regulation were established, the cost of compli-ance would be passed on to the clients.That would begreatly preferable to the current situation, in which thecountry pays the bill for damage to roads caused byoverweight vehicles and road users are exposed to thedanger of overly exhausted truck drivers.

Public Transportation Public transportation on buses or collective taxis (allprivately operated) continues to be the only option forthe vast majority of the population. However, the rela-tive importance of bus use is diminishing: in 1990, inboth Tegucigalpa and San Pedro Sula, buses generatedapproximately 80 percent of passenger trips. In 1997,this had fallen to around 65 percent of the total.Thecause of this rapid decline is rooted in the failure ofpublic transportation regulation (see box 9.2).

Historically, the licensing system operated by SOP-TRAVI’s DGT served principally to protect insidersfrom competitive pressure, but nothing was done toguarantee service quality to the user. In the 1990s,there was a significant level of influence peddling inthe DGT regarding the issuance of licenses. As a re-sult, the UPEG estimates that Tegucigalpa currently has1,022 licensed buses and microbuses—86 percent


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Table 9.8 Traffic by Vehicle Type

By volume By impact on traffic density

Vehicle type Vehicles per day % PCU Factor Number of PCUs %

Light passenger vehicles 280,420 71 280,420 52Pickups 98,139 25 1 98,139 18Autos 182,281 46 1 182,281 34

Buses 31,983 8 2 63,966 12Trucks 81,800 21 195,535 36

C2 46,551 12 2 93,102 17C3 6,628 2 2.5 16,570 3T3S2 28,621 7 3 85,863 16

Total 394,203 100 539,921 100PCU = passenger car units.The PCU factor measures the impact of a vehicle on the traffic compared with that of a passenger vehicle.Sources: Traffic volume is based on SOPTRAVI data. PCU estimates are by ESA Consultores.

more than the 550 it is estimated to need. Similarly,there are 5,782 licensed taxis compared with the 2,500that the city is estimated to need.10 This oversupply ofpublic transport vehicles is an important factor in grow-ing traffic congestion.

SOPTRAVI recently installed a transparent, com-puterized system to regulate the issuing of taxi licenses.The new system streamlined paperwork and reducedopportunities for corruption. It also created a newdatabase of permits and licenses to replace the one thatwas destroyed by Hurricane Mitch.This database willfacilitate statistical analysis and planning in this field.

Fares for public transportation are fixed by SOP-TRAVI and are relatively low. The urban bus fare inTegucigalpa is currently L 1.5 per trip (US$0.10),

which is between a half and a quarter of the level inMexico and South America. The fare for a one-waytrip in Tegucigalpa is equivalent to 3.3 percent of thedaily minimum wage. In comparison, the fare for a col-lective taxi is L 6.5 per trip, 13 percent of the dailyminimum wage. However, the low bus fare has notserved to reverse the rapid flight of users from buses toother transportation means.

In Tegucigalpa, bus owners’ incomes are supple-mented by a subsidy that costs the Treasury (Tesorería)L 120 million annually. In theory the subsidy is L 0.5per passenger trip and generates about 30 percent of anowner’s total income. However, given that the realnumber of trips is lower than that reported, the subsidyprobably represents around 40 percent of income.

The UPEG has developed a proposal to decentralizemanagement and regulation of public transportation tothe municipal level.Currently, the National Congress ofHonduras (Congreso Nacional de Honduras) is debating apublic transportation bill that would have this effect. Itproposes a progressive program,which would be imple-mented by a special unit of SOPTRAVI that wouldwork with the municipalities to develop their capabili-ties. It would start with a pilot program in San PedroSula and continue in Tegucigalpa.

Traffic ManagementApart from the flight of consumers from bus services toother means of transportation, another factor thatworsens urban traffic congestion is inadequate trafficmanagement. The circulation systems are poorly de-signed; parked vehicles are permitted to block side-walks; road surfaces are poorly repaired; signs are badlydesigned, obliging vehicles to change lanes near inter-sections; traffic lights are incorrectly programmed; andthe traffic police are poorly trained.These problems re-sult in saturation flows at intersections of between 900and 1,200 passenger car units (PCUs) per lane per hourof green light, compared with international parametersof 1,800 to 2,400 PCUs.

These problems are related to the management sys-tem as a whole.Therefore, any strategy to alleviate traf-fic congestion focused on new investment to eliminatethe worst bottlenecks (for example, through the con-struction of flyovers) is likely to have disappointing re-sults, because the problem will simply be passed to thenext intersection.

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Box 9.2 The Vicious Circle of the Decline in PublicTransportation and Increased UrbanCongestion

Because of the lack of effective regulations, the quality of servicein public transportation is poor.Bus routes are designed to max-imize the number of stops and to generate income, making thetrips unnecessarily long. Service reliability is low, and the busesare dirty, crowded, and dangerous. They are plagued by pick-pockets, armed robbers, and harassers of women. Few peopleuse the bus if they can afford an alternative.

The migration to other means of transportation has createda vicious circle, which has resulted in increased traffic volume,greater congestion, and the need for greater investment inroads. If current trends continue, traffic volume will triple inHonduran cities by 2010.

Ironically, other drivers often blame the buses for increasedtraffic congestion and exert pressure to exclude them fromdowntown and other key areas.This situation has recently oc-curred in Tegucigalpa. However, such policies will not have thedesired effect. Rather, they will contribute to accelerating theshift away from bus transportation. Such policies will createworse traffic congestion than ever before. Restructuring the busfleet would be far preferable to excluding buses from the down-town area.

At the same time, many of those who still use buses areopposed to the fare increases that are necessary to finance bet-ter service. Their opposition is partly because the promise ofimproved service is not credible and partly because many of thepeople who still use buses really do lack the means to pay forbetter service.

Breaking this vicious circle is a key challenge for Honduras’sprincipal cities.

Nonmotorized TransportationA large proportion of trips carried out by the house-holds with lowest incomes are undertaken on foot orby bicycle (the latter especially in flat coastal cities onthe north coast). However, little is done to meet theneeds of this kind of traveler. Only in Puerto Cortésare there bicycle lanes. In the whole country, urbansidewalks are narrow and lack maintenance.

Most municipalities require that the owner of theadjacent property maintain the sidewalk, so there is rel-atively little maintenance. In the principal cities, streetvendors are permitted to encroach upon downtownsidewalks, pushing pedestrians into the street.

Strategies for widening streets frequently involvesimply eliminating part of the sidewalk, and publicservice entities put up their poles on the remaining bit,obliging pedestrians to walk in the gutter. Many in-terurban roads do not have shoulders for nonmotor-ized traffic. Even where shoulders exist, their lack ofmaintenance and inappropriate use (for example, fordrying coffee and basic grains) sends nonmotorizedusers to the lanes designed for vehicles, a practice thatcauses many accidents.

Traffic Security and Respect for the LawsExisting data regarding traffic accidents are of poorquality. This deficiency is partly because of the com-mon practice of bribing the police to “arrange” acci-dent reports so that drivers can avoid judicial action.However, anecdotal evidence from newspapers sug-gests that accidents have reached epidemic propor-tions, especially on the interurban roads.The principalcauses of accidents are poor vehicle conditions (theylack safe brake systems, have no turn signals and lights,and have worn-out tires); aggressive drivers (oftenunder the influence of drugs or alcohol); and poorlydesigned and maintained roads.

With little effective police presence, speeding isendemic, stop signs are not always respected, and vehi-cles often pass on blind curves. Traffic police officersare poorly paid, poorly trained, and poorly adminis-tered, and they lack basic equipment. Their activitiesare generally limited to urban areas, where they con-centrate on trivial offenses and augment their salarieswith bribes (mordidas), which tend to be for the sameamount as the fine for the alleged infraction.

Ports: PerformanceThe port sector serves the needs of four economic sec-tors with high potential: agriculture, the forest industry,maquilas, and tourism. The first three rely on PuertoCortés, and tourism principally involves La Ceiba andRoatán. Roatán has a dock for cruise ships (in CoxenHole), and La Ceiba’s port also offers services for cruiseships.Tourism also depends on the airports of Roatán,La Ceiba, and San Pedro Sula. Roatán has ship repairfacilities and serves as the base for a fleet of fishingboats moored at French Harbour.

Puerto Cortés, on the northwest coast, is the mostimportant port, serving the country’s principal centerof economic activity, the Sula Valley. Puerto Cortés isthe second most important port in the Central Ameri-can region, after Limon-Moin in Costa Rica, andchannels 89 percent of the country’s volume, handling4.98 thousand metric tons in 1999 (table 9.9). It chan-nels the exports of high-value agricultural products(coffee, bananas, pineapple, other fruits, and wood). Italso handles both the imports and exports of themaquila industry. Imports principally involve petroleumproducts, fertilizers, corn, wheat, soy flour, and cargo intransit to other Central American countries.

Puerto Castilla in the northeast is a relatively newport that seeks to channel part of the trade goingthrough Puerto Cortés and to serve the Aguan Valley.However, in recent years, commerce has collapsed atPuerto Castilla, and San Lorenzo on the Pacific coast isthe only other important port. San Lorenzo, which re-duces the pressure on Puerto Cortés for petroleum andvehicle imports and wood exports, handled 0.56 mil-lion metric tons or 10 percent of the country’s volumein 1999.

Between 1992 and 1999, shipped tonnage grew byabout 50 percent in total, equivalent to 6.8 percentyearly (see table 9.9), compared with a 2.6 percentgrowth rate in the gross domestic product (GDP). Inthe same period, Puerto Cortés grew about 75 percent(an annual rate of 8.3 percent). It is noteworthy that thetraffic levels in 2000 were already greater than the lev-els originally projected for 2010 in the Master Plan forPorts financed by JICA in 1994.

The National Port Enterprise (Empresa Nacional Por-tuaria—ENP) owns and operates all the country’s ports.The number of employees at the ENP has dropped


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from 1,500 in 1996 to 1,200 in 1999.Approximately 50percent of the ENP’s personnel are administrative,com-pared with 25 percent in a well-managed port. Thereare too many employees with low qualifications, manyof them political appointees. If the ENP were to be re-structured under a concession, the number of personnelcould potentially fall to around 200 within 5 years.

Table 9.10 shows the performance indicators forPuerto Cortés compared with international standards.The port has long waiting times, low productivity intransferring the cargo (especially for dry bulk cargo),and extremely low tonnage per meter of dock. In spiteof this substandard performance, costs per unit of cargomanaged are in line with international standards.How-ever, total costs incurred by users are higher than inter-national norms because of the high costs to the user ofthe much longer waiting time.

In summary, the port’s performance resembles thatof a typical, unregulated public service company, oper-ating inefficiently at the expense of the users, but usingits monopoly position to ensure a healthy profit.This

conclusion is reflected in the ENP’s 26.6 percent mar-gin over sales in 1999.

Ports: Government Policy and Modernization StrategyCurrently the port subsector faces two strategicchallenges:• Improve efficiency and expand capacity to serve the

rapid demand growth of 6 percent to 7 percent peryear

• Reduce user costs to increase the country’s com-petitiveness.These goals will be difficult to meet without re-

course to private capital. The ENP has not improvedproductivity significantly in the last 5 years, and it lacksthe financial capacity to undertake the necessary in-vestment. At a minimum, investments of US$80 mil-lion are needed in the next 5 years for a new containerterminal and to improve the handling of dry bulkcargo.This exceeds the financial capacity of the ENP,which, in the past, has financed average annual invest-ment of US$10 million.

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Table 9.9 Annual Traffic in the Principal Ports, 1992–99

1992 1998 1999

Thousand Thousand Thousand Percentagemetric metric metric annual growth,tons % tons % tons % 1992–99

Puerto Cortés 2,857 80.5 5,091 82.9 4,977 88.6 8.3Puerto Castilla 557 15.7 520 8.5 73 1.3 –25.2San Lorenzo 130 3.7 524 8.5 564 10.0 23.3La Ceiba 6 0.2 7 0.1 7 0.1 2.2Total 3,550 100.0 6,142 100.0 5,620 100.0 6.8

Table 9.10 Performance Indicators for Puerto Cortés, 1999

Attribute Category International standard Puerto Cortés

Waiting time of ships (% of time in the port) Container ships < 5 22 Dry bulk vessels < 20 26

Cargo volume handled (metric tons per hour General cargo 89 24–55at dock) Dry cargo in bulk 1,000 89

TEUs per hour 14 25Metric tons per meter of dock per year General cargo 800–1,000 1,658

TEUs 8,000–10,000 1,383Unit cost for cargo management (US$) TEUs 120–180 135 Margin over sales (%) > 8 26.6Note: One TEU is equivalent to a 20-foot container.Sources: International standard:World Bank, Port Productivity Indicators; Puerto Cortés: ENP.

The government’s policy for ports is not well de-fined. In 1994, the Master Plan for Ports was prepared,and in 1996, a study was prepared on container man-agement options. The study recommended privatiza-tion. However, to date the only privatized services arethe stevedore service and a private dock where liquidpetroleum is unloaded.The ENP contends that expe-rience with contractors to date has not been positive,because of their inability to provide the investmentnecessary to efficiently manage grain cargo. However,these efforts have been sporadic, without an adequatedecisionmaking framework for policies and regulation.

The restructuring of the sector should aim at pro-viding efficient service at competitive costs to the finalusers and obtaining a return on the country’s historicalinvestment in port infrastructure. To achieve theseends, the restructuring should seek the maximumcompetition possible at each port and between the dif-ferent ports. It is also necessary to attract private capitaland management expertise to improve the capacity andquality of port services.

Several alternatives have been proposed in previousstudies. One option is to have only one concession (amaster concession) for the three international ports,Puerto Cortés, San Lorenzo, and Puerto Castilla, aswell as the other coastal ports.This option would notimply any restructuring of the industry. It contemplatesonly privatization and the award of a concession con-tract and its corresponding regulation.The concession-aire would continue using revenues from profitableports to subsidize those that are not.

The second option is to have individual conces-sions for each port mentioned.This option implies anelement of horizontal unbundling, although significantcompetition among the ports is not foreseen becauseof their locations and other characteristics.

Both options would permit maximum coordina-tion among different activities within each port andwould expose Puerto Cortés to competition withPuerto Barrios, after the improvements on the road be-tween Puerto Cortés and the Guatemalan border arecompleted. However, it is doubtful that the elements ofcompetition would be sufficient to ensure an adequateresult in terms of prices because the local monopolywould still exist. Thus, regulation would have an im-portant role, governing the design of concession con-

tracts; the regulatory mechanism for them; and the im-position of quality, quantity, and service cost norms.

A third option would be to privatize port and cargomanagement services in Puerto Cortés under the um-brella of the ENP (a landlord port). In this scenario, thehorizontal unbundling would be greater. In 2005,Puerto Cortés is envisioned to have four terminals (aliquid cargo terminal, a terminal for dry cargo in bulk,a multiuse terminal, and a new container terminal)owned by the ENP.However, each terminal would op-erate as an independent concession and compete withthe others. San Lorenzo and Puerto Castilla would alsobe offered in concession (possibly combined with oneof the terminals in Puerto Cortés).

Puerto Cortés has enough volume to sustain at leasttwo independent container terminal operators. How-ever, this strategy could present greater problems of co-ordinating and allocating use of warehouse and relatedfacilities compared with a sole concession. In any case,having only two operators could potentially result incollusion between them, so it would be imperative tomaintain economic regulation of the services.

Another proposed option is the so-called dry canal(see box 9.1). In one version of that scheme, PuertoCortés would pass to the hands of a concessionaire,who would be responsible for constructing and main-taining a trans-isthmus highway and a new port inCutuco, El Salvador. One likely implication of thisscenario would be that Puerto Cortés’s positive cashflow would be used to subsidize the other (loss-making) components of the dry canal project. Thestudy team does not favor adopting this strategy.

Whichever option is chosen for reorganizing theinternational ports, it will still be necessary to definethe future management of the other coastal ports. Oneoption is to eventually transfer them to the respectivelocal governments.However, this alternative would de-pend on the development of adequate managementcapability by the municipalities. In the medium term, itwould be more advisable for a national agency to man-age these ports together or, alternatively, to includethem in the responsibilities of a concessionaire of oneof the international ports or principal terminals. Thisstrategy would be similar to the master concessionstrategy followed by Honduras in the airport subsector(see next section). However, the port subsector does


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not share the same characteristic of the airports forforming an integrated system, and this strategy wouldneed to be studied more in this context.

The government has commissioned another study(financed by the World Bank’s Economic and FinancialAdministration project) to analyze the viability of pri-vate participation, including the feasibility of the con-cession of one or more of the container terminals inPuerto Cortés.The study will also analyze the existinglegal framework for the sector and the need to establishan independent regulatory mechanism.

The principal recommendation of the currentstudy for the port subsector is that the government acturgently to make progress in modernizing and expand-ing Puerto Cortés by incorporating one or moreprivate concessions. A new in-depth study of portfunctions could delay the necessary action. In-depthstudies of restructuring options already exist.The prin-cipal focus of the new study should be the preparationof a concrete proposal for implementing reforms in thesector, and the Organic Law of the ENP (Ley Orgánicade la Empresa Nacional Portuaria) should be revised topermit the necessary actions.

The minimum plan for progress could include thefollowing components:• Expansion in Puerto Cortés with private financing

for a new container terminal and expansion of ca-pacity for dry cargo in bulk.The contract would haveto be for a sufficient period of time to recover theconsiderable investment necessary (15 to 20 years).

• Immediate outsourcing for the functions of serviceto ships, including mooring, piloting, and tugboatservice.

• Transition to private cargo management of terminal3 in Puerto Cortés and of the ports of San Lorenzoand Puerto Castilla.The central goal in these caseswould be to improve operational efficiency andservice quality.The necessary investment would beless, and a shorter-term concession could be feasible.

Airports: Performance The four international airports in Honduras (Teguci-galpa, San Pedro Sula, La Ceiba, and Roatán) haveexperienced a rapid increase in passengers in recentyears, with an average increase of about 9 percent peryear (see table 9.11).

San Pedro Sula’s new airport has the greatest capac-ity and volume and is experiencing increases in cargoof 10 percent per year related to the expansion of themaquila sector.This airport, financed by a bilateral loanfrom Spain in the 1990s,was criticized for its high costsand for being oversized, but it is the only airport inHonduras currently equipped to receive large jets andnight flights under low visibility conditions. It hasample capacity to sustain the growth of coming years.

Honduran airports have relatively high labor pro-ductivity, handling 4,134 passengers per employee,which is close to the upper end of the internationalrange. (The normal range is from 2,000 to 5,000.) Thefees per passenger are high, at US$25 per exit (also atthe upper end of the international range of US$5 toUS$25), but the charges for cargo planes are in themiddle range (US$660 for an Airbus 310, comparedwith the international range of US$200 to US$1,000).

The principal problems of the air transport sectorare lack of service reliability and quality in Tegucigalpacaused by its short landing strip, lack of electronic in-struments for landing control, limited capacity of thepassenger terminal, high fares caused by low volumes,lack of competition (the market is dominated by oneairline—Transportes Aéreos Centro América or TACARegional Airlines), lack of effective mechanisms forconsumer protection, inadequate cargo managementcapacity in San Pedro Sula, and weak air traffic controlin low-altitude airspace.

Airports: Government Policy and Modernization StrategyThe concession of the four international airports for20 years to Inter Airports, a consortium led by the SanFrancisco International Airport, was awarded in 2000.This concession was granted through a competitiveand transparent process with the participation of sev-eral operators of recognized international prestige. Itwas the first public service concession on a nationalscale in Honduras. It marks an important step in inte-grating the private sector into infrastructure servicesand is also an important milestone in developing thegovernment’s institutional capacity for managing theprivatization process.

During the concession’s design process, SOP-TRAVI (through the DGAC) defined itself as thelicenser, and the Consultative Commission on Privati-

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zation carried out the technical work of consulting onthe sales process.The contract details were approved bythe DGAC, and the concession contract was approvedby the National Congress through a legislative decree.The concession itself is regulated by the Superinten-dency of Concessions and Licenses. Unfortunately, thatentity was not involved in designing the concession,and several conflicts have arisen from lack of under-standing of the contract’s intention. In general, the reg-ulatory entities should be involved—with voice, butwithout vote—in the design process.

Under the terms of the concession, the companywill pay the government a rent of 39.7 percent of grossincome.The concession stipulates quality improvementin terms of reaching a B Service Level as defined by theInternational Air Transport Association’s internationalnorms of airport classification. These improvementsmust be carried out within 2 years.There are two in-vestment stages to be negotiated between the govern-

ment and the concessionaire. In the first stage, urgentimprovements will be implemented; the second in-volves a master plan to be agreed within 6 months afterthe concession begins. It is expected that Inter Airportswill make emergency investments of US$19 million,including extending the landing strip by 300 metersand making other improvements to the Toncontin air-port in Tegucigalpa. Under a commitment made priorto the concession, the government is implementing im-provements in cargo terminal access in San Pedro Sula.

Under the concession contract, charges related toairplanes and passengers are regulated. These chargesare the airport use charge for travelers (US$25 per exit)and the landing charges.The concessionaire is free toestablish prices of commercial services in the airport(including rental of duty-free stores, as well as parkingand warehousing charges).

In the initial months of the concession, the ware-housing charge led to an unanticipated conflict.One of


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Table 9.11 Growth in Traffic of Passengers and Freight in the International Airports

Passengers or metric tons per year

San PedroYear Tegucigalpa Sula La Ceiba Roatán Total

International passengers1994 244,000 245,000 n.a. n.a. n.a.1995 255,000 284,000 n.a. n.a. n.a.1996 236,000 291,000 n.a. n.a. n.a.1997 260,000 308,000 29,000 37,000 634,0001998 267,000 330,000 31,000 39,000 667,0001999 274,000 401,000 28,000 43,000 746,000Average growth 2.5% 12.7% –1.7% 8.1% 8.8%

Domestic passengers1994 84,000 61,000 n.a. n.a. n.a.1995 107,000 101,000 n.a. n.a. n.a.1996 85,000 95,000 n.a. n.a. n.a.1997 77,000 70,000 209,000 128,000 484,0001998 81,000 75,000 219,000 135,000 510,0001999 96,000 100,000 233,000 148,000 577,000Average growth 2.9% 12.8% 5.7% 7.8% 9.6%

Air freight (metric tons per year)1994 5,700 14,400 n.a. n.a. n.a.1995 8,500 16,300 n.a. n.a. n.a.1996 7,500 12,100 n.a. n.a. n.a.1997 6,400 19,500 n.a. n.a. n.a.1998 6,500 16,700 n.a. n.a. n.a.1999 3,200 23,400 n.a. n.a. n.a.Average growth –8.8% 12.5% n.a. n.a. n.a.n.a. Not available.

the warehouses in Toncontin is a fiscal warehouse thatis used for customs clearing, not only of airfreight, butalso of road and ship freight brought into the countryin containers through Puerto Cortés.The warehousingcharges in the past were minimal. When the airportconcessionaire decided to increase them, businessesprotested and tried to organize political intervention inthe administration of the contract.However, in the endthe concessionaire and the private sector reached anagreement to reduce the charges without governmentintervention. Likewise, the concession contract ap-proved by the National Congress gave the concession-aire 2 years to implement specific improvements, andthe resulting slow pace of improvements in the firstyear of the concession also caused political protests.

Despite these political protests, it is important thatHonduras respect the terms of the contract signed withthe investor. Any change imposed ex post facto wouldsend a negative signal to future investors.To strengthenthe country’s credibility with investors and users, Hon-duras must ensure rigorous implementation of conces-sion contract conditions once they have been negoti-ated. Any pressure to change conditions of the signedagreements, whether by the concessionaire or by thecountry, should be resisted unless there is a justified causeof force majeure and a consensus between the parties.

At the same time as the concession was established,the Open Skies Law (Decree 23-2000) went into effect,permitting international commercial flights to Hon-duras without restriction, suspending the control ofinternational airfares, and establishing a legal base forconsumer protection in airline travel. The NationalCongress is currently considering a civil aviation billthat would create a civil aviation authority to replacethe DGAC of SOPTRAVI. It would function as an in-dependent agency for technical regulation of the sectorand ensure compliance with international securitynorms.

Opportunities and Priorities for PrivateInvestment in the Transport Sector

In the roads subsector, it is projected that the financingavailable for maintenance through the Road Fund,based on the fuel consumption tax, will be insufficientto meet all maintenance needs. One alternative for

completing the necessary financing would be to con-sider granting operation and maintenance concessionsfor the principal highways.Within 5 years, most of thenorthern highway will have average traffic flow greaterthan 10,000 vehicles per day, sufficient volume to makesuch concessions viable.11 These concessions constitutean important opportunity for private investment.

This kind of concession does not require the pri-vate company to invest heavily in the highway’s con-struction. Thus, the concessionaire’s costs—and thecorresponding tolls—are low compared with tolls re-quired for financing new roads. Compared with thefuel consumption tax, which is collected indiscrimi-nately for all fuel sales on the national level, main-tenance tolls have the advantage of relating the userpayment with the specific cost of maintaining the road. Preferably, this strategy would be applied to high-volume roads with high maintenance costs. The tollsshould reflect the degree of damage caused by differentvehicle types, with higher rates for heavy trucks.

To attract investors to concessions oriented atincreasing road capacity or at maintaining roads, Hon-duras must have a secure legal and contractual frame-work, because any element of risk raises the profit mar-gin required by the concessionaire. The ConcessionsLaw (Ley de Concesiones—Decree 283-98) provides thisframework. However, it should be reinforced with alegislative instrument that authorizes the government(national or local) to charge tolls.That instrument mustinclude an interpretation of the constitutional clausethat guarantees liberty of movement in national terri-tory, as well as an explicit authorization by the Na-tional Congress to charge the specific toll for eachconcession contract.

It will also be important to carry out ample publicdiscussion of the advantages and disadvantages of thetoll scheme in order to arrive at a consensus regardingits suitability. It is crucial to ensure that investmentsshould not be overdimensioned relative to the probabledemand.The scheme should be executed at the mini-mum feasible cost through transparent contractualprocesses so that the resulting toll is the minimum thatcan reasonably be achieved.

The other transportation subsector that shouldoffer important opportunities for private investors inthe short or medium term is ports. Puerto Cortés ur-

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gently needs a new container terminal—with a cost onthe order of US$80 million—and requires additionalinvestment in the terminal for dry cargo in bulk. Bothinvestments should be made with private funds underthe framework of a concession. The government ispreparing the details of its strategy in this respect. At

the same time, it is considering ways to involve the pri-vate sector in managing other ports in order to im-prove their performance.

In the airport subsector, Inter Airports will be incharge of meeting investment needs for the 20-year lifeof its concession contract, which was signed in 2000.


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Notes

1. According to a 1997 progress and updat-ing study of the 1989 Master Plan forRoads, out of 8 projects for 1990–92, only 5were completed; only 2 out of 5 projects for1993–94 were completed; and of 12 projectsfor 1995–99, 3 were completed by 1997.Clearly, the plan’s established priority systemwas not recognized. Although some long-term projects were implemented, the short-and middle-term projects were not. SeeFigueroa 1997.2. It was not possible to obtain comparabledata for 1997–98.3. Statistics from the balance of paymentsfrom 1999 were used for the data on invest-ment in vehicles and parts. Operations andmaintenance costs were estimated by theauthors on the basis of a vehicular fleet of 450,000, an average of 10,000 annualkilometers per vehicle, and an average ofUS$0.10 per kilometer in operations andmaintenance expenses.4. The initial legislation creating the RoadFund dates from 1993; however, the law wasmodified in 1998.5. Personal communication, Rene Paz,Road Fund Director, 2001.6. The contribution for road conservation,social programs, and tourism replaced theformer petroleum differential, which was avariable amount that resulted from the prac-tice of adjusting the domestic fuel prices sothat they were less than world prices, inorder to buffer their impact on the domesticeconomy. However, the formula applied todefine the new contribution is fixed in U.S.cents per gallon for each of the five types offuel covered (regular and unleaded gasoline,

diesel, bunker, and jet aviation). It does notfluctuate with international prices. Theamount to be received by the Road Fundvaries only as a function of the volume ofconsumption.7. The Road Fund is one among manyspending mandates established in the Consti-tution of the Republic and in the laws ofHonduras. For example, the constitutiondictates that 6 percent of the net income ofthe Honduran budget must be assigned tothe Autonomous National University ofHonduras (Universidad Nacional Autónoma deHonduras—UNAH), and 3 percent to theSupreme Court of Justice (Corte Suprema de Justicia). According to the MunicipalitiesLaw, 5 percent of the general budget must betransferred to the municipalities.Also, adjust-ment formulas for salaries of doctors andteachers employed by the government areestablished by law, according to the Doctors’Statute and to the Honduran Teachers’Statute. In general, the executive does not re-spect such mandates in their totality, arguingthat they are incompatible with the limitsimposed by good fiscal administration andother priorities.As part of the modernizationof the fiscal administration, the governmentmust find a way to eliminate this type of law,which seeks to guarantee income for interestgroups. However, the mandate to finance theRoad Fund does not affect the generalbudget in favor of an interest group. Rather,it creates an earmarked tax that charges high-way users according to their fuel consump-tion to cover the costs of highway services.8. It could be argued that vehicle purchasetaxes should be accounted for in the equa-

tion. In 2000, the budget for taxes for newvehicle introduction was US$6.8 million,and the budget for national vehicle registra-tion was US$14.4 million. However, suchtaxes are not paid in proportion to road use,and consequently they do not have the eco-nomically desirable effect of generating apayment every time a trip is made.9. Reconfirmed in a personal communica-tion with Holger Peters of the Honduran As-sociation of Shipping Companies in March2001.10. It is interesting to note that recently is-sued taxi permits, which have higher num-bers, trade in the secondary market withsteep discounts, as a result of the fear thatthey will be annulled because of the excessof taxis operating in the city.11. Previous studies have suggested a highervolume for these types of concessions to beviable in Honduras. For example, one studyestimated a minimum flow of 14,500 vehi-cles per day. The necessary traffic flow de-pends on the cost per kilometer of routinemaintenance, the quantity of investments onstipulated capacity improvements, and thefeasible charge for a vehicle per kilometer.Aconcession that would charge US$0.02 perkilometer (L 0.3) with daily traffic of 10,000would produce gross income of US$200 perkilometer per day or US$73,000 per kilo-meters per year, much higher than the ap-proximate US$10,000 needed for routinehighway maintenance with this traffic vol-ume. Even when a 25 percent factor is as-signed for the cost of collection, US$55,000would remain for maintenance and annualimprovements.

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Summary

The reform and modernization of the water and sani-tation sector have progressed slowly and partially. In theabsence of a new framework law, the sector’s insti-tutional framework continues to be confused, sectorpolicy and financing are poorly defined, and the orga-nization of services and the regulation of operatorsleave much to be desired.

For a number of years, there has been an ongoingdebate between the national, state, and the municipalsectors over which should license or operate water andsanitation services. Each of them operates a significantnumber of urban water connections.The AutonomousNational Service for Water and Sewer (Servicio AutónomoNacional de Acueductos y Alcantarillados—SANAA)—thenational public enterprise—operates systems in Teguci-galpa and 22 other cities, but most urban systems andconnections are operated by municipalities.

The water and sanitation sector has no sector-planning framework. SANAA and the municipal oper-ators are each in charge of planning their own systems,while the Secretariat of Health (Secretaría de Salud) andSANAA try to plan the expansion of rural coverage inliaison with the Collaborative Group on Water andSanitation (Grupo Colaborativo de Agua y Saneamiento),which also participates as a coordinator.

The CNSSP regulates the tariffs SANAA charges.There is no obligatory economic regulation for themunicipal systems, but recently, two municipalitieshave established regulation by contract in the contextof a concession contract (San Pedro Sula) and a leasing

contract (Puerto Cortés). There is no regulation orstandardization of rural systems.

In terms of sector performance, the great achieve-ment of the past decade has been the significant in-crease in water and sanitation coverage in rural andmarginal urban areas.This achievement is the productof an alliance among government agencies, donors,nongovernmental organizations (NGOs), and localcommunity organizations (water boards), which arecharged with operating the systems sustainably. Thismodel continues to be effective for expanding cover-age in the rural sector. However, for the sustainabilityof these systems to be reinforced, it is important toensure the continued existence of technical support in-stitutions, which in the past have been financed byUSAID through SANAA and, to a lesser degree, by theEuropean Union through the Secretariat of Health.

The performance of urban systems, with very fewexceptions, is uniformly disappointing in terms of effi-ciency, quality, and financial sustainability of services.Lack of preventive maintenance is an especially seriousproblem.

There is recognition in the sector of the need fornew legislation to address these problems and to clarifythe responsibility for policy and planning, determinethe general guidelines for the sector’s organization andfinancing, and establish an adequate framework for itsregulation.A bill for a framework law was presented tothe National Congress in 2000. This draft law wouldestablish a subsecretariat in the Secretariat of Health incharge of sector policy. It also calls for the gradualtransfer of SANAA’s systems to municipal control, so

10 Water and Sanitation

that the municipalities would become the licensers ofthe service and promote the adoption of indirectmodes for providing service through concessions,leases, or management contracts, as appropriate in eachcase.The proposed law would create a regulatory entityas a dependency of the Secretariat of the Interior andJustice (Secretaría de Gobernación y Justicia), which gov-erns the municipal sector. Under this new framework,SANAA would become a technical support agencyand have charge of developing rural coverage.The ap-proval of the framework law would mark a great stepforward because it would resolve the issue of whowould be the licenser of services in the sector andwould separate the functions of policymaking, operat-ing, and regulating the services. Honduras should con-sider relocating sector planning and policymaking to anew secretariat of energy and water.And if this study’srecommendation of establishing a sole regulatory bodyfor electricity, water, and communications were to beaccepted, then the regulatory function should be reas-signed to the new entity.

Pending approval of the framework law, some citieshave shown that it is possible to advance with servicereorganization and private participation, even in thecontext of the existing legislation. Several medium-sizecities (for example,Choluteca) have established munic-ipal water enterprises, an arrangement that seeks tominimize interference by local politicians in the day-to-day operation of the service. Puerto Cortés has setup its water enterprise as a corporation, with a lease toregulate its performance, and plans to sell most of thestock to private investors.

In 2000, San Pedro Sula granted a concession of itswater and sewage system.The success of this operationwas helped by a transparent process and by the adop-tion of a carefully designed expansion plan thatavoided tariff hikes coinciding with the initiation ofthe concession.A concession is also the best option forTegucigalpa, but, in this case, very large investmentswould be required to achieve meaningful service im-provements.The financing of the Tegucigalpa conces-sion should incorporate a public loan component,which would moderate the required tariff hike.

It is also necessary to develop viable models formanaging smaller systems, which would be less attrac-tive to international operators.One option is multimu-nicipal system operation,with satellites centered around

large cities that have an established international oper-ator. This option is now a real possibility in the SulaValley. Another alternative is the use of contracts thatcombine investment packages with the subsequent ob-ligation to operate service during a specific period.Thecontractor would derive part of its compensation fromthe tariff charged during the operating period andwould assume the corresponding commercial risk.Thistype of contract could be assigned on the basis of theleast subsidy required.

Irrespective of the organizational form adopted forservice provision, it is important to establish a sustain-able financing model that would link decisions on thechoice of technology and service characteristics withthe operator’s financial capacity and the users’ ability topay. IDB and the government have agreed on a financ-ing program for water and sanitation in medium-sizecities that links loan amounts to the system’s demon-strated payment capacity.

Principal Institutions of the Sector

Sector Policies and PlanningThere is a serious lack of sector planning in water andsanitation. No institution is in charge of sector plan-ning and policies, nor have the most basic decisionsbeen made in this regard. For example, it is not clearwhether the state or the municipalities are the licensersof the service. Also lacking is a vision of how the ser-vices should be provided (direct provision, concession,lease) or financed.

Even if a planning entity existed, its task would bedifficult, because there is no adequate informationabout service scope and quality, the engineering of thesystems, or existing deficiencies.This information gapmakes it difficult to plan coverage expansion and ser-vice quality improvement. Currently, SANAA contin-ues to be the principal source of information about thesector. However, the Honduran System of Water andSanitation Information (Sistema de Información de Agua ySaneamiento de Honduras—SINFASH) has been createdin the Secretariat of Health. If this system is kept up todate, it could create a sector database that would serveas a basis for planning.

There is no national vision or policy for financingthe sector.The reality is characterized by a dependenceon subsidies for constructing installations, a high prior-


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ity for investment in water as opposed to sewage sys-tems, and a high concentration of sector investment(subsidy or transfer) in larger population centers with a capacity to pay, to the detriment of rural services.There is no financial intermediary from which serviceproviders can obtain credit for expansion and improve-ments, even when they have the capacity to pay.

Numerous public and private actors (SANAA, theSecretariat of Health, municipalities, FHIS, NGOs, anddonors) participate in investment programs withoutany official coordination.The Collaborative Group onWater and Sanitation, a dependency of the Secretariatof Health, provides informal coordination. In recentyears, there has been a notable reduction of investmentby the Secretariat of Health and SANAA and greaterchanneling of resources through FHIS, a relatively newinstitution with less tradition of water and sanitationservice than the other two, and through municipalities.

Operation of Urban SystemsCurrently, the formal urban systems are owned by thenational government (SANAA) or municipalities, de-pending on who built them. Except in San Pedro Sulaand Puerto Cortés, the owner is also the operator.There has also been a trend for the transfer of SANAA-owned systems to municipal control, but the mecha-nisms to facilitate these transfers are deficient. Allsewerage systems, except for Tegucigalpa’s, are managedby the municipal governments.

SANAA was created in 1961 as an autonomouspublic enterprise. Its constitutive law states that itshould establish potable water and sanitation servicesand operators in all urban communities with popula-tions greater than 500 and enforce technical norms fortheir operation.The law specifies that SANAA shouldassume control, in a gradual fashion, of all municipalwater and sewage systems. However, the law stoppedshort of creating a legal monopoly.

Contradicting SANAA’s constitutive law, but with-out revoking it, the 1990–91 Municipalities Law estab-lishes that the provision of water and sanitation servicesis an explicit responsibility of local governments.Thislegislation provided a basis for seeking the devolutionof SANAA’s systems to municipal control, which wascarried out in San Lorenzo (1994); Puerto Cortés(1995); Tela (1996); and Choluteca, Catacamas, andMarcala (all 2000). However, in almost all of these

cases, SANAA simply delegated the administration ofthe systems to the municipalities; only in the case ofPuerto Cortés was the system’s ownership passed tothe municipality.

In most cases, the municipalities lack the technicalresources to take over SANAA’s systems; and supportmechanisms, such as SANAA’s Plant Advisory Officeand its Hydrology Division, no longer exist. SANAA’sregional organization—constituted originally to pro-vide support to rural aqueducts—is oriented currentlytoward the operation of its own systems and does notprovide support to weak municipal systems.

SANAA still operates the majority of large systems,including those of Tegucigalpa, La Ceiba, El Progreso,Comayagua, Siguatepeque, Danlí, Juticalpa, and Cata-camas. However, municipal management prevails inmost towns with populations greater than 2,000. It isestimated that municipal services provide around 65percent of all the urban water connections (serving 54percent of the total urban population), while SANAAprovides 35 percent of the connections, serving 29 per-cent of the urban population in Honduras (Walker andVelásquez 2000, table 2).There are 74 municipal watersystems (including San Pedro Sula) compared with 23SANAA systems. In some cases (Choluteca and PuertoCortés), separate municipal water enterprises havebeen set up in order to provide a cushion against polit-ical influence.

Regulation of Formal ServicesRegulation of SANAA’s tariffs is the responsibility ofthe CNSSP, which was created in 1991.1 The privateand municipal providers are not subject to any obliga-tory economic regulation by law. However, San PedroSula and Puerto Cortés have adopted contract-basedregulatory schemes through concession and leasingagreements extended to their operators.

The regulation of the use of water as a resource islimited. There is high dependence on subterraneanwater for the supply of bigger localities without anyappropriate legal or institutional framework for its ra-tional management.At the same time, there is no insti-tutional framework to promote citizen and communityparticipation in the protection and management of wa-tersheds that provide both surface and subterraneanwater. The proposal for a new water resource law, atpresent being considered by the National Congress,


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does not ensure such participation. However, the Lawof Territorial Organization (Ley de Ordenamiento Terri-torial) contemplates the possibility of joint manage-ment of water resources in watersheds that are sharedby various municipalities.

The municipality of San Pedro Sula has had a suc-cessful experience in watershed management and incontrolling subterranean water exploitation that isworthy of repetition.Tegucigalpa’s experience has beenless fortunate. For example, the construction of CiudadMateo by the public sector pension fund, the NationalInstitute for Retirement and Pensions of Public Em-ployees (Instituto Nacional de Jubilaciones y Pensiones delos Empleados Públicos—INJUPEM), in the Guaceriquewatershed threatened the environmental security ofthe Los Laureles dam, which provides part of Teguci-galpa’s water.

The Secretariat of Health is supposed to regulatethe quality of potable water. SERNA should regulatesewage discharge to receiving bodies. The municipalenvironmental units created in some of the country’sstronger municipalities assume SERNA’s responsibili-ties in a delegated fashion, and it is hoped that they willmore rigorously enforce the regulations.

Rural and Marginal Urban ServicesAll towns and villages with populations of fewer than2,000 have either municipal or communal water sys-tems. Most rural and marginal urban systems are pri-vate or communal, operated by water and sanitationcommittees or, at times, by water boards.About 4,200systems are administered by rural aqueduct administra-tive boards. Public agencies have played an importantrole in developing these communal systems throughtechnical assistance and capital subsidies, financed byexternal agencies, the Secretariat of Health,NGOs, andthe FHIS.

SANAA has developed a successful model for ruralwater, the Rural Water, Sanitation, and Health Program(Programa de Agua, Sanemaiento y Salud Rural—PRAS-SAR), a component of the USAID health sector proj-ect) and also has a successful project to increase cover-age in the marginal communities of Tegucigalpa, withsupport from the United Nations Children’s Fund(UNICEF).The European Union has successfully sup-ported rural water programs through the Secretariat ofHealth,with an emphasis on sustainability.These coop-

erative ventures between the public and private sectorhave permitted an increase in coverage of potablewater services over the past decade.

There is no uniformity in the ownership of ruralwater systems. In some cases they have been transferredto the communities, and in others they have remainedproperty of the state. Currently, SANAA is promotingthe transfer of these systems to their respective com-munities.There is no official regulation to govern theserural and peri-urban service providers.

Sector Performance and Key Themesfor Modernization

Honduras has expanded water coverage significantly inrecent years, especially in rural and marginal urbanareas. Unfortunately, this success is not due to the goodperformance of the formal public service providers(SANAA and the municipalities), but rather to arrange-ments for providing water to excluded communitiesthrough private providers, with the support of subsi-dized public financing.Meanwhile, the public providershave been unable to resolve their structural problemsthat result in generally unsatisfactory performance onservice coverage, quality, and cost.

The pattern of weaknesses varies among the largeand small cities, and important differences exist be-tween the performance of SANAA and that of themunicipalities. The large towns generally have lowercoverage levels and per capita consumption becausethey have difficulty keeping up with the relatively rapidgrowth of their populations. Small towns, on the otherhand, tend to have more water than they need butmanage it very badly.

SANAA generally charges more for water than themunicipalities, which suggests that its tariff determina-tion policies are less exposed to political capture than isthe case in many small towns. However, even thoughSANAA—pressured by the CNSSP—has reduced per-sonnel numbers in recent years, it still has a high ratioof employees per user, which is a manifestation ofemployee capture of the system’s income.The controlexercised by the SANAA union in the commercialdepartment is a special source of concern.

The following sections detail various aspects of theperformance of the different types of systems and theirrecent trends.


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Coverage and Access at the National LevelWith the exception of Costa Rica, Honduras is theCentral American country with the best results inwater and sanitation coverage (see table 10.1). Watercoverage is almost 80 percent, and sanitation coverage,at 82 percent, is second only to that of Costa Rica.From 1985 to 1995, Honduras made great progress,increasing water coverage by 15 percentage points and sanitation coverage by 23 percentage points.Thisachievement was the greatest advance in the entireCentral American region.

The increase in coverage was made possible bypublic investment in private, communal water systems

in rural and marginal urban areas. Community modelswere established for project identification and systemadministration. These models achieved technical andfinancial sustainability through a combination of com-munity organization and appropriate technical assis-tance. In this way, they could guarantee the provision ofadequate service after the system was constructed.

As a result of the dynamics described, only 24 per-cent of households in the bottom quintile of the in-come distribution receive water service from SANAAor the municipalities, while 52 percent depend on col-lective or private systems operated by communal watercommittees (see table 10.2).This statistic contrasts with


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Table 10.1 Water and Sanitation Coverage in Central America

Coverage (%)


Potable water1985 93 n.a. 45 62 461995 99 80 54 77 55Change in coverage 6 n.a. 9 15 9

Sanitation1985 95 59 33 59 161995 98 65 49 82 18Change in coverage 3 6 16 23 2n.a. Not available.Note: Sanitation coverage for Nicaragua appears low because the data include only sewers and exclude latrines.Source: IDB/Pan American Health Organization 1996, cited by Walker and Velásquez 1999. Rural coverage in El Salvador was estimated by Walker and Velásquez.

Table 10.2 Water and Sanitation Coverage by Percentage of Households, March 1999

Income quintilea (%)Total Urban Rural(%) (%) (%) 1 2 3 4 5

Origin of waterPipe 89 97 82 76 88 92 95 96Public 57 88 24 24 44 63 72 80Private or collective 32 9 58 52 44 29 22 16Well 5 1 10 11 6 4 3 3River or other 6 2 8 13 6 4 2 1

Where water is obtainedOff the property 13 6 14 23 13 9 5 3On the property 87 94 86 77 87 91 95 97

SanitationToilet 54 65 41 24 36 57 67 86Latrine 33 29 41 45 45 32 28 13None 13 6 18 31 19 11 5 1Source: EPHPM, March 1999.a. 1 = poorest; 5 = wealthiest.

the top quintile, where 80 percent of households re-ceive traditional public services.These data imply thatsubsidies to traditional water delivery are probably re-gressively distributed.

Household survey data (see table 10.3) confirm thepattern of improvement in coverage during the 1990s,but suggest that the process was checked in the secondhalf of the decade, when the proportion of householdswithout access to water and sanitation rose slightly. Inwater, the decline took place in rural areas; in sanita-tion, it was observed in both urban and rural areas.Thispattern probably reflects the short-term impact ofHurricane Mitch more than a reversal of the long-term trends. As in other infrastructure sectors, Hurri-cane Mitch highlighted the vulnerability of water andsanitation installations to natural disasters and showedthe need to improve designs to reduce catastrophiclosses in the future (see chapter 4,“The Impact of Hur-ricane Mitch and the Progress of Reconstruction”).

Honduras needs to strengthen the sustainability ofthe 4,200 rural systems administered by rural waterboards. The rural systems require permanent supervi-sion and support by operation and maintenance techni-cians (técnicos en operación y mantenimiento—TOMs). Inthe past, this has been funded under investment projectssuch as PRASSAR.As these projects end, the technicalassistance given by TOMs should become a responsibil-ity of the government. Resources are also needed forfinancing system rehabilitation, expansion, and im-provement.To date, no private development organiza-

tion has expressed interest in taking over these func-tions.A study of possible regional cooperation mecha-nisms in support of these systems is being prepared.

The Cost of Eliminating Gaps in Waterand Sanitation Coverage Expanding water and sanitation coverage is a priorityof the government’s Poverty Reduction Strategy (Es-trategia de Reducción de Pobreza—ERP). The greatestdeficit occurs in the rural population living in small,isolated villages and in the marginal urban populationof the metropolitan cites. As detailed in box 10.1, theeconomic gains from extending coverage to thesecommunities are expected to be very great.

In dispersed rural settlements, the distance to awater source suitable for a gravity-fed system is oftengreat, implying high construction and maintenancecosts. Subterranean sources are scarce, and there is no


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Table 10.3 Trends in Urban and Rural Access to Waterand Sanitation

Households without water or sanitation (%)

1990 1993 1997 1999

NationalWater 27 15 8 9Sanitation 34 17 17 18

UrbanWater 18 16 7 6Sanitation 13 7 6 8

RuralWater 33 15 9 11Sanitation 50 26 26 27Note: The data in table 2.12, which come from PAHO, use different definitions.Source: EPHPM for March of each year.

Box 10.1 The Benefits of Expanding Access to Drinking Water

There is no doubt that significant benefits come from having ac-cess to drinking water. A survey carried out in marginal com-munities in Tegucigalpa in 1995 found that households without ahousehold connection for water paid an average of US$2.90 percubic meter of water purchased from cistern trucks or similarsources.They consumed, on average, only 3.7 cubic meters permonth, paying a total of US$10.73 per month. That total costrepresented 7 percent of the average income of those house-holds. More recent data suggest that in 2001 the water expen-diture of households without running water was even higher.

In contrast, those with household connections for drinkingwater paid US$0.10 per cubic meter and consumed an averageof 30 cubic meters per month, paying a bill of US$3.00 (1.9 per-cent of their income). In consequence, having running water ledto savings of US$7.73 per month, plus increased water con-sumption of about 26 cubic meters. Taking into account thesebenefits and considering the costs necessary to increase cover-age, the above-cited study estimated the net annual benefit of in-creasing water coverage in the urban areas to 93 percent wouldbe equivalent to 2.1 percent of the gross domestic product(Walker and others 1997, p. 19).

The statistical analysis of rental prices in the national house-hold survey (World Bank 2000a) also suggests that access towater has a significant value for poor households. It was esti-mated that the net value of a water connection is equivalent to7 percent of average per capita income in households of the low-est quintile of income distribution (World Bank 2000a, table 3.6).

electricity for pumping. Service in those areas normallyis provided by wells with hand pumps and latrines. Re-cently, the Secretariat of Health has developed a modelof deep wells perforated by hand and accessed withmanual pumps.This low-cost solution has received sup-port from the European Union’s ALA-86/20 project.This type of project demands a high level of individualand community participation and requires both sani-tary education and local organization.

In the marginal urban sector, the principal obstacleto coverage expansion is institutional rather than tech-nical: the service providers’ inability to finance the net-work’s expansion and to charge for the service in thesesectors.The previously mentioned program of expan-sion to marginal communities in Tegucigalpa has over-come this problem, creating 30,000 new connections.However, in Tegucigalpa there are a growing numberof marginal settlements located above the height limitfor incorporation in the water network, which makesit very difficult to establish traditional services.

The cost of eliminating the gap in water and sani-tation coverage is not out of the country’s reach.According to data from the government’s HouseholdSurvey for Multiple Purposes (Encuesta Permanente deHogares de Propósitos Múltiples—EPHPM), an estimated18 percent of rural households (approximately 108,000households) do not have running water (including ac-cess to public or communal faucets) (see table 10.2).Asample of rural water projects over the past decade re-vealed an average cost of US$225 per household. Sothe capital cost of 108,000 new connections would be on the order of US$25 million. According to thesame source, in the urban sector, 3 percent of house-holds lack running water (including public faucets)—approximately 18,000 households. Estimated using thesame US$225 per connection parameter, the total costof providing service would be about US$4 million—raising the total to approximately US$29 million.

Approximately 15 percent of households (160,000)do not have basic sanitation. The FHIS experienceshowed the average cost of building a latrine to be aboutUS$180.2 Based on that, the total cost of covering thecurrent deficit (without taking into account populationgrowth) is estimated at around US$29 million.

Bearing in mind the enormous economic andhealth benefits from establishing basic water and sanita-tion services, these costs are relatively modest, with a

total for water and sanitation of US$56 million. In com-parison, the planned investment for San Pedro Sula’swater and sanitation service, for only the first 5 years ofthe Aguas de San Pedro concession (2001–05), is US$51million.The study team recommends that as part of sec-tor planning, under the framework of the Poverty Re-duction Strategy, Honduras should give priority to theidentification of the necessary financing to eliminate thegaps in rural water and sanitation coverage.

It should be emphasized that the estimates pre-sented here of the capital costs necessary to meet thewater and sanitation deficit are indicative and approxi-mate.They are intended merely to define the order ofmagnitude of the required effort and to demonstratethat it is within the reach of Honduras to solve thisproblem.

The estimates are based on the assumption that thesame technologies used to date can be applied withsimilar costs per unit.This assumption could prove falsebecause the population densities in these areas arelower. Also, the estimate does not include the cost ofcontinuous support to maintaining the sustainability ofthe systems through TOMs or a similar support struc-ture. It should be a high priority for Honduras to un-dertake a detailed study that is based on field researchto refine these estimates.

Performance of the Public Formal Services Table 10.4 presents performance indicators for fivegroups of urban water service operators in Honduras:SANAA’s metropolitan aqueduct in Tegucigalpa, agroup of six nonmetropolitan aqueducts operated bySANAA, municipal operators in the large cities of SanPedro Sula and Puerto Cortés, and a group of sevensmaller municipal operators.3 These systems are com-pared with the performance of water service providersin Guatemala City; Santiago, Chile; and Santa Fé deBogotá, Colombia.

There are marked contrasts between the perfor-mance of urban water operators in large cities and insmaller towns. However, there are also important dif-ferences between the performance of SANAA and ofthe municipal systems. Large towns generally havelower coverage and per capita consumption levelsrelative to smaller towns. Both situations reflect thedifficulty of keeping up with the rapidly growing pop-ulations of the biggest cities.The great weakness of the


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systems of small towns is that they tend to waste waterin a spectacular fashion, with typical per capita waterproduction levels above 400 liters per person per day.

Coverage of the Urban Water Systems. In Tegucigalpa,SANAA directly supplies 57 percent of the city’shouseholds.However, that figure does not take into ac-count the many households served indirectly throughthe SANAA-UNICEF Marginal Barrios project,which has 30,000 connections and serves approxi-mately 23 percent of the city’s population.Taking thatprogram into account, SANAA’s coverage extends to80 percent of households, a figure that compares favor-ably with the 60 percent reported by Guatemala City.4

Recently the Water for All (Agua para Todos) fund,which finances rural and marginal urban water provi-sion, was transferred to the Tegucigalpa Chamber ofCommerce to ensure transparency in its management.

As previously mentioned, large towns generally havelower per capita coverage and consumption comparedwith small cities because of the difficulty of keeping upwith relatively rapid population growth.SANAA’s non-metropolitan systems report average coverage of 72 per-cent.5 San Pedro Sula has 82 percent coverage, PuertoCortes has 66 percent, and the sample of seven small

municipal systems has an average coverage of 88 per-cent. Honduras is way behind the urban water coverageachievements of 97 percent and 94 percent reported forSantiago and Santa Fé de Bogotá, respectively.

Per Capita Consumption. Data reveal relatively low waterconsumption in Tegucigalpa of 172 liters per person perday, a figure similar to that of Guatemala City (150 litersper person per day). Both cities suffer from chronicproblems of insufficient water sources and apply ra-tioning to consumption. San Pedro Sula and PuertoCortés have per capita consumption in the range of 240to 280 liters per person per day.All the small cities havevery high consumption: 545 liters per person per day inmunicipal systems and 467 liters per person per day inSANAA’s systems.These figures are indicative of a greatwaste of water caused by inadequate management andthe lack of micro-measurement.

Unaccounted-for Water. Unaccounted-for water (theproportion of production not billed to users because ofphysical loss, illegal connections, or underestimatedbills) is especially high in Tegucigalpa, estimated at 50percent of production. In San Pedro Sula, the figure is 43 percent. Puerto Cortés implemented a micro-


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Table 10.4 Operating and Financial Indicators of Water Service Operators

SANAA Municipal International comparison

Six Seven small Santa FéTegucigalpa nonmetropolitan San Pedro Puerto systems Guatemala Santiago, de Bogotá,

system systems Sula, Cortés, (average), City, Chile, Colombia,Indicator 2000 1998 2000 2000 1998 2000 1991 1992

Operating indicatorsWater coverage (%) 80a 72 82 66 88 59.1 97 94Sewer coverage (%) 45 n.a. 65 0 24 53.2 n.a. n.a.Consumption (liters per person

per day) 172.1 467 277 238 545 150 37 41.8Employees per 1,000 connections 9 5.5b 7 4 4 8.7 2.1 3.6Water not accounted for (%) 50 n.a. 43 31 n.a. 45 27 40Micro-measurement (%) 64 10 70 92 n.a. 91 n.a. n.a.

Financial indicatorsPersonnel cost (% of total cost) 46 45 50 23 n.a. 42 n.a 73Energy (% of total cost) 21 50 11 21 n.a. 38 n.a 4Total operating cost

(US$ per meter) 0.13 0.85b 0.06 0.11 n.a. 0.17 0.09 0.14n.a. Not available.a. Includes households connected to SANAA systems through the Marginal Barrios project. If these are excluded, the coverage of SANAA’s metropolitan system inTegucigalpa is scarcely 57 percent.b. Data are for 2000.

measurement campaign in 1999–2000, raising micro-meter coverage to 92 percent (compared with 64 per-cent and 70 percent in Tegucigalpa and San Pedro Sula,respectively).This allowed Puerto Cortés to lower theproportion of unaccounted-for water to just 31 per-cent. Of the Latin American systems cited, only San-tiago reports a lower figure (27 percent).

Employment. SANAA’s metropolitan system in Teguci-galpa suffers from high levels of employment,with 9.24employees per thousand connections. Although thatfigure represents a significant reduction compared withthe figure of 14 per thousand registered 5 years ago, itis still four times higher than the international normreflected in the cases of Santiago and Santa Fé de Bo-gotá (2.1 and 3.6, respectively). SANAA’s nonmetro-politan systems have lower levels of employees (5.5employees per thousand connections). Puerto Cortésand the small municipalities have an average of 4, closerto international norms. Apart from overemployment,SANAA’s other major labor problem is that of unionprotection of staff members in the commercial section,some of whom are alleged to have solicited bribes.

Water Quality. SANAA regularly measures water qualityin Tegucigalpa, and the results are generally positive.Nevertheless, consumers lack confidence in water qual-ity, and the purified bottled water market is large. Nodata are available about water quality in the municipalsystems. Several systems (including SANAA systemsand municipal systems such as Choluteca, El Progreso,and San Marcos de Colón) have benefited recentlyfrom a water treatment program implemented bySANAA with Spanish financial assistance, under which50 highly automated plants were installed. However,Honduras should try to use less-sophisticated technolo-gies to facilitate adequate operation and maintenanceand to ensure financial sustainability in the long term.

Wastewater Treatment. Honduras lags in the field ofwastewater treatment, and few cities have sewer sys-tems integrated with treatment plants. Following thedestruction of the principal collectors of Tegucigalpa’ssewer system by Hurricane Mitch, SANAA has beguna program of sewage collection and treatment in thedifferent micro-watersheds in the city, starting with theSan José/La Vega watershed.

Other cities also report advances. Puerto Cortés isconstructing a sewage and treatment system using sta-bilization lagoons with the support of a US$15 millionIDB loan. FHIS has constructed 19 stabilization la-goons in intermediate towns, such as Choluteca,Danlí,and Nacaome.

These efforts not only mark an important step inenvironmental management but also underline the im-portance of safeguarding the efficient operation of thesystems and resolving the problem of effluent control.There is also some doubt about whether the countryhas assigned its available resources for sewage treatmentto the places where the problems are most urgent.Without doubt, resolving the sewage treatment prob-lem presents a great challenge for the sector.

Financial Sustainability Although at times development agencies have at-tempted to condition their loans on the imposition ofsustainable tariffs, neither the systems operated bySANAA, nor those operated by municipalities, recovertheir operating and capital costs from the tariffs paid byconsumers. In consequence, tariffs are generally insuf-ficient to finance replacement of equipment and sys-tem expansion. On top of that, the lack of effectiveregulation has resulted in unit costs well above an effi-cient level, resulting in even greater problems of finan-cial sustainability.

Operating Costs. It is not surprising, in the context of thepersonnel data mentioned previously, that personnelcosts for SANAA’s Tegucigalpa system are very high.They represent 46 percent of the total cost and arepartly responsible for operating costs per cubic meterof US$0.13, which are 45 percent above the US$0.09reported for Santiago, where salary levels are far higherthan those in Honduras. In other Honduran cities,lower employment levels result in lower operatingcosts, even in cities with high pumping costs such asSan Pedro Sula and Puerto Cortés (see table 10.4).

Tariffs. Adjustments to SANAA’s tariffs occur after longintervals, which results in great fluctuations in thecompany’s income in real terms because of the impactof inflation (see figure 10.1).The decisions to raise tar-iffs are highly politicized and require the prior de factoapproval of the Economic Cabinet. In this context, as


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documented in chapter 6, “Legal, Institutional, andRegulatory Framework for Infrastructure Develop-ment,” SANAA survives only with the aid of govern-ment subsidies.

Since 1991, increases have been approved inSANAA’s tariffs only in 1995 and in 2001 (see table10.5). On both occasions, the average authorized tariffincrease has been less than the inflation of the relevantperiod, creating an erosion of tariffs in real terms. In ad-dition,postponing tariff adjustments for 5 years at a timewhen annual inflation has been on average above 15

percent implies significant tariff erosion in the years inwhich there are no hikes. Even more than SANAA, themunicipal systems tend to charge insufficient tariffs,squandering the gains from their better cost perfor-mance by their weak performance on the income side.One possible explanation for this pattern of behavior isthe relatively important weight of the water tariff in amunicipality’s tax plan (plan de arbitrios),which thereforeattracts a lot of political attention. As a result, total re-source availability (the sum of subsidies plus user tariffs)is generally lower in the municipal systems than inSANAA, and the result is often inferior service.

To illustrate this point, table 10.6 compares 1997data for the financial performance of seven smallmunicipal systems with that of six nonmetropolitanservices operated by SANAA and three communitysystems. In the municipal systems, income from tariffsis generally lower than that in SANAA’s systems and iseven lower than that in community systems.6

Notwithstanding its imperfections, tariff regulationat the national level is less subject to political capturethan tariff setting in the municipal systems. SANAAcharges more for its water compared with the majorityof municipal providers, and that is why its financialperformance is superior.Unfortunately, as documentedin previous sections, SANAA’s superior income still iseroded by overemployment. Even though there hasbeen improvement in that area in recent years, SANAAis still subject to “capture” of its system’s income byemployees.


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Figure 10.1 Real Price of Water, SANAA (35 m3,domestic consumption)

Lempiras for 1990

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

16.0

14.0

12.0

10.0

8.0

6.0

4.0

Table 10.5 SANAA Tariffs Compared with Inflation, 1990–2001

Percentage increaseAugust September March 1990 1995 2001 1990–95 1995–2001 1990–2001

Cost of 35 m3 (L)a 14.9 29.8 60 100 101 302Consumer price index 20.2 52.6 113.0 160 114 459a. Domestic tariff Tegucigalpa, water and sewers, in Lempiras.

Table 10.6 Indicators of Financial Performance for Nonmetropolitan Water Systems, 1997

Seven municipal Six SANAAIndicator systems (L) systems (L) Three community systems (L)

Average annual salary 22,450 26,217 n.a.Monthly income from tariffs per connection 11.60 23.70 14.20n.a. = Not available.Source: ESA Consultores and FRISA Engineering 1998.

Government Policy and Sector Modernization Strategy

The Reform of Sector Legislation. As shown in previoussections, the performance of urban systems, with veryfew exceptions, is uniformly disappointing in terms ofservice efficiency, quality, and financial sustainability.New legislation is needed to correct these deficienciesand to clarify the responsibilities for policies and plan-ning, determine general guidelines for the sector’s or-ganization and financing, and establish an appropriateregulatory framework.However, it has not been easy toreach concrete agreements about implementing re-form (see box 10.2).

Since 1994, there have been debates about mod-ernization, centering on the proposal to pass SANAA’soperations to the municipalities and establish a nationalregulatory agency. In 1995–96, there was an effort topromote sector reform, which failed because ofSANAA’s resistance to handing over its installations tothe municipalities and the unwillingness of the munic-ipalities to submit to economic regulation by a nationaloffice. As an alternative to the proposed reform, in1995 SANAA implemented an administrative decen-tralization process through its seven regional offices.However, this initiative did not resolve all the structuralproblems of the sector.

In 2000, the government presented a new frame-work law bill, supported by SANAA’s managementand the Association of Municipalities of Honduras(Asociación de Municipios de Honduras—AMHON).Thisdraft law would establish a subsecretariat in the Secre-tariat of Health in charge of sector policy. It also calledfor the gradual transfer of SANAA’s systems to mu-nicipal control so that the municipalities were the li-censers of water and sewerage service and promotedthe use of indirect modes of providing service throughconcessions, leases, or operating contracts, as appropri-ate, on a case-by-case basis. The proposed law wouldcreate a regulatory entity as a decentralized organ ofthe Secretariat of the Interior and Justice (which gov-erns the municipal sector). Under this new framework,SANAA would become a technical support agency incharge of developing rural coverage.7

Reform from Below.Until 1999, all municipal systems andthose of SANAA were directly operated by their re-spective owners.However,pending approval of the newlaw, some cities have demonstrated that it is possible toadvance with service reorganization and private partic-ipation, even in the context of current regulation.

Several medium-size cities (for example, Choluteca)have established municipal water enterprises in order tominimize interference from the municipal governmentin the day-to-day operation of the service. PuertoCortés has formed a corporation to run the water andsanitation system of which it is the majority share-holder. It is operating with a 5-year lease and must payrent to the Municipal Water and Sanitation Fund (ad-ministered by a trustee) sufficient to cover capital costsand debt-service obligations.This structure is expectedto reinforce management and protect the system fromarbitrary political influence. The municipality plans tosell most of the stock to the public, but the details are asyet undefined.

Taking advantage of the 1998 Concessions Law, inOctober 2000 San Pedro Sula granted a 25-year con-cession to Aguas de San Pedro, a property of an Italianwater company.This operation was the first of its typein Honduras.The successful management of the oper-ation can be attributed to the transparency of theprocess and the careful design of its expansion goals toavoid a tariff hike that coincided with privatization (seebox 10.3).There will be opportunities for similar oper-


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Box 10.2 Regulation,“Municipalization,” and Autonomy

At present, neither the municipal operators nor the Au-tonomous National Service for Water and Sewer (SANAA) aresubmitted to effective regulation that obliges them to be effi-cient and to guarantee users the right of connection and a de-cent service. There is no requirement, either, that the tariffscharged be sufficient to cover the capital costs to ensure financ-ing of equipment replacement and system expansion. And nei-ther SANAA nor the municipalities have been inclined to “self-regulate” to this end.

Some municipalities have resisted being subject to a nationalregulatory authority, arguing that they have autonomy under theMunicipalities Law (Ley de Municipalidades—Decree 134-90).They allege that they are directly responsible to their respectivepopulations and that their accountability should be limited to the local electoral process. However, this point seems weakbecause SANAA also enjoys the status of autonomous entitybut is subject to tariff regulation—albeit ineffective—by the Na-tional Supervisory Commission for Public Services (CNSSP).

ations in several large cities, including Tegucigalpa, incoming years.

Policy Recommendations

Pass the Framework Law. The approval of a frameworklaw would be an important advance because it wouldresolve the question of which level of government isresponsible for providing water and sanitation servicesand would establish the principle of the separation of

functions between sector policymaking, service opera-tion, and regulation.

Sector Planning. Honduras needs urgently to develop anational water and sanitation plan as well as informa-tion systems that provide adequate data for decision-making.The plan should include coverage and servicequality goals, stipulate how public funds will be used,and define the role of private financing to accomplishthese ends.

Location of the sector policy entity is problematic.There is concern that delegating this function to a sub-secretariat of the Secretariat of Health could constitutea loss of hierarchy in the future and reduce the sector’scapacity to negotiate access to financing.Moreover, theSecretariat of Health would tend to consider water andsanitation as an adjunct of health programs and find itdifficult to focus on the sector as an industry providingeconomic services—a focus that is necessary to achieveefficiency and dynamism in the urban sector. For thosereasons, Honduras should consider relocating sectorplanning and policymaking to a new secretariat of waterand energy.

Sustainable Tariffs. A new approach to tariffs is essentialfor the sector.As a rule, tariffs should cover the full costof operating an efficient service. Technical specifica-tions should be determined by taking into accountuser preferences and their willingness to pay for theservices.

Regulation.Because the municipalities are sensitive aboutthe imposition of regulation by an office of the centralgovernment, regulation should be perceived by the sys-tem operators as a source of technical support in estab-lishing efficient costs and determining the necessarytariffs to cover them. Rather than imposing minimumtariffs, the central regulatory authority should limit itselfto establishing maximum tariffs related to efficientcosts, thus guaranteeing the consumers’ rights, and topreventing political capture (where a local governmentovercharges for the service to fund other activities).

If this study’s recommendation of a sole regulatoryentity for electricity, water, and telecommunicationswere to be adopted, the regulatory function for waterand sanitation should be reassigned to the new entity.


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Box 10.3 The San Pedro Sula Water Concession

The concession of the San Pedro Sula water system, approved in 2000, is an example of what can be achieved if a concession’sdesign reflects local preferences.Unlike other water sector con-cession schemes in Central America—such as the one thatfailed in Panama in 1997—the San Pedro Sula water concessionwill give short-term priority to improving efficiency, instead ofcalling immediately for large investments.

The politicians in charge of the process were not disposedto support a plan that involved a significant tariff hike. As a re-sult, even though the current tariffs are low compared with in-ternational parameters, the concession will lower them evenmore for many consumers. For example, a household that con-sumes 35 cubic meters per month will pay US$0.09 per meter,compared with US$0.11 previously. Only the consumers ofmore than 50 cubic meters per month will pay more.

To improve its income, the concessionaire will depend onimproved meter reading and bill collecting. Currently, manyhouseholds without water meters pay water bills based on esti-mated volumes, which does not cover all their consumption.Expanding water and sanitation coverage will also generateadditional income for the concessionaire.

Another important characteristic of the concession is thatthe investment required under the concession, estimated atUS$200 million over 30 years, is indicative, rather than being afirm contractual commitment. It is service improvement that isobligatory under the contract. In the first 5 years, the goals are100 percent water coverage, 100 percent micro-measurementof water consumption, and 100 percent sewer coverage.

The most costly goal is the introduction of sewage treat-ment, but this does not enter into force for 8 years, and a tariffrebalancing is contemplated before that date.After 5 years, theconcession is expected to have established its credibility by im-proving service efficiency without significant tariff hikes in realterms.Then it will be easier to promote a discussion of the needfor higher tariffs to finance sewage treatment.

Rural Water and Sanitation. Honduras should develop aplan for expanding water and sanitation coverage thatincludes identifying financing sources. It is also neces-sary to resolve the question of ownership of the ruralwater systems constructed by SANAA in the past andto assign resources to maintain the technical assistancesystem financed in the past by investment programs(like the TOMs of the PRASSAR project).

Big Cities. In the big cities, independent companiesshould operate the services, normally under concessionsand subject to modern regulation.A strategy that offerssignificant improvement in service without severe tariffhikes has the most possibility for success, calling for acautious approach to the size of the capital programs.Investments cofinanced with public funds—WorldBank or IDB—or quasi-public funds—InternationalFinance Corporation (IFC) or Inter-American Invest-ment Corporation (IIC), together with private capital,would help keep the average cost of capital at reasonablelevels and permit tariffs to stay at an acceptable level.

Tegucigalpa.For Tegucigalpa, the best option is a conces-sion to an international operator. This possibility willbe strengthened with the passage of the new sector law. It is important to emphasize that Tegucigalpa has a very large investment deficit compared with the situ-ation that existed in San Pedro Sula. It has urgent needsin terms of water production and sewage collectionand treatment, caused in part by the effects of Hurri-cane Mitch.The city is faced with the need to developwater sources that are increasingly distant, resulting in growing investment and operating costs.To moder-ate tariff adjustments, policymakers need to incorpo-rate a component of capital from public sources—butat an unsubsidized interest rate (similar to what onewould pay if there were a municipal bond market in the country)—into the financing of the Tegucigalpaconcession.

Models for Small and Medium-Size Cities. Models need tobe developed for the administration of small systems.One option is multimunicipal system operation, withsatellites centered in large cities where there is an es-tablished international operator. This option is now areal possibility in the Sula Valley.

Another option is the use of contracts that combineinvestment packages with the subsequent obligation tooperate services during a specific period.The contrac-tor would derive part of its compensation from the tar-iff charged during the operating period and wouldassume the corresponding commercial risk. This typeof contract could be assigned on the basis of the leastsubsidy required (see box 10.4).

Financing Water Service at the Municipal and CommunityLevel. In addition to defining the organizational formfor providing service, it is important to seek a financingmodel that would link decisions on the selection oftechnology and service characteristics with the opera-tor’s financial capacity and the users’ ability to pay.TheIDB and the government have agreed on a program formedium-size cities that links loan amounts to the pay-ment capability of the system.

Opportunities and Priorities for PrivateInvestment in the Water and Sanitation Sector

In urban communities, the sector policy should givepriority to improving coverage in marginal areas,


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Box 10.4 Economizing Public Investment in WaterSystems: The Colombian Experience

New mechanisms that combine the contracting of public workswith the subsequent operation of the system can offer impor-tant benefits in the water sector.

A World Bank water project in Colombia contracted privatecompanies to expand and rehabilitate water systems in smalland medium-size cities, and then to operate the system in its to-tality for a determined period, assuming the commercial risk. Inthis model, investors derive part of their income from the initialconstruction contract, and part from the user tariff applied dur-ing the period of operation.

This is a BOT (build, operate, and transfer) contract. How-ever, private capital is not used (as it is often very expensive).Rather, the contract is assigned with public funds. It is awardedto the bidder who offers the lowest bid for the works, takinginto account the tariffs (which will be declared in the biddingprocess) that the bidder will be permitted to charge later on foroperating the system. In this way, the initial public investmentcost can be minimized, and the quality of the work can be as-sured, because the contractors know they will have the respon-sibility of operating the system afterward.

streamlining the production and distribution systems,and developing sewage collection and treatment sys-tems.The private sector can play a critical role in thisprocess both as an operator and as a financing source.There is also a significant possibility that a concessionwill be granted for the water and sewage systems inTegucigalpa in the short term.

In small and medium-size communities, privatecompanies could play a growing role as service opera-tors. However, public funds will continue to be essentialto finance the capital needs of the sector. Given the im-pact of increases in water and sanitation coverage on re-ducing poverty, it is suggested that use of public funds begiven priority here. Establishing mechanisms to guaran-tee efficiency and establish adequate tariffs should alsobe a high priority.This action, in turn,will open the wayfor future use of private financing sources.

The public investments in these systems should beconditioned on recovering all costs (including opera-

tion, maintenance, capital, and interest) and on com-plying with performance indicators that push the op-eration toward financial viability. This strategy willopen the possibility of future access to national and in-ternational capital markets. The government and theIDB have adopted this strategy for a new loan for mu-nicipal water and sanitation, which will benefit 21cities starting in 2001.

In the rural sector, it is necessary to expand waterand sanitation coverage in isolated communities man-aged by private community organizations under aframework of public–private cooperation. Investmentsdestined toward this end should be given high priorityin the ERP and in the national planning framework,using sustainable, community-based models with tech-nical assistance from NGOs. FHIS is developing amodel to intervene in these communities as part of itsnew program with the World Bank.


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Notes

1. Originally in charge of supervising therates of all public enterprises, the CNSSPnow regulates SANAA, the ENP, and Honduras Mail (Correos de Honduras—HONDUCOR), having been replaced byspecialized entities for electricity and tele-communications.2. FHIS 2 constructed 19,800 simple septictank latrines and 1,300 hydraulic closing la-trines for a total cost of L 41 million orUS$3.86 million, for an average of US$183per latrine (ESA Consultores 1999).The aver-age rate of exchange from lempiras to dollarsof 10.63 for the period 1994–97 was used—the simple average for the yearly average ex-change rate reported by the Central Bank ofHonduras (Banco Central de Honduras—BCH).3. The cities included are Choluteca,Corquin, Gracias, Lempira, Olanchito, Tela,Tocoa, and Trujillo.They are among the mu-

nicipalities programmed to receive supportfrom IDB’s new municipal water project,scheduled to start operations in 2001. Thecited data were generated during 1998 by atechnical assistance program to prepare townsfor participation in such programs (ESAConsultores and FRISA Engineering 1998).The data for SANAA and San Pedro Sula for2000 come from the respective institutions.4. In the intercensal period 1988–2001,Tegucigalpa’s annual population growth was3.5 percent, compared with less than 3 per-cent for the national average.5. This average is based on data from LaCeiba, Choluteca (part of the system thenoperated by SANAA), Comayagua, La Espe-ranza/Intibuca, Marcala, and Siguatepeque.6. An earlier study using 1994 data (Walkerand others 1997) found that the tariff effortof nonmetropolitan systems of SANAA was

inferior to that of a sample of municipal sys-tems. However, after 1996, SANAA’s region-alization resulted in a significant improve-ment in tariff collection, because the regionswere permitted to keep the resulting income.7. In September 2001, the Legislative In-formation and Studies Center (Centro de In-formática y Estudios Legislativos—CIEL), atechnical advisory entity for the NationalCongress, proposed a change to the frame-work law bill to relocate the regulatory of-fice outside the Secretariat of the Interiorand Justice and leave it under the purview ofa technical secretariat within the CNSSP,which is currently in charge of SANAA’sregulation. CIEL also proposed eliminatingfrom the bill the creation of a subsecretariatof health for water and sanitation; however,the Secretariat of Health would continue tobe in charge of sector policy.

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Summary

In recent years, Honduras has experienced a significantincrease in electrical power coverage, made possible byincreased private generation capacity and expansion ofthe distribution network. By the end of 2001, officialcoverage is projected to reach 62 percent of householdscompared with 33 percent in 1989, and total coverage(including illegal connections) will be in the 75 per-cent to 80 percent range.

Installed generation capacity rose by 20 percent be-tween 1995 and 1999, making it possible to meet theannual growth of demand of 5.6 percent. This in-creased capacity was achieved through private thermalplants under power purchase agreements (PPAs) withthe National Electricity Enterprise (Empresa Nacionalde Energía Eléctrica—ENEE). However, there is little byway of reserve capacity in relation to the system’s max-imum demand. When an important plant is out oforder, rationing is often necessary.

The PPA contracts have been relatively expensive,with an average cost of US$0.087 per kilowatt-hour inJune 2001.High costs are attributable partly to a lack ofcompetition in the bidding process and partly to therelatively small size of the plants, which are of 80megawatts or less.This size has made it impossible totake advantage of the economies of scale available incombined-cycle technology. However, recently nego-tiated PPAs have been cheaper, with costs of US$0.071per kilowatt-hour, compared with previous contractsthat were as high as US$0.166 per kilowatt-hour.ENEE forecasts that all future generation capacity—

both thermal and hydroelectric—will be developedwith private capital.

The sector’s financial sustainability improved in the1990s because of cost reductions and implementationof higher tariffs under the 1994 Framework Law of theElectricity Subsector (Ley Marco del Subsector Eléctrico—Decree 158-94). In terms of costs, the number of em-ployees per 100,000 connections fell from 739 in 1994to 478 in 2001, and energy losses have been reducedfrom 29.4 percent in 1995 to 18.5 percent in 2001.Theoutsourcing of meter reading, billing, and collectioncontributed to this progress.

The 1994 law states that tariffs should reflect thesystem’s marginal costs. It authorizes a graded tariffstructure with cross-subsidies between high- and low-consumption consumers, which is economically ineffi-cient. In most years, total revenue from user tariffs hasbeen sufficient to cover ENEE’s costs (including exter-nal debt service), and the company reduced its historicdebt with the state from US$38 million in 1994 toUS$25 million in 2001. However, the tariffs do notcover the total economic cost of the services.The ratecomponent for distribution is especially deficient.Therate of return on ENEE’s net assets of 3.3 percent(2000) is low compared with the 8 percent goal pro-posed by the World Bank and the IDB. In this setting,ENEE’s financial surpluses in recent years have resultedfrom a low investment rate.

The sector receives two important subsidies. Since1997, the government has assigned a direct subsidy fordomestic consumption up to 300 kilowatt-hours permonth, with a total cost to the Treasury of US$18 mil-

11 Electricity

lion, which is equivalent to 7 percent of ENEE’s totalbilling receipts. The subsidy benefits principally theurban middle class.

The expansion of the network in rural communitieshas been to a large degree financed by capital grantsfrom foreign countries and from the central govern-ment.The total invested in these programs was US$23.5million between 1997 and 2000.This subsidy for newconnections is more equitable than the consumptionsubsidy; however, the cost per connection is high be-cause it involves communities that are progressivelymore remote and less densely populated.Also, the newconnections generally consume low volumes, and thetariffs collected do not cover the variable cost of pro-viding services,which implies losses for ENEE.The ex-pansion of coverage also implies future increases in theconsumption subsidy paid by the central government.

The 1994 law (with its subsequent reforms) con-templates separating the functions of (a) sector policy—assigned to the Energy Cabinet (Gabinete Energético);(b) regulation—assigned to the National Energy Com-mission (Comisión Nacional de Energía—CNE), an entityof SERNA; and (c) service production—assigned toENEE and private companies.The law proposes priva-tizing distribution; however, this proposal has not beenimplemented, in part because of limitations in the legalframework (among others, unfair advantages for the na-tional pension funds), and in part because of the lack ofpolitical will.

Consequently, the sector continues to be a verti-cally integrated state monopoly. ENEE owns the hy-droelectric generation plants and the transmission anddistribution facilities, and it operates the DispatchCenter. It also controls private generation throughPPAs.Without doubt, this structure limits Honduras’sability to take advantage of improvements in efficiencyavailable through liberalization and privatization.

To correct these problems, the Flores government(1998–2002), with the support of the World Bank andIDB, presented a bill for a new framework law to theNational Congress. The new law sought to promotethe private supply of electricity by creating a wholesalemarket for the direct purchase and sale of electricitybetween the generators and the distributors. It alsosought to facilitate the privatization of distribution bycreating three regional distribution companies. Asoriginally proposed, the law also opened the possibility

of privatizing transmission and the state hydroelectricplants. However, it was revised in the National Con-gress to eliminate those options.

The tariff system under the proposed law would nolonger include cross-subsidies. Payments would be de-termined by the sum of the respective generation costsdetermined by the market, plus cost-based tariffs fortransmission and distribution, set under the supervisionof the regulatory agency.Any subsidy would have to betransparently financed with government funds bud-geted as a separate line item.

The bill also called for regulatory reinforcement,with changes in the appointment and rotation of thecommissioners to increase their independence from theexecutive. It was hoped that competition in generation,together with the establishment of a strong regulatoryentity to ensure the efficiency of the distribution com-panies, would lead to great benefits for consumers.

The bill was very controversial. There was strongpopular opposition to the privatization of the distribu-tion, generation, and transmission systems as well asgrowing concern about the results of the operation ofwholesale generation markets in neighboring El Sal-vador.These factors slowed the bill’s approval process.After taking more than a year to approve half theclauses, the National Congress finally abandoned theprocess in July 2001. Changes made by the NationalCongress during the approval process were thought to have significantly altered the law’s coherence, and2001, an election year, was not an appropriate momentto achieve a suitable result. Legislators considered itpreferable to leave the reform process to the govern-ment that would take office in January 2002.

This study recommends that the reformulated re-form strategy should give priority to reinforcing thefunctions of sector policymaking and regulation and toprivatizing distribution. To establish adequate leader-ship in the sector—and avoid conflicts of interest withSERNA’s function of environmental control—thestudy recommends creating a secretariat of energy(which could also extend its responsibilities to thewater sector).To establish a sufficiently strong regula-tory function, the study recommends the creation of amultisector regulatory entity with clear provisions forits financing on the basis of a regulatory tariff to bepaid by the end users. To insulate the regulator frompolitical interference, there should be transparent pro-


98

cedures for appointing the commissioners. Sector re-structuring should begin as soon as possible with theprivatization of distribution.

To enable coverage expansion to continue, but at areduced subsidy cost, Honduras should establish anelectrification fund. Its resources should be allocatedgiving priority to the projects with the lowest sub-sidy requirements. To avoid distortions in technologychoice arising from the availability of subsidy, off-gridsolutions developed for remote communities should beeligible for subsidies on the same terms as conventionalconnections. The demand (consumption) subsidy forconsumers using less than 300 kilowatt-hours a monthshould be eliminated or severely restricted.

In relation to the architecture of the generationmarket, it is not advisable to adopt a full-fledged whole-sale market in the short term. In such a small market asHonduras, where the investment climate still leavesmuch to be desired, a totally free wholesale marketwould run the risk of attracting insufficient investment.This might lead to high prices reflecting a sustained im-balance between supply and demand, and not resultingfrom increases in the underlying cost of generation.

To avoid that risk, Honduras should maintain, fornow, central planning of the expansion of generationcapacity. Capacity expansion could be implementedthrough capacity contracts administered by an obliga-tory association of private generators under the super-vision of a regulator. This system would guaranteesufficient supply to meet demand and prevent tariff in-stability, which has undermined the reform process inother countries. The implementation of a completelyfree wholesale market should be postponed until theCentral American market has been integrated.An inte-grated regional market would have sufficient scale toavoid the problems mentioned.

The Sector’s Principal Institutions

As in most Latin American countries, electricity inHonduras has historically been a state-owned and -operated public service. For 50 years, the state com-pany, ENEE, had exclusive rights to generate, transmit,and distribute, on both the domestic and internationallevels.

The sector’s framework law, approved in 1994, wasdesigned to open the market to private generation to

complement the state hydroelectric plants and pro-mote the privatization of the distribution system. Sincethen, private thermal generation has grown rapidly, andin 1999 it represented 45 percent of installed capacityand 37 percent of total energy production.

The process of strengthening the sector began inthe early 1990s, led by the CNSSP, which established a contract-plan for ENEE, stipulating performancegoals. The 1994 framework law created an EnergyCabinet to be the governing entity for sector policyand a regulatory entity called the National Commis-sion on Electricity (Comisión Nacional de Energía Eléc-trica—CNEE). In 1997, the law was modified tostrengthen the control of the executive power over theregulatory agency, and the agency’s name was changedto the National Energy Commission (Comisión Na-cional de Energía—CNE). With the 1997 reform ofpublic administration, the newly created Secretariat of Natural Resources and the Environment assumedleadership of the sector, and the CNE became a de-pendency of SERNA.This structure presented a possi-ble conflict of interest, because SERNA is responsiblefor environmental control as well as for promoting theexpansion of electricity coverage—so it must rule onthe environmental soundness of electricity expansionprojects in which it has a direct interest.

The 1994 law stipulated that tariffs be based onENEE’s short-term marginal costs1 and that every billshould state the amount of subsidy, if any. Since 1997,domestic consumers of less than 300 kilowatt-hourshave received direct subsidies from the government,amounting to L 280 million (US$18 million) for 2001.

Although the framework law called for privatizingthe distribution system, the system still remains in thehands of ENEE.The only thing ENEE has done in thisrespect is to administratively separate the CentralSouth, Northwest, and Atlantic Coast regions. Theprincipal obstacles to privatization have included thepriority given by the 1994 framework law to nationalpension funds and unions as potential buyers and (until2000) the absence of a law permitting internationalarbitration rulings to be legally binding in Honduras.These factors made it risky for potential investors toparticipate in the bidding for distribution concessions.The lack of clarity in the framework law with regard tothe future operation of the energy markets (includingthe obligations and rights of distributors in this regard)

Electricity

99

created another source of uncertainty for potentialbuyers of the distribution concessions. For those rea-sons, in 1998 the government decided to reform thesector legislation before privatizing distribution.

Nevertheless, it is also pertinent to ask whetherthere really existed political will to move forward withthe reform process under previous governments. Thereform process was managed by a special commissionappointed by the Energy Cabinet, and which operatedunder the auspices of the Consultative Commission onPrivatization.The technical secretary was an official onloan from the World Bank. No senior governmentminister assumed a leadership role, and when the tech-nical secretary’s leave ended, he was not replaced, leav-ing the reform process stalled. By 2001, the proposedlaw had been in hands of the National Congress formore than a year, but only 50 percent of its clauses hadbeen approved, and in the process it had undergonesome important changes (including the prohibition ofthe future privatization of transmission or of state-owned hydroelectric plants). With presidential elec-tions imminent in November, the National Congresssuspended consideration of the framework law reformbill in July 2001.


Coverage and AccessElectricity coverage (as measured by formal individualconnections) has increased significantly during the pastdecade. Between 1989 and 1999, the number of con-nections rose from approximately 284,000 to 618,000,an annual growth rate of 8 percent (see table 11.1).Thisallowed coverage to rise steadily at 2 percent per year,rising from 33 percent of households in 1989 to 52percent in 1999.However, this coverage level remainedamong the lowest in Latin America, with 48 percent ofthe population not officially connected to the publicnetwork.

Data from the Latin American Economic Commis-sion (Comisión Económica para América Latina—CEPAL)confirm that the official coverage rate in Honduras isone of the lowest in Central America—only Nicaraguahad a lower rate in 1999 (see table 11.2).The electrifi-cation level is clearly correlated with per capita in-

come, and with population density, which affects theper capita cost of electrification.

However, like those of many other countries,ENEE’s official statistics underestimate real coveragebecause of the high number of illegal connections tothe network in marginal communities of the principalcities.The EPHPM estimated total coverage at 69 per-cent in 1999, which is 17 percent above ENEE’s figurefor formal coverage in the same year.

The expansion of coverage in the past decade wasmade possible by the construction of the FranciscoMorazán (El Cajón) dam in the 1980s and, sub-sequently, the expansion of private thermal energygeneration in the 1990s, together with programs ofnetwork expansion (rural electrification).

The Flores government (1998–2002) undertook anintensive electrification program and a program to for-malize informal connections. ENEE projected thatformal coverage would reach 62 percent by the end of2001, compared with 50 percent in 1997.

Thus, 175,000 new connections were established in4 years to achieve that goal, with an annual growth ratein connections of 9.5 percent, compared with the his-torical trend of 8 percent. If one takes into account thehigh number of informal and collective connections,


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Table 11.1 Formal Electricity Coverage, 1989–2001

CoverageYear Households ENEE clients (% of households)

1989 851,201 284,117 331990 879,482 307,827 351991 908,688 326,339 361992 938,817 353,811 381993 970,055 387,646 401994 1,002,218 432,346 431995 1,009,802 455,344 451996 1,036,694 490,680 471997 1,063,726 529,340 501998 1,169,974 586,801 501999 1,195,341 617,982 522000a 1,197,815 671,563 552001a 1,230,391 762,842 62

Growth of connections % per year

1989–1997 8.01998–2001a 9.5a. Figures are projected.Source: ENEE.

total coverage at the end of 2001 should be in therange of 75 percent to 80 percent of households, a fig-ure not far from the Latin American regional averageof 82 percent.

Factors That Affect AccessAs with water, there is a notable correlation between ac-cess to service and household income (see table 11.3).Coverage is only 30 percent for the poorest fifth of thepopulation compared with 93 percent for the most af-fluent fifth. But in contrast to the water sector, very fewpoor households have established a private supply ofelectricity,whether on an individual or a collective basis.

At the national level, fewer than 0.5 percent ofhouseholds have private systems, and in rural areas 2percent of households have them.A key factor for de-termining access to electricity is an urban location:

92 percent of urban households are connected to thenetwork, compared with 49 percent in rural areas.

The geographical distribution of service reflects thedifficulty of providing network services to the remotestplaces.The departments of Gracias a Dios, Lempira, andIntibucá have the lowest coverage of 4 percent, 9 per-cent, and 18 percent, respectively, compared with 80percent for Francisco Morazán and Cortés. In general,the places with lowest coverage are those with the low-est incomes, and a clear correlation exists between elec-tricity coverage and per capita income (see figure 11.1).

Value of Access to Electricity ServicesAnalysis of household rental data in the biannual gov-ernment household survey, EPHPM, suggests that thevalue of access to electricity is equivalent to an increaseof approximately 7 percent in the per capita income of

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Table 11.2 Formal Coverage of Electricity in Central America and Panama, 1999

Costa Rica El Salvador Guatemala Honduras Nicaragua Panama

% of households 95 73 65 56 47 65Source: CEPAL, preliminary figures.

Table 11.3 Access to Electricity by Income Quintile, 1999

Percentage of householdsa

Total 1 2 3 4 5

NationalNone 30 70 40 23 13 6ENEE 69 30 59 76 86 93Collective private 0 0 0 0 1 0Individual private 0.5 0.3 0.2 0.2 0.6 1.3

Urban areasNone 7 24 9 3 1 0ENEE 92 76 90 97 99 100Collective private 0 0 0 0 0 0Individual private 0 0 0 0 0 0

Rural areasNone 49 78 55 48 37 25ENEE 49 21 44 50 60 67Collective private 1 0 1 1 1 2Individual private 2 0 0 0 2 7a. 1 = poorest; 5 = wealthiest.Source: EPHPM, March 1999.

the households in the bottom fifth of income distribu-tion (World Bank 2000a, table 3.6.).

Balance between Capacity and DemandTotal demand in 2000 was estimated at 4,076 gigawatt-hours, growing at a rate of 5.6 percent per year, close tothe Latin American regional average.The supply situa-tion has improved notably since 1994, when there werefrequent blackouts attributable to the effect on thewater levels of the Francisco Morazán dam of the longdrought caused by El Niño.The improvement is due toincreased capacity (the maximum quantity of powerthat can be supplied by all the plants working togetherat the same time) and reduced distribution losses (whichfell from 29.4 percent in 1995 to 21 percent in 1999 and18.5 percent in 2001). It should be emphasized that a

significant part of the losses are not technical but, rather,involve electricity theft. Also clear is the growing im-portance of private generation, which reached 37 per-cent in 1999 (see table 11.4). However, that same yearHonduras also had to import 136 gigawatt-hours (3.8percent of the total available energy).

Like other countries in Central America, Hondurashas a relatively low (60.5 percent in 1999) load factor(the ratio between medium and maximum demand).Peak demand was 661 megawatts compared with aver-age demand of 406 megawatts and minimum demandof 260 megawatts.This load factor implies a low rate ofinfrastructure use, which affects average costs. As a re-sult, the management and remuneration of capacity is avery important issue in Honduras.

During 2000, available supply was above maximumdemand, except in January and February when a fire inthe Francisco Morazán hydroelectric generation plantdisabled four of its turbines (see table 11.5).There wasa reserve of about 10 percent between March andAugust. Between September and December, supplydropped to 776 megawatts, and there was a reserve ofabout 5 percent. This relatively low reserve level im-plies the possible need for electricity imports or, intheir absence, energy rationing when any major plant isout of order.

In a typical year, the most critical period is at theend of dry season when hydroelectric dams are at theirlowest levels. The Francisco Morazán plant is located at the foot of the reservoir wall and loses almost 50percent of its maximum generation capacity of 300megawatts when drought causes the level of its reser-voir to drop. From June to November, the capacity of


102

Figure 11.1 Correlation between Electricity Coverageand Per Capita Income at Department Level

1,400

Per capita income for March 1999, lempiras

1,200

1,000

800

600

4000 20 40 60

Percentage of homes covered by electrical service

R4 = 0.4418

80 100

Net generation (GWh)

Table 11.4 Supply and Demand in the Electricity Sector, 1980–99

Installed Maximum Charge Private Net Available Self-capacity demand factor generation imports energy production Sales Losses

Year (MW) (MW) (%) Public Private Total (%) (GWh) (GWh) (GWh) (GWh) (%)

1980 207.8 156 63.3 854 1 855 0.1 9.3 864 0 759 12.11985 560.3 220 63.5 1,346 6 1,352 0.4 –127.9 1,224 0 1,065 13.01990 532.6 351 63.1 2,274 0 2,274 0.0 –334.2 1,939 0 1,490 23.21995 755.9 504 63.0 1,915 883 2,798 31.6 –18.3 2,779 0 1,963 29.41996 753.0 534 64.1 2,042 1,020 3,063 33.3 –64.1 2,998 77.2 2,208 26.41997 729.0 605 63.3 2,127 1,074 3,201 33.6 155 3,356 74.1 2,484 26.01998 775.0 650 62.5 2,197 1,314 3,511 37.4 43.9 3,554 30.2 2,743 22.81999 906.3 661 61.5 2,175 1,253 3,428 36.5 135.7 3,564 16.6 2,815 21.0Source: CEPAL.

the Francisco Morazán dam grows, and run-of-riverhydroelectric plants such as El Níspero (which gener-ate electricity from a river’s flow without involving adam) are also contributing to the system.

Table 11.6 reports the average available supply andtotal generation by plant type for 1999.Approximately48 percent of available supply is hydroelectric and 52percent is thermal, mostly relatively new generatingunits using bunker and diesel fuel. Private companiessupply 405 megawatts of thermal generation, out of atotal of 473 megawatts.The thermal plants are gener-ally small and, therefore, have relatively high unit costs.

The system has a high level of hydroelectrical ca-pacity—a total of 433.5 megawatts in 1999—of whichonly 24 megawatts is in run-of-river plants (withoutstorage capacity) that must automatically dispatch

when they have power available. In winter, therefore,the demand for thermal generation is relatively re-duced. In 1999, the plant factor for hydroelectric plantswas 57.4 percent, and for the thermal plants it was only32.4 percent.

To maintain the energy balance, Honduras willneed to increase energy generation by 2,860 gigawatt-hours between 2000 and 2010. ENEE projects that allof this increase will be privately provided. The pro-jected generation and investment needs are detailedunder “Projection of the Energy Balance and the Roleof Private Generation” below.

Efficiency ENEE’s performance as a commercial enterprise hasimproved in recent years, but in various aspects, it still

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Capacity by type Reserve

Thermal Hydroelectric Total Demand Margin(MW) (MW) (MW) MW (MW) (%)

January 407 287 694 696 –2 –0.5February 407 287 694 702 –8 –1.3March 407 432 839 715 124 17.2April 407 422 829 743 86 11.4May 384 422 806 739 67 9.1June 384 432 816 728 88 12.0July 384 437 821 715 106 14.8August 384 437 821 716 105 14.7September 339 437 776 723 53 7.3October 339 437 776 742 34 4.5November 339 437 776 733 43 5.8December 339 437 776 738 38 5.0Source: ENEE.

Table 11.5 Projection of Supply and Demand, 2000

Table 11.6 Capacity, Generation, and Plant Factor, 1999

Installed capacity Net generation

(MW) (%) (MWh) (%) Plant factor (%)

Public: 501 55.2 2,175,229 63.1 50.7Hydroelectric 433 47.7 2,130,333 61.8 57.5Thermal 68 7.5 44,896 1.3 7.7

Average: 406 44.8 1,269,506 36.9 36.5Hydroelectric 1 0.1 1,565 0.0 24.4Thermal 405 44.7 1,267,941 36.8 36.6

Total: 906 100.0 3,444,735 100.0 44.4Hydroelectric 433 47.8 2,131,898 61.9 57.4Thermal 473 52.2 1,312,837 38.1 32.4

Source: CEPAL.

compares unfavorably with the most efficient compa-nies in the region.This difference can be seen clearlyby comparing its performance with that of LatinAmerican countries where energy has been privatizedand operates under regulations that give incentives forimprovements in efficiency.

Labor Productivity. ENEE made important strides in im-proving labor productivity (see figure 11.2).The num-ber of employees per 100,000 users fell from 739 in1994 to 478 in 1998. In the same period, the amountof energy sold per employee rose from 527 megawatt-hours per year to 1,014 (see table 11.7).

The figure of 478 employees for every 100,000users compares relatively well with the other electric-ity companies in Central America (see table 11.8). It is better than Nicaragua (678), Panama (1,023), and

Costa Rica (519); similar to El Salvador (475); butmuch higher than Guatemala (341).

Distribution Losses. ENEE has also improved its distribu-tion system, reducing losses (energy that enters thenetwork but is not reflected in sales) from 29.4 percentin 1995 to 18.5 percent in 2001.Technical losses in thehigh voltage network amount to approximately 7 per-cent, so 11.5 percent is being lost in the distributionnetwork (for technical and other reasons). ENEE’s goalis to reduce distribution losses to 8 percent.

A significant proportion of the losses result from il-legal connections in marginal communities. Anotherproblem in the past has been undercharging of com-mercial clients (reportedly in exchange for bribes). It isexpected that the outsourcing of meter reading, billdelivery, and collection, implemented in 1999, willhelp reduce this problem.

System Costs In March 2000, short-run marginal cost (SRMC) ofgeneration for the entire system was estimated atUS$0.057 per kilowatt-hour (see table 11.9).2 SRMCis calculated by Super OLADE, a computerized modelfor electricity costing that was developed by the LatinAmerican Energy Organization (Organización Lati-noamericana de Energía—OLADE). The program isoperated by ENEE, which submits the resulting costcalculation to the CNEE for approval. The figure ofUS$0.057 per kilowatt-hour is a weighted average forall sources used, according to their participation in thetotal.3 The gradual increase in the proportion of ther-mal generation has tended to raise the average cost ofgeneration, a trend that will inevitably lead to increaseduser tariffs.


104

Figure 11.2 Indicators of ENEE’s Labor Productivity

2,000

1,800

1,600

1,400

1,200

1,000

800

600

400

200

0

1980 1985 1994

Employees per 100,000 users

MWh sold per employee

1996 1997 1998

Table 11.7 Trends in ENEE Labor Productivity

Employees per MWh sold perEmployees Users GWh sold 100,000 users employee

1980 2,485 137,900 759.3 1,802 3061985 2,789 212,500 1,064.8 1,312 3821994 3,142 425,400 1,656.8 739 5271996 2,760 484,500 2,207.5 570 8001997 2,754 522,000 2,484.3 528 9021998 2,706 566,000 2,742.8 478 1,014Source: CEPAL.

Calculation of the Marginal CostLogically, the calculation of SRMC should includeonly the cost incurred when a plant is dispatched andshould exclude capital costs. However, in fact, theSRMC calculation includes an element to recover newinvestment costs projected over a 5-year time horizon,on the basis of data for the specific costs of the expan-sion projects currently under consideration. Thus, itcan be considered a hybrid indicator, incorporating anelement reflecting the short-term marginal cost of thecurrent plants and another element reflecting long-term marginal costs of plants soon to be built.

This duality has a certain logic, because the SRMCcalculated by Super OLADE both serves as a base fordetermining the price paid to private generators whopropose a project to ENEE on their own initiative (forexample small-scale hydroelectric projects) and is alsoused to determine the generation cost element in thetariff charged to the consumer. In both cases, the rele-

vant concept is the long-term marginal cost, includingcapital costs, and not the short-term marginal cost ofdispatching the system’s plants.

PPA CostsPPAs have been controversial because of their high costand the low participation of foreign investors, whichcreates the impression of barriers to competition.ThePPA contracts provide for a fixed payment to cover thefinancial costs of the investment plus the maintenancecosts to keep the power supply available. These fixedcharges are payable against a monthly capacity test.

An additional payment is made to cover variablecosts when power is dispatched.The variable paymentsper kilowatt-hour were negotiated, in each case, whenthe contract was signed, and are indexed with the rele-vant fuel price. ENEE makes a monthly plan for dis-patching private thermal generation.This plan is basedon each plant’s variable costs, giving priority to thosewith lower costs.The plants are allowed to offer vari-able prices below the contract ceiling to improve theirchances of being dispatched.

The average generation cost of the PPAs in June2001 (including fixed and variable payments) wasUS$0.087 per kilowatt-hour. The total cost per kilo-watt-hour varied between US$0.071 and US$0.166per kilowatt-hour, according to the plant (see table11.10).The variable cost averaged US$0.056, and the

Electricity

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Table 11.8 Comparative Indicators of Operating and Financial Efficiency in Electricity in Central America, 1999

Indicator Isthmus Costa Rica El Salvador Guatemala Honduras Nicaragua Panama

Employees 23,010 4,810 4,203 4,043 2,706 2,887 4,361Users (miles) 4,416 927 886 1,184 566 426 427Employees/100,000 clients 521 519 475 341 478 678 1,023Energy sold per employee

(MWh)a 820 1,130 696 867 1,014 482 730Income per user (US$) 462 344 n.a. n.a. 379 363 762Income per kWh generated

(US$) 0 0.057 n.a. n.a. 0.064 0.074 0.081Income per kWh sold (US$) 0 0.064 n.a. n.a. 0.081 0.105 0.101Losses from transmission

and distribution (%)b 16 10.6 12.1 12.5 21 30.1 19.7Charge factor (%) 62.5 65.4 62.6 55.8 61.5 62.4 67.6n.a. Not available.a. The data are from 1999 except for El Salvador (1996) and Panama (1997). For Costa Rica, the figure for energy sold per employee is for 1998.b. ENEE argues that the loss figures for Costa Rica, El Salvador, and Guatemala are not comparable to those of Honduras, Nicaragua, and Panama. In the first threecountries, the national companies—respectively, Instituto Costarricense de Electricidad (ICE), Comisión Ejecutiva Hidroeléctrica del Río Lempa (CEL), and Instituto Nacionalde Electrificación (INDE)—do not manage the distribution systems in the principal consumption centers.The figures reported in this case refer mainly to transmissionlosses, whereas for the other three countries mentioned they include distribution losses.Source: CEPAL, preliminary figures.

Table 11.9 ENEE Costs, March 2000

Type of cost Amount (US$ per kWh)

Generation 0.057Transmission 0.010Substation 0.029Value added in distribution 0.012Total 0.108

range for individual plants ran from a low of US$0.046to a high of US$0.078 per kilowatt-hour.

The relatively high cost of the early PPAs was theproduct of a lack of planning.When it is necessary tocontract energy under crisis situations, as in 1993–94,rapid construction is required. Hence, relatively smallplants were chosen.That situation made it impossible totake advantage of the economies of scale that are avail-able in combined-cycle plants. Another factor wasENEE’s inexperience in negotiating contracts of thistype (see box 11.1).These factors explain why the firstcontracts signed—Electricidad de Cortes, S.A. (ELCOSA)and Luz y Fuerza de San Lorenzo SA1 (LUFUSSA 1)—resulted in very high prices.

Tariffs Honduras has a complicated tariff structure. Like otherstate companies in the region, ENEE has a scaled tariffschedule that leads to cross-subsidies between high-and low-level consumers (see table 11.11). If users con-sume more than 500 kilowatt-hours per month, theypass to Rate B and pay a surcharge on all their con-sumption, even that part below 500 kilowatt-hours.

The average price of electricity for domestic con-sumption is L 1.1 per kilowatt-hour (US$0.073) (seetable 11.12). In comparison, the average residential tar-iff of private companies in El Salvador and Guatemalais approximately US$0.10 per kilowatt-hour, whereasprivate energy companies in Argentina, Bolivia, Chile,Peru, and Colombia have pretax residential rates of be-tween US$0.07 and US$0.14 per kilowatt-hour.

Table 11.12 details the structure of residential elec-tricity consumption and the result in billing terms.Average total consumption is 204.6 kilowatt-hours permonth. A large proportion of users consume between101 and 300 kilowatt-hours per month. This group,which constitutes 45 percent of consumers, pays an av-erage tariff of L 0.95 (US$0.063) per kilowatt-hour.They account for 43 percent of total consumption and37 percent of ENEE’s income. Approximately 18percent of users consume no more than 20 kilowatt-hours monthly (minimum consumption under thecurrent tariff).

The Demand SubsidyA direct subsidy for users of up to 300 kilowatt-hoursper month was introduced in 1997 and is financed bythe government. Although this subsidy appears in themonthly bill, it is not really transparent because it is cal-culated in a complicated way that few understand, andthe calculation is based on the difference between tworate schedules that no longer exist. It also communi-cates an unfortunate message to the users, because theamount of the subsidy rises with consumption. Withconsumption of 100 kilowatt-hours per month, thesubsidy is L 40.At 200 kilowatt-hours it is L 95, and at300 kilowatt-hours it is L 152. When consumptionreaches 301 kilowatt-hours, the subsidy rapidly dropsto zero, so that the marginal cost of the first kilowatt-hour over that limit is L 153.

For 2001, the government assigned a budget ofL 280 million, or around US$18 million, to finance the


106

Table 11.10 Energy Costs under PPAs, June 2001

Capacity Generation Plant factor Unit cost (US$/kWh)

Provider MW % MWh % % Total Fixed Variable

ELCOSA 80.0 20.0 28,061 16.7 48.7 0.106 0.043 0.063EMCE 1 82.0 20.4 32,781 19.5 55.5 0.071 0.015 0.056EMCE 2 55.0 13.7 34,062 20.2 86.0 0.071 0.025 0.046LUFUSSA 1 39.5 9.9 8,973 5.3 31.6 0.166 0.090 0.076LUFUSSA 2 77.0 19.2 47,167 28.0 85.1 0.071 0.025 0.046Nacional Ing. 45.0 11.2 11,697 6.9 36.1 0.117 0.041 0.077Laesz 22.5 5.6 5,785 3.4 35.7 0.122 0.045 0.078Total 401.0 100.0 168,526 100.0 58.4 0.087 0.031 0.056ELCOSA = Electricidad de Cortes, S.A.EMCE = Empresa de Mantenimiento, Construcción y Electricidad, S.A.LUFUSSA = Luz y Fuerza de San Lorenzo, S.A.Note: The global plant factor for the PPAs in June 2001 of 58.4 percent was relatively high due to the late arrival of the rainy season, which restricted hydroelectricgeneration.The annual average is lower (36.5 percent in 1999).Source: ENEE and the author’s calculations.

electricity demand subsidy.This sum represented closeto 7 percent of ENEE’s total income.

Distribution of the subsidy is not equitable (seetable 11.13). Households that consume between 100and 300 kilowatt-hours per month (41 percent of resi-dential users4) receive 86 percent of the subsidy, whilethose who consume less than 100 kilowatt-hours (44percent of users) receive only 14 percent of the total.

Since there is a strong correlation between electricityconsumption and income levels, this distribution isclearly regressive.World Bank calculations indicate that80 percent of the subsidy paid to those who consumemore than 100 kilowatt-hours per month is received byhouseholds that are not poor (World Bank 2000: p. 41).

Ideally, this subsidy should be abolished. If this ac-tion is not politically feasible, at a minimum the subsidyshould be focused on those users who consume lessthan 100 kilowatt-hours per month. Those users aremostly poorer, and the electricity bill represents agreater proportion of their income.5 This strategywould permit a reduction of total spending on the sub-sidy and free funds for more efficient poverty reduc-tion measures, such as subsidies for the capital costs forcoverage expansion (see next paragraph).

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Table 11.11 Structure of the Domestic Rate A, 2001

Usage (kWh per month) Rate (L)

0–20 8.03 (minimum rate)21–80 0.8117 per kWh81–300 1.1832 per kWh301–500 1.3758 per kWh

Box 11.1 The Contractual Calvary of the PPA Bidding Process

In 1993, to meet growing demand without investing public funds,the National Electricity Enterprise (Empresa Nacional de EnergíaEléctrica—ENEE) adopted a policy of expanding generation ca-pacity through power purchase agreements (PPAs) with privategenerating companies.To date, seven contracts have been signedwith three different companies—Electridad de Cortes, S.A. (EL-COSA); Empresa de Mantenimiento, Construcción y Electricidad, S.A.(EMCE); and Luz y Fuerza de San Lorenzo, S.A. (LUFUSSA)—toprovide 201.5 megawatts in new capacity plus 82 megawatts ofcapacity in state plants managed by a private company.

In 1993, a bidding process for 60 megawatts was carried outbut then abandoned because of macroeconomic problems. Thefirst contract for 48 megawatts was signed in 1994 with ELCOSA,a Honduran–U.S. company.There was no bidding process becauseof the energy crisis and because the framework law in the elec-tricity subsector had not been ratified.The contract was relativelyexpensive, at US$0.135 per kilowatt-hour.There have been threesubsequent bidding processes, each of which has been difficult.

The first PPA resulting from a bidding process was a contractof rehabilitation, operation, and maintenance (ROM) of ENEE’sthermal plants with 82 megawatts capacity, which are located inLa Ceiba and Puerto Cortés.This bidding process was first wonby a Guatemalan company, but the negotiation failed when thecompany could not confirm the participation of its technical part-ner. In 1994, the contract was granted to the second bidder, theHonduran company EMCE.This contract has proved successful,raising the plant availability factor from 62 percent to 90 percentand improving fuel efficiency by 5.6 percent.

The first bidding process for constructing a new plant was ini-tially won by American Power, a company that turned out not tohave the capacity to make the investment. American Power in-tended to sell the contract to a third party, but the bidding

process was declared void, and American Power’s local partnerwas charged the L 2.5 million guarantee. ENEE then negotiateddirectly with two possible bidders, and eventually, in 1995, a con-tract for 33.5 megawatts was signed with the Honduran companyLUFUSSA.This contract is the costliest of all the PPAs (US$0.166per kilowatt-hour in June 2001).

In 1997, there was a bidding process to acquire 60 megawatts.Thirteen firms were prequalified, but because of confused draft-ing of the specifications for the bidding process, in the end therewere only three bidders—Enron, LUFUSSA, and the ERI consor-tium (Panama)–EMCE. Enron offered a barcasa (floating) plant,which had been declared unacceptable by ENEE in correspon-dence regarding the specifications. Enron threatened to challengethe result, and the bidding process was declared void. Finally, theCouncil of Ministers authorized the direct contract of 120megawatts, using the lowest offered price (that of LUFUSSA), anddividing the contract between EMCE and LUFUSSA. In that case,the contracts were much less costly, at US$0.071 per kilowatt-hour in June 2001.

The main obstacles to finalizing the bidding process satisfac-torily are the following:

• The bidding processes have been carried out under crisis orimminent-crisis conditions.

• Public officials fear the consequences of their actions beingcontested, which causes paralysis.They would rather a biddingprocess be declared void than expose themselves to an objec-tion from the state comptroller for not adhering to the letterof the law.

• The lack of legal force of international arbitration rulings scaresoff foreign firms.This last obstacle was corrected with Decree161-2000.

Subsidies for Coverage ExpansionThe rapid expansion of coverage in recent years was fi-nanced by subsidies for connection costs.The costs fornew connections are at present in the range of US$300to US$500 per consumer.6 This amount is muchhigher than the normal range of US$100 to US$200,because of low population density in the areas beingincorporated. Between 1997 and 2000, US$23.5 mil-lion was invested in these programs (see table 11.14).ENEE receives these funds as capital transfers withoutany kind of future financial obligation.

Expansion of coverage is creating additional pres-sure on the demand subsidy.The great majority of newusers consume less than 300 kilowatt-hours per monthand, therefore, are eligible for the subsidy.The subsidybudgeted for 2001 of L 280 million (US$18 million)represented an increase of 6.6 percent in real terms.However, that amount was insufficient, and the govern-ment and ENEE had to adjust the formula for calculat-ing the subsidy so that it would not exceed the budget.

Estimated Cost of Closing the Remaining Access GapThe lack of precise data about the characteristics of thepopulations without service makes it difficult to esti-mate the cost of increasing coverage.A precise estimateof the cost of getting 100 percent coverage wouldrequire data about the proportion of potential userswho could be incorporated into ENEE’s network, theproportion who could be served by independent net-works, and the proportion who would require off-network solutions (for example, solar panels on theirhouses).These data are not available. However, a ball-park estimate can be made, on the basis of populationdata and current coverage and cost parameters for dif-ferent types of solutions.

Currently, urban coverage is 92 percent and rural,51 percent. For dwellings that can be connected to the network, the cost is US$200 in urban areas andUS$450 in rural areas. Isolated systems,both those withan independent network and those with solar solu-tions, have higher costs of approximately US$750 perdwelling. If all the urban population and half the ruralpopulation currently without electrical coverage couldconnect to the interconnected network, 38 percent ofthe rural population (19 percent of the national popu-lation) would remain outside the scope of the distribu-tion companies of the interconnected network.7

Based on the foregoing, one may estimate that thecost of eliminating the gap in access to electricitywould total US$175 million (US$165 million is for the rural sector and the rest for the urban sector) (seetable 11.15).

These sums are not totally out of Honduras’s reach.However, they are considerably higher than the cost forexpanding coverage of water and sanitation to 100 per-


108

Table 11.12 Structure of Residential Consumption,June 2000

Averages

Consumption Users kWh/ L per (kWh per month) (%) L/user user kWh

0–20 17.6 8.0 4.5 1.8a

21–100 18.2 32.5 49.7 0.7101–300 45.1 184.5 195.4 0.9> 300 19.1 698.2 558.8 1.2Total 100.0 223.8 204.6 1.1a. Minimum rate is L 8.03 for up to 20 kWh.That gives a cost per kilowatt-hour of L 0.4. However, many consumers in this range consume very lowquantities, resulting in a higher average of L 1.8.Source: ENEE.

Table 11.13 Distribution of the Electricity Subsidy per Consumption, 2000

Consumption Users Subsidy Subsidy Average subsidy per(kWh per month) (%) (% of bill) (% of total) client (L per month)

0–20 21 64 3 5.120–100 23 53 11 21.0

100–150 13 51 16 52.3150–200 11 50 22 80.9200–250 9 49 24 109.0250–300 8 49 25 138.2Total 85 50 100 50.1Source: Derived from World Bank 2000a, table 3.9, based on ENEE data.

cent, or for establishing public telephone service in3,000 communities with populations of 500 or more.

This cost underlines the importance of establishinga mechanism to minimize the subsidy given to thesepotential new users, based on studies of the willingnessto pay of potential users of the service. It is also impor-tant not to discriminate against off-network solutionswhen allocating the subsidy.That policy would result inpressure to incorporate isolated communities into thenetwork when an off-network solution would be eco-nomically more feasible. A competitive mechanism toassign contracts for off-network solutions to the biddersthat require least subsidy should be implemented.

Financial PerformanceThe financial sustainability of the sector was improvedin the 1990s by cost reductions and the implementa-

tion of higher tariffs.The framework law requires thattariffs reflect the system’s marginal costs.The regulatorpermits ENEE to bill customers based on the SRMCfigure. In 2000, it was US$0.057 per kilowatt-hour.The average cost of private generation is much more(US$0.087 per kilowatt-hour), but that amount wasoffset by the lower costs of imports (US$0.038 perkilowatt-hour) and the low financial cost of hydroelec-tric power for ENEE, since a large part of the financialinvestment in hydroelectric plants has been paid off.The tariff for transmission and distribution is below thereal economic cost of these elements of the service.

According to CEPAL data, in 1999 ENEE reportedincome of US$0.064 per kilowatt-hour generated andUS$0.081 per kilowatt-hour sold. Both figures com-pare unfavorably with the respective results in Nica-ragua and Panama, but they are higher than those ofCosta Rica (see table 11.8).These data are unavailablefor the private systems in Guatemala and El Salvador.Total income of US$0.064 per kilowatt-hour gener-ated is barely superior to the marginal generation costof US$0.57 per kilowatt-hour estimated for 2000,without including ENEE’s transmission, distribution,and administrative costs. It is noteworthy that total in-come per kilowatt-hour generated (US$0.064) is belowtotal generation costs even in the most economicalPPA contracts (US$0.071), as described in the follow-ing section.

In spite of persistent deficiencies in tariff determi-nation, ENEE’s total income has been sufficient tocover its costs (including external debt service) and hasalso permitted ENEE to reduce its historical debt withthe state from US$38 million in 1994 to US$25 mil-lion in 2001. In 2001, the government was able to pro-gram a budget transfer from the ENEE in the govern-ment’s favor. However, given the tariff insufficiencypreviously noted, the improvement in ENEE’s balance

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Table 11.14 Investment in Social Electrification, 1997–2000

Amount (US$)

Source 1997 1998 1999 2000 Total

National 2,564,000 1,630,000 1,309,000 4,187,000 9,690,000Foreign 2,325,000 993,000 3,502,000 7,023,000 13,843,000Total 4,889,000 2,623,000 4,812,000 11,209,000 23,533,000Source: ENEE.

Table 11.15 Estimated Cost of Providing 100 PercentElectrical Coveragea

Urban Rural Total

Population 3,000,000 3,000,000 6,000,000Persons per household 5.0 6.0 5.5Households 600,000 500,000 1,100,000Electrical coverage (%) 92 51 70Households without

electricity 48,000 245,000 293,000

Cost per household of providing service:ENEE network (US$) 200 450Independent or solar

network (US$) 750 750Gap in ENEE network (%) 100 25Gap in independent or solar

network (%) 0 75Total cost (US$) 9,600,000 165,375,000 174,975,000a. Data are for 2001. Population numbers are approximate.The 2001 censuswill provide more accurate numbers when it becomes available.Source: Estimates by ESA Consultores. For ENEE, includes only distributionnetwork.

sheet is owed overall to the low investment in recentyears.The rate of return on the company’s net assets isscarcely 3.3 percent (2000), compared with the 8 per-cent goal set by the World Bank and the IDB.

Government Policy and Sector Modernization Strategy Although there have been improvements in ENEE’sefficiency and there has been considerable mobiliza-tion of private financing through the PPAs, the elec-tricity sector continues to create a high fiscal burdenfor the state because of the subsidies for consumptionand coverage expansion. And the onerous terms ofsome of the PPAs will affect the system’s costs for yearsto come. If these factors are not corrected, Honduraswill undoubtedly face the need to raise tariffs in thecoming years.

There are also problems with the sector’s structure.The 1994 law proposed privatizing distribution. How-ever, privatization was never implemented, partly be-cause of limitations in the legal framework, such asunfair advantages for national pension funds, and partlybecause of a lack of political will. As a consequence,the sector continues to be a vertically integrated statemonopoly. ENEE owns hydroelectric plants, transmis-sion, and distribution and operates the Dispatch Cen-ter. ENEE also controls private generation through thePPAs.Without doubt, this structure limits Honduras’scapacity to take advantage of the improvements in effi-ciency available through liberalizing and privatizingthe energy markets.

To correct these problems, the government, withthe support of the World Bank and IDB, proposed anew framework law in 1999.The new law would pro-mote the private supply of electricity by creating awholesale market for directly trading energy betweengenerators and distributors. It would also facilitate pri-vatizing distribution by creating three regional distri-bution companies. The law, as originally proposed,opened the possibility of privatizing transmission andthe state hydroelectric plants, but the bill was revised inthe National Congress to exclude those options. Thehydroelectric plants would remain state property butcould be operated by private agents under contract,subject to the rules of the wholesale market. A non-profit company would manage the Dispatch Center,with the participation of the market’s principal actors.

According to the proposal, the tariff system wouldno longer contain cross-subsidies. Payments would bedetermined by the sum of the respective generationcosts, set by the wholesale market, in which generatorsand distributors would negotiate contracts for the pur-chase and sale of energy.8 The consumer tariffs fortransmission, distribution, and operating costs of theDispatch Center would be under the supervision ofthe regulatory agency. Any subsidy would be paid di-rectly by the government as a transparent line item inthe annual budget.

The bill also called for strengthening regulation,withchanges in the appointment and rotation periods of thecommissioners to increase their independence from theexecutive. It was hoped that competition in generation,together with the establishment of a strong regulatoryentity, would result in great benefits for consumers.

The bill was very controversial. Even though thegovernment presented it to the National Congress forapproval, there was a sense that the government’s“ownership” of the project was low. Rather, it wasperceived as a project of the international financial in-stitutions, and there was no strong pressure from theexecutive for its approval.

Legislators expressed doubts about the law’s techni-cal complexity and its lack of a clear purpose. Theproblems with the liberalized market in El Salvadorand California increased those doubts. Some popularorganizations, such as the self-appointed Popular Block(Bloque Popular) are opposed on principle to privatiza-tion, and many legislators were afraid to make unpop-ular decisions with elections approaching.

These factors slowed the law’s approval.After takingmore than a year to approve half the clauses, the Na-tional Congress finally dropped the bill in July 2001.Changes made by the National Congress during theapproval process were thought to have significantly al-tered the law’s coherence, and 2001, an election year,was not an appropriate moment to achieve a suitableresult. Legislators considered it preferable to leave thereform process to the government that would take of-fice in January 2002.

Weaknesses in the Reform ProposalEven though approval of a new framework law wouldhave represented progress over the status quo, it is im-


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portant to mention three important weaknesses of thebill in its 2001 form.

First, ENEE would continue to provide hydroelec-tric energy and to own the transmission network, as wellas control the regulatory entity. This structure presentsthe risk of a conflict of interest. It is true that the lawwould reduce the control of the executive over the reg-ulatory agency,because the appointment would be basedon a slate presented by the labor,professional, and privatesectors and would have to be ratified by the NationalCongress. However, this kind of corporate constitutionof the regulatory entity (similar to that of the CNSSP)reflects an essentially political vision of the functions ofthe office, which does not augur well for the technicaland independent management of its functions.

Second, the bill proposes specific price incentivesfor generating energy with renewable resources thatwould distort traditional economic rules for the dis-patch of generation. Dispatch should give priority tothe supply with the lowest price. Instead of distortingprices and forcing the distributors to buy a proportionof energy from generators using renewable resources,it would be preferable to provide direct subsidies forrenewable energy. Such subsidies should rely on ananalysis of factors that do not enter into its cost func-tions or whose benefits do not derive from the con-sumption of energy (such as flood protection, in thecase of hydroelectric dams).

Third, the proposed law leaves several importantpoints undefined. For example: How will the capacitycontracts work, and what is their relationship with en-ergy contracts? How will Honduras manage the transi-tion period, and what will the necessary and sufficientconditions be for the full functioning of the wholesalemarket? Regarding the last point, it should be notedthat possibilities are limited for a regional wholesalemarket now. Although the Interconnected ElectricalSystem for Central American Countries (Sistema Inter-conexión Eléctrica para los Países de América Central—SIEPAC) will be finished in 2001, the differences innational laws will make market unification difficult.The record to date makes one question the capacity ofthe regulatory entity in the near future to ensure thecompetitive working of such a complex market and toavoid the problems that occurred in El Salvador.Thosefactors could impede the modernization process.

Outlook for Sector ReformTaking into account recent experience, this study rec-ommends that Honduras give priority to strengtheningthe functions of sector policymaking and regulation,privatizing distribution, and streamlining the expan-sion coverage strategy. The following are its concreterecommendations for reform:• To establish adequate leadership and continuity of

policies, Honduras should create a secretariat of en-ergy. Its responsibilities should cover fossil fuels andcould also be extended to cover the water sector.The creation of such a secretariat is urgent, in orderto end ENEE’s de facto role as sector planner, giventhe lack of continuity in the Energy Cabinet’s in-terventions, and the conflict of interest betweenSERNA’s dual functions in energy policy and envi-ronmental control.

• To establish stronger sector regulation, Hondurasshould create a multisector regulatory entity, whichshould be financed through a regulatory tariff leviedon the service users.The procedures for appointingcommissioners should be designed to insulate theentity from political interference.To this end, com-mission members should be appointed for 5 years,with overlapping terms to ensure continuity. Theyshould be removed only in the case of justified causesrelated to the performance of their duties. Regula-tors in the new entity should receive intensive train-ing in modern methods of energy regulation.

• To move forward with restructuring the sector,Honduras should privatize distribution in the shortterm.At the same time,ENEE’s hydroelectric plants,transmission grid, and Dispatch Center should beseparated into independent enterprises (the firstshould be split into at least two enterprises).

• To ensure an adequate expansion of electricity sup-ply, Honduras should increase generation capacity.At the same time, the high costs previously incurredin PPAs and rental contracts must be reduced. Inthe past, the bidding processes were insufficientlycompetitive, and the technical specifications havenot permitted the achievement of reasonable costs.

• In the immediate future, the design of the whole-sale market should be based on the need to expandgeneration capacity at the lowest possible cost toconsumers. One possible mechanism would be to

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oblige private distributors to form an association toissue PPAs through competitive public bids underthe supervision of the regulator.The costs of thesecontracts—along with those of the existing PPAs—would be passed on to the final users pro rata ac-cording to their consumption. This system wouldavoid the risk of unstable consumer tariffs related todisequilibrium in wholesale generation markets,which have undermined reform sustainability inother countries.

• For the time being, Honduras should continue witha single buyer model in the generation market.Theavailable capacity should continue to be dispatchedin order of economic merit on the basis of the offersreceived, in order to minimize the cost of meetingdemand in each period. Plants with capacity con-tracts should have a specified maximum price thatthey are allowed to charge for dispatching power,based on SRMC. For other plants, the bid pricewould be free. In each period, total dispatch costswould be passed to the consumers pro rata accord-ing to their energy consumption so that they collec-tively pay exactly what is necessary to meet demand.

• To introduce sensitivity between demand andprices in real time, policymakers should require dis-tributors to develop a market for temporary sus-pensions of energy supply to large consumers.Thisprogram would involve paying consumers for de-creasing their demand, if doing so would becheaper than buying more energy at peak hours. Itwould have the benefit of reducing the average costof generation and would also provide an objectivebase for determining the value of unmet demand.

• To ensure competitive conditions and prevent pricedistortions, Honduras should postpone implement-ing a liberalized model of the wholesale market—one without central planning of supply expansion,where the price paid by consumers and received bygenerators is determined by a spot market—until theintegration of the Central American market hasbeen consolidated. Ideally, before a spot market isimplemented, the state’s generation and transmissionenterprises should be privatized in order to avoid aconflict of interest for the state when it exercises itsregulatory function. For this reason, the new law

should not rule out such privatization.However,pri-vatizing generation and transmission is not a sine quanon for advancing with reform in the short term.

• To continue to increase coverage with reducedsubsidy costs, Honduras should establish an electri-fication fund that would give priority to those pro-posals requiring the least subsidy per connection.To avoid distortions in the choice of technology,policymakers should make subsidies available foroff-network solutions. The new secretariat of en-ergy should prepare a coverage expansion plan,identifying communities without service, feasibletechnical options, and their indicative costs. Theamount available for subsidies in each period shouldalso be designated.

• The demand subsidy should be stopped, and theresources should be applied to the coverage expan-sion program. If this action is politically unaccept-able, the demand subsidy should, at the very least, belimited to those who consume less than 100 kilo-watt-hours per month. This limitation would im-prove the subsidy’s targeting and reduce its cost.

Opportunities and Priorities for PrivateInvestment in the Electricity Sector

Of all the infrastructure sectors in Honduras, electric-ity has the most investment needs and offers the mostpotential for private investment in the immediate fu-ture.As was detailed in the previous section, the coun-try urgently needs to privatize its distribution system.Also necessary is substantial investment in new hydro-electric and thermal generation in order to meet grow-ing demand. However, to ensure that these investmentsyield the maximum benefit, Honduras needs to com-plete the sector reform process and establish a strongand independent regulatory entity.

Projection of the Energy Balance and the Role of Private Generation Table 11.16 presents projections for demand and forinvestment needs for generation.According to ENEE’sestimates, thermal generation should increase by 1,234gigawatt-hours per year between 2000 and 2006. In2005, a new medium-size private hydroelectric gener-


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ation plant is expected to come on-line (Cangrejal),9

followed in 2006 by the opening of the Los Llanitoshydroelectric plant (possibly with private investment).With these projects, hydroelectric generation is ex-pected to increase by about 300 gigawatt-hours annu-ally. However, it is highly improbable that Los Llanitoswill begin operation in 2006 given the project’s cur-rent degree of progress.

According to official projections, a critical factor forreducing the need for thermal energy in 2007–09could be the gigantic project, Patuca 2, whose annualproduction is projected at around 2,000 gigawatt-hours per year. However, the project was controversialbecause of its potential effect on environmentally sen-sitive areas on the lower part of the Patuca River, andthe project’s promoters reported in 2000 that they hadabandoned the effort after opposition from environ-mental groups. Thus, ENEE’s projections have beenadjusted to reflect greater demand for thermal energy

in the absence of Patuca 2 or another hydroeloectricproject on the same scale. In this context, to maintainthe energy balance Honduras clearly will need signifi-cant new investment to avoid medium-term supplyproblems. One potential project that might go a longway to meet that bill is the combined-cycle liquid nat-ural gas plant proposed by AES Corporation in PuertoCortes (see box 11.2).

Investment ProgramENEE expects that all future investment for expandingthe generation supply will be undertaken by the pri-vate sector.According to ENEE’s projections (see table11.17), during the next 5 years the average required in-vestment will be US$857 million, or US$171 millionper year, of which approximately 70 percent is to in-crease generation supply, 20 percent to expand thetransmission network, and 10 percent for the distribu-tion system.

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Table 11.16 Projection of the Energy Balance, 2000–10

GWh per year

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Hydroelectric (ENEE projection): 2,444 2,366 2,058 2,415 2,126 2,436 2,745 4,119 4,483 4,651 4,806Patuca 2 1,722 2,087 2,023 2,074Subtotal hydroelectric without

Patuca 2 2,444 2,366 2,058 2,415 2,126 2,436 2,745 2,397 2,395 2,628 2,732

Thermal (without Patuca 2):ENEE 34 28 10 13 7 28 7 0 0 3 0Private 1,597 1,939 2,537 2,457 3,006 2,905 2,858 3,482 3,810 3,916 4,170Imported 0 0 0 0 0 0 0 0 0 0 0Subtotal thermal 1,631 1,967 2,548 2,470 3,013 2,932 2,865 3,482 3,810 3,919 4,170

Total 4,076 4,332 4,605 4,885 5,138 5,368 5,610 5,879 6,206 6,546 6,902Demand 4,077 4,332 4,606 4,885 5,133 5,368 5,611 5,879 6,206 6,546 6,902Deficit 1 –1 0 0 –5 0 1 0 0 0 0Source: Based on ENEE projections, but subtracting Patuca 2.


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Table 11.17 Energy Sector Investment Needs, 2000–04

Financing sources (US$ millions)

Total ENEE IDB Bilateral Private Pending

GenerationThermal 251 251Hydroelectric 326 326Subtotal 577 577Transmission 188 6 9 48 126Distribution 92 15 50 27Total 857 21 9 98 577 153Percentage of financing 100 2.4 1.0 11.5 67.3 17.8Source: ENEE.

Box 11.2 The AES Project in Puerto Cortés: Opportunity or Threat?

In February 2001, President Flores announced what would be thebiggest foreign private investment project in the history of Hon-duras. It would involve a thermal generation plant to be built inPuerto Cortés by the U.S. corporation AES.The plant would havea capacity of 750 megawatts (equal to 94 percent of the currentlyinstalled capacity in the country).The International Finance Cor-poration would provide approximately 75 percent of the totalinvestment of US$650 million.

The combined-cycle plant would use liquid natural gas, a rela-tively clean fuel that at that time had a low cost in the Caribbeanmarket. According to AES projections, the total cost of the en-ergy generated would be US$0.05 per kilowatt-hour.The com-pany intends to sell the energy in El Salvador, Guatemala, andHonduras, since plant capacity will be greater than the needs ofany one of those markets. To that end, AES will build a high-tension transmission line from Puerto Cortés to Nejapa in El Sal-vador. It is projected that approximately 30 percent of the energywill be offered to the Honduran market.

The construction of this project would have several advan-tages for Honduras. It would generate foreign currency becauseof the savings in the cost of imported fuel and would greatly in-crease generation capacity. If the offered price of US$0.05 wereconfirmed, the growth in demand could be met without raisingtariffs. In contrast, if the country continues to expand generationcapacity at kilowatt-hour costs over US$0.07, a tariff hike wouldbe inevitable. In addition, the selection of Honduras for a projectof this scale would send a signal to the world that Honduras isperceived as an attractive location for a large infrastructure in-vestment by a company experienced in this type of operation.

However, the project also presents several problems in thecontext of the incomplete reform process in Honduras and theCentral American region.

• For El Salvador, it presents the problem of the vertical reinte-gration of distribution and generation, because AES owns 80percent of the distribution there.

• For El Salvador and Honduras, it presents the prospect of thesubstitution of part of hydroelectric generation, since there arenot 750 megawatts of thermal generation currently being firedas “base” plants available to be substituted.

• For Honduras, it presents possible technical problems in thetransmission network caused by the impact of the charge of upto 400 megawatts directed toward El Salvador.

• For Honduras, it presents the problem of adding to the nationalnetwork a plant that would have almost 50 percent of the firmcapacity of the system, equal to 90 percent of maximum na-tional demand.Unless this was channeled through a power pur-chase agreement—and therefore controlled by the NationalElectricity Enterprise (Empresa Nacional de Energía Eléctrica—ENEE)—it would represent a powerful private market positionthat could be incompatible with establishing a competitivewholesale market in Honduras.

In light of these considerations, it would make sense to define thesector reform scheme to be adopted in Honduras—especiallywith respect to the functioning of generation markets—beforeapproving the project.

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Notes

1. Although the law says short-term mar-ginal costs, in practice the formula used tocalculate rates incorporates a componentbased on the capital costs of incrementalgenerating projects and, therefore, can beconsidered to be a measure of long-termmarginal costs.2. The value in 2001 was US$0.062; the in-crease is due to fuel costs.3. The estimated cost of hydroelectric gen-eration is based on the opportunity cost ofwater use today, estimated using probabilisticforecasts for future rainfall. It is the dis-counted value, today, of the cost of having touse a thermal source in the future, in theevent that rainfall does not replace the waterconsumed in generation today.4. This proportion is slightly different fromthat given in table 11.12, because consump-tion range data in these two tables are forslightly different periods.5. The average consumption of electricityin households with electricity in the lowest

quarter of income distribution is estimatedat 79 kilowatt-hours per month; for those inthe two middle quarters, the average is 126kilowatt-hours; and for the top quarter, 243kilowatt-hours. Households in the lowestquarter spent an average 5.7 percent of theirincomes on electricity, compared with 3.5percent for the two middle quarters, and 1.8percent for the top quarter (ESA Consul-tores 1995). That study calculated the fol-lowing relation between electric energyconsumption (C ) and household income (I )using EPHPM’s 1993 data:

C = –311 + 64.3 log I(Multiple R = 0.40948, R2 = 0.61767,

F = 95943.2, Sig. of F = 0.000)

6. For example, in a group of electrificationprojects inaugurated in 2001 to serve nearly1,900 connections in 13 villages in Danlí’smunicipalities,Teupasenti, and Guinope, thecost per connection was US$434 (according

to an advertisement placed by ENEE in ElTiempo, April 17, 2001, p. 31).7. In Panama, a country with very low ruralpopulation density, the Rural ElectrificationOffice has estimated that 25 percent of thetotal population cannot connect to the in-terconnected system.8. The draft law did not clarify the mecha-nism for determining the consumer rate forgeneration in each distribution zone. It sim-ply said that the generation price will not beregulated.The detailed rules for charging thefinal user are deferred to the law’s regula-tions. In principle, the users would pay anamount that covers the efficient cost of pro-viding the service, taking into account capi-tal and operating costs, including capacityavailability and dispatch.9. This project will be delayed by at least a year compared with the schedule citedhere.

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Summary

The 1995 Framework Law of the TelecommunicationsSector (Ley Marco del Sector de Telecomunicaciones—Decree185-95) called for the separation of service operationfrom the regulatory function, the establishment of an in-dependent technical regulatory entity, and the creationof a regime of licenses and concessions for providingservices.The National Commission for Telecommunica-tions (Comisión Nacional de Telecomunicaciones—CONA-TEL) was created as the regulatory entity responsible forissuing licenses and operating concessions in the sector,including administering broadcast frequencies. Withinthis framework, the law called for the capitalization ofthe state telephone company, Empresa Hondureña de Tele-comunicaciones (HONDUTEL), by selling a majoritystake in a new operating company, Honduran Telecom-munications Corporation (Corporación Hondureña de Tele-comunicaciones—COHONDETEL), to a private investor.COHONDETEL would have a concession until 2020,with a monopoly until 2005.

In telecommunications—as in the case of electric-ity—the implementation of the sector’s restructuringas contemplated by the framework law has been slowand incomplete. Because of coordination problemsbetween the executive and legislative powers, the gov-ernment took 5 years to define the terms of the in-ternational bidding process for choosing the privateinvestor in COHONDETEL.The legal framework forthis process was not complete until the approval of De-crees 244-98 and 89-99. Then the bidding process

ended in failure in October 2000. Telmex made theonly offer, for a third of the US$300 million reserveprice established by the government.

Meanwhile, HONDUTEL continues to operate asa state monopoly. However, pending the definition ofits future, HONDUTEL’s investment program hasbeen severely restricted. Since the approval of theframework law in 1995, the company has made no im-portant new investments, partly because it cannot con-tract nonconcessional debt and partly because it is pro-hibited from signing contracts that make commitmentsregarding the company’s future earnings. For example,in 2000 HONDUTEL invested barely US$3 million, asum that implies increasing decapitalization.

The framework law calls for developing othertelecommunications services (wireless telephony, datatransmission, Internet, value added, and so on) by pri-vate capital in a competitive environment.This provi-sion has permitted considerable private investment inthe sector (US$45 million in 2000), above all in cellu-lar telephone service. However, to date there is onlyone concession for this service (Telefónica Celular orCELTEL) since 1995 and, as a consequence, its tariffsare among the highest in the region.A second conces-sion for mobile telephones, the personal communica-tion system (PCS) band, included in the COHONDE-TEL concession has been suspended since the sale fellthrough. The liberalization process for the other ser-vices has progressed, and currently 55 private compa-nies offer Internet service provider (ISP) services anddata transmission and switching.

12 Telecommunications

In terms of institutional framework, a relativelystrong regulatory authority has been established.CONATEL is not formally an autonomous entity. Itbelongs to the executive branch, and its commissionersare named by the president. However, in practiceCONATEL has a relatively high degree of autonomy.Its decisions are not subject to executive confirmation,and it has an annual budget of US$2 million—muchmore than any other regulatory entity. It is financed bya supervision charge of 0.5 percent imposed on the su-pervised entities plus part of the US$12 million annualincome generated for Honduras by cellular and broad-casting licenses,which CONATEL administers. It has agood team of technicians and has benefited from a pro-gram of technical support financed by the IDB and theInternational Telecommunication Union (ITU).

There is still a degree of confusion and institutionalconflict regarding the assignment of the sector policyand regulation functions. An amendment to the 1995framework law that was passed in 1997 assigned policydefinition to the president of Honduras, and he dele-gated the management of the HONDUTEL capitaliza-tion process to the Secretariat of Finance, with supportfrom the Consultative Commission on Privatization, adependency of that secretariat.An ad hoc commissionwas created to manage HONDUTEL’s capitalization,made up of representatives of the Secretariat of Fi-nance, SOPTRAVI, the Office of Administrative In-tegrity, and HONDUTEL, and two representatives ofcivil society.

In the absence of a specialized sector policy entity,the Secretariat of Finance, supported by the Con-sultative Commission on Privatization and ad hoc com-mission, made the most important policy decisionsregarding the COHONDETEL concession.Normally,it would not be considered suitable for a specializedentity in the implementation of privatization (such asthe Consultative Commission on Privatization) to alsodefine the policy framework. CONATEL, the regula-tory entity, was also very involved in the process of re-viewing and approving the concession contract.

The concession design included the definition ofthe tariff rebalancing program. The initial technicalwork was done by experts from the ITU, contracted byCONATEL.The work was reviewed by the investmentbank that had been contracted as adviser in the sale of amajority interest in COHONDETEL. This approach

was appropriate as the regulator should determine thetariffs for the noncompetitive parts of the market.However, the tariff proposal was subsequently adjustedto make the concession more attractive to potentialinvestors.Although CONATEL was involved in approv-ing these decisions, it has since suggested that the pro-posed tariff rebalancing favors the operator excessively.

CONATEL considers that it should be the princi-pal policymaker for the sector, and de facto assumessome policymaking functions. In fact, it had an impor-tant role in determining the investment requirementsand performance indicators for the proposed CO-HONDETEL concession.

Unsurprisingly, in the context of a stalled modern-ization program and ongoing institutional confusion,the sector’s performance continues to be deficient.With respect to coverage, between 1995 and 2000, anexpansion program increased the number of lines inservice by 73 percent, reaching 299,000 lines in De-cember 2000. This was implemented under turnkeycontracts with Siemens and AT&T at a cost of overUS$200 million. However, telephone coverage is stillamong the lowest in the region with scarcely 5 linesper 100 inhabitants. For those households that havebeen able to get a line, the quality of service is verypoor and, for long-distance and international calls, veryexpensive. The income from international traffic isused to finance HONDUTEL’s internal inefficiency—above all, the “capture” of part of the income by itsmore than 4,000 employees—and to generate fiscaltransfers to the central government.

The concession contract for COHONDETEL setambitious goals for expanding the number of lines by100 percent to 600,000 in 2005, improving servicequality, and expanding access by placing public tele-phones in 3,000 communities that are currently with-out service.The principal reason for the failure of thebidding process was the disconnect between the invest-ment requirements (estimated at US$500 million) andthe government’s proposed reserve price (US$300 mil-lion), given the unfavorable international climate forthe sale of traditional telephone companies. Eventhough the monopoly was guaranteed until 2005, theoffer was unattractive to potential investors.

The new government elected in November 2001will have to reinitiate the modernization and liberaliza-tion process in this sector.To that end, it is urgent that

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clear and decisive policies be adopted.The main policylines recommended by this study follow:• The organization of the telecommunications sector

should to be reformulated.The secretariat responsi-ble for this sector’s policies should be defined, and itshould not be the Secretariat of Finance. CONA-TEL should support the implementation of sectorpolicies but should not be in charge of them. Merg-ing telecommunications regulation into a multi-sector regulatory agency, which would also coverenergy and water and sanitation, should be consid-ered.Commissioners should be appointed for 5-yearperiods with overlapping terms to ensure continuity.

• HONDUTEL should be privatized as soon as pos-sible by granting a nonexclusive concession to anenterprise with a majority of private capital. Theconcession contract should emphasize performanceand service-quality norms rather than define goalsin terms of rigid amounts of investment or numberof lines to be installed. Before the bidding, publicfeedback on the concession contract should be so-licited by publishing it on the Internet and in thenational media and by requesting the opinions ofthe public and potential bidders before the biddingprocess is finalized.

• The rebalancing of HONDUTEL tariffs should bereevaluated to ensure that the tariffs for nationalcalls reflect the real cost of efficiently provided ser-vice, and the adjustment program should be im-plemented without waiting for the concession toCOHONDETEL.

• HONDUTEL should immediately implement anaccelerated program of cost restructuring.The gov-ernment should authorize the use of the enter-prise’s financial surpluses to make any necessaryseverance payments.

• The government should grant priority status to auniversal access program to be handled by the en-tity charged with making sector policies. Resourcesshould be distributed through a competitive mech-anism (using a “least subsidy” allocation rule) andshould be open to all telecommunications serviceproviders.

• Two additional concessions for mobile servicesshould be established in the short term, throughpublic international bidding, to make this marketsegment competitive.

• The framework law should be revised to establishmore flexible technical definitions, congruent witha simplified administration of the sector in the con-text of rapidly changing technologies.

Principal Institutions of the Sector

Sector PolicyThe 1995 Framework Law of the TelecommunicationsSector called for reform that included separating thefunctions of operation and regulation by establishingan independent technical regulatory entity. The lawcontemplates a central role for the private sector in thefuture development of telecommunications and createsa regime of licenses and concessions for providingservices.

In the 1995 law, the function of planning and mak-ing sector policy was assigned to the Secretariat ofCommunications, Public Works, and Transport (Secre-taría de Comunicaciones, Obras Públicas y Transporte—SECOPT). However, in 1997, when SECOPT ceasedto exist and the Secretariat of Public Works, Trans-portation, and Housing (Secretaría de Obras Públicas,Transportes y Vivienda—SOPTRAVI) was created, thenew secretariat was not assigned a role in telecommu-nications. That responsibility stayed directly in thehands of the president, who (using his power under the1997 Law of Public Administration) delegated to theSecretariat of Finance the management of the HON-DUTEL capitalization process.

HONDUTEL’s capitalization was to take placethrough the sale of a majority share in a new operatingcompany (COHONDETEL) to a private investor,which would have a concession until 2020 and a mo-nopoly until 2005. The proposed terms of the CO-HONDETEL concession contract were rooted in thegovernment’s vision of expanding fixed-line telephoneservice and included goals for access and expansion oflines.

However, because of a lack of coordination betweenthe executive and legislative branches, the governmenttook 5 years to define the terms of the internationalbidding process for choosing the private investor inCOHONDETEL.The legal framework for this processwas not completed until the approval of Decrees 244-98 and 89-99. Later, the bidding process ended in fail-ure in October 2000.


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The only offer received, from Telmex, was for justone-third of the US$300 million reserve price that thegovernment had established (see box 12.1).As a conse-quence, sector policy was left in confusion. It will be apriority task of the new government that took powerin January 2002 to renew the process of sector mod-ernization and privatization.

RegulationThe 1995 law created the National Commission forTelecommunications, which was given the responsibil-ity of regulating telecommunications services. Amongother functions, CONATEL issues licenses and con-cessions for fixed-line and wireless telephony, datatransmission, and Internet services. It is also in chargeof administering broadcast frequencies (assigning avail-able frequencies for telecommunications in general,including radio and television). CONATEL is incharge of tariff regulation under the framework estab-lished in the laws and concession contracts. In 2000,CONATEL had 814 operators under its supervision(see table 12.1).

CONATEL is a relatively strong regulatory agency,compared with others in the country. It is not legallyautonomous but, rather, is part of the executive branch,ascribed to the Secretariat of Finance. However, thesecretariat does not supervise CONATEL, which isadministratively and technically independent of it.CONATEL’s decisions are not subject to confirmationby the executive. Rather, they are appealed directly tothe court of administrative litigation. In practice,CONATEL has a relatively high level of autonomy.The commissioners are appointed by the president ofHonduras.

CONATEL has a good team of technicians and hasbenefited from a technical support program for the de-velopment of the sector’s regulations and norms.Thatprogram was financed by a nonreimbursable technicalcooperation loan from IDB’s Multilateral InvestmentFund (MIF) of US$800,000,plus a government contri-bution of US$200,000 (loan ATN/MT-5234-HO).

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Box 12.1 The Failure of the HONDUTEL Auction

The auction of 51 percent of the national telecommunicationsmonopoly, Empresa Hondureña de Telecomunicaciones (HONDU-TEL), failed in October 2000. Seven companies were prequali-fied, but only three of them (Telmex,Telefónica de España, andFrance Telecom) bought the auction guidelines, and only Telmexmade an offer. Its offer of US$106 million was barely a third ofthe reserve price of US$300 million for 51 percent of theshares.This reserve price, which was kept secret and declaredonly when the Telmex offer was opened, implied that the com-pany was valued at US$600 million, or US$2,142 per line.

The auction’s failure suggests that the government erred inbalancing between the program of tariff adjustment, the obliga-tory investment with an estimated cost of US$500 million, andthe reserve price of US$300 million.Without doubt, one of thegovernment’s important motivations in determining the baseprice of the bidding process was to maximize resource genera-tion to finance social programs. Fifty percent of the income fromthe sale of shares was going to be transferred to the Secretariatof Finance to pay for national reconstruction and poverty re-duction programs. However, the real justification for the privati-zation is that Honduras needs efficient, high-quality telecommu-nications services, available to satisfy the demand of householdsand businesses. HONDUTEL is inefficient, provides low-qualityservices, and cannot satisfy the demand for lines and services.

Those considerations were not absent in the design of theconcession. However, from the start there was a contradictionbetween the ambitious goals for improving service, the tariff pro-gram, and the government’s plans to generate income to be ap-plied to social spending. In the successful San Pedro Sula waterconcession, the required investment was relatively low, and thebidder was permitted to propose the tariff in light of the stipu-lated investments.The concession was assigned to the bidder thatoffered that most favorable tariff without requesting a capital in-vestment for it (see box 12.2.) However, in the case of HONDU-TEL, the government fixed both the tariff and the high investmentlevel and later miscalculated the amount that investors would bewilling to pay for the concession given those limitations.

Before the next auction, the government should reflect onwhich elements of the package should be adjusted, balancing thebenefits of improved service for consumers against the incomefrom the sale of the shares.

Table 12.1 Telecommunications Operators Supervisedby CONATEL, 1996 and 2000

Type of Service 1996 2000

Fixed telephone 1 1Cellular telephone 1 1Data transmission, networking, and

Internet 1 55Cable television 59 77Broadcast television 62 148Radio stations 375 484Others 25 48Total 524 814Source: CONATEL.

CONATEL’s annual budget of US$2 million is farsuperior to that of any other Honduran regulatory en-tity, partly because CONATEL is financed with part ofthe US$12 million annual income generated by thecellular concession to CELTEL as well as the broad-casting licenses. As part of the executive branch, itsbudget is part of the country’s general budget. How-ever, the fact that CONATEL has a nontax source ofincome—and that it needs only a portion of that in-come to cover its costs—reduces its exposure to finan-cial pressures within the budgetary process.

One area where CONATEL, like other regulatoryagencies in Honduras, needs reinforcement is in atten-tion to users’ complaints.Although it has set up a Webpage to receive complaints, this function is not yetviewed as an important activity.

Confusion of Functions and Institutional ConflictsElements of confusion still exist in the definition of theresponsibility for sector policies and regulatory func-tions.As mentioned previously, with the reform of theframework law in 1997, policymaking was assigned tothe president, who delegated it to the Secretariat of Fi-nance,with the assistance of the Consultative Commis-sion on Privatization, a dependency of that secretariat.An ad hoc commission was created to manage theHONDUTEL capitalization. The ad hoc commissionwas made up of representatives from the Secretariat ofFinance, the Office of Administrative Integrity, andHONDUTEL, and two representatives of civil society(see box 12.2).

Because of the vacuum in sector policy definition,the Secretariat of Finance, supported by the Consulta-tive Commission on Privatization and ad hoc commis-sion, made the main policy decisions in the context of defining the COHONDETEL concession terms.Normally, it is not considered suitable for a specializedentity that implements privatization (such as the Con-sultative Commission on Privatization) to also definethe policy framework. In addition, although it was notpart of the ad hoc commission, CONATEL, the regu-latory agency, intervened in the process, reviewing andapproving the concession contract.

The concession’s design included the definition of atariff restructuring program.The initial technical workwas done by experts from the ITU. They were con-tracted by CONATEL and based their work on refer-ence prices from 1995. This is appropriate since the

regulatory agency should determine the tariffs for non-competitive parts of the market.The proposal was re-viewed by the investment bank that the Secretariat ofFinance contracted as an adviser in the COHONDE-TEL privatization. However, subsequently the tariffproposal was adjusted to make it more attractive for po-tential investors. Although CONATEL participated inapproving this decision, it later suggested that the tariffrestructuring proposal favored the operator excessively.Obviously, the Secretariat of Finance had an interest inraising the value of the COHONDETEL shares.


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Box 12.2 The “Capture” of HONDUTEL

As often occurs when public monopolies are not submitted toindependent and effective regulation, the national telecommuni-cations monopoly, Empresa Hondureña de Telecomunicaciones(HONDUTEL), has been “captured” in various ways by its em-ployees, some private companies, and the government.

The capture by the employees comes in the form of overem-ployment, overpay, and inefficiency, resulting in the appropriationby the work force of part of the company’s potential income.The HONDUTEL union has a strong collective contract thatmakes it difficult to fire extraneous employees and assignssalaries that are far above the market value.

For example, in spite of the minimal demand for telegraphservice, HONDUTEL still employs 700 telegraph operators and300 maintenance personnel (whose function is to maintain thetelegraph lines free of trees). In 1988, the telegraph service inTegucigalpa reported a monthly income of L 3,000 and payrollcosts of L 240,000.HONDUTEL also maintains 400 janitors withsalaries in the range of L 6,000–10,000 per month, depending ontheir seniority—four times more than the minimum salary.

The government is also one of HONDUTEL’s captors. Overthe past decade, it has extracted significant transfers from thecompany—equivalent to 10 percent of its current income on theaverage during the 1990s—to finance spending in other sectors.Even though in principle it is perfectly acceptable for the state tocharge a canon to recover the intrinsic value of public capitalgoods that have been awarded under concession, this is not thecase with HONDUTEL. Here, the government is taking advan-tage of a state monopoly to impose tariffs that are far above theefficient cost of the service of international phone calls.Thanksto the high tariffs and lack of competition, HONDUTEL’s earn-ings in 2000 were US$132 million. In the same year,HONDUTELtransferred US$80 million to the Treasury.

Private companies have also used their political influence to negotiate comfortable contracts that take advantage ofHONDUTEL’s facilities in the operation of their businesses. Forexample, various television companies have contracts to usespace in HONDUTEL repeating stations at a very low cost.

In addition to defending its functions as regulator,CONATEL also considers that it should be the princi-pal maker of telecommunications policy and declaresthat no separate entity is needed to perform this func-tion. In fact, CONATEL has intervened in differentways in the determination of telecommunications pol-icy, which has created even more confusion about theroles and functions in the sector. For example, in thedesign process for the COHONDETEL concession,CONATEL defined the investment and service expan-sion requirements to be incorporated in the concessioncontract. These requirements—while they sought tofavor current and potential users—were stipulated inan inflexible way and were also incompatible with theother terms of the concession contract.

In effect, various other aspects of sector policy thatare unrelated to the design of the COHONDETELconcession have also been determined by CONATELand HONDUTEL as a consequence of the decisionsthat they make in executing their respective functions.For example, until the COHONDETEL capitalizationis completed and the service expansion stipulated in theconcession contract is under way, HONDUTEL’s busi-ness decisions will effectively determine access policy.Likewise, CONATEL has had a dominant role in de-termining the limits of HONDUTEL’s legal monopolywith respect to changing technologies that furthererode the historical distinctions between switching andother services.This role has reinforced CONATEL’s in-fluence in the sector.

Unfortunately, the confusion of functions betweensector policy and regulation gives rise to the danger ofpoliticizing the regulator. It is noteworthy that CONA-TEL is the target of significant criticism and policy sug-gestions coming from the National Congress and thepress. It is important to set these doubts to rest by creat-ing a strong entity to make sector policy that is part ofthe executive branch, but not part of the Secretariat ofFinance, and by limiting the regulatory agency to thefunctions that correspond to it.1

OperatorsHONDUTEL, a state entity, has a legal monopoly infixed-line telephone services, with 299,000 lines inservice in December 2000. Historically, HONDUTELwas administered by the armed forces because tele-communications was considered an area of national se-curity. However, as part of the state modernization

process, in recent years nonmilitary professionals haveoccupied the posts of manager and general deputymanager.

The 1995 Framework Law of the Telecommunica-tions Sector (with its 1997 revision) authorized thepartial privatization, or capitalization, of HONDU-TEL. It called for creating a new operating enterprise,COHONDETEL, of which 51 percent ownershipwould be sold to a private investor.The investor, dulyqualified in the operation of large telephone systems,would be granted the concession until 2020, as a min-imum, and would have a monopoly on national andinternational telephone services until 2005.2 ThroughHONDUTEL, the government would retain 45 per-cent of the shares, 2 percent would be assigned toHONDUTEL employees, and 2 percent would be as-signed to various social organizations.As noted above,the process fell through in October 2000.

Wireless ServicesHonduras opted to develop wireless services throughconcessions to private investors. The process was de-layed because the first bidding process was contestedand declared void, but in 1994 a concession of 10 yearswas granted to CELTEL. Subsequently, the concessionwas extended until 2021 by a resolution of CONA-TEL. Negotiation on the price CELTEL will pay forthis extension is pending. CELTEL initiated operationsin 1996.As of August 2001, it had 193,000 subscribersand was the second most important communicationscompany in the country.

It is urgent to grant an additional concession inwireless services to create competition for CELTEL.Under the terms of the COHONDETEL concession,COHONDETEL was to have a license to operatewireless services in the PCS band. However, initiatingthis service will depend on finalizing COHONDE-TEL’s capitalization.


For many years, HONDUTEL was accountable to noone for its performance.The results were low coveragelevels and mediocre service. Enactment of the frame-work law in 1995 established a regulatory entity, butHONDUTEL has not been subject to a concessioncontract that would provide the base for demanding

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improvements in its performance. This accountabilitywas put off until the implementation of the COHON-DETEL concession and the transfer of HONDUTEL’sassets to it.

Pending the implementation of the capitalizationplan, no new significant investment has been author-ized for HONDUTEL in recent years. In 2000, ac-cording to CONATEL data, HONDUTEL’s totalinvestment was scarcely US$3 million, principally infurniture and spare parts. Similarly, the implementationof reforms to reduce internal inefficiency (principallythe enormous overemployment and overpayment ofemployees that characterize the company) has beenpostponed until the transfer to the new operator.That,and the long delay in implementing capitalization,explain HONDUTEL’s lagging indicators comparedwith international parameters.

Nonetheless, the telecommunications sector as awhole is growing because of private investment. In2000, CONATEL registered US$44.8 million in pri-vate investment in public telecommunications services,of which nearly 76 percent was for cellular telephoneservices (see table 12.2).Apart from fixed-line and cel-lular telephone services, the sector is becoming morecompetitive, especially in the areas of data networking,Internet, and cable television.

The following sections present data about the sec-tor’s current performance in coverage and access, ser-vice quality, and tariffs and sustainability.

Coverage and AccessIn the 1990s, a build, operate, and transfer (BOT) in-vestment program was implemented by Siemens and

AT&T for more than US$200 million. The programwas authorized in 1993 and has produced improve-ments in service coverage and quality.3 The number of fixed telephone lines grew by 73 percent in the past 5 years.

However, Honduras still has one of the lowest tele-phone densities in the region, with scarcely 4.42 linesper 100 inhabitants in 1999.This density is less than aquarter of that registered in Costa Rica and less than60 percent that of El Salvador. Only Nicaragua haslower density in telephone coverage (see table 12.3).

Of the 279,000 installed lines that HONDUTELhad in 1999, 70 percent were residential (see table12.4).The rest were divided among commercial users(25 percent), HONDUTEL (3 percent), and the gov-ernment (2 percent). HONDUTEL has approximately425,000 applications on its waiting list, a big jumpfrom the 269,000 registered in 1995.4 The recent ex-plosion in the cellular telephone market is another signof the great unsatisfied demand (see details in the latersection on cellular services).

The contract proposed for COHONDETEL’s con-cession set a goal of increasing the number of fixedlines to 600,000 in 2005, with an estimated cost ofUS$210 million. In 2001, HONDUTEL had 25,000available lines, principally in its Tegucigalpa and SanPedro Sula switchboards, that had not been assigned tosubscribers because of the lack of external plant (cablesalong the road).That figure represents 8 percent of thecompany’s total supply, close to the international normof 10 percent. However, after the failure of the CO-HONDETEL bidding process, HONDUTEL beganto acquire cable, metal fittings, and line multipliers totake advantage of this capacity.The company plans tosignificantly increase the use of pair multipliers; how-ever, this technology increases electrical induction in


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Table 12.2 Private Investment in PublicTelecommunications Services, 2000

Service US$ millions %

Cellular telephone 34.0 75.7Television 3.6 8.0Internet 2.4 5.3Radio broadcasting 1.7 3.8Data transmission 1.3 2.9Added value 0.9 2.0Cable television 0.5 1.1Community repeater 0.2 0.5Beeper service 0.2 0.5Trunking 0.1 0.2Total 44.8 100.0Source: CONATEL.

Table 12.3 Trends in Telephone Density in CentralAmerica, 1980–99

Fixed lines per 100 inhabitants

Country 1980 1990 1995 1999

Costa Rica 6.9 9.3 14.38 20.41El Salvador 1.7 2.5 5.03 7.61Guatemala 1.4 2.1 2.87 5.46Honduras 0.9 1.7 2.70 4.42Nicaragua 1.1 1.3 2.22 2.98Source: ITU.

the switchboards, causing management problems anddeterioration in service quality.

Access to public telephones is also a problem. In2000, there were scarcely 1,524 coin-operated publictelephones in Honduras, 0.26 for every thousand in-habitants. That figure compares unfavorably with the

regional figure of 0.69 for Central America. El Sal-vador and Costa Rica have 0.9 and 2.06, respectively.In addition, there were 552 community telephoneswitchboards and 565 public telephones in HONDU-TEL offices.

Access and PovertyThere is a strong correlation between telephone accessand poverty.Table 12.5 shows telephone access per in-come decile in 1998–99, according to the NationalSurvey on Household Income and Expenditures (En-cuesta Nacional de Ingresos y Gastos de los Hogares—ENIGH). In total, about 14 percent of the 1.15 millionhouseholds in the country have a telephone in thehome, but in the four poorest deciles, only 0.1 percent,0.7 percent, 1.6 percent, and 2.2 percent, respectively,have telephones. In the eighth decile, 23.1 percent havetelephones; in the ninth, 30.9 percent; and in the tenth,52.1 percent.

As in other Central American countries, in Hon-duras telephone service is concentrated in urban areas,especially Tegucigalpa (see table 12.6). In 1998, tele-phone density in Tegucigalpa was 9.6 telephones per

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Table 12.4 Indicators of Access to Telecommunicationsin Honduras, 1995–99

Indicators 1995 1998 1999

Fixed telephones (thousands) 160.8 249.7 279.2Residential 70%Commercial 25%HONDUTEL 3%Government 2%

Mobile telephones (thousands) 0 34.9 78.6Fixed lines per 100 inhabitants 2.70 3.81 4.42Mobile density per 100 inhabitants 0 0.53 1.24Number on waiting list (thousands) 268.9 400.0 425.0Public telephones (per 1,000

population) 0.19 n.a. 0.26Public telephones (total, thousands) 1.19 n.a. 1.3n.a. Not available.Sources: Data on waiting list and public telephones: HONDUTEL; other data:ITU.

Table 12.5 Percentage of Households with a Telephone in the Home, 1998

Decile per capita incomea

1 2 3 4 5 6 7 8 9 10 Total

Percentage of households 0.1 0.7 1.6 2.2 7.4 9.6 13.4 23.1 30.9 52.1 14.1a. 1 = poorest; 10 = wealthiest.Source: ENIGH 1998–99, BCH, and the General Directorate of Statistics and Censuses (Dirección General de Estadísticas y Censos).

Table 12.6 Indicators of Metropolitan Concentration of Telephone Access, 1998


Line density per 100 inhabitantsNational 15.5 5.6 2.9 4.0 2.6Capital city 47.8 19.8 10.3 9.6 5.7Rest of the country 2.9 1.7 0.8 2.7 1.5

Percentage in principal cityOf total population 26.3 22.1 24.1 18.6 26.6Of principal lines 86.4 76.2 79.6 44.6 60.0

RatiosDensity of capital city per national density 3.1 3.5 3.6 2.4 2.2Participation of capital principal lines per

participation of capital in population 3.3 3.4 3.3 2.4 2.3Source: Author calculations from ITU data.

100 inhabitants, more than 2.4 times the national av-erage of 4.0, whereas the rest of the country had adensity of scarcely 2.7. However, the metropolitanconcentration of telephone service in Honduras is lessthan that of the other countries of the region, with theexception of Nicaragua.

Rural Coverage The rural areas, home to approximately 50 percent ofthe national population, report a very low level of ser-vice coverage. In 1996, the rural telephone density wasestimated at 0.55 (in that year the national average was2.7). According to HONDUTEL reports, more than100 of the 298 municipalities in Honduras still have notelecommunications service, and 50 have only telexand radio services.

The ALA-91/23 project, financed by the EuropeanUnion 10 years ago, established 2,000 public and com-munal telephones in 98 municipalities and villages inEl Paraíso, Choluteca, and the southern part of Fran-cisco Morazán. However, those services have had greatsustainability problems. Partly owing to restrictionsplaced on equipment purchases by HONDUTELsince 1995,HONDUTEL has not been able to acquirespare parts for the French equipment.As of 2001, only37 of the 98 municipalities still have functioning ser-vice. Tariff insufficiency is also a problem for publictelephones. On average, they generate US$16 incomeper month, compared with a cost of US$30 for theiroperation and maintenance.

The service build-out requirements in the CO-HONDETEL concession stipulated significant invest-ment oriented at improving coverage for rural areasand low-income communities.The number of publictelephones must reach 23,500 lines for 2005, at an es-timated cost of US$33 million, and telephones must beinstalled in 3,000 population centers with more than500 inhabitants, at a cost of US$15 million.

Since the failure of the bidding process, those re-quirements are being reconsidered. The present studyrecommends that extending access to communitieswithout service through public telephones and othermeans should remain a central goal of telecommuni-cations policy. However, it should be implementedthrough a fund for expansion of access to telecommu-nications services and not through the COHONDE-TEL concession.

It is noteworthy that HONDUTEL already has 35repeater stations nationwide, which makes it pos-sible to expand coverage at a much lower cost than inthe past. The ALA-91/23 project reported a cost ofUS$1,500 per line and US$30,000 per location. Incontrast, the cost of expansion to new population cen-ters is currently estimated at US$5,000 per location.Afund of US$15 million would be sufficient to serve3,000 locations. It would be very feasible to grant con-cessions to private companies for installing and operat-ing services in many places by taking advantage of theexisting repeaters.

Efficiency IndicatorsHONDUTEL’s long-lasting status as an unregulatedmonopoly not only has held back service coverage andaccess, but also has resulted in poor service for thosefortunate enough to get a line. Thirty-six percent oflines report service problems, compared with the inter-national parameter of 1 percent. Only 60 percent ofthese problems are resolved within the first 24 hours,compared with the international parameter of 75 per-cent. Although the expansion of lines carried out bySiemens and AT&T in the 1990s increased the net-work’s digitalization from 83 percent to 95 percent (seetable 12.7), data regarding the percentage of calls com-pleted are not promising.Only 67 percent of local calls,51 percent of national long-distance calls, and 52 per-cent of international calls are completed.5

HONDUTEL has moved slowly ahead in reducingoveremployment. The number of lines per employeerose from 34 to 66 from 1995 to 1999 (see table 12.7),but that increase was principally attributable to the ex-pansion of lines. Between 1995 and 2000, the numberof employees was reduced from 4,700 to approximately4,200. In the first quarter of 2001, another 635 em-ployees were dismissed. Subsequently, however, a groupof them were rehired because of a decision of the


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Table 12.7 Indicators of HONDUTEL Efficiency

Indicator 1995 1998 1999

Network digitalization (%) 83 93 95Number of employees

(thousands) 4.7 4.5 4.2Lines per employee 34 55 66Source: HONDUTEL and author calculations.

National Congress. It is noteworthy that, in terms oflabor productivity, HONDUTEL lags behind InstitutoCostarricense de Electricidad (ICE), the electricity andtelephone service in Costa Rica (179 lines per em-ployee), and Telecomunicaciones de Guatemala (TEL-GUA), the telephone service in Guatemala (147).

HONDUTEL Tariffs and the Rebalancing Program Table 12.8 details the tariff structure in effect in 1999and 2000 in Honduras and the restructured programproposed for implementation between 2001 and 2005under the COHONDETEL concession. The schemebasically proposes to raise the tariff for local calls tocompensate for the tariff reduction for internationaland national long-distance calls. For purposes of com-parison, the tariff in effect in El Salvador in 2000 is alsopresented.

The HONDUTEL tariff in effect in 2000 wasUS$2.05 per month, including 200 local minutes free,

with each subsequent minute having a marginal tariff of US$0.021. Because of HONDUTEL’s inefficiency,those charges do not cover the cost of providing service.

International and national long-distance calls, how-ever, have prices far above the cost of efficiently pro-viding the service. For example, in 1999, a call to theUnited States cost US$1.40 per minute, comparedwith US$0.60 in the opposite direction. As a result ofthis kind of distortion, 90 percent of international traf-fic originates in the United States, and in 1998, HON-DUTEL received US$60 million from U.S. phonecompanies to pay for those calls.

One important consequence of this tariff structurehas been the concentration of HONDUTEL’s incomein a limited number of subscribers (see table 12.9).Data from 1996 show that scarcely 1 percent of theusers (those with bills of more than US$85 per month)generated 23 percent of the company’s income,whereas 60 percent of subscribers (all those with bills

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Table 12.8 Tariff Rebalancing Program of 1999–2005 and Its Effect on the Consumer

Honduras 2005 compared with:

Honduras Honduras El SalvadorEl Salvador 1999 2000

1999–2000 2001 2005 2000 (%) (%)

Installation cost (US$)Residential 24.0 33 160 341 567 47Commercial 58.2 66 200 341 244 59

Monthly line rental (US$)Residential 2.05 2.66 8.00 6.28 290 127Commercial 5.48 6.66 8.00 12.75 46 63Local minutes included in rental 200 150 50 n.a. –75 n.a.US$ per local minutes 0.021 0.024 0.035 0.02 62 170US$ per 1 minute national long distance 0.12 0.11 0.06 0.03 –50 200

US$ per 1 minute internationalUnited States of America 1.40 1.19 0.50 0.80 –64 63Central America 0.40 0.40 0.31 0.40 –23 78

Total bill for residential users(US$ per month)

200 local minutes 2.1 3.9 13.1 10.3 639 127300 local minutes 4.2 6.3 16.5 12.3 398 134400 local minutes 6.3 8.7 19.9 14.3 318 139600 local minutes 10.5 13.5 26.7 18.3 256 146

Total bill for commercial users(US$ per month)

1,200 local minutes 26.5 31.9 47.1 36.8 178 128n.a. Not available.Source: Author calculations based on data provided by the Consultative Commission on Privatization.

of US$17 or less per month) generated less than 10percent of the company’s income.

The distorted tariff structure has been a principalcause of the low domestic penetration by HONDU-TEL. On the one hand, it permits the company toreceive a comfortable income at the cost of a smallproportion of the subscribers without worrying aboutserving other clients. On the other hand, the companyhas not had an incentive to expand coverage to users ofonly local calls, which should be the basic business oftelecommunications.

Even if it were desirable for the country to con-tinue with this traditional strategy, it is no longer aviable option.The growing competitiveness of the in-ternational long-distance market, including the use ofthe Internet to place calls, will make it progressivelymore difficult to generate significant income by over-charging in this market. In recognition of this fact, thetariff rebalancing program called for reducing chargesfor international calls by 64 percent and raising localcharges by 62 percent between 1999 and 2005. Addi-tionally, the monthly flat rate would be raised fromUS$2.05 per month (residential) and from US$5.48per month (commercial) to US$8.00 in both cases, andthe number of free local minutes would be reduced to50, compared with 200 in 1999.

As a result of those adjustments, it is projected thatfor 2005 the total bill for a client who consumes 200minutes in local calls would increase 639 percent inreal terms; for a user of 300 minutes, the increasewould be 398 percent; for a user of 400 minutes, 318percent; and for a user of 600 minutes, 256 percent.Acommercial subscriber with 1,200 local minutes wouldpay 178 percent more (see table 12.8).The first adjust-

ment was implemented in 2001, with a reduction ininternational charges that was compensated for by a re-duction in free local minutes included in the subscrip-tion fee and the new process of rounding off by second(instead of rounding off by minute).

However, even though it is clearly necessary to re-duce the price of international calls, raise the monthlyfee, and reduce the number of free minutes included, itis not obvious that the marginal cost of local calls re-quires the increase presented in table 12.8. The localtariff of US$0.034 per minute proposed in Honduras issignificantly higher than the US$0.02 that is in effect inEl Salvador’s already privatized market. For 2005, Hon-duran subscribers would be paying between 27 percentand 46 percent more in real terms than what was paidin El Salvador in 2000.Those data suggest that the tar-iff rebalancing program is relatively favorable to theoperator. It is important to stress that the reduction ininternational long-distance tariffs should be “financed”by improving efficiency (reduction of capture by em-ployees) and increasing long-distance traffic, rather thanby raising local tariffs above regional benchmarks.

It is noteworthy that the effect of the proposedrebalancing of the tariffs for subscribers with low con-sumption levels—most probably relatively poor house-holds—will be especially heavy. If those increases areseen as a consequence of privatization, which is proba-ble because of their timing, a negative reaction on thepart of the population can be anticipated. It is also im-portant to consider the possible effect of adjusting localtariffs on Internet service use.

In summary, it can be concluded that the Hondurangovernment faces a significant challenge in rebalancingtelecommunications tariffs.A rebalancing program notonly should be perceived as a way to guarantee incomefor the operating company, but also should be anintegral part of the government’s overall policy for uni-versal access to telecommunications services and devel-opment of information technology. Unfortunately, todate the government does not have a clear policy inthis respect.

Wireless ServicesHonduras was among the last countries in Latin Amer-ica to establish a cellular service.The concession of thefirst license was delayed by legal disputes.6 CELTEL fi-nally won the bidding process in 1994, paying US$5.1


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Table 12.9 Analysis of HONDUTEL Billing

Participation inBilling range (US$/month) Clients (%) total billing (%)

0–3.41 24.1 1.53.41–8.50 18.6 2.78.51–17.00 17.2 5.517.01–85.00 30.7 30.1> 85.01 1.0 22.8Other 8.7 37.3Source: HONDUTEL, data for 1996. Since there were no important changes inthe tariff structure until the beginning of 2001, the demand structure hasprobably not changed much.

million for a 10-year concession, with sole rights for 5years. It began operations in 1996. Subsequently,CONATEL Resolution AS 665-99 extended theterms of the concession until 2021. CELTEL paysCONATEL US$7.30 monthly for each of the first28,000 phones in service, more than 8 percent of itsgross income. Those payments amounted to close toUS$25 million until 2000.

CELTEL installed an AMPS system using Motorolaequipment and operating on the frequencies 825–835megahertz (transmission) and 870–880 megahertz (re-ception). In 2000, CELTEL initiated the installation ofa CDMA (code division multiple access) digital systemon top of the analog system. At the end of 2000, thesystem covered the cities of Tegucigalpa, San PedroSula, Puerto Cortés, La Lima, El Progreso, Choluteca,Comayagua, Siguatepeque, and La Ceiba, as well as theBay Islands. CELTEL had expansions under way to thenortheast of Tegucigalpa in the department of Olancho(already concluded) to Dulce Nombre de Culmí andon the Atlantic coast to the border with Guatemala.

In April 2001, after 5 years of operation, CELTELwas operating 172,000 lines, equal to 52 percent of thefixed telephones operating in the country.This expan-sion was carried out with tariffs 15 times higher thanthose of HONDUTEL.7 CELTEL’s tariffs are amongthe highest in the region, with a per minute cost ofUS$0.48 when consumption is 100 minutes (see table12.10).8

The delay of HONDUTEL’s sale has interruptedthe introduction of competition in the cellular market.Hoping to raise the value of COHONDETEL’s shares,the government included in its concession an authori-zation to operate wireless services in the PCS band and delayed the bidding process for a second cellularlicense (the so-called B band).

This delay is unfortunate because international ex-perience shows that in most countries competitionamong three providers causes a dramatic drop in tariffsand an increase in the proportion of traffic channeledthrough wireless technology. This study recommendsthat Honduras proceed as soon as possible to grant twomore concessions in mobile services to private opera-tors through public international bidding processes.

InternetAvailable data show that, compared with the CentralAmerican region, Honduras is lagging in terms of In-ternet use, a key area for economic development andcompetitiveness. In 1998, Honduras had approximatelyhalf the personal computers and Internet users per in-habitant of El Salvador and one-fifth those of CostaRica (see table 12.11). Although the absolute figurescited are out of date, it is probable that the relative po-sitions are the same.

One reason for the lagging performance of Hon-duras with respect to the Internet was the slow de-velopment of the ISP market, which HONDUTELdominated until 1998. Another factor is the low levelof access to the telephone lines that are necessary to usethe Internet. The difficulty of accessing the Internetbackbone has been the cause of delays. Access to thebackbone is a conditioned monopoly for HONDU-TEL. If HONDUTEL is unable to satisfy demand,CONATEL can authorize private companies to estab-lish their own channels. In March 2001, seven privatechannels were functioning.

Cable Television and Data NetworkingIn 1998, approximately 350,000 households in Hon-duras (32.1 percent) had televisions. In 2000, therewere 24 cable television operators with approximately

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Table 12.10 Cellular Rates in Central America, 2000

Per minute cost Per minuteMonthly fee Minutes for peak hours for nonpeak hours Cost of 100

Country (US$) included (US$) (US$) minutes (US$)

Costa Rica 13.2 60 0.12 0.07 18.0El Salvador 19.9 100 0.17 0.17 19.9Guatemala 30.8 100 0.22 0.11 30.8Honduras 20.0 0 0.28 0.28 48.0Nicaragua 25.0 35 0.35 0.35 47.7Source: Telecom Management Group,Washington D.C.

50,000 subscribers (ITU 2000). At the beginning ofthe 1990s, the cable market was affected by the imple-mentation of intellectual property rights laws, whichobliged the companies to pay for their programming.The end of impunity for pirating channels had theconsequence of raising prices and reducing the num-ber of available channels. However, the market ad-justed, and currently demand is increasing.Multivisión,the principal provider in Tegucigalpa, has installed fiberoptic cable in various parts of the city and offers pack-ages of cable television plus Internet access.

During the past year, the market for data network-ing and wide band has expanded notably. For manyyears, companies with the need to transfer informationin a secure form have had to opt for radio modems,typically with channels of 64 kilobytes, at high costswith mediocre service quality. However, during 2000,three companies (Metro Red, Americatel, and Multi-data, the latter a subsidy of Multivisión) establishedfiber optic networks of varying lengths in the country’sprincipal cities. The Newcom Company is offeringwireless data networking.Without doubt, the competi-tion among these companies will provide great benefitsto data networking clients in terms of improved ser-vice and reduced prices.

Government Policy and Sector Modernization Strategy Following the failure of the bidding process to capital-ize HONDUTEL in October 2000, the government’sstrategy for sector modernization is not clearly defined.The Flores administration decided not to repeat thebidding process, nor was it possible to carry out a bid-ding process for the B band and wireless services.

The new government elected in November 2001will have to reinitiate the modernization and liberaliza-tion process in the telecommunications sector. It is

necessary to redefine the country’s strategy in the sec-tor and move urgently to reestablish the momentum ofthe process by adopting clear and decisive policies.

This study recommends the following courses ofaction:• The organization of the sector needs to be re-

formed.The secretariat responsible for telecommu-nications policies should be defined, and it shouldnot be the Secretariat of Finance. Nor should pol-icy definition be a de facto function of the Con-sultative Commission on Privatization (an entityspecializing in the privatization of state enterprises)or CONATEL (a regulatory entity). One possibleoption would be to assign policy functions to SOP-TRAVI. Salaries should be high enough to recruitand retain executives of the level needed to success-fully carry out the work.

• CONATEL’s role in the policy field should be pro-viding support and information for making tele-communications policies and implementing them,but it should not be in charge of them. Mergingtelecommunications regulation into a multisectorregulatory agency, which would also cover energyand water and sanitation, should be considered.

• Because of the need to reduce political pressures on CONATEL, the commissioners should be ap-pointed for 5-year periods, with overlapping termsto ensure continuity. The only causes for removalshould be related to performance of duties.An auc-tion mechanism could be established with zeroregulatory discretion to reduce pressures linked toassigning broadcast frequencies.

• HONDUTEL should be privatized as soon aspossible by granting a concession to an enterprisewith a majority of private capital. The concessionshould not be exclusive. In other words, it should


128

Table 12.11 Use of Personal Computers and Internet Access, 1998

Personal computers ISPs Internet usersCountry (per 100 inhabitants) (per 100 inhabitants) (% of population)

Costa Rica 3.91 2.08 3.9El Salvador 1.66 0.16 0.7Guatemala 0.83 0.16 0.6Honduras 0.76 0.02 0.3Nicaragua 0.78 0.23 0.4Source: Telecom Management Group,Washington, D.C.

no longer offer the monopoly until 2005 proposedto COHONDETEL.

• The concession contract should emphasize perform-ance and service-quality norms in the establishedservice areas, including response times for installinglines, repairs, call completions, and similar needs,rather than defining goals in terms of rigid amountsof investment or number of lines to be installed.The increased coverage requirements in new areasshould be handled by an independent program (seebelow).

• CONATEL should reevaluate the program of rebal-ancing HONDUTEL tariffs to ensure that the tariffsfor national calls reflect the real costs of efficientlyproviding service.Those costs should not be inflatedfor the sole purpose of increasing the potential valueof the concession sale.Once set, the tariff adjustmentprogram should immediately be put into practice byHONDUTEL, without waiting for implementationof the concession to COHONDETEL.

• A reserve price should not be set for the bidding onthe concession because its main purpose should notbe generating resources for the Treasury.The objec-tive is to create a new framework for providingservices that will be favorable to users and furtherthe country’s competitiveness. After the content ofthe concession contract and the norms for regulat-ing tariffs have been determined, Honduras shouldassign the concession to the highest bidder.The fu-ture income for the Treasury will come from thedividends on the shares retained by the state.

• Before the bidding, public feedback on the conces-sion contract should be solicited by publishing it onthe Internet and in the national media and by re-questing the opinions of the public and potentialbidders before the bases for the bidding process arefinalized.

• HONDUTEL should immediately implement anaccelerated program of cost restructuring by reduc-ing extraneous staff without waiting for the conces-sion to be implemented. The government shouldauthorize the use of the enterprise’s financial sur-pluses to make the resulting severance payments.The existing confusion surrounding the liabilitiesof the retirement fund of the enterprise also needsto be resolved.

• The government should grant priority status touniversal access by establishing public services incommunities cut off from communication. Thestrategy for broadening coverage in rural areas thatcurrently have no service should be handled sepa-rately by the entity charged with sector policies,rather than forming an integral element of CO-HONDETEL’s concession. Initially, a minimum ofUS$15 million should be assigned to this fund fromthe resources of the HONDUTEL privatization.This amount would be sufficient to set up publictelephones in approximately 3,000 communities.Resources should be distributed through a compet-itive mechanism (based on favoring projects withthe lowest subsidy requirement) that is open to alltelecommunication service providers.

• Two additional concessions for mobile servicesshould be established in the short term throughpublic international bidding, so that competition isthe rule in this market.The bidding process for themobile services should be separated from the CO-HONDETEL concession. The COHONDETELinvestor should have the option of participating inthe bidding for mobile telephones, with the re-quirement that the enterprises be independent ofeach other and that access to switching be given toall the mobile operators under the same terms.CONATEL should define the fees for interconnec-tions between the mobile and fixed services as soonas possible.

• The framework law should be revised to establishmore flexible technical definitions, congruent witha simplified administration of the sector, in the con-text of rapidly changing technologies.The distinc-tion between switching and other services, in par-ticular, should be eliminated in favor of sole licensesfor offering telecommunications services.This strat-egy would be feasible if the idea of maintaining amonopoly on switching in favor of HONDUTELor its successor until 2005 were abandoned.

Opportunities and Priorities for PrivateInvestment in the Telecommunications Sector

The government has made the strategic decision thatthe telecommunications sector should be developed by

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129

private companies, using private capital. As a conse-quence, the telecommunications sector in Hondurasoffers many opportunities for both national and for-eign investors.

The first of those opportunities will be the sale of amajority share in COHONDETEL, a process that willprobably be resumed in 2002.Also expected in 2002 isa bidding process for the second mobile concession.The government will probably revise the frameworklaw of 1995 to immediately liberalize the sector, per-mitting private companies to compete directly withHONDUTEL or its successor.

Apart from telephony, the other segments of thetelecommunications market—cable television, Inter-net, data networking—are already open for participa-tion of private companies, and significant investment

activity exists in the development of new services withthe participation of both national and internationalactors. Even though some aspects of HONDUTEL’smonopoly still limit the development of those services,the recent trend has been for CONATEL to licenseprivate operators to carry out any activity for whichHONDUTEL is not able to provide a service, apartfrom switching telephony, which is still a legal monop-oly of HONDUTEL.

Given the telecommunications industry’s nature, itis not possible to quantify the necessary or possible in-vestment in the same way as was done for the electric-ity sector. Many of these services are new, the demandis not well known, and the decision of the state hasbeen to let the market determine the quantity of in-vestments and service to be provided.


130

Notes

1. It is appropriate that the Secretariat of Fi-nance represent the Honduran state on theHONDUTEL board of directors, where itwatches out for the interest of the state as aninvestor.However, this is quite different fromassuming the sector-policy function.2. This date is now unmovable because theFree Trade Agreement signed with Mexicoin February 2001 commits Honduras to lib-eralize the phone market in 2005.3. In 1993, HONDUTEL held a biddingprocess to double the number of phone linesby constructing 110,000 new lines. The fi-nancing had to be provided by the bidders inthe form of a loan to HONDUTEL thatwould be guaranteed by the government.Controversy surrounded the bidding process.Initially, the contract was granted to theGerman enterprise Siemens. However, theother bidder,AT&T, accused HONDUTELof favoring Siemens, implying corruption.Eventually, after an energetic intervention bythe U.S. embassy, an agreement was madewhere both companies were granted con-tracts to build 110,000 lines each, thus dou-bling the planned expansion.

4. To apply for a line, one need not makeany payment to HONDUTEL, and the in-stallation price is well below cost.As a result,it is possible that some of these applicationsdo not represent real requests. Some applica-tions are doubtless filed with the expectationof reselling them in the secondary market,where they cost 10 times HONDUTEL’sprice. However, no doubt exists that Hon-duras has a large unsatisfied demand forphone lines.5. Note that the cited figures are for com-pleting calls from person to person and arenot comparable with international figuresfor completing calls only as far as the switch-board.6. In 1993, the government held a biddingprocess for a 10-year exclusive cellular con-cession.Pan-American Cellular Systems beatMotorola and Chile’s telephone company.However, the decision was challenged andthe bidding process stopped.The process wasresumed with the participation of Motor-ola, AT&T, Hughes Network Systems, andWorldwide Cellular Telecommunications. In1994, CELTEL—a property of Motorola,

Millicom International Cellular (Luxem-bourg/U.S.), and Proempres, S.A.—won theconcession. However, there were some de-lays in the license extension, and CELTELcould not start operations until October1996.7. HONDUTEL’s marginal local tariff in2000 was US$0.021, and the cellular tariffwas US$0.3 per minute. However, the localtariff also included 200 free local minutes inthe monthly rent.8. The cited data are based on CELTEL’sIdeal Plan, the plan with the lowest marginalcost in 2000. However, in 2001 CELTELstarted a small tariff reduction. In September2001, based on the Anniversary or Millen-nium Plan that costs US$9 per month plusUS$0.28 per consumed minute, CELTELoffered the possibility of using 100 minutesfor US$37. Note that these comparisons aresensitive to the consumption level analyzed.According to CONATEL, when the com-parison is made for a consumption level of20 minutes, Honduras has the lowest pricefor service in the region.

131

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Besant-Jones, J., and B. Tenembaum. 2001.The California Experience with Power SectorReform: Lessons for Developing Countries.Washington, D.C.: Energy and MiningSector Board. March.

Banco Central de Honduras (BCH).Variousyears. Anuario Estadístico.Tegucigalpa.

Banco Internacional Desarrollo (IDB). 2000.Perfil II de Programa de Desarrollo de Cuen-cas Prioritarias en Honduras. Washington,D.C.

Banco Mundial. 2000a. Informe de DesarrolloMundial 2000.Washington, D.C.

———. 2000b. Mitigación de Desastres Natu-rales en Honduras. Project Appraisal Docu-ment: Report 20386 HO. Washington,D.C. May.

Comisión Económica para América Latina(CEPAL). 1999. Estudio de evaluación dedaños de Mitch. Mexico City.

Empresa de Mantenimiento, Construcción yElectricidad, S.A. (EMCE). 1994. Con-trato Plan.Tegucigalpa.

ESA Consultores. 1995. La relación entre ingre-sos y consumo de energía eléctrica en Honduras,1992–95. Prepared for Consejo Hon-dureño de la Empresa Privada (COHEP).Tegucigalpa.

———. 1999. “Ex Post Evaluation of FHIS2.” Prepared for the World Bank.Teguci-galpa. Processed.

———. 2000a. Agenda Hondureña para el De-sarrollo Sostenible y la Competividad en elSiglo XXI. Tegucigalpa.

———. 2000b. “Plan de Negocios para laEMPAGUA.” 2000. Prepared for theBID.Tegucigalpa. June. Processed.

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———. 2000a.“Documento de Avances delPMRTN.” Prepared for the meeting ofthe Grupo Consultivo para CA. Teguci-galpa. February.

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Appendixes

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World Bank Document€¦ · 12.1 Telecommunications Operators Supervised by CONATEL, 1996 and 2000 119 12.2 Private Investment in Public Telecommunications Services, 2000 122 12.3