World Bank Document · Document of The World Bank Report No: 20515-HO PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 14.4 MILLION (US$19.0 MILLION EQUIVALENT)

Document of

The World Bank

Report No: 20515-HO

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 14.4 MILLION(US$19.0 MILLION EQUIVALENT)

TO THE

REPUBLIC OF HONDURAS

FOR AN

ECONOMIC & FINANCIAL MANAGEMENT PROJECT

August 15, 2000

Poverty Reduction and Economic Management UnitCentral America Country Management UnitLatin America and Caribbean Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective June 5, 2000)

Currency Unit = Lempira (L)LI = US$ 0.07

US$ 1 = L14.74

FISCAL YEARJanuary 1 December 31

ABBREVIATIONS AND ACRONYMS

ANACI Civil Aviation Authority PRSP Poverty Reduction Strategy PaperCAS Country Assistance Strategy PSMSAC Public Sector Modernization Structural Adjustment

CreditCCP Consultative Commission for Privatization PSMTAC Public Sector Modernization Technical Assistance

CreditCGR Office of the Comptroller General of the Republic PSMP Public Sector Modernization ProgramCNE National Energy Commission SAI Supreme Audit InstitutionCOHDETEL Honduran Telecommunications Company SCL Superintendency of Concessions and LicensesCONATEL National Telecornmunications Commission SDR Special Drawing RightsCPME Presidential Commission for the Modernization of the SEFIN Secretariat of Finance

StateDGSC Central Civil Service Office SEP Secretariat of Public EducationENEE National Electricity Enterprise SERNA Secretariat of Natural Resources and the EnvironmentGA Administrative Management Unit (Line Secretariats) SETCO Technical Secretariat for International CooperationGOH Government of Honduras SIAFI Integrated Financial Management SystemGPAL General Public Administration Law SIARH Comprehensive Human Resources Management

SystemHONDUTEL Honduran Telecommunications Enterprise SIDA Swedish International Development AgencyICAO International Civil Aviation Organization SINEG National Information System for Evaluating PMRTNIDA International Development Association SOPTRAVI Secretariat of Public Works, Transport and HousingIDB Inter-American Development Bank SPR Secretariat of the PresidencyIFC International Finance Corporation SSP Secretariat of Public HealthJNBS National Board for Social Welfare UNAT Technical Assistance Unit (Secretariat of the

Presidency)PCU Project Coordinating Unit (Executive Secretariat of UNDP United Nations Development Programme

CPME)PEU Performance Evaluation Unit (Secretariat of the UPEG Planning and Evaluation Unit (Line Secretariats)

Presidency)PMRTN Master Plan for National Reconstruction and USAID United States Agency for International Development

Transformation

Vice President: David de FerrantiCountry Manager/Director: Donna Dowsett-Coirolo

Sector Manager/Director: Ernesto MayTask Team Leader/Task Manager: Antonio Martin del Campo

HONDURASECONOMIC & FINANCIAL MANAGEMENT PROJECT

CONTENTS

A. Project Development Objective Page

1. Project development objective 22. Key performance indicators 2

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 22. Main sector issues and Government strategy 23. Sector issues to be addressed by the project and strategic choices 5

C. Project Description Summary

1. Project components 82. Key policy and institutional reforms supported by the project 133. Benefits and target population 144. Institutional and implementation arrangements 14

D. Project Rationale

1. Project alternatives considered and reasons for rejection 152. Major related projects financed by the Bank and other development agencies 163. Lessons learned and reflected in proposed project design 174. Indications of borrower commitment and ownership 175. Value added of Bank support in this project 17

E. Summary Project Analysis

1. Economic 182. Financial 183. Technical 194. Institutional 195. Social 196. Environmental 207. Participatory Approach 20

F. Sustainability and Risks

1. Sustainability 202. Critical risks 203. Possible controversial aspects 22

G. Main Conditions

1. Effectiveness Condition 222. Other 22

H. Readiness for Implementation 22

1. Compliance with Bank Policies 23

Annexes

Annex 1: Project Design Summary 24Annex 2: Project Description 31Annex 3: Estimated Project Costs 41Annex 4: Summary of Benefits 42Annex 5: Financial Summary 43Annex 6: Procurement and Disbursement Arrangements 44Annex 7: Project Processing Schedule 52Annex 8: Documents in the Project File 53Annex 9: Statement of Loans and Credits 54Annex 10: Country at a Glance 56

HONDURAS

ECONOMIC & FINANCIAL MANAGEMENT PROJECT

Project Appraisal Document

Latin America and Caribbean RegionLCSPS

Date: August 15, 2000 Team Leader: A. C. Martin Del CampoCountry Manager/Director: Donna Dowsett-Coirolo Sector Manager/Director: Emesto MayProject ID: P060785 Sector(s): BF - Public Financial Management, BR - Public

Enterprise Reform, BY - Other Public Sector ManagementLending Instrument: Technical Assistance Loan (TAL) Theme(s): Public Sector; Private Sector

Poverty Targeted Intervention: N

Project Financing DataD Loan 1 Credit El Grant C Guarantee LI Other (Specify)For Loans/Credits/Others:Amount (US$m): SDR 14.4 (US$ 19.0 million equivalent)

Proposed Terms: Standard Credit

Grace period (years): 10 Years to maturity: 40Commitment fee: 0.50% Service charge: 0.75%

Financing Plan: Source Local Foreign TotalGOVERNMENT 4.00 0.00 4.00IDA 2.00 17.00 19.00

Total: 6.00 17.00 23.00

Borrower: REPUBLIC OF HONDURASResponsible agency: EXECUTIVE SECRETARIAT OF THE CPMEExecutive Secretariat of the Presidential Commission for the Modernization of the State (CPME)Address: Edificio Ejecutivo Las Lomas, 4 piso, Blvd. Juan Pablo II, Frente Casa Presidencial, Colonia Lomas Mallab,Tegucigalpa, HondurasContact Person: Lic. Gustavo A. Alfaro, Minister - Secretariat of the PresidencyTel: (504) 235-9369-71 Fax: (504) 235-9368 Email: [email protected]

Other Agency(ies):Secretariat of Finance (SEFIN)

Contact Person: Lic. Gabriela Nufiez de Reyes, Minister - Secretariat of FinanceTel: (504) 222-1211 Fax: (504) 238-2309 Email:Office of the Comptroller General of the Republic (CGR)

Contact Person: Lic. Vera Sofia Rubi Avila, Comptroller General - CGRTel: (504) 234-4182 Fax: (504) 233-5555 Email:Estimated disbursements ( Bank FYIUS$M):

FY 2001 2002 2003 2004 2005Annual 3.2 7.0 6.0 2.5 0.3

Cumulative 3.2 10.2 16.2 18.7 19.0

Project implementation period: Four yearsExpected effectiveness date: 11/30/2000 Expected closing date: 08/31/2004

OCS PAD F-T . M-h. N2

A. Project Development Objective

1. Project development objective: (see Annex 1)

The proposed project would support Government efforts to improve transparency and accountability in theuse and allocation of public resources; develop a budgetary planning and evaluation capacity in keygovernment agencies; promote institutional restructuring within the telecommunications, ports and postalservices sectors; and strengthen the technical capacity of the regulatory entities. The result would besignificantly improved planning, use and control of financial, physical and human resources; moreallocation of resources to priority programs; and a better institutional framework to facilitate the delivery ofpublic services.

2. Key performance indicators: (see Annex l)

Progress towards achieving the development objective will be assessed against the following keyperformance indicators: increased transparency and accountability in the use of public resources; standardsand procedures for new types of audits in the new CGR legislation implemented; rationalization of publicsector employment, improved control of human resources, and application of modem human resourcepolicies; improved sectoral programming and priority setting of public expenditures; increased efficiencyand transparency in the procurement of goods and services by the public sector; and improved quality,coverage and increased efficiency in the delivery of public services.

B. Strategic Context1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1)Document number: 19893 HO Date of latest CAS discussion: 12/14/99

The Honduras CAS was discussed by the Board on December 14, 1999. The overriding priority of theCAS is the development and implementation of a comprehensive poverty reduction strategy. The strategysupports faster growth, as an essential complement to poverty reduction, through infrastructurerehabilitation, strengthening the financial system, and private sector development. It also seeks to ensurethat progress can be sustained, through macroeconomic stability, public sector modernization, improvedgovernance, and stronger environmental management and disaster preparedness. The project primarilysupports the goals of public sector modernization and improved governance. To this end, the projectwould complete implementation of the administrative reform component of the Government's PSMP;strengthen economic and financial management capabilities in SEFIN and key line secretariats; integratehuman resource policies and systems; develop planning, monitoring and evaluation capacity; supportdevelopment of a national standardized procurement system; strengthen the institutional capacity of theOffice of the Comptroller General of the Republic (CGR); and provide a modem regulatory framework forthe provision of public services. The project also would contribute to the private sector developmentobjective by strengthening regulatory entities that would increase investor confidence to participate in thedelivery of public services. In addition, strengthening institutional capacity and modernizing the publicsector will be key to the attainment of interrelated CAS goals, including: maintaining fiscal discipline,effectively implementing the Government's post-Mitch reconstruction program, deepening the structuralreform agenda, and implementing an outcome-based and participatory poverty reduction strategy.

2. Main sector issues and Government strategy:

The main issues which have affected the performance of the Honduran public sector have included: anover-extension of the State apparatus in both the central and decentralized administrations; weak sectormanagement and coordination; multiple and sometimes contradictory lines of authority and responsibility

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over the decentralized administration; poor deployment of and over-dimensioned human resourcecomplements; low wages and high compression of the salary scale; and misapplied public sector humanresource policies.

To address these issues, in 1995 the Government initiated a Public Sector Modernization Program (PSMP)supported by IDA and other donors. The Government's strategy concentrated on three main areas: (i)reform of public service sectors--i.e., by establishing a modern regulatory (legal-institutional) framework topromote de-monopolization and market development based on the introduction of sound pricing policiesand the promotion of private sector participation in the provision of these services; (ii) publicadministration reform through institutional restructuring of secretariats, accompanied by employmentrationalization; and (iii) reform and modernization of the key public management systems.

The PSMSAC and PSMTAC projects (Credits 2816-HO and 2814-HO, respectively) helped to implementthe first phase of the PSMP. Advances to date in the areas of privatization, governmental restructuring,employment and salary regime rationalization, and the implementation of the first phase of an integratedfinancial management system for the public sector, are summarized below.

Private Sector Participation in the Provision of Public Services

The Consultative Commission for Privatization (CCP) was created by the Government in 1995, within theframework of the PSMP, to spearhead privatization of selected public enterprises. This Commission,headed by SEFIN and integrated by several secretariats, has an implementation unit consisting of theexecutive secretary and a small staff responsible for carrying out the privatization processes of the civilaviation, telecommunications, and electricity sectors. To date, the CCP has obtained the approval ofseveral enabling Laws and Regulations in the above mentioned sectors, and (i) has completed theconcession of the four major airports; (ii) is nearing the final stage of the privatization of HONDUTEL;and (iii) has prepared a new legal framework for the electricity sector which would, inter alia, permitprivatization of electricity distribution.

Civil Aviation. The Government strategy for civil aviation, approved in December 1998, calls for openingthe sector to competition and strengthening the regulatory framework. With the passage of the Law for theProvision and Management of Public Services (Concessioning Law) in October 1998, the legal basis forconcessioning was set up, and a regulatory agency under the authority of the CGR, the Superintendency ofConcessions and Licenses (SCL), was established, with its Superintendent appointed by Congress. Amaster concession for the four international airports was awarded in March 2000 and approved byCongress in April 2000. On March 15, Congress approved an Open Skies Law that fully achieved the firstobjective of opening the sector to competition. A new Civil Aviation Law is presently being debated inCongress. It would create the Civil Aviation Authority (ANACI) as an independent entity in charge of thetechnical regulation of the sector. Such regulatory agency should be considered as a part of an integraltransport sector regulatory agency. ANACI would oversee safety and security, by ensuring compliancewith the International Civil Aviation Organization (ICAO) standards and recommended practices.

Telecommunications. In 1995, the General Telecommunications Law redistributed state responsibilities inthe sector, mandated private sector participation in the provision of public services, and created theNational Telecommunications Commission (CONATEL) as the regulatory agency for the sector.

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Congress approved the Regulations for the Telecommunications Law in May 1997 and the capitalization ofHONDUTEL in October 1998. The provisions of the capitalization HONDUTEL were modified to grantthe Executive the authority to sell 51 percent of the new company to a strategic investor via internationalcompetitive bidding without seeking prior Congressional approval. The privatization process is now quiteadvanced, and a contract is expected to be awarded by September 2000.

Electricity. Government plans include the privatization of the regional electricity distribution companies.A Framework Law was approved in 1994 that mandates privatization of the distribution companies andestablishes the basis for tariff adjustment. A new, single regulatory entity for the sector was established in1998.

Two studies to determine the geographical regionalization of electricity distribution were completed in 1997and a privatization strategy for distribution companies approved in July 1998. In December 1998, theGovernment decided to negotiate a contract with the IFC to serve as the investment bank for theprivatization of the National Electricity Company's (ENEE) distribution system.

The initial strategy foresaw the privatization of ENEE's distribution system, while electricity generationand transmission would remain under the domain of this state-owned company. During the first semesterof 1999 the Government decided not only to pursue the reforms in the existing Electricity Law, but to adopta more comprehensive sector reform strategy that requires a new legal framework. Under this new strategy,the Government will seek to: (i) privatize electricity distribution; (ii) open electricity generation tocompetition; (iii) allow the respective generators open access to transmission lines; and (iv) establish anindependent entity to serve as the clearing house/dispatch center between the generating and distributioncompanies. Currently, the Government is trying to seek consensus on how to proceed with sectorlegislation.

Negotiations with IFC have been on hold pending pasage of the draft law that is now in Congress. On thepositive side, this process has taken longer than expected since a substantially broader and deeper reformthan initially envisioned could be implemented if the law is approved. Privatization of the distributioncompanies could take place in 2001, if the law is passed.

Public Administrative Reform

Institutional Restructuring. In December 1996, Congress approved reforms to the General PublicAdministration Law (GPAL), which had the effect of encouraging public sector entities to carry out actionplans to improve their performance. Most notable were the restructuring and decentralization effortsundertaken by the Secretariats of Education and Health. The education sector is in the process ofincreasing the management, technical, and supervisory roles of its 18 departmental offices and hasallocated 68.2 percent of its 2000 budget to basic education compared to about 52 percent in 1996. Thehealth sector is transferring budget management and procurement to the Departments/Regions and ismoving the system towards more emphasis on prevention and primary care.

Other restructuring includes: the outreach to private sector and civil society participation in the case of theNational Board for Social Welfare--JNBS (which transferred 80 percent of its operations to religious andcivic organizations); the Secretariat of Agriculture (which transferred agricultural extension and all of itsresearch to the private sector); SOPTRAVI (which subcontracts all road and airport maintenance andconstruction services); and the institutional and functional streamlining of planning, economics, andfinance; the latter resulted in the elimination of SECPLAN (national planning secretariat) and the transfer

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of policy formulation, technical cooperation and investment policies to the Presidency, as well as theconsolidation of financial management and investment programming in SEFIN.

Human Resource Management. Since launching its PSMP, the Govermment has tackled issues ofoverstaffing (particularly lower level staff); compressed salaries that reduced the salaries of technical andprofessional staff relative to lower level staff; overbureaucratization and politicization of human resourcemanagement; low staff morale; poor performance; and high absenteeism. Since 1994 the reduction in thenumber of staff positions in the central government and decentralized institutions (excluding teachers,medical doctors and paramedics, civil police and defense) totaled 18 percent, thus surpassing the 10 percenttarget under the PSMSAC. On the other hand, the number of special employment and salary regimes hasincreased--e.g., dentists and professional nurses each have their own regime; and the assistant nurses, whoare under the civil service regime, are lobbying for another. The danger is that preferential salary treatmentmay become the norm. The Government is committed to continue to rationalize employment as a way toreduce the size of the central government wage bill; however, it is now faced with the challenge of how tobring consistency in the way human resources are managed in the wake of pressure from special interestgroups within the public sector.

Reform and Modernization of Key Public Management Systems

Integrated Financial Management and Investment Programming. SEFIN is completing the installationof basic modules of the integrated financial management system (SIAFI) in budget, treasury, accountingand public credit. To test the system, a prototype for SIAFI's information systems was used in theexecution of the 1999 budget and continues to be used for the preparation/execution of the 2000 budget.Full implementation of the related computer systems in the Central Government began with a pilot thatincorporated selected secretariats. Now, after this pilot phase, the basic modules and related computersystems are being installed throughout the Central Government. This process will be completed byend-2000. Additionally, efforts are underway to integrate the human resource management and payrollsystems into the SIAFI. Finally, an Integrated Financial Management System Law (the Ley SIAFI) isexpected to be submitted to Congress by December 2000 to facilitate the decentralization of financialmanagement activities throughout the centralized and decentralized institutions.

3. Sector issues to be addressed by the project and strategic choices:

The proposed operation would continue the process of administrative and public management reform;integrated financial management; and institutional restructuring in the provision of public services, asreflected in the Government's PSMP. In addition, in the aftermath of Hurricane Mitch, the Governmentprepared a Master Plan for National Reconstruction and Transformation (PMRTN). The plan wasformally presented to the international donor community during the May 1999 Consultative Group (CG)meeting in Stockholm. It underscores the importance of ensuring that the practice of public administrationincorporates the principles of efficiency, transparency and accountability. Improved governance andtransparency are key priorities in the Government's development agenda. In this context, the proposedproject would also address issues concerning: (i) the lack of transparency in public auditing and contractingprocedures, and (ii) the lack of efficiency and accountability, as reflected in inadequate budgetaryprogramming, monitoring and evaluation.

Issues: Modernizing the State

Administrative, public management and systems reform. Although there has been progress under thePSMP, individual public sector institutions are still quite weak, and much remains to be done in the areas

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of intersecretarial coordination and systems integration. With respect to integrated financial management,while the SIAFI system is now being installed, its full implementation will require further development ofits main tools and computer systems and the restructuring of SEFIN.

Following are the main issues with the SIAFI system that will be addressed by the proposed project: (i)while the software already developed provides an adequate response to budget formulation and execution,the accounting and treasury subsystems need to be strengthened and broadened; (ii) further development ofthe software is also necessary to permit administrative decentralization of public finance management tothe level of the expenditure executing units; (iii) the national counterpart groups in the government agenciesneed to be strengthened to ensure the sustainability of developments made to date by SIAFI; (iv) it is highlyadvisable to analyze the possible incorporation of a medium-term expenditure framework; and (v) theinformation technology tools need to be further developed to efficiently link all fundamental subsystems ofSIAFI and create the basis for a unified registry of accounts. Likewise, implementation of SIAFI requiresfurther restructuring of SEFIN. In particular, the role of the offices of budget, treasury, public credit andaccounting within SEFIN must be reformed and strengthened to adapt to the new approach andrequirements of modem public finance management.

In terms of improving human resource management for the civil service, although a comprehensive systemhas been designed and the implementation phase has begun in the areas of classification of posts andremuneration system, the implementation of this reform constitutes a major challenge for the Government.It will require strong coordination among SEFIN, DGSC and the line secretariats to create a new culturefor human resource management based on merit and performance, and to make control of human resourceseffective. With respect to systems, the Government has advanced in improving information mechanisms forhuman resource management and control. However, it has yet to implement an integrated informationaltool to support this reform.

Public enterprise reform. In general, the major issues in this area concern the lack of qualified personnel,inadequate training and weak regulatory frameworks. More specifically, continued implementation of thereform agenda by the CCP will require strengthening its capacity to coordinate restructuring efforts.Examples of issues in the sectors of telecommunications, civil aviation and energy include:

* CONATEL has the authority to collect fees from operators. However, because it falls under SEFIN, itsbudget is subject to SEFIN's approval. CONATEL currently has few professional employees and thusneeds to recruit and train new staff; it also needs to purchase systems to manage the radio frequencyspectrum.

* Given that the newly-established SCL is a young agency with a small professional staff, it is essentialto strengthen its technical capacity to confront the challenges of enforcing the new civil aviation law(once approved), fostering competition, and overseeing the compliance of concessionaires withcontractual agreements.

* There is a need to improve the autonomy of the regulatory entity for the energy sector by financing thecontracting of capable staff and providing technical assistance geared to ensuring its ability to fulfillits functions.

Issues: Governance and Transparency

The restructuring of the Government under the PSMP eliminated SECPLAN and transferred policyformulation, technical cooperation and investment policies to the Presidency. It also consolidated financial

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management and investment programming in SEFIN. As described above, there has been progress in thedevelopment of an integrated financial management system (SIAFI), the centerpiece of the Government'sbudget program, and the institutionalization of the public investment system (SISPU). The transfer ofpolicy issues to the Presidency has proven more difficult because of the inherent complexities, number ofinstitutions involved, as well as generally weak public sector management.

With the restructuring, it was expected that the line secretariats would assume responsibility for planningand evaluation of their respective programs through their Planning and Evaluation Units (UPEGs); and thatthe secretariats, including the UPEGs, would be strengthened through projects financed by bilateral andmultilateral agencies. However, although the donor-financed projects invariably include institutionaldevelopment components, they have not focused adequately on planning and evaluation at the secretariatlevel. Also, a number of projects financed by the donor agencies are not incorporated into the budgetplanning of the line secretariats. As a result, the UPEGs require strengthening in the areas for which theyare responsible, namely, planning, preparation and evaluation of investment projects and operationalprograms, and formulation of policies.

One consequence of the dialogue with the international community, and in consonance with the basicprinciples agreed at the CG Meeting in Stockholm, is the recognition of the need for the Government toimprove the effectiveness and efficiency of resource allocation; develop a results-based approach to linemanagement and service delivery; and foster accountability through better management and screening ofpublic expenditures. Specific issues relate to the use of goal setting, analytical techniques in budget andadministrative decision-making, and statistical and accounting information systems, and the need forfeedback from civil society in assessing public sector performance--e.g., adequacy of delivery of essentialservices.

Another issue pertains to the Comptroller General's Office (CGR), which is responsible for establishingauditing standards and procedures. The CGR is unable to meet increased demands resulting from thereconstruction efforts. In light of the increased investment and external assistance introduced in theaftermath of Hurricane Mitch, the Government has decided to establish a transitional Inspectoria deProyectos via contracting of a consulting firm, whose fundamental purpose will be to: (i) serve as aninternal monitoring and control mechanism to ensure efficiency and transparency in public procurement;(ii) promote the appropriate use of resources allocated to public investment; and (iii) monitor the quality ofinvestment projects. Financing for the Inspectoria will be provided by the Inter-American DevelopmentBank (IDB). In addition to this work in the area of public contracting, there is a need to continue workingwith the CGR to modernize auditing standards and procedures and provide training and computerequipment necessary to upgrade personnel skills and systems.

Finally, institutional capacity in procurement is generally weak throughout the public sector. The StateContracting Law lacks its corresponding regulations, thus promoting conflicting interpretations. Nouniform organizational mechanisms and systems are in place to facilitate procurement transactions, andthere are no standardized or computerized procedures. There is insufficient training of personnelresponsible for carrying out public purchases and contracting.

Strategic choices

A strategic choice was made to group support for a range of public sector modernization efforts under oneproject rather than through a series of operations. This is based partly on the fact that a number of thereforms are interrelated and complementary, and also on the positive experience of the predecessorPSMTAC. The proposed credit would therefore continue to strengthen the capacity of the Government to

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deal with the areas of public sector modernization by fully developing and implementing the new financialmanagement system, including its integration with other management systems and smoothing thecoordination between SEFIN and sector secretariats; strengthening human resource policies andinformation systems, including linking of its management data base to the integrated financial managementsystem in SEFIN; and strengthening the restructuring of public enterprises initiated under thePSMSAC/PSMTAC. It would also support Government efforts to improve efficiency, transparency andaccountability by strengthening the capacity for planning, monitoring, and evaluation in SEFIN and in theline secretariats; improving public procurement policy and procedures; and strengthening the CGR throughrestructuring and related capacity-building.

C. Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed costbreakdown):

Project Component 1 - Public Finance Management and Internal Control.

The proposed credit includes completing the organization improvement in SEFIN and subsequently in theline Secretariats to support the full implementation of SIAFI. The envisaged integrated financialmanagement system is designed and developed to operate in an integrated fashion in the areas of budget,treasury, accounting, and public credit. SIAFI would have the following characteristics. There would bean automatic simultaneous registering of each transaction in the budget current account, accounts payable,and in the national accounts. It would operate in SEFIN and in the other secretariats, semi-autonomousinstitutions, and autonomous institutions to create a systems environment, wherein all governmentinstitutions involved in budget finance and execution would be able to carry out their activities undercentralized norms but decentralized operations, with the aim of promoting efficiency and transparency inthe use of public resources.

The Presidential Commission for Modernization of the State (CPME) would manage implementation of thiscomponent in collaboration with SEFIN, and the objective is to have SEFIN fully in charge of SIAFI by theend of the project period. The project would finance technical assistance, training and equipment(computer hardware and software) to support two subcomponents:

1) Institutional Strengthening of SEFIN to implement the integrated financial management system(SIAFI) in the areas of budget, treasury, accounting, and public credit, which would include:

(a) design of a legal framework, including the issuance of appropriate regulations, to govern theoperation of SIAFI within the public sector;

(b) completion of the organizational restructuring of SEFIN initiated under the PSMP;

(c) improvement of SEFIN's technical capacity to formulate, coordinate, execute and evaluate policiesconcerning public finances and the Government's budget; and accordingly, establishment of a basis forsetting priorities for public expenditures, giving special emphasis to gender and poverty reduction;

(d) preparation and distribution of internal manuals within SEFIN, said manuals to include, inter alia,norms and procedures for carrying out SEFIN's functions and responsibilities;

(e) design and implementation of an internal performance benchmarking system that will enable

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SEFIN to, inter alia, measure operational efficiency and customer satisfaction and improve servicequality standards;

(f) design and implementation of a training program for SEFIN's technical and professional personnel;

(g) carrying out of a communications program to inform SEFIN's staff and the public regarding thebenefits of SIAFI; and

(h) improvement of the capacity of SEFIN's UPEG to design and analyze policies and programsrelated to public investment and budgeting.

2) Strategic implementation of SIAFI, which would include:

(a) completion of the design of SIAFI's management tools, including: the adaptation of the accountingsub-system to enable incorporation of information concerning the Government's net worth accounts andthe management of non-financial assets; the design of a sub-system to reconcile bank accounts in whichpublic funds are deposited; the design of a detailed plan of accounts to permit administrativedecentralization of budget execution; the design of treasury subsystem; and the integration of SIAFI'saccounting, budget, debt management and treasury subsystems.

(b) implementation of SIAFI, including all its subsystems, in all secretariats, participatingsemi-autonomous institutions and participating autonomous institutions; and

(c) design and implementation of a training program with respect to the implementation and use ofSIAFI within the secretariats, participating semiautonomous institutions and participating autonomousinstitutions.

Project Component 2 - Reorganization of the Comptroller General's Office (CGR)

This component builds on two developments: (a) the experience of the World Banks region-wide initiativeto support the strengthening and modernization of the supreme audit institutions (SAI) of membercountries as part of an overall strategy to promote transparency and accountability in the public sector andGovernment affairs; and (b) the technical assistance to CGR provided by USAID in Honduras and ElSalvador, the European Union, and the Government of Spain. The CGR would be the executing agency forthis component, which comprises four subcomponents:

1) Institutional strengthening of CGR, to carry out the administrative and technical reorganization ofCGR, including preparation of audit standards and procedures.

2) Promotion of the social comptrollership by carrying out a program to promote the participation of civilsociety in the external control process carried out by CGR.

3) Design and implementation of a comprehensive training program for CGR's staff in public financialmanagement, internal and external control, and auditing and evaluation of entities which manage publicresources.

4) Establishment of an information network within Sk4FI to enable CGR to obtain information concerningthe accounting practices, financial transactions and reporting requirements of the secretariats,semi-autonomous institutions and autonomous institutions.

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Project Component 3 - Human Resource Management

This component would support the Government's program to improve the development of human resourcemanagement policies and systems through the provision of technical assistance and training. The CPME,in collaboration with the Secretariat of the Presidency (SPR) and Central Civil Service Office (DGSC),would manage implementation of this component, which consists of two subcomponents:

1) Establishment of a modern human resource management policy which would include:

(a) further rationalization of public employment within secretariats, semi-autonomous institutions andautonomous institutions;

(b) preparation of a proposal to enable special employment and salary regimes goveming publicservants to be consistent with the principles contained in the Civil Service Law;

(c) preparation of a bill of law to amend the Civil Service Law to promote the efficient and flexiblemanagement of human resources in the central Government; and

(d) improvement in the administrative, operational and technical capacity of the DGSC, the centralnormative human resource management office, by providing support to its planned reorganization andspecialized training.

2) Design and implementation of a comprehensive human resource management system (SIARH), tosupport the following activities:

(a) completion of the design and implementation in the DGSC and SEFIN of the SIARH Global,which integrates essential data on employment, salaries and benefits, and organizational structures ofsecretariats, semi-autonomous institutions and autonomous institutions;

(b) design and implementation of the SIARH at entity-level (SIARH Institucional), which includesadministration and evaluation of posts, job grading, payroll, training, career management, and staffappraisal, all according to newly designed norms, processes and procedures, and the transfer ofessential data to SIARH Global; and

(c) training staff of the DGSC and human resources and financial analysts/managers of administrativeunits (GAs) in the use of the SIARH as a management tool (e.g., preparation of staff budgets, jobevaluation and classification, training plans, etc.).

Project Component 4 - Developing Performance Evaluation Capacity

The component would support the Government's efforts to develop performance-oriented management andevaluation capacity in the public sector by: strengthening the performance evaluation unit (PEU) in theSPR; improving planning, monitoring and evaluation capacity in SEFIN and in the line secretariats(beginning with Health, Education, Agriculture, SOPTRAVI and SERNA), with emphasis on sectoralprogramming and identification of expenditure priorities; and supporting mechanisms to strengthen theevaluation "community" in Honduras, especially within the Government, with links to the private sector andbroader civil society .

The CPME would be the executing agency for this component in collaboration with the SPR. The project

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would fund technical assistance, training, studies, and equipment (computer hardware and software) in thefollowing subcomponents:

1) Strengthening of the performance evaluation unit. This subcomponent would support the strengtheningof the technical capacity of the performance evaluation unit (PEU) within the SPR to improve the planning,monitoring and evaluation capacity, and provide a basis for priority setting, with special emphasis ongender and poverty reduction, to guide resource allocation to operational programs, in the participatingsecretariats, including their corresponding UPEGs.

2) Developing evaluation capacity in participating secretariats. This subcomponent would finance

(a) carrying out of a diagnosis of the evaluation capacity of each of the participating secretariats; and

(b) based on the findings of each diagnosis, the preparation of an action plan, acceptable to theAssociation, for each participating secretariat.

3) Establishing communication and dissemination mechanisms. This subcomponent would enable theCPME in collaboration with the PEU to carry out a communication and dissemination program to:

(a) promote the exchange of information among the staff within the participating secretariats andrepresentatives of the private sector and civil society with respect to the monitoring and evaluation ofthe programs carried out by the secretariats;

(b) encourage public dissemination of the results of the evaluation concerning the performance of thesecretariats with respect to the annual programs; and

(c) foster public awareness and participation in the evaluation of public sector performance.

Project Component 5 - Public Procurement

Since 1996, the PSMSAC/PSMTAC operations have supported Government efforts aimed at introducinglegal, regulatory and institutional reforms necessary to invigorate and promote the effectiveness of thepublic administration. To this end, among the activities financed under this credit, technical assistance hasbeen provided to encourage increased efficiency and transparency in the procurement of goods and servicesby the public sector.

This component would support Government initiatives to strengthen state governance and to promotetransparency by providing technical support and cofinancing for the IDB-financed Efficiency andTransparency of State Purchasing and Contracting Project in the areas of: procurement training(component III of the IDB operation); and the development of a new national system for the procurement ofgoods and services (component IV of the IDB operation). Additionally, financing would be provided forconsultancies geared to review and ultimately update the existing legal, regulatory and institutionalframeworks that have a bearing on public sector procurement practices. The CPME would be responsiblefor managing this component, which would support:

1) Training in procurement procedures throughout participating secretariats;

2) Developing a new public procurement information system; and

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3) Strengthening of the national regulatory and institutionalframework governing public procurement,acceptable to the Association, through the provision of technical assistance and training, includingstrengthening of the normative unit for procurement and the Office of Administrative Probity.

Project Component 6 - Consolidating Regulatory Reforms

This component would continue to support the Government's efforts to create adequate legal frameworksand consolidate regulatory entities as well as reduce the scope of State intervention in the provision ofpublic services. This component would be managed by SEFIN, assisted by the Consultative Commissionfor Privatization (CCP), and comprise three subcomponents:

1) Strengthening of the CCP through the provision of legal, financial, and technical assistance for thecarrying out of:

(a) a program to strengthen CCP's technical capacity to manage the Government's privatizationprocess;

(b) a study of the ports sector to design a strategy to restructure the ports sector; including anacceptable environmental assessment of the ports sector, and an environmental management plan;

(d) a study of the postal services sector to design a strategy to restructure the postal services sector;and

(e) studies to support the institutional restructuring within the telecommunications sector.

2) Strengthening of regulatory institutions.

This subcomponent would strengthen the regulatory capacity of CONATEL, CNE and the Superintendencyof Concessions and Licenses (SCL) through the provision of technical assistance, training and equipmentrequired to:

(a) improve the existing telecommunications regulatory framework and assist the regulator, train staffand provide radio frequency spectrum management and monitoring systems for CONATEL;

(b) strengthen the National Energy Commission (CNE) and the SCL; and

(c ) strengthen the regulatory capacity of ANACI (within an integrated transport framework), whenestablished.

3) Consolidation of the system ofpublic service and infrastructure regulatory entities.

This subcomponent would include technical assistance to carry out a legal and technical review of theregulatory entities (CONATEL, CNE and SCL) to consolidate the regulatory functions within a systembuilt on common principles and standardized procedures.

Project Component 7 -- Project Management

This component would strengthen the operational capacity of the project coordinating unit (PCU) in theExecutive Secretariat of the CPME by financing consultants, equipment and activities necessary to manageimplementation of the project in coordination with the other executing agencies and implementing entities.

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. Indicative Bank- % ofComponent Sector Costs % of financing Bank-

________________________ _ __ (US$M) _Total (US$M) financing1. Public Finance Management and Public Financial 7.70 33.5 6.61 34.8Internal Control Management

2. Reorganization of the Comptroller Public Financial 2.70 11.7 2.33 12.3General's Office (CGR) Management

3. Human Resource Management Other Public 2.40 10.4 2.06. 10.8SectorManagement

4. Developing Performance Evaluation Other Public 2.20 9.6 1.72 9.1Capacity Sector

Management5. Public Procurement Other Public 1.50 6.5 1.20 6.3

SectorManagement

6. Consolidating Regulatory Reforms Public Enterprise 5.00 21.7 4.00 21.1Reform

7. Project Management Institutional 1.50 6.5 1.08 5.7Development

Total Project Costs 23.00 100.0 19.00 100.0Total Financing Required 23.00 100.0 19.00 100.0

2. Key policy and institutional reforms supported by the project:

The ongoing institution-building and transformation of the state in Honduras is altering the way the publicsector adjusts and responds to unexpected events and routine responsibilities under the Government'sstewardship. Hurricane Mitch has underscored the inadequacy of the line secretariats' capacity to respondto emergencies of this nature and scope. This has led to the development of special initiatives under thedirection of the President's Office to provide the appropriate accountability over donor programs and funds,with special assistance from a tripartite commission headed by the SPR, SEFIN and SETCO (TechnicalSecretariat for International Cooperation). Currently, the focus of IDA assistance is shifting away fromemergency funding to more customary sector lending programs-although the deteriorated state ofinfrastructure and further debilitated capacity of line secretariats, including the loss of data, requirecompensatory institutional arrangements to ensure adequate accountability and control. This points to acompelling need to rebuild the capacity in the line secretariats, and to bring standardization and uniformityto organizational relations, as expeditiously as possible. Much of the implementation of SIAFI, includingthe proposed human resource system's integration with SIAFI, can be accomplished under the existingOrganic Budget Law. However, passage of the SIAFI Law would provide the optimal framework fordecentralizing the management of public expenditures to the line secretariats.

The project contemplates the restructuring of SEFIN, as well as related capacity-building and extensivetraining of personnel. The performance evaluation unit (PEU) in the SPR would support the developmentof planning, monitoring and evaluation capacity in the line secretariats, with emphasis on sectoralprogramming and identification of expenditure priorities. The PEU would coordinate project support tostrengthen the UPEGs (planning and evaluation units) and the GAs (administrative management units), in

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close coordination with the implementation of SIAFI and SINEG. Further restructuring would take placein CGR in an effort to increase its institutional capacity and promote transparency.

3. Benefits and target population:

The proposed project should help the Government meet the social and infrastructure needs of the generalpopulation more efficiently and economically, and with more likelihood of assistance reaching those furtherimpoverished by Hurricane Mitch. Specifically, the project would build on achievements under the publicenterprise restructuring initiative in the PSMTAC by transferring structures, functions, and services thatcan be better delivered more economically by the private sector. The Government would promote andsupport development of a performance culture and participation of civil society in assessing performlance ofpublic sector programs. Project benefits are also expected to result from modernization of human resourcemanagement systems, which are intended to further professionalize the public sector. The project wouldcreate a public sector climate that would facilitate sound public sector financial management andinvestment programming, especially in the social sectors, where Government capacity is severely strained.Although the primary beneficiaries are govermment agencies, the project is expected to build transparencyand contribute to the fight against corruption, which would induce significant fiscal savings and facilitate astronger growth trajectory. These improvements would benefit the general population as well as bringinternational credibility to the Government in its efforts to combat corruption and strengthen thegovernance of the Honduran state.

4. Institutional and implementation arrangements:

Implementation Period: Four years.

Project Implementation and Coordination:

As in the first stage of the PSMP, the Executive Secretariat of the Presidential Commission for theModernization of the State (CPME) would be responsible for overall project coordination. The day-to-daymanagement of the project would be the responsibility of the National Director, who heads the projectcoordinating unit (PCU). The PCU, which depends directly on the Executive Secretariat of the CPME,would be supported by a small staff, including a project coordinator, an accounting/financial administrator,a procurement officer, a lawyer, information technology specialist, and a network of technical/coordinationunits for each of the project components. The PCU would coordinate implementation of the projectcomponents with the respective implementing entities and administer the general -accounts of the project.The PCU would consolidate overall project finances and external audits of all implementing entities.

The CPME would directly manage five project components: Component I (Public Finance Managementand Internal Control), together with SEFIN, in the implementation of SIAFI in the line secretariats;Component 3 (Human Resource Management), together with the SPR and DGSC; Component 4(Developing Performance Evaluation Capacity), coordinating technical assistance to the UPEGs and theGAs to strengthen planning and evaluation in the participating secretariats, in collaboration with the SPRand other entities; Component 5 (Public Procurement); and Component 7 (Project Management).

SEFIN, assisted by the CCP, would manage Component 6 (Consolidating Regulatory Reforms); and CGRwould manage the activities under Component 2 (Reorganization of the CGR). The project unit within theCCP would be led by a technical secretary nominated by the CCP and composed of two units: one tocoordinate the privatization efforts; the other, an administrative/financial unit. Procurement for theimplementation of this component would be the responsibility of the administrative/financial officer andcontrolled by the technical secretary. The CGR would have a project unit composed of three staff: a unit

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coordinator, a systems specialist, and a training specialist.

Accounting, Financial Reporting and Auditing Arrangements:

The PCIJ, CCP and CGR would maintain separate subaccounts under the Special Account. Each of theentities in charge of managing project resources will maintain separate project records and will reportperiodically to the PCU on the use of those resources. Such records will be maintained to reflect, inaccordance with sound accounting practices, the operations, resources and expenditures of each projectactivity. Executing entities will be staffed at all times with qualified financial and accountingprofessionals. Adequate financial management arrangements for the project will be included in theOperations Manual. PCU will prepare combined financial statements for the project as a whole. Theproject accounts maintained by the PCU and the other executing entities will be audited periodically byindependent and qualified auditors acceptable to the Association, and in accordance with InternationalAuditing Standards and the guidance provided in the "Guidelines and Terms of Reference for Audits ofProjects with Financing by the World Bank in the Latin America and Caribbean Region" (the Guidelines)and other guidance. The PCU and the CGR will submit to the Association a certified copy of the auditreports no later than four months after the end of each year. The first audit report will cover from thebeginning of the project through December 31, 2000. Subsequent audit reports will be contracted beforethe beginning of the year to be audited, and will encompass at least an interim visit (in addition to the finalvisit of the period).

Monitoring and Evaluation Arrangements:

The CPME would monitor project execution through a set of performance indicators, supported by IDAsupervision missions. The CPME would coordinate preparation of annual work programs prior to eachcalendar year. By December 31 each year, starting in 2000, the CPME would prepare and furnish to theAssociation a plan, acceptable to the Association, describing the Project activities to be carried out in thefollowing calendar year; and thereafter implement the plan in accordance with its terms. Annual reviews ofthe project will be carried out not later than September 30 of each year. A mid-term review would beconducted by September 2002 to assess progress in meeting agreed targets and to identify additionalsupport as needed. Semi-annual progress reports would be presented to the Association no later than 30days after the conclusion of each calendar semester, starting in 2001.

Cofinancing:

The first phase of the Bank's public sector reform effort was cofinanced by IDB. Component 5 (PublicProcurement) of the new operation would complement the Improving Efficiency and Transparency ofPublic Procurement Project financed by IDB. In separate activities, bilateral resources have supportedinstitutional reforms in planning, information systems, and public information infrastructure; and bilateralfunding is expected to cofinance, on a parallel basis, and at a later date, the "mentoring program," underComponent 4 (Developing Performance Evaluation Capacity).

D. Project Rationale

1. Project alternatives considered and reasons for rejection:

The public sector reform program, which was launched within the framework of the 1995 PSMP andsupported by the PSMTAC and PSMSAC, has made substantial progress, but is not yet complete. For thisreason, agreement was reached to consolidate current gains in public enterprise reform, governmental

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restructuring, employment rationalization, and implementation of the first phase of an integrated financialmanagement system, and to complement the reforms already underway by initiatives to addresstransparency, accountability, and the development of a performance culture. This approach is alsoreinforced by the social expectations in Honduras of deeper, broader reforms in the public sector withtangible results.

Although the design of an alternative project was not considered, several issues regarding the content andbreadth of the proposed operation have been addressed. During the PCD concept review meeting,discussion focused on the possibility of modifying or eliminating two components: social security reformand privatization. It was decided that social security reform should not be included in this project, becausethe institutional and policy reform issues could be more effectively handled through initiatives and projectsin the health and financial sectors. As for privatization, it was agreed that maintaining the momentumgained in the PSMTAC and PSMSAC operations was important. Accordingly, it was decided that thecomponent would provide the necessary support to consolidate restructuring efforts and to support theinitial institutional development stage of regulatory entities.

A new project component, Component 5 - Public Procurement, was added at the formal request of theGovernment to the Association, subsequent to the Consultative Group Meeting in Honduras in February2000. The Government asked the Association to provide support to IDB's project Improving Efficiencyand Transparency of Public Procurement Project. Based on discussions both internally and with IDB, itwas agreed with the Government that this operation would support procurement training as well asdevelopment of a national standardized procurement system by co-financing components III and IV of theIDB-financed project.

2. Major related projects financed by the Bank and/or other development agencies (completed,ongoing and planned).

Latest SupervisionSector issue 0 000;0Proiect ( PSR) Ratingsf

(Bank-financed projects only)

Implementation Development

Bank-financed Progress (IP) Objective (DO)

Public sector reform, modernizing PSM/SAC S Sinstitutions, privatization of stateenterprisesPublic sector reform, modernizing PSM/TAC S Sinstitutions, privat.of state enterprisesInfrastructure rehabilitation Transport Sector Rehab. S S

Other development agenciesPublic sector reform IDB(cofinances IDA's PSMSAC andPSMTAC Projects)Transparency in procurement IDBInformation and evaluation system UNDPPlanning and productivity USAIDCensus and national statistical systems Sweden

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

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3. Lessons learned and reflected in the project design:

The proposed credit incorporates the following lessons: Public sector experience in LAC has pointed to thevalue of broad-based approaches to project design, such as that adopted in the proposed operation. Incomplex public sector environments, such as Honduras, this approach facilitates the identification of majorissues and systemic distortions that need to be addressed before deep policy and institutional reforms canoccur. E,ssentially to design viable public sector reformn programs, a global understanding of public sectorstructure, function, and characteristics is required. Economic and sector work and background studieswere conducted as part of the preparation of the PSMTAC and PSMSAC. The design of this newoperation is also based on OED's findings regarding the development of evaluation capacity and thecontribution of performance evaluation to furthering good governance. As a result, the project would applythe diagnostic tool prepared by OED with respect to evaluation capacity options and prepare tailor-madeaction plans for the participating secretariats.

Important privatization initiatives were a part of the PSMSAC and PSMTAC. There is a need toconsolidate the regulatory frameworks in order to ensure that private investments are safeguarded. There isa consensus and commitment by the Government to develop the frameworks more fully.

One of the most important lessons learned is the need to foster a sense of teamwork between theGovernment and the Association, as well as with other donors. This has proven to be an essential ingredientto the success of any comprehensive public sector modernization program. The operation is structuredspecifically around the partnership between the Government, the Association, and other donors to meet thepressing social and economic needs of Honduras. The project has been designed with sufficient flexibilityto incorporate relevant findings resulting from the ongoing Public Expenditure Review (PER) andInfrastructure Assessment.

4. Indications of borrower commitment and ownership:

The Government is fully committed to the reform of public administration, completing nationalreconstruction in the aftermath of Hurricane Mitch, and further stimulating the privatization process bydeveloping complementary regulatory frameworks. The Government's commitment to transparency andgovernance has become much more prominent than in the past, and these will be a major focus of theproposed credit. Evidence of this commitment includes: approval of the regulatory framework for theGeneral Law of Public Administration (Decree No. 218-96) to facilitate institutional restructuring inSEFIN and other secretariats (e.g., Education and Health) and strengthening of the UPEGs and GAs; andagreement to establish the performance evaluation unit (PEU) in the SPR.

The Government's National Plan for Reconstruction and Transformation (PMRTN), presented to theConsultative Group (CG) in Stockholm in May 1999, laid out a program of reforms that are compatiblewith the objectives of the proposed credit. These objectives were further endorsed at a subsequent meetingin Tegucigalpa in February 2000. In addition, the Government, with support from the UNDP, isdeveloping a National Information System (SINEG) to monitor and evaluate the PMRTN. A furtherindication of the Government's commitment to the reform process was Congress' approvalon May 31, 2000 to establish a National Institute of Statistics and its commitment to carry out the 2000National Census.

5. Value added of Bank support in this project:

IDA has developed an extensive knowledge base of cross-sectoral issues affecting public sector reform ona global scale. Specifically, it has attained worldwide experience, and thus a comparative advantage in the

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areas of state modernization, governance and transparency, public finance reform, and private participationin the provision of services which can readily be transferred and tailored to the unique needs/circumstancesin Honduras. On a Regional basis, the proposed project has already benefited from a cross-fertilization ofexperiences in Latin America as a whole and particularly, other Central American countries. In the area ofintegrated financial management in particular, project preparation has benefited from the experience ofproject teams working on similar and highly successful projects in Guatemala and other Central Americancountries. The value added of IDA's global comparative advantage in these areas is further enhanced bythe fact that the project team was present during the initial design stage of the Government's PSMP, andcontributed to the same, and has since then fostered a partnership through the implementation of the PublicSector Modernization Structural Adjustment and Technical Assistance Credits (2816-HO and 2814-HO,respectively). The resulting accumulated country-specific experience and partnerships attained since theProject's start further promote it prospects for success.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4):O Cost benefit NPV=US$ million; ERR = % (see Annex 4)O Cost effectiveness* Other (specify)

2. Financial (see Annex 5):NPV=US$ million; FRR = % (see Annex 4)

Fiscal Impact:

Project Costs: Total project costs are estimated at US$23 million equivalent, of which US$19 millionequivalent would be financed by the Association; and US$4 million equivalent would be financed bythe Borrower.

Project Benefits: Important technical, managerial, personnel, and procedural benefits produced by theproject would have a positive impact on the country's fiscal health. Implementation of SIAFIthroughout the central government and decentralized institutions will allow complete transparency inthe recording and reporting of the Government's economic activities and will establish a framework toensure an accountability regime, while strengthening the external control system. Today,inefficiencies arise from weak structures in audit institutions. Building adequate technical andmanagerial capacity within SEFIN and restructuring of CGR are key elements in the Government'sapproach. Improved audit standards and the overall institutionalization of internal controls within theExecutive would ensure rigorous management of fiscal resources.

Another substantial benefit from the project is expected to occur in the public sector workforce. Theproject's proposed implementation of centralized norms and decentralized operations, and theconsolidation of the ongoing Human Resources Information System is expected to yield importantfiscal savings. By having a complete and accurate registry of public employees, the project would beable to help rationalize human resources needs and deployment. This quality reallocation is expected tohappen, at different degrees, in several administrative units across secretariats.

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The development of performance evaluation capacity should lead to improved budget analyticaltechniques and use of evaluation findings. The expected result would be better sectoral programmingand priority-setting in public expenditures. Better distribution of scarce public funds would minimizeinefficiently allocated resources and increase accountability of actual expenditures, thus allowing theTreasury to attain more efficient cash flow management.

Strengthening regulatory authorities to oversee private sector participation in the provision of publicservices will consolidate the savings already gained in the State's transfer of public enterprises to theprivate sector. Of utmost strategic importance for fiscal savings, the component of public procurementwill increase transparency and is expected to minimize deficiencies of the transactions in public sectorpurchasing.

3. Technical:The activities to be undertaken under the proposed project are considered feasible based on the technicaladvances made to date in implementing the Government's PSMP under the PSMSAC/PSMTAC.Moreover, the experience gained in implementing these credits provided the proposed project with: (a) aseasoned PCU, experienced in supervising consultants in the areas contemplated by the proposed project,procurement activities, and the oversight and coordination of various reform components; (b) a fullyoperating Consultative Commission for Privatization that obtained valuable experience in the area ofprivatization processes and legal and regulatory reforms in the telecommunications, electrical distribution,and civil aviation sectors; (c) approval in 1996 of the General Public Administration Law, which allowedfor an ambitious institutional restructuring and decentralization efforts throughout the public sector andprovided the framework for the civil service reforms which have been undertaken; (d) the implementation ofthe first stage of the integrated financial management system in budget, treasury, accounting, and publiccredit; and (e) a draft Integrated Financial Management System Law.

4. Institutional:

a. Executing agencies:The three executing agencies are the Executive Secretariat of the CPME, SEFIN and the CGR. TheExecutive Secretariat of the CPME would be responsible for overall project coordination and through itsPCU would manage the bulk of the project in coordination with SEFIN and the CGR. The CPME wouldmanage Components 1, 3, 4, 5 and 7 in collaboration with various implementing entities; SEFIN, assistedby the CCP, would manage Component 6; and CGR would manage Component 2.

b. Project management:The PCU of the CPME has gained significant expertise in the management and administration of thePSMAC and PSMTAC. The PCU has a trained staff with substantial experience in the supervision ofconsultants, procurement activities, and the oversight and coordination of various reform components, andis prepared to begin implementation of the new credit. In assisting SEFIN to carry out the privatizationefforts in the first stage of the PSMP, the CCP has effectively demonstrated its capacity for projectmanagement. While this base of experienced public sector institutions and leaders provide valuablesupport for the new executing agency, CGR would have its own project management team and requirespecial assistance from both the Association and the Borrower.

5. Social:

N/A

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6. Environmental assessment: Environment Category: C (Not Required)

No adverse environmental impact is anticipated as a result of the project activities related to restructuringof the telecommunications, ports and postal sectors. In the ports sector the assistance would concentrate onthe development of a strategy to restructure the sector, including the preparation of an environmentalassessment. LCSES would be requested to participate in reviewing the terms of reference for the relatedassessment.

7. Participatory Approach (key stakeholders, how involved, and what they have influenced or mayinfluence; if participatory approach not used, describe why not applicable):

a. Primary beneficiaries and other affected groups:

The primary beneficiaries, including a number of government agencies and the CGR, participated fully inthe design of the proposed project. The line secretariats, particularly the administrative management andthe planning and evaluation units, contributed to the design of the plan and activities to be carried out in thefive participating secretariats.

b. Other key stakeholders:

The project has been designed in cooperation with umbrella civil organizations, particularly FONAC (ForoNacional de Convergencia) and ASONOG (Asociacion de Organismos No Gubermentales), and with otherfinanciers, including IDB, UNDP, USAID and SIDA.

F. Sustainability and Risks

1. Sustainability:

The proposed project builds on the reforn achievements under the ongoing PSMTAC and PSMSAC. Theimportant legal and institutional reforms being introduced under these operations have helped to create anenvironment favorable to sustaining the gains expected under the project and expanding the scope of publicsector economic and financial management reforms. Weak institutional capacity in the public sector is amajor risk, especially in line secretariats. For that reason, institution-building, including extensive training,is a major feature of the project and should ultimately offset this risk.

2. Critical Risks (reflecting assumptions in the fourth column of Annex 1):

Risk Risk Rating Risk Minimization MeasureFrom Outputs to ObjectiveI.(a) Institutional capacity within SEFIN M A program of institutional strengtheningto implement the intended reforms not measures based on institutional capacitydeveloped. assessment and extensive training.

l.(b) Despite restructuring of SEFIN, M Prepare operational and technical manuals andSIAFI not adequately deployed in the line provide training directed to full integration ofsecretariats. SIAFI both in SEFIN and in the line

secretariats.2. Restructuring of CGR and creation of S Joint efforts with international donors to exposepublic auditing environment to prevent government, public sector entities, and civiland combat corruption resisted by special society to the importance of transparency andinterests. accountability in the management and control of

public resources.

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3. Streamlining the public sector S Systems applications and institutionalworkforce in SEFIN, DGSC, and line assessments to provide basis for furthersecretariats undermined by political rationalization of the public sector personnelconsiderations and special interests. complement in coordination with the

implementation of the HR management systemand SIAFI, and adequate planning and strategicprogramming.

4. Inability to attract or maintain good M Building ownership by sector ministers to ensurequality staff in participating secretariats qualified staff appointed and appropriatedue to weak human resources and lack of incentives established, plus extensive andcommitment. continuous training.

5. Staff throughout participating agencies M Comprehensive training program includingdo not apply training and technology operational procedures; on-the-job training;received to carry out purchasing and workshops and seminars for the interchange ofcontracting procedures in an appropriate experiences between participating entities; andmanner. educating civil servants in benefits of employing

standard practices and utilizing publicprocurement information system.

6. The regulatory entities are ineffective M Successful privatization efforts providedue to entrenched vested interests favorable environment for Congressional

support to increase autonomy of regulators.And increased competition among operators willreduce risk of regulatory capture.

From Components to Outputs1. Inadequate commitment and technical M Active support at highest levels of Government.capacity in government agencies to Intersectoral coordination and capacity buildingimplement and sustain SIAFI. mechanisms, extensive training of counterparts,

and development of internal and publiccommunications program.

2. Resistance to the reforms prescribed S Cohesive plan to communicate purpose offor the CGR by other government reforms through workshops with officials of theagencies and from within the agency CGR and counterparts in public entities.itself.

3. Weak leadership and poor S The heads of the Secretariats of the Presidencycoordination limit improvements in and Finance have agreed to jointly address thismanagement and control of human risk.resources.

4. Planning and evaluation is not a M Strengthening technical assistance provided bypriority in the participating secretariats. the central Government and collaborating with

bilateral and multilateral agencies supportingprojects in the respective sectors.

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5. Govermnent commitment to strengthen M Concerted efforts by the Government andstate governance and to promote Association to highlight the need to improve thetransparency of public purchasing and efficiency and transparency of publiccontracting practices not realized. procurement.

6. Inadequate quality of preparatory and N Intensive supervision of the quality of theother technical outputs technical assistance.

Overall Risk Rating M Overall rating is modest, but substantial in fourinstances.

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk)

3. Possible Controversial Aspects:

None identified.

G. Main Credit Conditions

1. Effectiveness Conditions

a. Operational Manual has been approved by the Association.b. Financial management system, acceptable to the Association, has been established in CPME.c. Financial management system, acceptable to the Association, has been established in CGR.

2. Other [classify according to covenant types used in the Legal Agreements.]

a. Condition of disbursement: Subsidiary Agreement has been executed on behalf of the Borrower and theCGR, and issuance of legal opinion, acceptable to the Association, concerning validity and enforceability ofsaid Agreement; as conditions of disbursement of the CGR component.b. Condition of disbursement: Establishment of ANACI as the new regulatory agency for the sector; as acondition of disbursement before assistance can be provided to the ANACI.c. Dated covenant: (i) Carrying out of study of the ports sector to design a strategy to restructure theports sector, including carrying out of an environmental assessment to assess the potential environmentalimpact of any participation of the private sector in the ports sector, not later than 18 months aftereffectiveness; (ii) preparation of an environmental management plan, acceptable to the Association, tomitigate any negative environmental impact identified in the assessment, not later than 45 days aftercompletion of the study; and (iii) thereafter carry out, or cause to be carried out, said plan in accordancewith its terms.

H. Readiness for Implementation

]I 1. a) The engineering design documents for the first year's activities are complete and ready for the startof project implementation.

1 1. b) Not applicable.

Z 2. The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.

1 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.

El 4. The following items are lacking and are discussed under loan conditions (Section G):

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1. Compliance with Bank Policies

E 1. This project complies with all applicable Bank policies.El 2. The following exceptions to Bank policies are recommended for approval. The project complies with

all other applicable Bank policies.

c/A . .artin DelC po mEesto May Donna Dowsett-Coirolo (

v 'Teagdeader K_z Sector Manager/Director J Country Manager/Director

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Annex 1: Project Design Summary

HONDURAS: ECONOMIC & FINANCIAL MANAGEMENT PROJECT

Hierarchy of Objectvs" Indiiors Mo oring &EEvaluation: Critical AssumptionsSector-related CAS Goal: Sector Indicators: Sectorl country reports: (from Goal to Bank Mission)To modernize the state and Administrative reform Annual reports of CPME, Government capacity to setimprove governance and component of Government's SPR, SEFIN, CCP, CGR and and sustain economic andtransparency in order to PSMP completed; economic participating secretariats. social policy priorities.improve implementation of and financial managementdevelopment policies, projects capabilities in SEFIN and key Government commitment toand service delivery, including line secretariats strengthened; transparency andincreased private sector integrated financial accountability.participation, and to make management systemdevelopment programs implemented; and regulatoryeffective to combat poverty on reforms consolidated.a sustainable basis.

Project Development Outcome i Impact Project reports: (from Objective to Goal)Objective: Indicators:To improve transparency and Increased transparency and Reports by SEFIN Congress approves SIAFI lawaccountability in the use and accountability in the use of and Government maintainsallocation of public resources; public resources. commitment to implementdevelop budgetary planning SIAFI.and evaluation capacity in keygovernment agencies; promote Standards and procedures for Reports by CGR Congress approves newinstitutional restructuring new types of audits in the new legislation regarding CGR.within the CGR legislation implemented.telecommunications, ports andpostal services sectors; and Reports by CPME and DGSC Government commits tostrengthen the technical Rationalization of public modernizing the public sectorcapacity of the regulatory sector employment, improved workforce.entities. control of human resources,

and application of modernhuman resource policies.

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Improved sectoral Reports by CPME and SPR Government recognizesprogramming and priority contribution of monitoringsetting of public expenditures. and evaluation to furthering

good governance.

Increased efficiency and Reports by CPME Government continues itstransparency in the commitment to strengthenprocurement of goods and state governance and toservices by the public sector promote transparency of

public sector purchasing andcontracting practices

Improved quality, coverage Reports by CCP Government creates favorableand increased efficiency in the environment to fosterdelivery of public services development of private sector

initiatives.

Output from each Output Indicators: Project reports: (from Outputs to Objective)component:1. SEFIN restructured with More accurate, complete and IDA supervision reports Institutional strengtheningfully functioning offices of opportune fiscal accounts, and and training in SEFIN leads tobudget, treasury, public credit increased access/voice by improved capacity to developand accounting. interested parties. Reports of SEFIN economic and financial

management techniques andperformance measures.

Integrated financial Operational Manuals for SEFIN restructured to fullymanagement system implementation of SLIFI implement SIAFI andfunctioning in SEFIN and all prepared by May 2001. subsequently integrate systemline secretariats. in all line secretariats.

Implementation of SIAFI inSEFN and initiation ofsystem integration in twosecretariats (health/education)by Sept. 2001, and in all bySept. 2002.

Development of performanceindicators on impact of SIAFIby Sept. 2002.

Communications strategy andrelated products developed byMar. 2001.

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2. A functioning strong, Acceptance by public entities IDA supervision reports CGR is administratively andcapable, and fully independent of advisory role of the CGR. technically reorganized andsupreme audit institution Ad hoc reports of CGR issues new standards and(CGR): to monitor the Number of public entities procedures to improveperformance of the public evaluated/monitored by the auditing of public resources.sector and other branches of CGR in a given period.government based onaccountability, transparency,legal and ethical criteria; andto serve as a center ofexcellence, preventive controland advisor to other publicentities on financial andadministrative matters.

The elements for establishing Number of internal auditing Acceptance by CGR anda central coordinating reports analyzed, with relevant SEFIN of the centralperformance internal audit comments transmitted to the coordinating performanceunit reporting to the President President internal audit unit.exist.

3. Streamlining of the public The integration of human IDA supervision reports Reduced public sector payrollsector workforce for greater resource information system Reports by CPME and DGSC expenditures and greaterefficiency and effectiveness with SIAFI and with key core control over HR systemachieved. secretariats. applications.

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4. Performance evaluation unit PEU coordinating IDA supervision reports Government develops(PEU) in SPR functioning. development of evaluation planning and evaluation tools

capacity in participating in the participatingsecretariats. secretariats.

Planning, monitoring and Diagnosis of evaluation Reports by CPME and SPRevaluation capacity in capacities in each of the Qualified staff in theparticipating secretariats participating secretariats participating secretariats applydeveloped. completed by Feb. 2001. the training and technical

assistance provided by theQuality of critical performance Action plans for each of the Reports of participating central government with theindicators measuring service participating secretariats secretariats: inter alia, Health, full support of sectoraldelivery in participating completed by March 2001 -- Education, Agriculture, ministers.secretariats improved. including types and depth of SOPTRAVI, SERNA.

training.

Mentoring programfunctioning in theparticipating secretariats byApril 2001.

Performance indicators for theannual operational programs(POAs) in each participatingsecretariat prepared by Juneeach year, beginning in 2001.

Sectoral performanceevaluation framework re: rolesof agencies in planning,conduct, quality, reporting anduse of performance findings.

Evaluation forum/networkamong evaluation staff,private sector & civil societyestablished by Sept. 2001

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5. Civil servants involved in Improved efficiency in the IDA supervision reports Qualified staff throughoutthe procurement process procurement of goods and participating agencies applythroughout participating services training and technologysecretariats adequately trained received to carry outin operational procedures purchasing and contracting

procedures.Public procurement database Public procurement Reports by CPME& information system information systemimplemented established and functioning Development of appropriate

regulatory and institutionalNational regulatory and Copies of regulations/laws frameworks applied toinstitutional frameworks promote transparent, uniform,related to public sector and standard procurementpurchasing and contracting practices throughout thestrengthened public sector.

6. CCP strengthened Studies on ports and postal IDA supervision reports CCP and regulatory agenciesservices sectors completed. have qualified staff and

Reports by CCP adequate financial resources

Regulatory institutions Quantity and quality of staff instrengthened CONATEL, CNE, SCL and

CAA sufficient, and capableof enforcing regulations

Public service and -Telecommunications:infrastructure regulatory Urban and rural telephoneentities consolidated lines per hundred inhabitants

improved.

Time to repair faultsimproved.

-Electricity:Urban and rural electricitysubscribers increased.

Time of service interruptionreduced.

-Civil Aviation:Number of operationsincreased.

Terminals' square footage perpassenger improved.

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Key PerformanceHierarchy of Obectives Indicators Monitoring & Evaluation Critical Assumptions

Project Components I Inputs: (budget for each Project reports: (from Components toSub-components: component) Outputs)1. Public Finance US$6.61 million Semi-annual project reports of Timely counterpart fundingManagement and Internal CPME (all components)Control Adequate institutional and

IDA supervision reports budget support for SIAFI

Institutional strengthening (all components)Adequate management and

Strategic implementation of Plus reports from SEFIN maintenance of all SIAFI andSIAFI related systems.

Management and staff of linesecretariats institutionalizeand sustain changes generatedby SIAFI;

2. Reorganization of the US$2.33 million Plus CGR reports Commitment by CGRComptroller General's management and concemedOffice (CGR) agencies to carry out and

sustain the restructuring

Institutional strengthening program.

Promotion of socialcomptrollership anddecentralization

Training program

Provision of equipment andinformation network3. Human Resources US$2.06 million Plus reports of CPME and Effective restructuring of theManagement DGSC designated key agencies such

that deconcentration effortsDeveloping a modem system occur smoothly and humanof human resource resource management systemsmanagement and control provide the necessary controlacross the public sector. to rationalize personnel

complements

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4. Developing US$1.72 million Plus reports of SPR and SPR and SEFIN commit toPerformance Evaluation participating secretariats: inter strengthening UPEGs andCapacity alia, Health, Education, GAs in five participating

Agriculture, SOPTRAVI, secretariats; and coordinateStrengthening of performance SERNA. closely with bilateral andevaluation unit (PEU) multilateral agencies.

Developing evaluation Participating secretariats makecapacity in participating planning and evaluation asecretariats high priority.

Establishing communicationand disseminationmechanisms

5. Public Procurement US$1.20 million Plus reports by CPME Continued Governmentcommitment to strengthen

Training program state governance and topromote transparency of

Public procurement public purchasing andinformation system contracting practices

Strengthening regulatoryframework6. Consolidating US$4.00 million Plus reports by CCP Adequate quality ofRegulatory Reforms preparatory and other

IDA supervision reports technical outputsStrengthening of the CCP

Strengthening of regulatoryinstitutions

Consolidation of publicservice and infrastructureregulatory entities

7. Project Management US$1.08 million Reports by CPME

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Annex 2: Project Description


By Component:

Project Component I - US$7.70 million

Public Finance Management and Internal Control

The Government is implementing a broad strategy to reform and improve financial management throughoutthe public sector. To continue with this effort would require building adequate technical and managerialcapacity within SEFIN to prepare designated secretariats and decentralized entities for successfulimplementation. This will be especially important for the secretariats of education and health, whichcomprise the majority of personnel in the public sector and require strong financial management andcontrol. Moreover, SEFIN will require strengthening of its capacity for economic management. Thiscomponent, which the CPME would manage in collaboration with SEFIN, comprises two subcomponentsessential to meet these needs:

1) Strengthening of SEFIN institutionally to carry out its core functions successfully. Thissubcomponent supports: (a) design of legal framework for SIAFI with appropriate norms and internalregulations; (b) completion of the organizational restructuring of SEFIN; (c) development of the technicalability to formulate coordinate, execute and evaluate policies related to public finances and the generalbudget concerning income and expenditures in line with strategies defined by the Office of the President;and accordingly, establishment of a basis for setting priorities for public expenditures, giving specialemphasis to gender and poverty reduction; (d) preparation of manuals containing norms, systemsconfigurations, methods and procedures for core areas of SEFIN; (e) development of agency-wideperformance measures; (f) developing an appropriate training plan and program to meet knowledge andskill gaps among technical and professional personnel; (g) carrying out of a communications program toinform SEFIN's staff and the public regarding the benefits of SIAFI; and (h) strengthening the Planning andEvaluation Unit (UPEG) through specialized training in the analysis and design of policies and programsbased on budget and public investment policy and official directives of the Office of the President.

2) Strategic implementation of SL4FI across the public sector, including the central government and thedecentralized administration. This subcomponent consolidates progress made under the PSMTAC insupporting the development of: a comprehensive and integrated finance information system for the wholepublic sector; accuracy and transparency in the recording and reporting of the economic activities of theGovernment; and a framework for internal control in the public sector to ensure an accountability regime,while building the foundation of a sound external control system. This subcomponent would support:

a) Completion of the development of SIAFI's management tools, including: the adaptation of theaccounting subsystem to incorporate networth accounts and the management of non-financial assets; thedesign of a subsystem to reconcile bank accounts in which public funds are deposited; the design of adetailed plan of accounts to permit administrative decentralization of budget execution; the design ofpayroll and treasury subsystems; and the integration of SIAFI's accounting, budget, debt management,payroll and treasury subsystems; (b) establishment and installation of SIAFI in all secretariats,participating semi-autonomous institutions and participating autonomous institutions, including theacquisition and utilization of the goods required therefor; and (c) design and implementation of a trainingprogram with respect to the installation and use of SIAFI within the secretariats, participatingsemi-autonmous institutions and participating autonomous institutions.

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Project Component 2 - US$2.70 millionReorganization of the Comptroller General's Office (CGR)

This component builds on two developments: (a) the experience of the World Bank's region-wide initiativeto support the strengthening and modernization of the supreme audit institutions (SAI) of membercountries as part of an overall strategy to promote transparency and accountability in the public sector andGovernment affairs; and (b) the technical assistance to CGR provided by USAID in Honduras and ElSalvador, the European Union, and the Government of Spain. In the aftermath of Hurricane Mitch, a newdimension and focus for external control systems is needed. Consequently, the organization of SAI willnow be primarily aimed at ensuring social controls and reporting on the economy, efficiency andeffectiveness of government and public sector operations, with special emphasis on the utilization of allfunds channeled to the reconstruction process (national, international, and bilateral agreements with foreigndonors).

This component would support the development of a strong, capable and independent SAI which willmonitor the perfornance of the public sector and other branches of Government in order to ascertain thatthey operate according to accountability, transparency, legal and ethical criteria; and serve theseGovernment entities as a center of financial and administrative advise for the prevention of fraud, wasteand abuse in government and the improvement of public sector activities. CGR would be the executingagency for this component which comprises four subcomponents:

1) Institutional strengthening of the CGR, to carry out the administrative and technical reorganization ofthe CGR, including preparation of audit standards and procedures

2) Promotion of the social controllership by carrying out a program to promote the participation of civilsociety in the external control process carried out by the CGR.

3) Designing and implementation of a comprehensive training program for CGR's staff in publicfinancial management, internal and external control, and auditing and evaluation of entities which managepublic resources.

4) Establishment of an information network within SIAFI to enable the CGR to obtain informationconcerning the accounting practices, financial transactions and reporting requirements of the secretariats,semi-autonomous institutions and autonomous institutions.

Assistance under the project would be aimed specifically at: (a) reorganizing the CGR's administrative andtechnical organization; (b) preparing standards and procedures for CGR's to carry out the different types ofaudits and for the evaluation of national programs, both routine and centered on the reconstructionprogram; (c) developing the basic elements for eventual institutionalization of the internal control systemwithin the Executive; (d) decentralization of the control function; (e) promoting the social controllershipthrough popular participation; (f) providing the CGR with basic computer, transport and technicalequipment; (g) installing an information network within SIAFI that will permit CGR to have direct accessto accounting and financial transactions and reporting from the centralUdecentralized administration; and (h)designing and conducting a comprehensive Training Program in public financial management, control,audit and evaluation to be offered to CGR staff and selected officers from the central administration anddecentralized entities, including municipalities.

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Project Component 3 - USS 2.40 millionHuman Resource Management

With support of the PSMSAC and PSMTAC, the Government has made significant progress in this area,both on the policy side of human resources reform as well as on the management side. On the policy side,since January 1994 the number of staff positions in the central government and decentralized institutions(excluding teachers, medical doctors, paramedics, police and defense), was reduced from a combined46,323 to 37,911, or an overall reduction of 18 percent. This is well above the 10 percent requirement setout in the legislative decree of October 1994 and agreed under the PSMSAC. Most of these posts havebeen cancelled administratively and eliminated from the budget. Monitoring of employment is satisfactorybut weakest for the decentralized institutions, where Government continues to take steps to improve-thetimeliness and completeness of the data.

A new human resource management system for the civil service was designed and implementation hasbegun with post classification and grading structure. The first phase of classification was put into effectwith the July 1999 salary increases. According to government figures, as a result of this initiative thecompression ratio of civil service salaries has gone from about 6:1 in December 1998, to 10: 1, therebyalready meeting the performance indicator for decompression in the PSMSAC action plan. While makingan important improvement generally in salaries of top technical and professional staff, the fiscal impact ofthis reform was minimal, as the number of persons involved were relatively small (this is due to the existingbottom-heavy structure of the civil service). 4

Other modules of the human resource management system include institutional restructuring andstrengthening of the DGSC, recruitment policies, performance evaluation, and training. The implementationslrategy of the system also contemplates technical assistance to the health sector to help the secretariatintroduce these reforms, specifically in identifying all nurse and nurse aide posts, and in constructingfunctional charts of health offices and hospitals.

Triggered by the need to reduce the size of the central government wage bill - which this year is estimatedto reach 9.3 percent of GDP - a salary and employment policy for the central government will be put intoeffect in the second semester of 2000. The fundamental elements of the policy are being defined and a draftdocument has been prepared. Elements include further employment rationalization, criteria for futuregeneral salary increases including conditions for calculating salaries of health workers, a more aggressivemiechanism of employment census and post audits, and either a new civil service law or amendments to theexisting one. The Government has requested that the proposed operation provide technical assistance tohelp implement this policy.

On the management side, after agreement was reached between the DGSC and SEFIN regarding thepayroll data, a new human resources database is operating in both institutions. The conceptual design forturning the database into a full-fledged human resource management tool (SIARH) for operation within thesecretariats and linked with SIAFI is being developed. What is needed now is to develop the software forthe various modules of the System, and introduce the management tool in main agencies of the Government.

E,mployment censuses were carried out in SEP and SSP and post audits were carried out in SEFIN, SSPand Secretariat of Agriculture; however, so far there is no effective mechanism to transform these one-timechecks into a permanent updating and correcting of staff lists. It is hoped that once the SIARH isoperational, a permanent system of staff audits will exist and feed into the SIARHI.

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With regard to the teachers regime, while the SEP had committed to introducing a new human resourcemanagement tool under the Education Reform Project, this did not materialize at the end. However, underthe PSMTAC a conceptual design for the system was carried out and as a starting point the Government isplanning to put into effect as soon as possible a payroll system for teachers. In terms of the decentralizedinstitutions, since the beginning of the PSMSAC/TAC, monitoring of employment figures has improvedconsiderably, and based on reviews of the various management systems involved, the Government willintroduce an informational human resource management tool in some main institutions on a pilot basis.

In terms of improving human resources management for the civil service, although a comprehensive systemhas been designed and the implementation phase has begun in the areas of classification of posts andremuneration system, the implementation of this reform constitutes a major challenge for the Goveriinentand will require strong coordination among SEFIN, DGSC and the line secretariats.

This component is to support the Government's efforts to improve the policy and management of humanresources in the public sector. Given the complexity of implementing reforms in this area, this componentwould be managed by the CPME in collaboration with the SPR and DGSC, as well as the secretariats.This component would provide technical assistance and training in two subcomponents per the following:

1) Strengthening human resource policy formulation and implementation This subcomponent supportsactivities to help the Government implement its new wage policy for the central government, includingtechnical assistance for (a) further employment rationalization, (b) improved treatment of teachers' regimeconsistent with the civil service system, and (c) development of amendments to the civil service law. Thiswould include measures to rationalize and make more harmonous the various employment and salaryregimes that exist currently in the public sector, including the Civil Service Law, the so-called NeighboringRegimes (medical doctors, nurses and paramedics, non-military police, administrative staff of schools,diplomatic and consular staff, and other permanent staff excluded from the Civil Service Regime), teachers,and public employees under the labor code. In addition, the project would support the strengthening of thecentral human resource management office, DGSC.

2) Improving the management of human resources. This subcomponent supports the following activities:(a) implementation of the human resources management policy system for the civil service, (b) introductionof the integrated human resource management system (SIARH) in all Secretariats and main agencies,which will be linked with SIAFI through the payroll, (c) development and implementation of a payrollmodule for the central Government within SIAFI, which will include the civil service and neighboringregimes, as well as teachers, and (d) training. Strengthening of the technical capabilities of the humanresource management offices of the Secretariats will be complemented with resources from Component 4(see below).

Project Component 4 - US$2.20 millionDeveloping Performance Evaluation Capacity

The component would support the Government's efforts to develop performance-oriented management andevaluation capacity in the public sector. The goal is to improve the effectiveness and efficiency of resourceallocation; develop a results-based approach to line management and service delivery; and fosteraccountability through better management and screening of public expenditures. The focus is on greateruse of goal setting, analytical techniques in budget and administrative decision-making, and statistical andaccounting information systems, as well as closer engagement of civil society in evaluating public sectorperformance.

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Given that the Government has developed an information system (SINEG) to monitor policies, programs,projects and activities related to implementation of the Master Plan for Reconstruction and Development(PMRTN), and created planning and evaluation units (UPEGs) and administrative units (GAs) per Reformof the General Public Administration Law (Legislative Decree No. 218-96), the Government has agreed toset up a performance evaluation unit (PEU) in the SPR.

The project would support the PEU, whose function would be to improve the planning, monitoring andevaluation capacity in the line secretariats, with emphasis on sectoral programming and identification ofexpenditure priorities. The PEU would also establish mechanisms to strengthen the evaluation'community" in Honduras, especially within the Government, with links to the private sector and broadercivil society, and promote public awareness and participation in assessing the performance of the puiblicsector.

Ihe PEU would coordinate closely with government agencies, including SEFIN, SETCO, the NationalInstitute of Statistics and the participating secretariats, as well as with government programs--e.g., thePRSP (Poverty Reduction Strategy Paper), especially regarding outcome monitoring and impactevaluation, and the above-mentioned SINEG concerning the monitoring and evaluation of the PMRTN.

T he project would focus on institution building in the public sector by developing sound planning,monitoring and evaluation capacity in line secretariats, beginning with those that represent a significantshare of the national budget, namely Health, Education, Agriculture, SOPTRAVI and SERNA. Support tothe participating secretariats would be based on the findings of a diagnosis of evaluation capacity, withspecific recommendations regarding an action plan for each secretariat. The diagnosis would becoordinated by the PEU. Strengthening of these secretariats would provide a useful basis for theperformance budgeting aspect of a medium-term expenditure framework (MTEF), if the governmentdecides to implement one.

The institutional diagnosis would follow the steps of an OED-developed guide to assist in the identificationof evaluation capacity development (ECD) options, with the action plans developed and tailored to each ofthe participating secretariats. The diagnosis would include a review of the budget process in each of thesecretariats, including the functions of the planning (UPEGs) and administrative (GAs) units and of relatedunits (especially statistics units), and of the uses made of information/analysis--i.e., for purposes ofmanagement, planning, resource allocation and accountability.

Each action plan would include the types and depth of training to be provided, technical assistance needs,and an assessment of the equipment (hardware and software) required. Depending on the strengths,weaknesses and opportunities facing each secretariat, and the depth of long-term donor support, each actionplan would include "ministry mentoring" in order to establish and demonstrate to others a range ofgood-practice approaches concerning performance evaluation.

The project would finance the strengthening of the UPEGs, including the statistical units, and the GAs inthe participating secretariats. The assistance would be provided in close collaboration with SEFIN andimplementation of SIAFI, as well as with UNAT and the requirements of the SINEG. The project wouldsupport the application of measurement methodologies, and the development of performance indicators forsectors, programs and projects. It would also provide a basis for priority setting, with special emphasis ongender and poverty reduction, to guide resource allocation to operational programs in the participatingsecretariats. The project would ensure that donor financing is fully taken into account in the budgetplanning and evaluation process at the sectoral level.

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The PEU would help to identify and share good practice approaches to the planning, conduct, quality, useand reporting of perfornance evaluation findings; and to clarify responsibilities of key actors withinGovernment. The unit would facilitate and support the "ministry mentoring" programs in collaborationwith donor agencies. The unit would support the strengthening of the evaluation community, especiallywithin the Government, by establishing forums/networks, holding regular meetings and annual conferencesto share good practice evaluations, and fostering participation by the private sector, universities, thinktanks, and the broader civil society.

The CPME would be the executing agency for this component in collaboration with the PEU, and theproject would fund technical assistance, studies, training and equipment (computer hardware and software)in the following subcomponents:

1) Strengthening of the performance evaluation unit: This subcomponent would strengthen the technicalcapacity of the PEU in the SPR through support of consultants, training and provision of equipment. Theproject would support consultancies to aid the PEU in carrying out consultation workshops in collaborationwith SEFIN and UNAT with the representatives of the UPEGs and GAs in the participating secretariats;conducting an OED-designed diagnosis of evaluation capacity in the secretariats; and designing tailor-madeaction plans for developing evaluation capacity in each of the participating secretariats through workshopswith each of the secretariats. Consultancies would also assist the PEU in developing a sectoralperformance evaluation framework; developing performance indicators and instruments for monitoringresults; and coordinating/supporting the "mentoring" program of participating secretariats with theinternational donor community.

2) Developing evaluation capacity in participating secretariats: Based on the diagnoses of thesecretariats, action plans, satisfactory to the Association, would be designed to develop and strengthensectoral planning, monitoring and evaluation in each of the participating secretariats. This sub-componentwould strengthen each of the secretariats by providing equipment (computer hardware and software),training and consultancies. Financing of consultants to assist in the "mentoring" program established ineach of the secretariats would be coordinated, as appropriate, with support provided by donor agencies atthe sectoral level in the areas of programming and evaluation.

3) Establishing communication and dissemination mechanisms: This subcomponent would enable theCPME in collaboration with PEU to carry out a program to foster communication and collaboration amongworkers in the evaluation community, including a forum/network to promote meetings and exchangesamong staff in the secretariats with representatives in the private sector and civil society; promote thepublic dissemination of evaluation findings of sectoral performance in order to provide feedback tosecretariats and relevant data for the Government's intemal oversight agencies; and to foster publicawareness and participation in the evaluation of public sector performance. Financing would includesupport for equipment and materials, periodic workshops and an annual conference for the forum/networkof evaluators, publications, and training of representatives from civil society.

Project Component 5 - US$1.50 millionPublic Procurement

Since 1996, the PSMSAC/PSMTAC operations have supported Government efforts aimed at introducinglegal, regulatory and institutional reforms necessary to invigorate and promote the effectiveness of thepublic administration. To this end, among the activities financed under this credit, technical assistance hasbeen provided to encourage increased efficiency and transparency in the procurement of goods and servicesby the Public Sector via the following consultancies: (a) review of the Draft Reforms to the State

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Contracting Law and Other Normative Instruments Related to the Government's Purchasing andContracting System 17/09/96) (b) Support to the Office of Administrative Probity in the Preparation andImplementation of a Technical and. Financial Cooperation Program(l /09/97); (c) review of the Norms andProcedures Regarding the Contracting of International Financial Organizations and Potential forH[armonizing same with National Legislation(3/12/97); and (d) drafting of Reforms to the Law Against theIllicit Enrichment of Public Servants and Issuance of Necessary Regulations (1/02/99).

I'his component would build on the advances made to date toward improving the efficiency andtransparency of public sector purchasing and contracting practices. It is furthermore fully commensuratewith the Government's Master Plan for National Reconstruction and Transformation which underscores theimportance of' ensuring that the practice of public administration be consonant with the principles ofefficiency and transparency and contemplates amongst the initiatives to be addressed, the design of aprogram to strengthen and modernize the Nation's state procurement system-- (Programa deF'ortalecimiento y Modernizaci6n del Sistema Nacional de Adquisiciones del Estado) which will beprepared by the Government with the IDB's collaboration. .

This component would support Government initiatives to strengthen State governance and to promotetransparency by providing technical support and cofinancing for the IDB-financed project: Efficiency andTransparency of State Purchasing and Contracting (Proyecto de Mejora de la Eficiencia y Transparenciaen las Compras y Contrataciones del Estado) in the areas of: (a) procurement training [component III of theIDB operation]; and (b) the development of a new national system for the procurement of goods andservices (component IV of the IDB project). Additionally, financing will be provided for consultanciesgeared to review and ultimately update the existing legal, regulatory and institutional frameworks that havea bearing on public sector procurement practices.

Specifically, project assistance would be managed by the CPME and channeled towards:

1) Training in procurement procedures throughout participating secretariats. This will include trainingprograms in operational procedures for civil servants involved in the procurement process; on-the-jobtraining; workshops and seminars for the sharing of experiences among participating entities.

2) Developinzg a new public procurement information system. Financing would be provided to developand implement a system, such as the COMPRANET database and information system, which willdisseminate Government procurement requirements (technical specifications/economic requirements) toprospective suppliers via the internet and allow the latter to present their offers electronically.

:3) Strengthening of the national regulatory and institutionalframeworks associated with public sectorpurchasing and contracting. This would include financing of consultancies to review and update existingstate procurement legislation; and support studies geared to strengthening of institutional capacity ofsecretariats to evaluate bids and award contracts--i.e., standardize procurement procedures throughout thepublic sector. It would also strengthen the norrnative unit for procurement and the Office of AdministrativeProbity.

Project Component 6 - US$5.00 millionConsolidating Regulatory Reforms

The new operation would continue supporting Govermment's efforts to create adequate legal frameworksand consolidate regulatory authorities and to reduce the scope of State intervention in the provision ofpublic services. This component would comprise three subcomponents: strengthening of the CCP;

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strengthening of regulatory institutions; and consolidation of public service and infrastructure regulatoryentities. SEFIN, assisted by the CCP, would manage implementation of this component.

1) Strengthening of the CCP. As a continuation of the efforts financed under the PSMTAC, the followingactivities would be included in the Project:

(a) To strengthen the CCP: (i) Local Consultants would be contracted to increase the Commissiontechnical capacity to manage the restructuring processes and constitute the local counterpart for theinternational firms that will advise the Government; (ii) local staff would be trained in the technical,economic and legal aspects of restructuring, to include travel expenses and tuition of courses, seminars andon-the-job training of staff; and (iii) computer, other office equipment and supplies, plus purchasing ofinformation and literature.

(b) Ports: Consultants would (i) update the diagnosis of the ports sector actual situation and the countryneeds for future ports expansion; (ii) propose options for sector restructuring; (iii) discuss the options withthe government; (iv) recommend the preferred option; (v) carry out an environmental assessment of theports sector, not later than 18 months after effectiveness; and (vi) prepare an environmental managementplan, acceptable to the Association, to mitigate any negative environmental impact identified in theassessment, not later than 45 days after completion of the study.

(c) Postal services. Consultants would (i) prepare the diagnosis of the postal services sector actualsituation and the country needs for future postal expansion; (ii) propose options for private sectorparticipation in the sector; (iii) discuss these options with the government; and (iv) recommend thepreferred option. Legal and technical advisors would carry out the privatization according to the optionselected.

(d) Telecommunications. Carry out technical, financial and legal studies to support institutionalrestructuring within the telecommunications sector.

2) Strengthening of regulatory institutions.

The project would support the existing regulatory institutions, through training of the staff, technicalassistance and provision of equipment. In particular training would emphasize (i) regulatory accounting;(ii) benchmark analysis; (iii) concession design and analysis of impact; (iv) interconnection pricing; (v) costbased models for tariff setting and reviews; and (vi) particular areas applicable to specific sectors asdescribed below.

(a) Telecommunications. CONATEL started operations in January 1996 and is still a young organizationwith only nine professional staff. The Commission needs at least 20 to 30 professionals to properly regulatethe sector to promote private sector investment in Honduras. This subcomponent includes:

Technical assistance to: (i) prepare amendments to the 1995 Telecommunications Law and its Regulationsto adapt it to new technological developments and to prepare for Sector liberalization, specifically whenCOHODETEL exclusivity over basic services expires in five years, to transform CONATEL into asemi-autonomous entity (it was created originally as part of the Secretary of Communications, PublicWorks and Transport, and now is under SEFIN); (ii) create the National Telecommunications DevelopmentFund to provide subsidies to investment by private companies in rural and poor urban areas to provide theircitizens with access to telecom services; (iii) re-classify services, to be consistent with a more competitiveregime; (iv) simplify current procedures for granting licenses for frequencies; (v) revise regulations; and

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(vi) draft new services' regulations.

CONATEL staff training, in, inter-alia: (i) services' control; (ii) service regulations; (iii) fundamentaltechnical plans; (iv) control of spectrum emissions; (v) radio frequency spectrum engineering; (vi) newtechnologies; (vii) frequency licensing processes; (viii) management of the radio frequency spectrum; (ix)interconnection pricing; (x) telephone numbering management; (xi) tariff regulation; (xii) competitionevaluation; (xiii) quality of service control; (xiv) sanction processes; (xv) deregulation of services incompetitive regimes.

Systems to manage the radio frequency spectrum to convert CONATEL paper archives to an automateddata base system for the radio frequency spectrum, as well as for the service concessions. The new systemwould enable C'ONATEL to reduce the response time to grant a new license from weeks to days, asCONATEL inlegrates the different data bases for each service into a unified database.

Systems to monitor the radio frequency spectrum to expand CONATEL's two fixed monitoring stations inTegucigalpa and San Pedro Sula, with three portable monitoring equipment for all bands (VHF, UHF, SHFarid EHF) to allow the entity to detect and correct interferences and to determine the compliance of thelicensees to the terms of the licenses.

(b) Electricity. The Government would strengthen CNE, by providing:

Technical Assistance. The Government would hire a firm to assist the Commission to solve issues that itneeds to address from time to time.

Training of the staff. The staff of the Commission would be trained in Honduras as well as in foreigncountries in the technical aspects of transmission and distribution of electrical energy, inter-alia, in thefcllowing subjects: (i) control of compliance of concession contracts; (ii) regulation of services; (iii) newtechnologies; (iv) tariff regulation and price formation; (v) transmission prices; (vi) treatment oftransmission and distribution losses; (vii) spot market analysis; (viii) pool governance issues; (ix)commercialization development and oversight; (x) evaluation of competition and anti-competitive behaviorof operators; (xi) quality of services control; (xii) enforcement of safety regulations on installations andelectrical appliances; and (xiii) enforcement of compliance, sanctions and resolution of disputes.

Information Systems. This subcomponent would include support for the information systems for theCommission, including the hardware and software.

(c) Private sector participation: concessions and licenses. The Government would strengthen SCL byp]roviding:

Technical assistance to (i) draft the regulations of the superintendency, for the Law of Promotion andDevelopment of Public Works and National Infrastructure; and (ii) assist the superintendency to solveissues that it needs to address from time to time.

Training of the staff in, inter-alia: (i) control of compliance of concession contracts; (ii) technicalmeasurement of usage and billing of public services, including interrruption and restoration of services;(iii) tariff regulation; (iv) evaluation of competition and anti-competitive behavior of operators; (v) controlof the quality of service; (vi) enforcement of safety regulations; and (vii) enforcement of compliance ofconcession contracts, sanctions and resolution of disputes.

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Information systems for the Commission, including the hardware and software.

(d) Civil Aviation. The Government would strengthen ANACI once created within the framework of anintegrated transport agency, by providing:

Technical assistance, once the new Civil Aviation Law is approved, to: prepare its Regulations; and assistthe Authority to solve issues that it needs to address from time to time. The technical assistance wouldinclude preparation of an environmental assessment of the sector.

Training of the staff in the technical aspects of regulation and supervision of, inter-alia: (i) construction ofaerodromes, airports; (ii) aerial navigation services provision; (iii) air traffic control; (iv) air transp6rt andwork; (v) safety and flight protection; (vi) quality of service provision regulations; (vii) installations safetyregulations; and (viii) technical regulations on airport services.

Information systems for the Authority, including the hardware and software.

3) Consolidation of the system ofpublic service and infrastructure of regulatory entities.

This subcomponent would include technical assistance to carry out a review of the regulatory entities,aiming at determnining the current regulatory capacity and needs of all sector entities. This would include ananalysis of current legislation pertaining to the sectors included in this project. Particular attention will begiven to study the advantages of an integrated transport regulatory agency, and the development of amultimodality and logistic unit. The consultancy would propose a new model that, according to theHonduran legislative framnework, would improve the financial independence and administrative autonomyof the regulatory entities. Based on the results of this study, the Government would propose adjustments tolegislation pertaining to the entities in order to create a coherent and harmonic system of regulation.

Project Component 7 - US$1.50 millionProject Management

This component would support the Executive Secretariat of the CPME by strengthening the operationalcapacity of the project coordinating unit (PCU), which is responsible for the day-to-day management of theproject. The component would finance the costs of the PCU consultants, equipment and activitiesnecessary to manage implementation of the project and to coordinate with the other executingagencies--SEFIN, assisted by CCP, and CGR, as well as with the various implementing entities. The PCUwould support and monitor the progress of the project, oversee contract completion, track disbursements,prepare semi-annual progress reports, and provide assistance to the Association's supervision missions. Theoutput of this component would be effective project management and results.

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Annex 3: Estimated Project CostsHONDURAS: ECONOMIC & FINANCIAL MANAGEMENT PROJECT

Local Foreign TotalE Project Cost By Component US $million US $million US $millionPublic Finance Management and Internal Control 1.23 6.09 7.32Reorganization of the Comptroller General's Office (CGR) 0.35 2.20 2.55Human Resource Management 0.76 1.52 2.28Developing Peiformance Evaluation Capacity 0.93 1.17 2.10Public Procurement 0.29 1.14 1.43Ccnsolidating Regulatory Reforms 1.00 3.74 4.74Project Management 1.14 0.30 1.44Total Baseline Cost 5.70 16.16 21.86Physical Contingencies 0.00 0.00 0.00Price Contingencies 0.30 0.84 1.14

Total Project Costs 6.00 17.00 23.00Total Financing Required 6.00 17.00 23.00

Local Foreign TotalProject Cost By Category US $million US $million US $million

Goods 0.28 7.44 7.72Works 0.00 0.00 0.00Services 5.52 8.96 14.48Training 0.20 0.60 0.80

Total Project Costs 6.00 17.00 23.00Total Financing Required 6.00 17.00 23.00

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Annex 4


Summary of Benefits:

Important technical, managerial, personnel, and procedural benefits produced by the project wouldhave a positive impact on the country's fiscal health. Today, inefficiencies arise from weakstructures in audit institutions. Building adequate technical and managerial capacity within SEFINand restructuring of the CGR are key elements in the Government's approach. Improved auditstandards and the overall institutionalization of internal controls within the Executive would ensurea rigorous management of fiscal resources. Additionally, implementation of SIAFI throughout thecentral government and decentralized institutions will allow complete transparency in the recordingand reporting of the Government's economic activities and will establish a framework to ensure anaccountability regime, while strengthening the external control system..

Another substantial benefit from the project is expected to occur in the public sector workforce. Theproject's proposed implementation of centralized norms and decentralized operations, and theconsolidation of the ongoing Human Resources Information System is expected to yield importantfiscal savings. By having a complete and accurate registry of public employees, the project wouldbe able to rationalize human resources needs and deployment. This quality reallocation is expectedto happen, at different degrees, in several administrative units across secretariats. A voluntaryretirement scheme would complement this employment rationalization.

The development of performance evaluation capacity should lead to improved budget analyticaltechniques and use of evaluation findings. The expected result would be better sectoralprogramming and priority-setting in public expenditures. Better distribution of scarce public fundswould minimize inefficiently allocated resources and increase accountability of actual expenditures,thus allowing the Treasury to attain more efficient cash flow management.

Strengthening regulatory authorities to oversee private sector participation in the provision of publicservices will consolidate the savings already gained in the state's transfer of public enterprises to theprivate sector. Of utmost strategic importance for fiscal savings, the component of publicprocurement will increase transparency and is expected to minimize deficiencies of the transactionsin public sector purchasing.

Financial controls would be positively affected by the nature and objectives of the project. Thestrategy supports the development and implementation of a new financial management system,including its integration with other management systems and coordination with SEFIN and linesecretariats. The strategy would also link human resources management to the financialmanagement system in SEFIN, and strengthen the capacity for planning, monitoring and evaluationin SEFIN and in the line secretariats. Moreover, modernization of the supreme audit institution,the financial management system and the strengthening of regulatory authorities would contributeto the overall strategy to promote transparency and accountability in the public sector.

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Annex 5: Financial Summary


Years EndingAugust 31 (in US$M)

*MLf-MENTATION PERtOp

Year I I Year2 2 Year 3 | Year 4 | Year5 | Year 6 l Year 7Total Financing RequiredProject CostsInvestment Costs 4.6 9.2 6.9 2.3 0.0 0.0 0.0

Recurrent Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total Project Costs 4.6 9.2 6.9 2.3 0.0 0.0 0.0

Total Financing 4.6 9.2 6.9 2.3 0.0 0.0 0.0

FinancingIBRD/IDA 3.8 7.6 5.7 1.9 0.0 0.0Government 0.8 1.6 1.2 0.4 0.0 0.0 0.0

Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0User Fees/Beneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Project Financing 4.6 9.2 6.9 2.3 0.0 0.0 0.0

Main assumptions:Investment costs include technical assistance, training and goods.

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Annex 6: Procurement and Disbursement ArrangementsHONDURAS: ECONOMIC & FINANCIAL MANAGEMENT PROJECT

Procurement

Procurement Arrangements

Procurement for the proposed project would be carried out in accordance with World Bank "Guidelines forProcurement under IBRD Loans and IDA Credits" published by the Bank in January 1995 and revised inJanuary and August 1996, September 1997 and January 1999; and "Guidelines: Selection and Employmentof Consultants by World Bank Borrowers" published by the Association in January 1997 and revised inSeptember 1997 and January 1999; and the special provisions stipulated in the Development CreditAgreement.

Procurement Methods: The methods to be used for the procurement described below and the estimatedamnounts for each method, are summarized in Table A. The threshold contract values for the use of eachmethod are fixed in Table B.

Goods

Goods procured under this project will include computer equipment and software, electronic informationsystems, training material and publications, vehicles and office equipment, totaling US$7.72 millionequivalent. To the extent possible, contracts for the goods will be grouped into bidding packages of overUS$100,000 equivalent and will be procured following Intemational Competitive Bidding (ICB)procedures, using Bank-issued Standard Bidding Documents (SBDs). Contracts with estimated valuesbetween US$25,000 equivalent and US$100,000 equivalent up to an aggregate amount not to exceedUS$700,000 equivalent may be procured using National Competitive Bidding (NCB) procedures andstandard bidding documents agreed in advance with the Association. Contracts for goods which cannot begrouped into larger bidding packages and estimated to cost less than US$25,000 equivalent per contract upto an aggregate amount not to exceed US$340,000 equivalent, may be procured using shopping(National/Intemational) procedures based on a model request for quotations satisfactory to the Association.

Selection of Consultants

Consulting services will be contracted under this project in the following areas of expertise: financialmanagement and control, information systems, human resource, performance evaluation, privatization,purchases and acquisition systems. These services are estimated to cost US$14.48 million equivalent andwould be procured using Bank Standard Requests for Proposals.

Firms

All contracts with firms would be procured using QCBS, except for small and simple contracts estimatedto cost US$100,000 equivalent or less that would be procured using CQ, up to an aggregate amount not toexceed US$900,000 equivalent.

Individuals

Specialized advisory services would be provided by individual consultants selected by comparison of

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qualifications of three candidates and hired in accordance with the provisions of paragraphs 5. Although5.3 of the Consultant's Guidelines up to an aggregate amount of US$3.19 million equivalent.

Prior review threshold:The proposed thresholds for prior review are based on the procurement capacity assessment of the projectimplementing unit and are summarized in Table B.

Assessment of the Agency's capacity to implement procurement

The PCU (Project Coordinating Unit) within the CPME would carry out the procurement for Components1, 3, 4, 5 and 7. Procurement for Component 6 (Consolidating Regulatory Reforms) would be carried outby the CCP (Comision Consultiva de Privatizacion). Procurement for Component 2 (Reorganization of theComptroller General's Office) would be carried out by the Comptroller General of the Republic (CGR).The PCU will include a project coordinator, three specialists to coordinate implementation of projectcomponents, one procurement officer and one administrative/financial officer. The Operational Manual willinclude the procedures for the internal control of procurement actions, the technical specifications in eachcase, as well as reference to the model contracts as per the Bank's Standard Bidding Documents.

An assessment of the capacity of the PCU and the PU-CCP was carried out and subsequently cleared onMay 18, 2000 by the Regional Procurement Advisor. The assessment covered the organizational structure

of the implementing units and the procurement arrangements for the project, their capacity to carry out theBank required procurement cycle management and the interaction between the different projectimplementing tnits.

The risks identified in the assessment include: lack of a procurement officer clearly responsible for projectprocurement; lack of procurement planning and lack of staff with planning skills; some external influenceon the appointment of individual consultants. The CPME will take actions to mitigate these risks, such as:revise PCU staff s responsibilities and functions; appoint a qualified procurement consultant for an initialperiod of two rnonths and to provide further assistance through short-term visits during projectinmplementationi; and favor the appointment of consulting firms over individual consultants. In addition, thetechnical specialists in the CCP must submit a six-month procurement plan each semester to the CCP'sprocurement officer to facilitate project implementation.

The overall project risk for procurement is average.

Procurement Plan

At appraisal, the Borrower developed a procurement plan for project implementation which provides thebasis for the aggregate amounts for the procurement methods. This plan will be revised with the assistanceof the procuremnent consultant to be appointed by the PCU. At the beginning of each calendar year, theBorrower shall update the Procurement Plan with a detailed procurement schedule for the coming year.

Frecuency of Procurement Supervision.

In addition to the prior review supervision to be carried out by the Association, the capacity assessment ofthe PCU and PU-CCP recommended one full supervision mission to visit the field every six months duringproject implementation, to carry out post review of procurement actions. Based on the overall riskassessment, the post-review field analysis should cover a sample of not less than I in 5 contracts signed.

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Procurement methods (Table A)

Table A: Project Costs by Procurement Arrangements(US$ million equivalent)

Procurement MethodExpenditure Category ICB NCB Other N.B.F. Total Cost

1. Works 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

2. Goods 6.68 0.70 0.34 0.00 7.72(6.68) (0.66) (0.34) (0.00) (7.68)

3. Services 0.00 0.00 14.48 0.00 14.48(0.00) (0.00) (10.52) (0.00) (10.52)

4. Training 0.00 0.00 0.80 0.00 0.80(0.00) (0.00) (0.80) (0.00) (0.80)

Total 6.68 0.70 15.62 0.00 23.00(6.68) (0.66) (11.66) (0.00) (19.00)

Figures in parenthesis are the amounts to be financed by the IDA Credit. All costs include contingencies

71 Includes goods to be procured through national and international shopping, consulting services, servicesof contracted staff of the project management office, training, technical assistance services.

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Table Al: Consultant Selection Arrangements (optional)(US$ million equivalent)

Consultant Selection MethodServices

Expenditure QCBS QBS SFB LCS CQ Other N.B.F. Total CostCategory

A. Firms 10.39 0.00 0.00 0.00 0.90 0.00 0.00 11.29(7.58) (0.00) (0.00) (0.00) (0.65) (0.00) (0.00) (8.23)

B. Individuals 0.00 0.00 0.00 0.00 0.00 3.19 0.OQ 3.19______________ (0.00) (0.00) (0.00) (0.00) (0.00) (2.29) (0.00) (2.29)

Total 10.39 0.00 0.00 0.00 0.90 3.19 0.00 14.48______________ (7.58) (0.00) (0.00) (0.00) (0.65) (2.29) (0.00) (10.52)

1\ Including contingencies

Note: QCBS = Quality- and Cost-Based SelectionQBS Quality-based SelectionSFB = Selection under a Fixed BudgetLCS = Least-Cost SelectionCQ = Selection Based on Consultants' QualificationsOther = Selection of individual consultants (per Section V of Consultants Guidelines),Commercial Practices, etc.

N.B.F. = Not Bank-financedFigures in parenthesis are the amounts to be financed by the Bank Credit.

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Prior review thresholds (Table B)

Table B: Thresholds for Procurement Methods and Prior Review'

Contract Value Contracts Subject toThreshold Procurement Prior Review

Exnenditure Category (US$ thousands) Method (US$ millions}1. Works

2. Goods >100 ICB All documents25-100 NCB All contracts over 25

<25 SHOPPING First two contracts3. ServicesFirms >100 QCBS All

<100 CQ TORs only & Short ListIndividuals >30 Other All

<30 Other All TORs & Short List4. Miscellaneous5. Miscellaneous6. Miscellaneous

Total value of contracts subject to prior review: US$18.31 million

Overall Procurement Risk Assessment

Average

Frequency of procurement supervision missions proposed: One every 6 months (includes specialprocurement supervision for post-review/audits)

Thresholds generally. differ by country and project. Consult OD 11.04 "Review of ProcurementDocumentation" and contact the Regional Procurement Adviser for guidance.

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Disbursement

Allocation of credit proceeds (Table C)

Financial Arrangements:

Financial ManagJement AssessmentThe Borrower will maintain a financial management system with CPME, inicluding records and accounts,anci prepare finatncial statements in a format acceptable to the Association, adequate to reflect theoperations, resources and expenditures related to the Project.

In compliance with the conditions outlined in the Bank's Project Financial Management Manual (Feb.1999), a LAC FMO carried out the required project financial management assessment to determine thecapacity to produce PMRs concluding that the PCU and the CCP have the capacity and experiencedprcfessional staff to undertake financial management and observe Bank standards in this regard duringprcject implementation. The project's Financial Assessment was perforned in Tegucigalpa on April 24-28,2000 by FMS Manuel Vargas (in project files).

Project Coordinating Unit (PCU) at the CPME and Inmplementing Unil at the CCP.

Both the Project Coordinating Unit at the CPME and the CCP at SEFIN have managerial responsibilities inthe contracting and payment of services and goods provided under the ongoing Project (PSMTAC). Forthese purposes, each of these entities has used funds from the special account. The PCU currently is andwill be responsible for recording financial transactions, preparing supporting documentation for creditwithdrawal applications, financial reports and for the coordination with external auditors. Internal controlprocedures are acceptable and there is a corresponding manual. Arrangements for flow of funds and therecovery of advances to the Special Account are also adequate. The accounting system satisfies theminimum requisites for financial information as requested by the Association and the annual financialstatements are audited by an independent firmn under acceptable conditions. The adequate execution of thesefunctions has relied on close collaboration between the two entities. The continuation of TLhese attributes isnecessary for the proposed operation. Yet, some improvements are necessary and they are specified in theAction Plan described below.

Implementation Unit at the CGR

This unit was recently created, and there will be a financial management system that will work underarrangements similar to those of the CPME: It will have its own subaccount with funds allocated from theSpecial Account by the PCU according to project needs, and it will be responsible for payments associatedwith its project component. The unit will provide its own PMRs to register transactions in its accountingregistries and thus enable the PCU to present PMRs and other financial information and coordinate theexternal auditing on the CGR's behalf to the Association.

Although the CGR is not yet experienced in the handling of funds coming from the IDA, the staff assignedto this activity have a satisfactory professional background. On internal control and flow of fundsprocedures, the CGR will apply the model used by the PCU and the CCP.

Summarizing, [or this project, the three implementing units (PCU, CCP, CGR) will keep separatesubaccounts with funds allocated from the Special Account by the PCU, according to project needs.

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Action Plan

Action Plan: As a result of the assessment, the following activities were identified that must be completedbefore effectiveness:

a. Updating, review and approval of the manual for management, financial and accounting norms andprocedures.b. Opening of the Special Account and of the bank account for counterpart funds.c. Revise Project Implementation Plan, including management indicators and annual budgets, all consistentwith the Project Appraisal Document. During the first year, the annual Operation Plan and the Budget mustbe specified by quarter.d. Definition of the format for the Project Management Reports PMRse. Updating of the Chart of Accounts.f. Definition of the distribution, review, analysis and approval procedures for the monthly, quarterly andannual financial information.g. Preparation, review and approval of the terms of reference for the external auditors.h. Definition of the mechanisms of coordination of the financial information with the executing agency atthe CGR.i. Preparation, review and approval of the position descriptions of project staff at the CGR.

The following activities must be implemented not later than March 31, 2001:

a. Updating of the management informnation electronic system to allow PMR preparation.b. Preparation of the technical and user manuals for the management information electronic system.a. Preparation and submittal of quarterly PMRsc. Utilization of PMRs as a base for disbursement applications for the Credit.d. Contracting of external auditors.e. Deposit of counterpart funds for the first year of implementation in the Project's bank account.f. Updating of the information management software that will: i) allow the processing of multicurrencyinformation; ii) permit a multi-user capacity; and iii) establish the linkages to monitoring indicators.

It is recommended that the three units with administrative/managerial functions (PCU, CCP and CGR)agree on a timetable to coordinate their collaboration towards the achievement of the activities earlierdescribed. For supervision purposes, the PCU will present monthly reports to the Association to inform onthe progress of the execution of such activities.

Table C: Allocation of Credit Proceeds

Expenditure Category Amount in US$million Financing Percentage1. Goods 7.68 100% foreign, 88% local.2. Consultant Services 10.52 100%3. Training 0.80 100%

Total Project Costs 19.00 |

Total 19.00

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Usie of statements of expenditures (SOEs):

Disbursement of IDA funds will be made in accordance with the categories shown in Table C. Retroactivefinancing would be permitted to reimburse eligible expenditures made after November 1, 1999 for goods,consultancies and training up to a total amount of US$1.9 million equivalent (with no financing forANACI). The closing date of the credit is August 31, 2004.

At the beginning of project implementation, the Borrower will use traditional disbursement procedures,incl]uding Statements of Expenditures for contracts below US$25,000 in the case of procurement of goods,US$100,000 for consulting firm contracts and US$30,000 for individual consultant contracts and training.Full documentation will be required for disbursement against goods and services exceeding the abovelimits. For documentation in support of Statements of Expenditures, the Borrower must: (i) maintain, orcatuse to be maintained, records in separate accounts reflecting such expenditures; (ii) retain, until one yearafter the Association has received the audit report for the fiscal year in which the last with drawal from theloan account was made, all records evidencing such expenditures; (iii) enable the Association'srepresentatives i:o examine such records; (iv) ensure that such recordsand accounts are included in theannual audit. The report of such audit must contain a separate opinion by the auditors as to whether theStatements of Expenditures (or eventually the Project Management Reports) submitted during such fiscalyear, can be relied upon to support the related withdrawals.

Project Management Reports:

Not later than March 31, 2001, the PCU and the CGR will furnish to the Association quarterly ProjectManagement Reports which specify actual sources and applications of funds for the parts of the Projectunder their responsibility, both cumulatively and for the period covered by that report as well as projectedsources and application of funds for the project for the six month period, following the period covered bythat report. The report will also show separately expenditures out of the proceeds of the fund during theperiod covered by the report and expenditures proposed to be financed out of the proceeds of the creditduring the next six month period.

The PMRs will: (i) describe physical progress in project implementation both cumulatively and for theperiod covered by the report; (ii) explain variances between the actual and previously forecastedimplementation targets and (iii) describe the status of procurement under the project and expenditures undercontracts financed out of the loan, as at the end of the period covered by the report.

Special accoijnt:In order to facilitate disbursements and timely project implementation, the Government will establish,maintain and operate a Special Account in US dollars at the Central Bank, under terms and conditionssatisfactory to -he Association to cover the IDA share of eligible expenditures. Total advances at any giventirne would not be allowed to exceed the "authorized allocation" of US$1.4 million equivalent.

The PCU will manage a Special Account and will allocate funds to the implementing units (CCP andCGR), via subaccounting arrangements, according to project needs.

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Annex 7: Project Processing Schedule


Project Schedule Planned ActualTime taken to prepare the project (months) I10 6First Bank mission (identification) 08/16/99 11/15/99Appraisal mission departure 11/30/99 04/25/2000Negotiations 06/21/2000 05/25/2000

Planned Date of Effectiveness 11/30/2000 11/30/2000

Prepared by:

Honduran team led by the Executive Secretariat of the Presidential Commission for Modernization of theState (CPME) together with the Secretariat of Finance and Office of the Comptroller General of theRepublic, andWorld Bank team.

Preparation assistance:

Government: Licda. Rosa Lidia Montes de Oca (Project Coordinator, PCU/CPME), Licda. Gloria MariaPalacios (Institutional Restructuring PCU/CPME), Licda. Rosario Cobar (Employment and SalaryRegimes/Human Resource Mangement PCU/CPME), Licda. Carmen Martinez (Procurement PCU/CPME), Licda. Glenda Gallardo (Director. UNAT/SPR), L-ic. Hugo Castillo (Viceminister, Public Investment &Credit, SEFIN), Lic. Rodolfo Danery Fuhes (Viceminister, Finance & Budget, SEFIN), Ing. GustavoAdolfo Torres (Information Systems SIAFI/SEFIN), Lic. Mario Aguero Lacayo (Executive SecretaryCCP), Dra. Lorena Rodriguez (Regulatory issues, CCP), Lic. Edgardo Madariaga (Privatization, CCP),Dra. Vilman Morales (Lawyer, CCP). Consultants: Vicente Lopez (information technology systems),Bruce Carlson (performance evaluation/donor coordination), Angel Gonzalez-Malaxechevarria(restructuring of the CGR), Marcelo Osorio (procurement), William Mayville (institutional assessment).

Bank staff who worked on the project included:

Name SpecialityAntonio Martin del Campo |Team Leader

Javier Burgos |Privatization/Regulatory Frameworks/Airports Specialist

Eloy Vidal !Telecommunications Specialist

Monica Fidel Hfiuman Resource Management Specialist

Maria del Carmen Minoso Institutional development/public procurement-Operations Analyst

Jose Kliksberg jPerformance evaluation/indicators/Projects Assistant

Keith Mackay Peer Reviewer

Vicente Fretes-Cibils Peer Reviewer

Eliana Villagomez Task Team Assistant

Reynaldo Pastor Legal Counselor

Emilio Rodriguez Procurement SpecialistRose Elba Perez Project Management/ Costing/ Operations Analyst

Manuel Vargas Financial Management Specialist

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Annex 8: Documents in the Project File*HONDURAS: ECONOMIC & FINANCIAL MANAGEMENT PROJECT

A. Project Implementation Plan

Project Implementation PlanDraft versions of the basic programs of implementation by component.

B. Bank Staff Assessments

Donor Coordination (Bruce Carlson)Donor Activities Related to the Office of the Comptroller General of the Republic (AngelGonzalez-Malaxechevarria)Involvement in Institutional Diagnosis of the Office of the Comptroller General of the Republic (AngelGonzalez-Malaxechevarria).Institutional Assessment (William Mayville).

C. Other

Telecommunications

Telecommunications LawRegulations to the Telecommunications Law (May 27, 1997).Reformed Capitalization Decree approved by Congress in May 1999.

Civil Aviation

Ley para la Prestaci6n y Gesti6n de los Servicios Publicos (January 1999).Proyecto de Ley de Aviaci6n Civil

Electricity

Proyecto de Ley Electricidad (1999)Enacted Regulations to the Electric Sector Framework Law.Amended Framnework Law (May 1998)

Human Resource Management

Design and Implementation of a Human Resource Management System for the Civil Service andNeighboring Central Government Regimes (Cincorp-Hay) approved by Congress in March 1998.

Integrated Financial Management and Investment Programming

Draft Integrated Financial Management System Law (1999).Phases I and II of the Design and Implementation of the Integrated Financial Management System (Vinterc& Barents).

*Including electronic files

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Annex 9: Statement of Loans and Credits


Difference between expectedand actual

Orginal Amount in US$ Millions disbursements

Project ID FY Borrower Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd

HN-PE-7392 1993 GOVERNMENT NUTRITION/HLTH TRNSPRT SCTR D.00 35.40 0.00 6.71 -4.40 -0.87

HN-pE-7388 1993 GOVERNMENT OF RHB BASIC EDUCATION D.00 85.00 0.00 17.93 -2.97 8.85

HN-PE-7399 1995 HONDURAS GOVT OF ENVIRON. DEVELOPMENT PUB SEC 0.00 30.00 0.00 10.24 9.53 0.00

HN-PE-7396 1995 HONDURAS MOD TAC 0.00 10.80 0.00 2.72 2.76 3.06

HN-PE-34607 1996 GOVERNMENT OF PUB SEC MOD SAC RURAL LAND 0.00 9.60 0.00 1.54 1.61 0.00

HN-PE-7387 1996 HONDURAS REPUBLICOF MGMT PROFUTURO 0.00 115.70 0.00 27.58 1.13 6.83

HN-PE-7398 1997 HONDURAS REPUBLICOF FHISIV 0.00 34.00 0.00 20.52 8.16 5.87

HN-PE-57350 1999 HONDURAS 0.00 8.30 0.00 7.60 0.00 0.00

HN-PE48651 1999 GOVERNMENT OF 0 00 67 .5 0 00 24 62 -31.28 o0.0

1 HONDURAS REPUBLIC OF

HONDURAS

GOVERNMENT OF

HONDURAS

Total: 0.00 396.30 0.00 119.46 -15.60 23.54

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HONDURASSTATEMENT OF IFC's

Held and Disbursed Portfolio

In Millions US Dollars

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic1995/98 Elcosa 7.90 2.6 3.50 19.46 7.90 2.63 3.50 19.461997 Cressida 15.00 40.00 10.00 37.00 15.00 0.00 10.00 37.00

Total Portfolio: 22.90 2.64 13.50 56.46 22.90 2.63 13.50 56.46

Approvals Pending CommitmentFY Approval Company Loan Equity Quasi Partic1998 CAMINO REAL 10.00 0.00 0.00 0.001998 PLAZCRESSIDA BLINC 0.00 0.00 0.00 7.001999 GRANJAS MARIN II 6.00 0.00 0.00 0.00

Total Pending Commitment: 16.00 0.00 0.00 7.00

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Annex 10: Country at a GlanceHONDURAS: ECONOMIC & FINANCIAL MANAGEMENT PROJECT

LatinPOVERTY and SOCIAL America Low-

Honduras & Cari. income Development diamond1998PoniitAtion mid-vser Mttillios5 A 7 .(n 1 SIS Life expectancyGNP nar anAnida t(A 1method NSS) 730 3 940 .50O.NP fAtHas method UlSS billionl) 4 s t £78 I 844

Average annual orowth. 1992-98

pnolArtion (%l £ 1R 1 7Labor force t%l 38 2 3 19 Gpe pross

per >.primaryMost recent ftstimat* flatest vear avaIlable. 1992-98) capita enrolImentPavertv (% of ooculation below national aovertv linel Solt ran n onlatn, t% aOf tONfi oonU/atotonl 48 75 31

I ifeA sntetan.v at hirth Ivears) 69 7( f fMInfant mortalitv foer 1.000 live birthsl 36 32 69thildn maln&tritinn f% of children undftr 5) 1 R 8 Access to safe waterAccess to safe water (% of Dooulltion) 77 75 74lterart-vw (/ of oooulation Aoe 15+. 79 13 97

Gross orimarv enrollment (% of sctlool-aoe oooulabonl ilt 113 108 HondurasMale 11f 11 3 -Low-income groupFPaml a 112 103

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1977 1S87 1997 1998Economic ratios

GOP fuSS billions) 1 7 4 2 4.6 5,3G-rosstomestic invAstmentlGfnP 731 17 4 31 5 29 r TradeEwoorts of 0oo0s and servicesIGOP 34 8 22 0 47 0 45.3Gr-ss dome,st,r sav,nnsGnoP 18 13 5 7 5S 27 4Gross natinnal s.vinns/GOP 14 S 97 24 6 230t

0.-rrant acr.onunt hal-an .P .F t - Domestic .nvestmentInterest navments/GI3P 1 R 2 3 3 7 34 InvestmentTotal detll/G DP 451 79.5 101 4 94 6 SavingsTotal (le.t qervi,-.As/nrts 17 q 34 1 71 7 159Present value of debt/GOp 80 5Present vrait nf rldhtflmnorts 16i02

Indebtedness1977-87 1S88-98 1997 1998 1999-03

(averaoe annual orowthlGnP 2 2 34 51 30 39 HondurasG NP oar t-anitr -10 n 05 3 4 1 1 1 f Low-income oroupExnoris ot aoods and services 1 5 21 1 0 1 a 7 0

STRUCTURE of the ECONOMY

1977 1987 1997 1998 Growth rates of output and investment (%)t% of GDPI

40Anrirnultutre 30 2; 90 9 20 7 17 r TInd,,strv 23 2 23 0 25 fi 7

Manufacturinn lb 1 14 5 1.S 5. 1.S 9berv i,es 4S2 561 54 2 55f

Private consumotion 68 9 72 3 60 2 63 1 -10 93 94 95 96 97 98G eneral onovrnmrnt consurmntinn 1 5 14 7 14 2 14 s GDI -GDPImDorts of ooods and services 39.3 25.9 52.9 52 4

1977-87 v*raoannualorowth1988-98 1997 1998 Growth rates of exports and Imports (%)(aversae annual orowthlAariculture 22 32 5.6 -7O D 5Indrustrv 24 3 7 47 a n 10

Manufacturina 2.2 3.7 6 1 5 8 5.ervices 25 34 52 59

Private consumDtion 2.5 3 1 6 0 3.0 s 2 94 9s 96 99General onvernment consumotion 3 1 -2 0 -0 4 92Gross domestic, investment -4 1 83 1 1 6f n .Imnorts nf onrds and servines -' 4 3 4 -1 9 6n Exports 2 Impo0sGross national oroduct 2 2 3 8 6 4 4 0

Note, 1998 data are preliminary estimates.

The diamonds show four kev indicators in the countrv (in bold) comDared with its income-orouo averane. If data are missino. the diamond willhe incomnlete

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Honduras

PRICES and GOVERNMENT FINANCE

Domestic prices 1977 1987 1997 1998 Inflation (%)

(% change) 40

Consumer prices .. 2.5 20.2 13.7 30Implieit GDP deflator 12.2 2.8 22.7 13.7 20

Govemment finance(% of GOP, includes current grants) 0Current revenue . 22.6 31.3 29.9 93 94 95 96 97 98

Current budget balance . 1.0 6.9 5.5 GDP deflator 4 CPIOverall surplus/deficit . -3.8 -1.3 -1.8

TRADE1977 1987 1997 1998 Export and import levels (USS millions)

(US$ millions)Total exports (fob) . 822 1,536 1,605 3,000

Bananas .. 311 212 176Coffee .. 200 327 430 2,000Manufactures . .

Total imports (cif) 953 2,149 2,569 IFood .. 139 269 346 1.000.Fuel and energy .. 119 234 221Capital goods . 193 529 510 0E,.E JU

92 93 94 95 96 97 99Exoort orice index (1995=100) .. 87 98 87Imoort once index (1995=100) .. 81 95 84 * Exporns ImportsTermsoftrade(1995=100) .. 108 103 103

BALANCE of PAYMENTS

(USS millions) 11977 1987 1997 1998 Current account balance to GDP ratio (%)

Exports of goods and services 581 950 2,176 2,396 oImports of goods and services 655 1,072 2,452 2,775

Nei income -69 -235 -218 -206Net current transfers 0 36 174 235 -11l 11Current account balance -143 -320 -321 -350 -12

Financing items (net) 209 398 601 518Changes in net reserves -67 -78 -280 -168 -16

Memo:Reserves includina aold (USS milbions) .. 114 591 824Conversion rate (DEC. locaMUSSI 2.0 2.0 13.0 13.4

EXTERNAL DEBT and RESOURCE FLOWS1977 1987 1997 1998

(USS millions) Composition of total debt, 1998 (USS millions)

Total debt outstanding and disbursed 754 3,300 4,698 5,007IBRD 87 575 275 235 G: 536 A:235IDA 33 80 496 579 3:579

Total debt service 106 342 505 506IBRD 9 59 73 68 F:576 C:113IDA 0 1 5 6

Ccmposition of net resource flowsOfficial grants 9 133 139 193Official creditors 71 124 348 18Private creditorA 69 -41 3 110Foreign direct investment 9 39 128 99 | 1_ 45

Portfolio equity 0 0 0 0

World Bank programCommitments 17 4 48 245 A - IBRD E - BilateralDisbursements 25 25 95 63,908 B - IDA D - Other mulbiateral F - PnvatePrincipal repayments 3 26 52 50 CC- MF G - Short-termNetflows 22 -1 43 63,858Interest payments 6 34 26 23Net transfers 16 -35 17 63,835

Development Economics 9/22/99

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