World Bank Document · Document of The World Bank Report No: 25798 PROJECT APPRAISAL DOCUMENT ONA PROPOSED CREDIT IN THE AMOUNT OF SDR 8.8 MILLION (US$12.0 MILLION EQUIVALENT)

Document ofThe World Bank

Report No: 25798

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED CREDIT

IN THE AMOUNT OF SDR 8.8 MILLION (US$12.0 MILLION EQUIVALENT)

TO THE

REPUBLIC OF HONDURAS

FOR A

REGIONAL DEVELOPMENT IN THE COPAN VALLEY PROJECT

Environmentally and Socially Sustainable Development Sector Management UnitCentral America Country Management UnitLatin America and the Caribbean Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective March 10, 2003)

Currency Unit = Lempira1 Lempira = US$0.056

US$1 = 17.64 Lempira

FISCAL YEARJanuary 1 - December 31

ABBREVIATIONS AND ACRONYMSACTA Cooperation Agency of Tecino and Associates (private Swiss agency)AECI Agencia Espanola de Cooperacion Internacional, Spanish International Cooperation AgencyCAS Country Assistance StrategyCEMCA French Center for Central American and Mexican StudiesCFAA Country Financial Accountability AssessmentCONIMCHH Consejo Nacional de Indigenas Maya Chorti de Honduras, National

Council of Indigenous Maya Chorti of HondurasCPAR Country Procurement Assessment ReportDGCP Direccion General de Credito Publico de la Secretaria de Finanzas,

Directorate of Public Credit, Ministry of FinanceEA Environmental AssessmentEOP End of ProjectERR Economic Rate of ReturnFHIS Fondo Hondurefio de Inversidn Social, Honduras Social Investment FundFMR Financial Monitoring ReportsGDP Gross Domestic ProductGENFUND Norwegian Trust Fund for Gender MainstreamingGoH Government of HondurasHIPC Highly Indebted Poor Countries InitiativeICB International Competitive BiddingICR Implementation Completion ReportIDA International Development AssociationIDB Inter-American Development BankIHAH Instituto Hondurenio de Antropologia y Historia, Honduras Institute of Anthropology and HistoryIHT Instituto Hondureno de Turismo, Honduras Institute of TourismIMF International Monetary FundrNE Instituto Nacional de Estadistica, National Statistics InstituteIRR Internal Rate of ReturnJICA Japanese International Cooperation AgencyLCS Least-Cost SelectionLCSES Environmentally and Socially Sustainable Sector Management Unit,

Latin America and the Caribbean Region, World BankNCB National Competitive BiddingNGO Non-governmental organizationNPV Net Present ValueOCDIH Organizacion Cristiana-Desarrollo Integral de Copdn,

Christian Organization for the Integrated Development of CopdnOED Operations Evaluation DepartmentPCU Project Coordination UnitPHRD Policy and Human Resources Development/Japan Grant ProgramPROFUTURO Honduras Interactive Environmental Learning and Science Promotion ProjectPRSP Poverty Reduction Strategy Paper

PRSC Poverty Reduction Support CreditRFP Request for ProposalsRPA Regional Procurement Advisor, Latin America and the Caribbean Region, World BankQCBS Quality and Cost-Based SelectionSCAD Secretaria de Cultura, Artes, and Deporte, Ministry of Culture, Arts, and SportsSEA Strategic Environmental AssessmentSETCO Secretar(a Tecnica y de Cooperacion, Ministry of Technical CooperationSOE Statement of ExpendituresSERNA Secretaria de Recursos Naturales y Ambiente, Ministry of Natural Resources and the EnvironmentST Secretarta de Turismo, Ministry of TourismTOR Terms of ReferenceUNESCO United Nations Educational, Scientific, and Cultural OrganizationUSAID United States Agency for International Development

Vice President: David de FerrantiCountry Director: Jane Armitage

Sector Director: John RedwoodSector Leader: Martin Raine

Sector Manager: Mark CacklerTask Team Leader: Maria-Valeria Pena

HONDURASREGIONAL DEVELOPMENT IN THE COPAN VALLEY 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 33. Sector issues to be addressed by the project and strategic choices 6

C. Project Description Summary

1. Project components 112. Key policy and institutional reforms supported by the project 123. Benefits and target population 124. Institutional and implementation arrangements 13

D. Project Rationale

1. Project alternatives considered and reasons for rejection 152. Major related projects financed by the Bank and/or other development agencies 163. Lessons learned and reflected in the project design 174. Indications of borrower commitment and ownership 185. Value added of Bank support in this project 18

E. Summary Project Analysis

1. Economic 192. Financial 193. Technical 204 Institutional 215. Environmental 236. Social 247. Safeguard Policies 26

F. Sustainability and Risks

1. Sustainability 272. Critical risks 27

3. Possible controversial aspects 29

G. Main Credit Conditions

1. Effectiveness Condition 292. Other 30

H. Readiness for Implementation 30

I. Compliance with Bank Policies 30

Annexes

Annex 1: Project Design Summary 31Annex 2: Detailed Project Description 35Annex 3: Estimated Project Costs 40Annex 4: Cost Benefit Analysis Summary 41Annex 5: Financial Summary 56Annex 6: (A) Procurement Arrangements 57

(B) Financial Management and Disbursement Arrangements 63Annex 7: Project Processing Schedule 68Annex 8: Documents in the Project File 69Annex 9: Statement of Loans and Credits 71Annex 10: Country at a Glance 73Annex 11: Assessment of the Project Areas and Impact of Tourism 75Annex 12: Social and Indigenous Issues 80Annex 13: Non-governmental Organization Profile 87

MAP(S)EBRD Map: 32376

HONDURASRegional Development in the Copan Valley Project

Project Appraisal DocumentLatin America and Caribbean Region

LCSEO

Date: April 24, 2003 Team Leader: Maria-Valeria PenaSector Manager/Director: John Redwood Sector(s): Sub-national government administration (20%),Country Manager/Director: Jane Armitage Agricultural extension and research (20%), Micro- andProject ID: P081172 SME finance (20%), Vocational training (20%), OtherLending Instrument: Specific Investment Loan (SIL) industry (20%)

Theme(s): Rural non-farm income generation (P), Otherenvironment and natural resources management (P),Gender (S), Indigenous peoples (S)

Project Financing Datl,,i_ -.,

] Loan [X] Credit [ ] Grant [ Guarantee [ Other:

For LoanslCredits/Others:Amount (US$m): SDR 8.8 million (US$12.0 million equivalent)

Proposed Terms (IDA): Standard Credit

Grace period (years): 10 Years to maturity: 40Commitment fee: 0.00-0.50% Service charge: 0.75%Financing Plan(US Source, 7 -- Local Foreign TotalBORROWER 1.18 0.00 1.18IDA 10.15 1.85 12.00LOCAL COMMUNirrES 0.17 0.00 0.17Total: 11.50 -1.85 13.35

Borrower: REPUBLIC OF HONDURASResponsible agency: HONDURAS INSTITUTE OF TOURISMAddress: Apartado Postal 3261, Tegucigalpa, Honduras

Contact Person: Miriam Leiva, Coordinator, Project Coordination UnitTel: 504 221 1909 Fax: 504221 1911 Email: [email protected]

Estimated Disbursements ( Bank FY/US$m):'' '.' FY, "Q0, 2005 22006, 2007 >2008,

Annual 1.20 2.90 3.90 3.00 1.00Cumulative 1.20 4.10 8.00 11.00 12.00

Project implementation period: 4 years--October 1, 2003 to September 30, 2007Expected effectiveness date: 09/30/2003 Expected closing date: 03/31/2008

orAcE *O .R P. z

A. Project DeveMopment Obiectlve

1. Project development objective: (see Annex 1)

The development objective of the Regional Development in the Copan Valley Project - Copan Valley -is to achieve sustainable tourism development based on the cultural and natural patrimony of the CopanValley and surrounding areas which will, as a result, create investment opportunities for the privatesector, foster employment, and reduce poverty in one of the poorest regions of Honduras. This projectwill achieve its objective by supporting: (a) the creation of an archeological tourism circuit integratingthree archeological parks (Copan, El Puente, and Los Naranjos) and two archeological sites (CerroPalenque and Plan Grande); (b) ecologically sustainable management in the three parks and two sitesand surrounding areas to address negative impacts provoked by poverty, deforestation, erosion, andnatural disasters; (c) environmental education that is appropriate to the biodiversity and the historicalcharacteristics of the region; (d) capacity building for employment associated with park/sitedevelopment, eco/cultural guiding, and the tourism service sector; (e) strategic planning for tourismdevelopment among key community, private, and public stakeholders; (f) access to training andtechnical assistance for high-quality alternative products and services provided to indigenous andlocally-owned enterprises, tourism operators, and municipal staff to provide better services, generateincome and foster longer stays, encouraging a local investment climate; and (g) institutionalstrengthening for cultural management and planning capacity.

2. Key performance indicators: (see Annex 1)

Key performance indicators are measurable and will include, at end of project (EOP): (a) averagenumber of visitors increased by at least 20 percent above the natural historic rate; (b) average length ofstay increased at least 100 percent with respect to baseline (2.6 days); (c) level of average expendituresby tourist increased at least 100 percent with respect to the baseline ($117); (d) 15 percent increase inmunicipal revenues in the areas benefiting from the project (expected through growth in localeconomies, employment, and increase in tax collection); (e) 5 percentage points increase in employmentin the region benefiting from project (at least 4 percentage points for women, at least 6 percentagepoints for men); (f) 100 percent increase in the number of small, local enterprises in the region (with anincrease of 35 percent in indigenous enterprises) created and functioning sustainability; (g) 100 percentincrease in the number of hectares under ecologically sustainable management; and (h) at least 70percent of the visitors express satisfaction with the service received.

B. Strategic Content

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1)Document number: 20072-HO Date of latest CAS discussion: 12/14/1999

The project is consistent with the Bank Group Country Assistance Strategy (CAS) discussed by theExecutive Directors on December 14, 1999 and is incorporated in the new CAS expected to be presentedto the Board in June 2003. The 2000 CAS prioritizes a comprehensive poverty reduction and socialdevelopment strategy through building human capital, supporting indigenous peoples development,mainstreaming gender, supporting environmental management, and stimulating sustainable ruraldevelopment. Sustainable tourism is identified as a significant growth sector for the country. Thisoperation will contribute to the CAS goal by focusing on the poverty reduction and private sectordevelopment potential of sustainable tourism based on diversification of attractions, ecologicalsustainability, and training and technical assistance for community-based initiatives linked to tourism,and particularly for the very poor, indigenous communities, and women.

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2. Main sector issues and Government strategy:

National Level: Issues and Government Strategy

Honduras possesses rich natural and cultural resources, yet ranks as the third poorest country in LatinAmerica and has a high incidence of extreme poverty in rural areas. Its natural endowments have beenthreatened by deforestation, inappropriate land use, degradation of water and coastal resources, andpoor management. According to the 2001 Poverty Reduction Strategy Paper (PRSP) for Honduras,although the country has substantially recovered from Hurricane Mitch, the Government of Honduras(GoH) still faces many challenges to sustainable economic growth. To increase economic growth,Honduras is pursuing a robust tourism development strategy that capitalizes on its many exceptionalnatural and cultural resources. Tourism is the world's fastest growing economic activity and it has thepotential to generate employment, foreign exchange, and tax revenue and contribute to povertyreduction. In 2002, tourism in Honduras grew by 20 percent with more than 800,000 visitors. The GoHseeks to increase this number to one million visitors by 2005 and be a regional leader in tourism by2021.

The main issues affecting growth in the tourism sector include: (a) lack of a strategic framework fortourism development that makes the country competitive due to prevailing legal and institutionalobstacles to private sector investment; (b) insufficient infrastructure to support physical demands andinvestment in tourism; (c) poor or nonexistent public services in priority areas (such as water,sanitation, solid waste management); (d) difficult access to potential tourism clusters; (e) fragmentedmanagement of sectors that impact tourism (such as transport and communications); (f) limitedapplication of land use planning and mapping; (g) weak municipal capacity; and (h) low humanresource capacity.

The Secretarfa de Turismo (ST - Ministry of Tourism) and the Instituto Hondureiio de Turismo (IHT -Honduras Institute of Tourism) are pursuing a comprehensive Plan of Action for 2002-2006 to increasegrowth in the sector, in partnership with the private sector, donors, and civil society. The objective is toprovide incentives for tourism development based on a national strategy to support equitable,sustainable, and responsible growth to generate employment, capture foreign currency, and supportlocal/regional development. The Plan consists of: enhancing infrastructure, access portals, andtransportation; developing new destinations; building consensus at regional/local levels; creatingopportunities for private sector investment; developing marketing campaigns; and implementing tourismpolice units in key areas. The World Bank is helping the GoH to address some of these issues throughthe Sustainable Coastal Tourism Project. Also, the Competitiveness Program, currently underpreparation, will help Government address the main legal and institutional challenges to promoting aninvestment climate in tourism, such as private sector innovation, labor force skills, local development,and communications. In addition, the Poverty Reduction Support Credit (PRSC), which will financepriorities identified in the PRSP, will contribute to resolving many of these obstacles.

CoRan Valley: Issues

(a) Persistent Poverty and Low Human Resource Capacity. Although an increase in tourism hasbrought progress to the western region of Honduras, the Department of Copan continues to rank amongthe poorest of the country. The municipality of Copan Ruinas has benefited from the increase intourism, but poverty remains: the illiteracy rate is 49 percent, malnutrition rate is 55 percent and 75percent of the households have Unmet Basic Needs. Vertical linkages between tour operators, hotels,and airlines have limited opportunities for new, small enterprises to enter the sector and theseoperations often produce employment that is limited to unskilled and poorly paid jobs. However, due to

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labor laws, even when low paid, the cost of formal labor that is generated is high, particularly for thesmall employer, leading to significant turnover. The other five municipalities with archeological sitesincluded in the project also show very low human development indicators and a high number ofhouseholds with Unmet Basic Needs: In Guanaja (Plan Grande), the illiteracy rate is 92 percent and 30percent of the households have Unmet Basic Needs; in La Jigua (El Puente), the illiteracy rate is 80percent and 67 percent of households have Unmet Basic Needs; in Yojoa (Los Naranjos), the illiteracyrate is 62 percent, the malnutrition rate is 40 percent and half of the households have Unmet BasicNeeds; and in both Pimienta and Porterillos (Cerro Palenque), the illiteracy rate is 70 percent, themalnutrition rate is about 28 percent, and the percentage of households with Unmet Basic Needs is 54and 73 percent respectively. The main challenge for the GoH in a pro-poor tourism approach is toensure that the poor have the capacity to benefit from the potential of tourism development (see SocialAnalysis in Annex 12).

(b) Pressurefrom Increasing Number of Tourists. The Copan Archeological Park, located near thewestern border with Guatemala, contains some of the most impressive Maya ruins in Central Americaand it is the most popular tourist attraction in Honduras. Copan has experienced substantial growth inthe number of tourists (from 12,500 in 1975 to 135,000 in 2002) and in the 1990s, this increase resultedin a boom in tourism-related hotels and restaurants in the nearby town of Copan Ruinas. TheInter-American Development Bank (IDB), through the Mundo Maya initiative, will be supporting aregional aerodrome for larger planes in the nearby Rio Amarillo Valley. Although this airport willrespond to one of the main needs for regional development, by facilitating the arrival of an increasingnumber of tourists, it will place additional pressure on the existing infrastructure and require morediversified attractions. The Copan Park has nearly reached its maximum carrying capacity (in terms ofnumbers of people visiting the ruins without damaging them), and although occupancy rates for hotelsin the project areas are low (as shown in the Economic Analysis), the municipalities, specifically CopanRuinas, have limited capacity to absorb additional inflows of visitors given constraints in publicservices such as sewage, water, garbage collection, electricity, and police coverage (see Annexes 11 and12).

(c) Lack of a Strategic Framework to Attract Investors. Private sector investment has generallyfollowed the development of the Copan archeological site with hotels and restaurants constructed inCopan Ruinas and neighboring areas, in part stimulated by regressive tax incentives the Governmentprovided in the aftermath of Mitch. Ultimately, this development has benefited only a few investorswith very little trickle down effect. Government is just beginning to recognize that private investorsshould include local residents, who if appropriately skilled and trained, can take advantage of marketniches created by the inflow of tourists seeking local attractions, products, and gifts. Finally,institutional and legal obstacles to the creation of enterprises, even small businesses, continue to exist,with substantial bureaucratic requirements often taking place in Tegucigalpa.

(d) Environmental Degradation. The Environmental Assessment (EA) confirmed the limitations of amodel that relies only on quantity of tourists without addressing the environmental impacts that thesenumbers provoke. In terms of non-economic impacts, it is important to raise awareness aboutenvironmental degradation that may be caused by overuse of areas. Increasingly, the GoH is aware thatthe environment is the capital of the poor and any poverty reduction strategy must be environmentallysustainable. This is particularly true in areas where natural and cultural resource attractions are the mainsources of income.

(e) Weak Municipal Capacity. Tourism growth can strain local public services delivery and hence,municipalities must have the capacity, in terms of human resources, planning tools, and finances, to

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respond to these new demands. Municipalities in the area, including Copan Ruinas, face significantproblems in generating their own revenue, in part due to the lack of a cadastre for tax collection. InCopan, there is also an issue of the collection of entrance fees from the Archeological Park, which areappropriated by the central government and only in part, spent on maintenance of the Park. This issuehas been raised in the past and is currently being negotiated between the municipality and the centralgovernment. Also, the Tourism Incentive Law (April 1999), designed to promote the touris-m sectorafter Hurricane Mitch, provides tax exemptions for new tourism developments, but it has resulted in theunintended consequence of limiting municipal tax collection. The Tourism Law provides incentives, butadministrative and legal requirements to create a new business are cumbersome, costly, and slow, and ingeneral constitute a disincentive to enterprise development, particularly in a poor area such as theCopan Valley.

(f) Protection of Cultural Patrimony. The Instituto Hondurefio de Antropologia y Historia (iHAH -Honduran Institute of Anthropology and History) in the Secretaria de Cultura, Artes, y Deportes(SCAD - Ministry of Culture, Arts, and Sports) is responsible for the use and preservation of allcultural patrimony associated with archeological ruins. For centuries, Maya artifacts have beentransferred out of the country, reappearing in private collections and foreign museums. The GoH hasprioritized.security in the archeological parks and sites since illegal artifact smuggling, which is highlyprofitable, continues to be a significant problem.

C6pan Valley: Government Strategy

Government has developed strategies to address these sector issues, some of which will addressed bythe C6pan Valley Project and others by complementary World Bank Projects, bilateral and multilateraldonors, or by Government itself. The GoH tourism development strategy in the Western region is tocontribute to social and economic development by valuing attractions and diversifying existingofferings through implementation of short- and medium-term plans for tourism development. Thisstrategy is based on several fundamental principles: (a) consultation and participatory planning withlocal authorities, communities, and the private sector; (b) restoration and security of archeological sites;(c) promotion of tourism and social infrastructure; (d) partnership with the private sector and smallenterprises with incentives for local productive initiatives; (e) environmental conservation; (f)institutional strengthening of rural municipalities in the area; and (f) promotion and marketing.

As part of this strategy, the GoH plans to create a new "Archeological Tourist Circuit." This strategyuses Copan as a prnmary attraction, diversifies destinations, and facilitates visitor access tounder-utilized and/or undeveloped sites, including the El Puente Archeological Park, the Cerro.PalenqueArcheological Site, the Los Naranjos Eco-Archeological Park, and the Plan Grande ruins on the islandof Guanaja. All five sites are accessible through the San Pedro Sula International Airport (four sites canbe reached in less than 3 hours by road and for Guanaja in less than one hour by air). Copan and ElPuente (in the Department of Copan near Cop.n Ruins) are also accessible from Guatemnala by road fortourist groups visiting other Maya sites. The road conditions are good and have been recentlyrehabilitated in the aftermath of Hurricane Mitch, including through the World Bank-financed RoadReconstruction and Improvement Project. Cerro Palenque is located near San Pedro Sula (a nine mileaccess road is in poor condition and rehabilitation is planned for in the Copan Valley Project) and LosNaranjos is located along the main road from San Pedro Sula to Tegucigalpa near Lake Yojoa (the twomile access road is in fairly good condition). Access to Guanaja, one of the Bay Islands, is by air or boatand then to the "Plan Grande" site, by boat and then walking (additional information on these projectareas is included in Annex 11). These archeological sites also coincide with six national parks withvarying levels of development that are included in the Protected Areas System of Honduras. With this

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strategic choice, the GoH intends to promote a more decentralized and inclusive model of developmentthat will be complemented with intensive capacity building, training, and incentives for local enterprisedevelopment.

Local and central governments recognize the main constraints that affect the successful expansion oftourism and are seeking financing mechanisms to plan and address priority needs. For example, theMunicipality of Copdn Ruinas is currently carrying out a participatory strategic planning process andwill develop a strategic plan for investments in infrastructure, particularly water treatment and solidwaste management. In Copan, the Ministry of Tourism and IHT are supporting municipal-levelactivities including: urban development plan, historical center regulations planning, restoration ofpublic buildings, tourism police, training, municipal strengthening, and establishment of municipaltourism units. Spanish Cooperation will be supporting infrastructure improvements in Copan related tosolid waste management. The World Bank-financed Competitiveness Program will enhancecompetitiveness by supporting the development of local competitiveness strategies in four locations, tobe selected, based on their high economic development potential. It will also pilot, in one or two ofthese priority areas, small-scale initiatives to increase productivity by upgrading local infrastructure,promoting business innovations and use of technology, and increasing micro, small, and medium sizedenterprises' access to training and advisory services. Government has prioritized Copan as the first pilotarea and during preparation of the Competitiveness Program, the Bank team will support theorganization of a public/private partnership to identify needs and formulate a ComprehensiveDevelopment Plan for Copan.

The GoH has been also pursuing a Decentralization Program to build the capacity of local governmentsto support equitable economic development, focus on poverty reduction, and ensure greater coverage ofpublic services. Copan Ruinas has been prioritized with the other 87 poorest municipalities. TheCountry Financial Accountability Assessment (CFAA), currently under preparation as part of the PRSC,has identified several problems with the revenue and collections office and the issue of financialtransfers to municipalities has been identified as a key issue on the decentralization topic in the PRSC.Several studies are currently under preparation to identify legislation gaps, financial systems, capacityissues, and specific sector issues. The decentralization program has been supported by the United StatesAgency for International Development (USAID), which is providing technical assistance on financialmanagement, budgeting, and planning to priority municipalities, including Copan Ruinas and La Jigua(municipality of El Puente). The Japanese International Cooperation Agency (JICA) is preparing a newinitiative in the Copan Department to build municipal capacity to raise revenues to invest in servicesand address economic development in the poorest areas. A second phase of the IDA-financed LandAdministration Project, currently under preparation, will include priority areas in its cadastre work.Finally, in the Bay Islands, the IDB is supporting environmental management and municipal capacitybuilding with particular emphasis on general sanitation and protection of natural resources.

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

The GoH has recognized that multi-sectoral efforts are needed to address poverty and promotesustainable development in ecologically fragile and culturally diverse areas. In addition to the creation ofincentives for local private sector involvement, the challenge is to create conditions for tourism tocontribute to poverty reduction. The Copan Valley Project will target the Copan Valley and surroundingareas, one of the poorest regions of Honduras, and seek to promote a holistic vision of pro-poor,community-based tourism development. The project will take a broad approach in a limited geographicarea as a model of sustainable regional development that benefits local residents. The following strategicchoices were made, based on the sector issues described in the previous section:

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(a) Creation of a Tourism Circuitfor Regional Development. The first strategic choice was todecentralize the tourism flow from Copan by developing other sites and parks by creating a newarcheological-ecological tourism circuit. This choice is strategic for the following reasons: (i) it protectsthe delicate ruins in Copan, which cannot absorb additional increases in the number of visitors withoutadditional archeological works that will take time to complete; (ii) it protects the environment in the Parkand the municipality, already at capacity limits; (iii) it allows time for the Copan Management Plan to beimplemented so that attractions can be enhanced and created; and (iv) it allows for the protection anddevelopment of other cultural resources as significant as Copan.

(b) Pro-poor Modelfor Tourism Development The second strategic choice was the adoption of aPro-poor tourism approach. First, this approach recognizes that cultural heritage and the environment arethe patrimony of the poor. The poor are the most vulnerable and may lose the most from environmentaldegradation and misuse of cultural patrimony. The project pursues this strategy by creating conditions forthe preservation of archeological parks and sites and their natural environments while at the same time,promoting employment and income opportunities linked to this preservation. Second, this approach,based on worldwide research, will promote: (i) market access (how to break into the location of poorpeople); (ii) commercial sustainability (quality of products, marketing, and positive cost benefit); (iii)policy framework (favorable government involvement); and (iv) capacity building for the poor with astrong social communication strategy. These issues are corroborated by the lessons learned from the pilotGENFUND (Norwegian Trust Fund for Gender Mainstreaming Program implemented in Copan during2002-2003 under the IDA-financed PROFUTURO Project). Third, a pro-poor strategy also requiresincentives for the creation of a local climate for investments to prevent economic leakages to wealthierlocations.

(c) Frameworkfor Private Sector Investment. By developing a new tourism circuit in areas thatpreviously have not benefited from the tourism inflow, but are easily accessible through the IntemationalAirport in San Pedro Sula, the C6pan Valley Project is providing the private sector with importantinvestment incentives and market opportunities derived from tourism. The framework for private sectordevelopment is based on the following elements: (i) The best investments for regional and localdevelopment are those that do not produce resource leakages to external areas. To promote theseinvestments, intensive capacity building and planning exercises among key public, private, and civilsociety stakeholders, including tourism operators (following the model of the Sustainable CoastalTourism Project) will be financed by the Copan Valley Project (in coordination with the CompetitivenessProject) in C6pan Ruinas, the Valley, and the other project municipalities; (ii) Institutional and legalbarriers to business creation exist, are generally regressive, and they should be challenged. The CopanValley Project will collaborate with the Competitiveness Project, which will be working to improve theinvestment climate in Honduras, and particularly in C6pan; and (iii) Private sector development includessmall businesses than can be effectively run by indigenous organizations. The GoH has recognized thevalue of cultural resources for tourism, the potential of micro and small enterprises linked to the sector,handicraft development, and cultural heritage promotion (PRSP, 2001). The development of artisanproducts can produce substantial economic benefits if groups are linked to technical assistance to providehigh-quality products, reliability, stringent quality control, marketing, and commercialization. Therediscovery, development, and successful commercialization of the Lenca ceramics is a model experienceto be followed. An intermediary organization can play an important role in maximizing the businessopportunities. Fondo Prosperidad (Prosperity Fund) will identify market niches, and finance subprojectswhich may include technical assistance, quality control, and commercialization.

(d) Enhance Quality of Destinations. The challenge is not only to attract tourists to the other sites, butalso to encourage longer stays by enhancing existing destinations and creating new high quality

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attractions. In addition to infrastructure and interpretation improvements in the parks and sites, theproject will expand and diversify sights, such as the integration of the parks and sites in anarcheological-ecological tourist circuit; the creation of a Maya village from the 8th century A.D. in ElPuente; appreciation of environmental richness and biodiversity (such as the lake near Los Naranjos);and reorientation of local production towards a market responsive to visitor demand. The Copan ValleyProject will also promote attractive tourism opportunities for private investment, with a priority onindigenous communities.

(e) Conservation of Natural and Cultural Resources. The future sustainability and attraction of thearcheological parks and sites is contained in their natural environment and cultural resources. Tourismcan produce unintended negative effects such as: overuse of the resource, an increase in nearbypopulations, and generation of garbage. Lax security can provide opportunities for artifact smuggling.The Cop6n Valley Project will place a priority on the management and security of the sites by balancingconservation and archeological research needs with increased access and interpretation. If there is noconsideration given to planning and implementation of sound environmental and cultural managementplans with an assessment of carrying capacity and security, the interest and potential of the sites will belost.

(f) Capacity Building and Skills Development. To help integrate local residents, the project will providespecialized training and capacity building and support the creation of employment related to alternativetourism enterprise development, guiding, and management of archeological parks and sites (related topreservation and conservation). Women, and specifically indigenous women, will be targeted in thetechnical assistance and training program to improve income generation skills among vulnerablepopulations. Through the Fondo Prosperidad, the project will support income generation activities inrural and urban areas that are identified by a pre-feasibility study to be sustainable, cost-effective, andresponsive to market demand.

(g) EnvironmentaiEducation. The project will design and implement interactive education for childrenand families that takes into account biodiversity and the historical characteristics of the northwest regionof Honduras. This project will build on the work started by the PROFUTURO Project, which supportedthe development of Casa K'inich (House of the Sun), an interactive learning center for children in CopanRuinas. This center presents the complexities of Maya life, their scientific knowledge and their closerelationship to the environment through interactive exhibits, text, and sound. There is a need to supportexpansion of Casa K'inich, creation of new exhibits, and the production of curriculum materials based onnew findings. Similar educational activities targeting youth will also be designed and developed in theother parks and sites in the project. Environmental awareness will also be promoted by the training andcapacity building linked to the Fondo Prosperidad.

(h) Communications/Institutional Development. The project will strengthen the institutional capacityfor tourism and cultural patrimony management among public, private, and civil society actors at both thenational and local levels. A participatory planning process will accompany the development of the newarcheological-ecological circuit with a strong social communications strategy. The long-termsustainability of the tourism investments will depend on the ability of local level actors to invest in andmaintain the areas that serve the parks and sites. A national and international marketing campaign topromote the new destinations will be designed and implemented.

The following chart summarizes the main sector issues in tourism in the C6pan Valley area, outlines theProject's strategic choices, and presents complementary World Bank and donor projects that havecontributed to the choices of the C6pan Valley Project.

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Copin Valley Project: Sec tor Issues and Strategic C oicesSector Issues Copan Valley Project Strategy World Bank Projects Selected Partner Activity

Persistent poverty Implement a pre-feasibility study * PRSC a JICA (new project forand low human to identify market niches. * PROFUTURO Project economic development inresource capacity (GENFUND Program) poorest municipalities inin high-potential Create Fondo Prosperidad to * Competitiveness Program Copan Department)tourism clusters finance subprojects that include (labor force skills * OCDIH (Christian

training, capacity building, and development) Organization for Integratedtechnical assistance for production Development ofand commercialization. Copan-cooperatives)

* APSO (Irish agency,Create employment agricultural productivity)opportunities in archeologicalsites, including training.

Strategic Design a regional framework for a Sustainable Coastal * IDB (tourismframework for tourism development through Tourism Project (support for a development alongtourism ialogue among private sector, National Tourism Strategy that Omoa-Guatemala road anddevelopment municipal governments, civil will complement the Copan restoration of Rio Amarillo

ociety, and communities based on egional strategy) site)decentralization, participation, * Spanish Cooperation, inrivate sector involvement, and oordination with IHT, IHAHnvironmental management. This and other government

framework may guide development agencies (development off other circuits (Lenca Trail, other tourism circuits: Lenca

Colonial Circuit). and Colonial Circuits, ruralourism)

Implement a socialommunications strategy and a

marketing and promotioncampaign.

Private sector Create market opportunities * Competitiveness Program * IDB (Mundo Maya/Planinvestment through the development of an * LCSES-managed Panama)promotion archeological-ecological tourism Norwegian Trust Fund * USAID (Covelo

ircuit. (research on income generation Foundation)pportunities related to * Germany Cooperation

Provide technical training on tourism) (small enterpriseusiness development to local evelopment)rivate sector.

Conduct pre-feasibility study.

___ _ C_ reate Fondo Prosperidad.Infrastructure Improve access to sites through * Competitiveness Project * IDB (Mundo Maya/Planconstraints ehabilitation of access roads to (Copan pilot) Panama-new aerodrome in

s Naranjos and Cerro Palenque. * Social Investment Fund Rio Amarillo)* Transport Sector * Canada (technical

Enhance signs and directions for Rehabilitation assistance, water andvisitors to and in all sites. * Road Reconstruction and sanitation in Copan)

Improvement Project * Spanish CooperationCoordinate with current and future (solid waste management/onor initiatives to improve public Copan)ervices in rural municipalities. * USAID (sanitation

lagoons in Copan)

Municipal Enhance municipal capacity in D Competitiveness a USAID (working indevelopment cultural and tourism management (public/private partnership) Copan Ruinas and La Jigua

through training of functionaries, o New Land Administration [El Puente] on municipalmayors, community leaders, and Project Project (cadastre) capacity building)entrepreneurs. JICA (new project to

evelop municipal capacity inConvene an Advisory Commuttee Copan Department)for project that includes a European Unionparticipation of mayors in project 1 Swedenareas. a Spanish Cooperation

plement a study on optimal use a PRSC and CFAA (revenueof the revenue for Copdn sharing)Archeological Park and AdvisoryCommittee will develop a proposalon the mechanism for the use of therevenue from the upgradedarcheological parks and sites.

Environmental Implement participatory a Natural Disaster Mitigation n IDB (Bay Islandsdegradation Management Plans and Strategic (high risk areas in Copan Environmental Management)

Environmental Assessments. Department, urban planningand zoning)

nhance environmental education D LCSES-managedthrough Casa K'inich. orwegian Trust Fund (in

2003/04 a CountryEnvironmental Assessmentwill be carried out, withspecific attention to prioritytourism areas, includingCopan)

Pressure from Decentralize tourism circuit and D Sustainable Coastal Q JICA (new project willincreasing number create new "touch and feel" Tourism Project (North Coast work in other areas of Copdnof tourists attractions including Visitor's Tourism Cluster) Department with high tourism

Centers, reconstruction of Maya potential)village and household in El Puente, a Spanish Cooperationeducational and interpretive (development of otheropportunities in all parks and sites. tourism clusters)

Protection and Develop and implement In Copan Park:preservation of Management Plans, including 1 IDB (restoration of acultural cultural resource management part of Las Sepulturas siteresources that (research, conservation, near Copan)are the collection management, a JICA and Japanpatrimony of the ethnography) and security Foundationpoor systems (fences, alarms, cameras) D Getty Conservation

for archeological parks and sites. Institutea Universities (Harvard,Tulane, University of PA,University of California,Riverside, Yale, Universityof Queensland, Australia)

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* Asociaci6n Copan* Copa.n Maya Foundation* French Cooperation(CEMCA)

Develop culturally appropriate * ACTA (Swiss nonprofitincome generation activities agency for development andwith emphasis on effective commercialization of Lencaproduct development and ceraniics)commercialization.

C. Project Description Summary

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

Component 1 - Integrated DeveloRment of Archeological Parks and Sites will create an ArcheologicalTourism Circuit by financing tourism infrastructure and participatory management in threearcheological parks and two archeological sites. This component will fund: (a) the implementation ofthe Management Plan priorities in the Copan Archeological Park (financed under the PROFUTUROProject), including security equipment in the Park, environmental management and education, culturaleducation activities and community outreach; and (b) Management Plans and implementation ofpriorities in El Puente Archeological Park, Los Naranjos Eco-Archeological Park, Cerro PalenqueArcheological Site, and Plan Grande Archeological Site.

Component 2 - Income Generation Opportunities will implement a program of formation and incentivesto foster income generation opportunities for populations in the project areas, particularly the very poor.This component will fund: (a) local capacity building, skills development, and training for workers andguides in Archeological Parks and Sites; (b) capacity building in tourism services delivery for localresidents, including tourism operators and municipal staff; and (c) income generation opportunities witha pre-feasibility study to identify profitable market niches and training and technical assistance forvulnerable groups on production and commercialization through the creation of Fondo Prosperidad.

Component 3 - Institutional Development will design and implement institutional strengthening forIHT, IHAH, and SCAD; a plan for tourism development by fostering consensus among public, private,and civil society actors at the local, regional and national levels, including technical assistance andtraining for municipalities; a marketing and promotion strategy; and a social communications strategy.This component will fund: (a) institutional strengthening and communications; and (b) enhancements tothe Project Coordination Unit (PCU) and monitoring and evaluation.

Indicative Bank- % of., -Component -.. 'Costs '. %of financing Bank-

(US$M) Total. (US$M) financing

1. Integrated Development of Archeological Parks/Sites 6.93 51.9 6.19 51.62. Income Generation Opportunities 2.96 22.2 2.69 22.43. Institutional Development 3.46 25.9 3.12 26.0

Total Project Costs 13.35 100.0 12.00 100.0

Total Financing Required 13.35 100.0 12.00 100.0

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

The existing policy and institutional framework is not expected to inhibit project viability norsustainability, although there are several important issues as presented in Section B.3.-This project willcomplement ongoing initiatives by the GoH to address policy and institutional reforms, including theWorld Bank-financed Competitiveness Program, which will support actions to strengthen the businessclimate in the tourism sector, forge a partnership between private and public actors and reduce barriersthat create disincentives to private sector investment. The project is consistent with priorities identifiedin the CAS and in the PRSP by addressing poverty, particularly of vulnerable groups such as indigenouspeoples and women, and creating investment opportunities for the private sector. It will also promoteconsensus-building mechanisms regarding revenues produced in the CopAn Park and the other parks andsites, which will also support objectives of the PRSC.

3. Benefits and target population:

The western region of Honduras, including the Copan Department, is inhabited by a larger proportion ofthe country's poor and the project will specifically target this group. The project will generate benefitsfor direct and indirect beneficiaries. The large majority of direct beneficiaries are indigenous peoples.The approximately 141,400 residents of the six municipalities where archeological sites in the projectare located will also benefit from the project. The departments where the archeological sites are locatedand that will benefit from the archeological tourism circuit are inhabited by a population ofapproximately 1.5 mnillion people, who will indirectly benefit from the project. A Baseline Survey willbe conducted in the area to refine the numbers below and will, when replicated, produce the expectedoutcomes of the project described in Annex 1. Based on available information from the PRSP, it ispossible to estimate the following number of beneficiaries:

Estimated Number of Beneficiaries--,A,Xc'^l&itj 7 ; T | IDirect Befletciaries indirect RenericiariesEmployment in development and 4,000 (1,000 workers Local communities, private sector,implementation of Management and their families). tourist operators, and ruralPlans. municipalities and regional

departments (approximately 1.5million individuals).

Improvements in Archeological Local communities, private Country and Government ofParks and Sites. sector, tourist operators, rural Honduras.

municipalities and regionaldepartments (approximately1.5 individuals).

Environmental and cultural 20,000 children at the end of Tourists and residents of the sixeducation in Casa K'inich and in the project based on current municipalities involved in theother parks and sites. number of visitors. project: Copdn Ruinas, La Jigua,

Guanaja, Santa Ruz de Yojoa,Pinienta, and Potrerillos(approximately 141,400).

Participants in training and capacity 4,000 (including municipal Tourists and residents of the sixbuilding programs. staff, tourism operators, local municipalities involved in the project

private sector, beneficiaries of (approximately 141,400).Fondo Prosperidad, at least 30percent are expected to bewomen).

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Fondo Prosperidad. 500 individuals (total of 2,000 Tourists and residents of the sixconsidering an average of four municipalities involved in theper household) at least 30 project (approximately 141,400).percent expected to bewomen; and 90 percentindigenous).

Strategic Participatory Planning for 280 local leaders and staff of The population of the fivetourism circuit. the six municipal governments. departments involved in the project.

Institutional strengthening Government personnel at local The three departments, country andactivities. and national levels. GoH.Increase in number of visitors Business owners and staff, Residents in the municipalitiesand longer stays of tourists. local residents (especially and departments, and country and

indigenous), and the GoH. GoH.

4. Institutional and implementation arrangements:

The estimated period of implementation of the project is four years. Overall project oversight andcoordination will be the responsibility of the Instituto Hondurenio de Turismo (HiT - Honduras Instituteof Tourism).

Project Coordination Unit. The existing Project Coordination Unit (PCU) in IHT for the SustainableCoastal Tourism Project will serve as the PCU. The PCU will be responsible to the Bank for all projectimplementation activities including procurement, accounting, financial reporting, auditing, andmonitoring and evaluation, and it will be enhanced with the addition of a Budget Specialist, andaccounting and procurement assistants. A small branch of the PCU will be established in Copan with acoordinator, procurement assistant and a cultural specialist from IHAH to facilitate local-level actions.The procurement, financial management, audit, and disbursement arrangements are presented in SectionE.4 and Annex 6.

Technical Support Agreement. The Instituto Hondureino de Antropologia y Historia (IHAH - HonduranInstitute of Anthropology and History) has the legal mandate to preserve and protect the archeologicalsites. The project design includes a Technical Support Agreement to be signed between IHT and IHAHthrough which 1IAH will participate in technical support, development of terms of reference, review ofprocurement, etc. in all the activities related to the archeological sites. The Institutional Developmentcomponent also includes specific capacity building activities for IHAH.

Asociaci6n Copan/Component 1. Government has requested the involvement of Asociaci6n Copan, alocal non-governmental entity specialized in archeological work, for technical support to IHAH for partof Component 1 -- Integrated Development of Archeological Parks and Sites. This will be pursued as asole source contract (see Annexes 6 and 13 for additional information).

Fondo Prosperidad. It is expected that a NGO (Management Agency), will be selected, according toBank procurement procedures, to administer the subprojects. The Agency will have experience in themanagement of subprojects, a history of trust dealing with communities, and a presence in the area. Atleast one local organization representative will participate in the decisions of the Agency regarding theFund. The Management Agency will report financially and in terms of development results each sixmonths to the PCU. The Agency will identify subprojects and request IHT to disburse funds for thesubprojects to the Management Agency, which will then disburse to beneficiary groups. Disbursementsto the Management Agency will be based on the commitments of the Agency with beneficiaries and on

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the results achieved each six months (see Annexes 2 and 6 for additional information).

Advisory Committee. A high-level advisory committee will be convened by 1HFT with the participationof the Ministry of Finance, Minister of Tourism, Minister of Culture, Arts, and Sports, IHAH Director,and local mayors in project areas. This committee will meet regularly to review project plans andimplementation progress and will include representatives from other central and local-level governmentagencies and non-governmental organizations involved in the sector.

The table below summarizes the implementation arrangements and institutional responsibilities:

l[mplementation ArrangementsSummary Activities Carried out by Procedure

Component 1: Integrated Development ofArcheological Parks/SitesProcurement of works, goods, and consultant PCU/IHT. Specific inputs Bank procurement procedures.ervices, related to implementation of Copan rovided by IHAH.

Management Plan.Archeological Services (archeological HAH (legally responsible) with Force account for specializedrotection and conservation of monuments, technical assistance of Asociaci6n abor.

sculptures and tunnels, etc.) identified in Cop6n.Management Plans in Component 1.

echnical assistance/Component 1. Asociaci6n Copan. Consultant contract withPCU supervised by IHAHgiven their legalresponsibility for theruins, under the TechnicalSupport Agreement withIHT, which is a conditionof effectiveness.

Procurement of Development and PCU/IHT. Specific inputs Bank procurement procedures.implementation of Management Plans for El provided by IHAH with technical

uente, Cerro Palenque, Los Naranjos, and assistance by Asociaci6n Copan, aslan Grande. stablished in consultant contract

with PCU.Component 2: Income GenerationOpportunitiesProcurement of training for archeological PCU/IHT. Bank procurement procedures.assistants, guides, tourism service workers.Contract for Pre-feasibility study. PCU/IH-T. Bank procurement procedures.ontract for Management Agency for Fondo PCU/IHT. Bank procurement procedures.

Prosperidad.

Solicit, approve, administer, and monitor Management Agency to be According to contract agrredFondo Prosperidad subprojects. selected. _with PCU.mplement Fondo Prosperidad subprojects Subproject beneficiaries, with Three quotations or

(goods, works technical assistance, training or procurement assistance from Chapter V Consultantany combination of these four). Management Agency upon Guidelines.

request.Technical assistance and training services for PCU/IHT. Bank procurement procedures.Fondo ProsperidadComponent 3: Institutional DevelopmentProcurement of goods, consultant services, PCU/IHT. Bank procurement procedures.and training.

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D. Project Rationale

1. Project alternatives considered and reasons for rejection:

Focus only on Implementation of Management Plans for Archeological Parks. Consideration was givento only providing the inputs necessary to improve visitor access and preserve the archeological parks andsites. However, experience shows that there is a need to be pro-active regarding poverty reduction andthat markets can be created given the availability of good products. The Bank's experience in technicalassistance and training shows that opportunities can be created through a strategic approach in a region,in this case, the entire Copan Valley and surrounding areas. This project is designed not only to addresscultural assets, but also to support ecologically sustainable management and income generationstrategies.

Focus only on Copan Park. The Copan Park is the main attraction in the Valley and consideration wasgiven to only implementing the Management Plan recommendations for this park. However, the fragilityof the ruins, absorptive capacity, and the fact that a greater number of tourists staying for longer periodsof time is needed to provide sustainable employment and development for the poorest residents, led tothe decision to create a more diversified supply of tourism attractions and services. Therefore, the projectwill create a new archeological-ecological circuit that encompasses the other significant sites in theregion. It will develop a model Maya village from circa 8th century A.D., promote eco-tourism in LosNaranjos, Cerro Palenque, and Guanaja and provide new, educational attractions for visiting children andyouth. This strategy complements the Mundo Maya Program, supported by IDB which is identifying keyinfrastructure constraints and tourism development opportunities to be financed, including the regionalaerodrome in Rio Amarillo.

Include as part of the Competitiveness Program. This altemative was considered, but not pursued due toseveral reasons: (a) conceptually the project is focused on promotion of pro-poor tourism development,indigenous development, and financing Management Plans with a strong emphasis on environmentalprotection; (b) there are no savings on IDA funds as the project would require the same financing; and (c)there would be no savings on supervision/administration budgets given the social and environmentalfocus which requires specialized expertise.

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

Latest SupervisionSector Issue Project (PSR) Ratings

._______________________________ I _________________(Bank-financed projects only)Implementation Development

Bank-financed Progress (IP) Objective (DO)Sustainable Tourism Sustainable Coastal Tourism S SSustainable Development/Education PROFUTURO S SNatural Resources/Land Rural Land Management S SLand/Sustainable Farm Enterprises Land Pilot PACTA S SBiodiversity Conservation GEF Biodiversity in Priority Areas S SDisaster Prevention Natural Disaster Mitigation S SRural Infrastructure Fifth Social Investment Fund S SBusiness Climate and Infrastructure Competitiveness Program

(preparation)Other development agenciesMunicipal Development Municipal Strengthening

(USAID)Bay Islands/Environment Environmental Management

(IDB)Cultural Patrimony Technical archeological

support in Copan, JICA;international researchuniversities

Rural Development Rural development,cooperatives, coffeeproduction, OCDIH

Conservation/Archeology in Copan Integrated ConservationProgram of the Copan Park(PICPAC), Getty ConservationInstitute

Infrastructure/Tourism Development Mundo Maya (IDB)Agricultural Productivity in Copan APSO (Irish support)Tourism development/infrastructure/ AECI (Spanish InternationalMunicipal capacity Cooperation Agency)Commercialization of cultural products Lencan Pottery; ACTA (Swiss

non-profit developmentagency) .

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 program in Copan financed by the PROFUTURO Project and the GENFUND program havegenerated many lessons and ideas, which have been used to inform the design and preparation of thisproject. These programs have allowed for a clear identification of the economic needs in the CopanValley, the natural and cultural assets, and the definition of areas to be involved in the proposed project.The following lessons also reflect concepts from other eco/cultural tourism programs, Bank research,Implementation Completion Reports (ICR) Reports, and Operations Evaluations Department (OED)findings.

Barriers to Participation of Poor in Tourism. The main lessons learned from pro-poor tourism researchshows that the following issues must be addressed if a project is to benefit the poor: (a) provision offormal/informal skills training and capacity building to meet tourist expectations on issues such asbusiness management, language, guide training, and/or craft development; (b) access to financialresources; (c) participation of communities and community-based organizations in decision-making; (d)training in gender sensitive approaches; (e) creation of tourism that is compatible with existing livelihoodstrategies-avoid mass market tourism to reduce pressure on resources and issues of waste management;(f) destination building and marketing by private sector and government is necessary; (g) development oftourism plans and lobbying for infrastructure development is important; and (h) there is a need to developand establish new "products" for tourists, such as destinations, visitor's centers, tours, etc.

Management Plans. Ample evidence from natural and cultural parks around the world shows that thedevelopment of participatory Management Plans with integrated conservation management can establisha framework for improvements and allow managers and community members to develop a consensus onthe future management of the resource. An increase in the number of visitors is welcome, but theimplications must be managed so that natural and cultural sites are not degraded. Management Plansidentify priority areas in need of immediate preservation and address long-term issues related toconservation and education. Once a Plan is developed, the implementation allows for the sustainabledevelopment of the site and expansion of attractions for visitors.

Development of High Quality Alternative Attractions. Copan, as a primary site, is currently benefitingfrom a high influx of visitors, but as is the case in other Maya sites in Mesoamerica, most visitors onlystay for a short time as part of national or international tour packages. Sustainable tourism projectsshould promote alternative attractions so visitors stay longer, visit additional parks, and spend additionalresources. The Copan Valley possesses many cultural and natural attractions, but they will not becometourist products until identified, made accessible, staffed with well-trained guides, advertised, and linkedvia distribution and sales mechanisms to the market.

Community Participation and Benefit can Lead to Sustainability. Incorporation of those living near anatural or cultural asset is the best way to preserve physical and living culture and ensure sustainable useby the local residents. Local residents and indigenous communities will be encouraged to participate inthe project through the training and educational opportunities and access to the Fondo Prosperidad.

Institutional Development. The strengthening of national institutions responsible for sustainable tourismdevelopment and cultural heritage preservation is essential to the long-term sustainability of projectsinvolving archeological sites. An important part of this institutional development is the establishment ofenhanced communication and coordination with all involved agencies.

Preservation of the Environment and Cultural Heritage. One way of achieving the preservation of theenvironment and cultural heritage is by building a stake in their conservation. The project will implement

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a strategy that will make conservation measures productive for both the private sector and the poor.

4. Indications of borrower commitment and ownership:

The Copan Valley Project has enjoyed strong Government commitment and ownership. The GoHexpressed interest in this project as a result of the successful implementation of the PROFUTUROcomponent in Copan, the increasing number of visitors to this site, and the desire to transform this inflowinto benefits for the local residents of one of the poorest regions in the country. The GoH initiallyrequested this project in a letter dated May 27, 2002. During a preparation mission in September 2002,the Government presented the mission with a preliminary project preparation plan, detailed designs andimplementation arrangements.

During the Pre-Appraisal Mission in February 2003, over 30 participants, including Government andother partners (the Minister of Tourism; the Minister of Culture, Arts, and Sports; the Vice-Minister ofTourism; the Director of IHAH; the Director of International Cooperation of IHT; representatives fromthe Direccion General de Credito Publico de la Secretaria de Finanzas (DGCP - General Directorate ofPublic Credit in the Ministry of Finance); representatives from the Ministerio de Recursos Naturales y elAmbiente (SERNA - Ministry of Natural Resources and the Environment) and the Department ofProtected Areas, and Asociaci6n Copan) participated in a two-day logical framework meeting to reviewand discuss project objectives, components, activities, and risks. This meeting served to develop aconsensus on the project and establish implementing arrangements. This project is a top priority forGovernment and inter-agency coordination has been exemplary.

5. Value added of Bank support in this project:

There are five strong reasons illustrating the value-added of Bank involvement in this project: First,through the Sustainable Coastal Tourism Project, the Bank is already active in reducing poverty andpromoting prosperity through equitable eco- and heritage-based tourism. Second, this project is afollow-up of the IDA-financed PROFUTURO Project, providing an opportunity to scale-up thesuccessful experience of financing several activities in the Copan Park, specifically small civil works andcapacity building. Third, several of the design characteristics of the proposed project draw fromsuccessful lessons of two grants implemented by the Bank in the area. Fourth, the Bank is the onlymultilateral organization with experience in creating the conditions for pro-poor sustainable tourismdevelopment in the Copan Valley. Finally, an important comparative advantage of Bank involvement isthe focus on reducing poverty and increasing prosperity of poor households. The Bank brings decades ofexperience in rural development and cultural resources management to the proposed project. The Bankwill support the actions of IHT in the integration and development of the parks and sites for tourism andpromotion of employment opportunities as a means to achieve the goal of improving the lives of poorresidents living in the Valley and surrounding areas. The Bank will also seek to protect the environmentand provide opportunities and resources for the poorest households.

The World Bank support for this project has catalyzed a number of agreements between the Government(IHAH) and top research institutions (Harvard University, University of Pennsylvania, TulaneUniversity, and others) and donors (Japanese expert volunteers and others) to continue and expand theirarcheological investigation, research, and publishing about these sites in Honduras. These agreementsrepresent a significant input into the project, which although not considered official co-financing,represents an important contribution to the project and to preserving the cultural patrimony of Honduras.

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

1. Economic (see Annex 4):* Cost benefit NPV=US$9.4 million; ERR = 20.5 % (see Annex 4)0 Cost effectiveness

O Other (specify)

This project makes a public investment in public goods (archeological parks and sites, roads, etc.) andprivate goods (training and financing for small tourism businesses), to promote growth in the tourismindustry. The benefits expected from the project's implementation are additional jobs, production, andincomes in the project's areas of influence and the increased flow of tourist demand takes up the slack inthe hotel industry. At present, occupation rates in the hotel industry are very low, estimated at under 20percent. The project will invest in the development of additional visitor attractions, will support themarketing of the industry and will strengthen the capacity of private actors to provide good qualityservices demanded by visitors. This should lead to a rapid increase in the flow of visitors.

The project's economic rate of return was analyzed by comparing the public investment cost of theproject with the project's stream of expected net benefits in terms of additional net incomes to Honduranfactors of production. In this variant of the analysis the costs and benefits are all accounted for at theireconomic opportunity costs. The NPV in the medium scenario is US$ 9.4 million with a 20.5 percentERR. Under Scenario 3, of high growth in demand, the NPV is US$ 32.4 million with a 78.5 percentERR. The project is likely to be socially profitable under reasonable scenarios for demand growth andcosts.

The sensitivity analysis shows that the project's profitability will be sensitive to the flow of visitors andto the number of days they stay in Honduras. This implies that the project's success requires the effectivepromotion of these archeological sites as tourist destinations, and on the supply of tourism products andservices that will make it more attractive for tourists to stay longer and spend more money. Both aspectsare backed by specific components in the project's design. The implementation of the project must alsobe complemented with continuing Government actions in exploration and research at the selected sitesincluding the acquisition of property rights of lands where the archeological sites are located.

Additional information on the conversion factors, conceptualization of costs and benefits, economic netpresent value and Internal Rate of Return, the sensitivity analysis, and detailed data tables are included inAnnex 4.

2. Financial (see Annex 4 and Annex 5):NPV=US$ 6.1 million; FRR = 20.7 % (see Annex 4)

The project's rate of return is analyzed in terms of the relationship between the stream of costs incurredboth publicly (the project costs) and privately (the costs of the industry) due to the project's intervention,compared with the incremental revenues to be derived by tourism mdustries in the zone of influence as aresult of the project. In the first variant of the analysis, all the costs and benefits are analyzed at theirmarket prices. The analysis shows that the overall financial rate of return of the project is positive, with aNet Present Value (NPV) of $6.1 million and an Internal Rate of Return (IRR) of 20.7 percent in themedium scenario; and NPV of $25.6 million and IRR of 46.7 percent in the high scenario.

The distributive and fiscal impact of the project was analyzed to determine the distribution of the costsand benefits between the public sector (public investment and tax revenues) and the private sector(additional factor incomes, net of taxes). Annex 4 contains detailed information on the benefits stream,cost stream, and the Financial Rate of Return.

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Fiscal Impact:

The counterpart contribution to this project is ten percent of the project costs, including taxes for a totalof US$1.2 million.

The analysis of fiscal impact separates the public and private components of the economic costs andbenefits of the project. This exercise was done for Scenario 2 - Moderate Impact, allowing an analysis ofthe components of the NPV of $6.8 million projected in this scenario. The analysis shows that the projecthas a negative fiscal impact of US$1.421 million, indicating a recovery rate of 82 percent on the publicinvestment. The government invests $7.79 million and gets back in taxes $6.37 million.

The projected net benefit derived from payments to national factors is US$ 10,837 million. Since the netprivate benefits after taxes are positive, and greater than the project cost, it might be argued based onthese numbers that if the private sector undertook the investment it would have a positive net return.

However, given the public-good nature of the investments in the development of the archeological parksand sites, coupled to the fact that the economic return is derived entirely from a net benefit to labor not tocapital, it is most unlikely that private companies would undertake the investment if the government didnot do so. This same fact indicates that the distributive impact of the project in terms of benefits to laborand capital is very positive.

Additionally, it's worth pointing out that the loan terms (IDA) for the project, much below the discountrate of 11.5 percent used here - imply that the Central Government's cash flow will be positive in thisproject. As a result, the fiscal balance as measured by the IMF will be improved, not worsened, by theproject.

3. Technical:The technical design of the project is appropriate to the needs and capacity of Honduras. Theinfrastructure needs in CopAn, as prioritized in the PROFUTUIRO-financed Management Plan, includeestimated costs for small civil works based on market rates, with a consideration of contingencies andinflation. Management Plans will be carried out for the other archeological sites to inform the priorityneeds for each site. The design of Management Plans for archeological sites is based on a model whichhas been used and tested worldwide. A model for participatory Management Plans is included in theEnvironmental Assessment Document (Annex 4 of EA). The Management Plans generally include:analysis of regional context (biological, social, economic aspects); legislation; evaluation of currentmanagement; cultural resource management (archeological research, conservation, collectionmanagement, ethnography); natural resource management; public use program (interpretation,community involvement, carrying capacity, monitoring of use, planning of site); operational program(administration, public relations, security, maintenance, and monitoring and evaluation); timetable andoperational plan. For Component 1, Government has requested involvement of a local non-governmentalorganization (Asociaci6n Copan) for specialized technical assistance of part of the component and acontract with an engineering firm for supervision of the works.

The project design is based on best practices in a pro-poor tourism approach, which is appropriate to thesituation in Copan and the other project areas. The Income Generation Opportunity Component isdesigned to provide training, capacity-building, and technical assistance. The inclusion of apre-feasibility study prior to the technical assistance and the implementation of Fondo Prosperidad isbased on best practices and the need to identify profitable market niches in advance of targetingresources. Project design has also considered sustainable tourism models and "green" certificationprograms that will help support ecologically sustainable management and also provide marketing benefitsfor local enterprises.

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4. Institutional:

4.1 Executing agencies:

The Executing Agency for this project will be the Honduras Institute of Tourism (IHT).

4.2 Project management:

Project management will be carried out by the same Project Coordination Unit for the SustainableCoastal Tourism Project in IHT, which has demonstrated experience with project management, financialreporting, and procurement procedures. This PCU consists of a Director, Financial Officer, ProcurementOfficer, Accountant, Administrative Assistant, and recently hired Communications and Monitoring andEvaluation Specialists. Terms of Reference with clear definition of roles and responsibilities of the staffwere approved by IDA before effectiveness of the Sustainable Coastal Tourism Project and all staff hasbeen selected competitively. For the new project, the PCU will be enhanced with additional staff tohandle budgeting, accounting, and procurement and a small branch will be established in Copan with aCoordinator, Procurement Assistant, and IHAH representation.

IHT is a deconcentrated, autonomous agency reporting to the Ministry of Tourism, established in 1993(Decree No. 103-93). IHT has the responsibility for tourism policy, planning, implementation, acquisitionof technical assistance, and tourism promotion. The Director of IHT also functions as the Minister ofTourism. IHT has a National Tourism Council, a body that consists of public and private sectorrepresentatives which meets regularly to approve the budget and policy direction. IHT is currentlymanaging the Sustainable Coastal Tourism LIL and the IDB Bay Islands Environmental ManagementProject. The Institute has developed strong capacity over the last year and has spearheaded manyinitiatives related to tourism development, including participatory strategic planning and the developmentof targeted marketing and promotional materials.

4.3 Procurement issues:

Taking into consideration a Country Procurement Assessment (CPAR) prepared in 1999 by the IDBusing the World Bank model, the main problems in Honduras are: (a) outdated and incomplete legalframework and procedures that, in some cases, conflict with Bank procurement policy; (b) lack ofoversight and coordination; (c) lack of standardization; and (d) poor procurement capacity. Despite thesefindings, previous operations have not presented any serious conflicts between Bank's policy anddomestic legislation. A new CPAR, as part of a joint IDB-World Bank effort, is under preparation as partof Bank support to the Government through PRSC operation. The PRSC requires a new CPAR and anagreement with the GoH on an action plan to tackle the identified procurement issues.

A Procurement Capacity Assessment was carried out of the current PCU in IHT and the CapacityAssessment was approved by the Regional Procurement Advisor Office on March 24, 2003. It was agreedthat this PCU will serve as the coordinating unit for the Copan Project and will be responsible for all theprocurement financed by the project. The assessment shows that this unit has adequate capacity to carryout the proposed procurement activities, with additional staff to assist in procurement and accounting.The following Procurement Action Plan has been agreed with GoH:

Procurement Action PlanPlanning:a) A detailed procurement plan for first year of the project. Complied by negotiations.Code of EtCocs: To be included in Operational Manual.b) A draft Code of Ethics will be developed for the projectstaff.

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Staffing: Before effectiveness.c) Appointment of procurement assistant for the PCU.

Training: At project launch workshop and during the lifed) Specific procurement training to procurement staff of of the project and on-the-job training by PCUthe different implementing agencies. procurement specialist.

Procedures: As a condition of effectiveness.e) Operational Manual (OM) should describe clearly theprocedures, methodologies, coordinating arrangements, filingand records, and internal control mechanisms for allprocurement and related disbursement activities to be carriedout by the different agencies and the PCU.

The GoH has requested the involvement of Asociaci6n Copan, a local non-governmental entityspecialized in archeological work, in part of Component 1. This option will be pursued as a sole sourcecontract (See Annex 6 for additional information).

4.4 Financial management issues:

The Bank (led by this project's Financial Management Specialist) is currently carrying out a CountryFinancial Accountability Assessment (CFAA). The final results are expected in May 2003. Initial resultsshow that the GoH faces various obstacles that prevent operational efficiency, sound personnelmanagement, and effective external oversight. The Financial Management Assessment for this projectconsidered some of the weaknesses identified by the technical analysis of the CFAA, which have beenreflected in the proposed implementation arrangements for the project.

The Financial Management Assessment shows that the PCU in IHT has a well-established finance andaccounting division, with clear policies, rules and procedures in place. The PCU has the capacity tohandle the financial management and reporting requirements for the new project. Several actions wereidentified as part of the Financial Management Action Plan (see Annex 6).

The project financial statements, along with the physical progress and procurement sections of theFinancial Monitoring Reports (FMRs), will be submitted to the Bank on a semi-annual basis, and will besubmitted no later than forty-five (45) days after the end of 6-month period. The contents of the FMRshave been discussed and an initial design has been agreed.

Audit. There are no outstanding audit issues for EHT as the first audit for the Sustainable CoastalTourism Project will be due by June 30, 2003. Annual project financial statements will be audited inaccordance with International Standards on Auditing, by independent private auditors (X) acceptable tothe Bank and in accordance with the terms of reference (TORs) already reviewed and cleared by theBank. Audits will be financed by the Bank. Standard project special purpose financial statements andaudit opinions on project financial statements, Special Accounts and Statements of Expenditures (SOEs)will be required. The reports will be required to be submitted to the Bank no later than 4 monthsfollowing the end of the fiscal year (January - December).

Special Account. Credit funds will be disbursed to one Special Account (US dollar account for Bankfunds to be held at the Central Bank of Honduras), which will be utilized for the purposes of theimplementation arrangements agreed and will be managed by IHT. The special account will bereplenished via the use of Statements of Expenditure (SOE) due to the experience that IHT already hasutilizing the traditional method of disbursements under the Sustainable Coastal Tourism Project.

Retroactive Financing. IDA will finance expenditures incurred after February 18, 2003. The amount of

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the retroactive financing will not exceed 10 percent of the total Credit amount.

Fondo Prosperidad. It is expected that an NGO will be selected, as per Bank procurement procedures, forthe administration of the Fondo Prosperidad. The advances to subprojects will be considered as eligibleexpenditures with respect to disbursement of funds from the Special Account. The subprojects will beapproved based on the policies, procedures, and criteria detailed in Annex 2, Annex 6 and in theOperational Manual.

S. Environmental: Environmental Category: B (Partial Assessment)5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (includingconsultation and disclosure) and the significant issues and their treatment emerging from this analysis.

An Environmental Assessment was carried out with visits to the five project areas, consultations withinvolved officials, review of existing information and maps, and consultation with the Protected AreasDepartment in SERNA. The EA category of B is confirmed.

No major environmental impacts are envisioned in this project; however the EA does highlight potentialsynergistic impacts that may be caused by tourist development such as: unplanned park development;increase in neighboring populations; the impact of a larger number of visitors on natural and culturalresources; an increase in demand for public services such as water and electricity; and the generation ofwaste and garbage. The project will seek to reduce the impacts caused by tourism development byincluding a Strategic Environmental Assessment (SEA) within the Management Plans for each park andsite. The EA document provides a conceptual model for the development of participatory ManagementPlans (Annex 4 of EA), which can be adapted to the needs of each particular area. The ManagementPlans will include a detailed monitoring plan to identify and mitigate any potential problems.

Infrastructure sub-components will entail mainly the rehabilitation and/or expansion of existinginfrastructure. Impacts from new infrastructure such as expansion of existing electric transmission linesand archeological research laboratories will be direct and localized in specific areas. The EArecommends three methodological tools to be applied for infrastructure activities: (a) guide forcategorization of projects based on type of project and level of sensitivity, taking into account theSafeguard Policies of the Bank; (b) fieldwork checklist to determine potential social and environmentalimpacts of infrastructure subprojects; and (c) an environmental manual for all infrastructure subprojectswhich addresses among other items: site selection, construction activities and environmentalspecifications for contractors, preventative measures, security, communication with community,chance-finding procedures, and environmental supervision during the construction. Models and formatsfor these tools are included in the full EA document. The PCU will be responsible for ensuring executionof the SEAs, screening of the works, and application of the construction manuals.

There are not expected to be any significant environmental impacts from the subprojects implemented bythe Fondo Prosperidad. This Fund can actually serve to support the environmental education programs.Criteria will be specified in the Operational Manual with an emphasis on ecological and environmentalawareness.

5.2 What are the main features of the EMP and are they adequate?

The main recommendations of the EA are reflected in the project design with a specific provision for aSEA as part of each Management Plan. The SEA will include the tools needed to appropriately evaluatesocial and environmental impacts and subproject screening criteria and procedures for all infrastructureactivities. Site-specific EMPs for each infrastructure component based on the methodological toolspresented in the EA will be prepared during implementation.

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5.3 For Category A and B projects, timeline and status of EA:Date of receipt of final draft: March 4, 2003

The EA was received on March 4, 2003 and submitted to the InfoShop on March 7, 2003. It wasapproved by LCSES/QAT on March 24, 2003 and made available in Honduras in the Resident Mission,the PCU for the Sustainable Coastal Tourism Project, and the Ministry of Natural Resources and theEnvironment (SERNA). The findings of the assessment have been made available to key stakeholdergroups.

5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EAreport on the environmental impacts and proposed environment management plan? Describemechanisms of consultation that were used and which groups were consulted?

The main stakeholders (representing the Ministries of Tourism and Culture, IHT, IHAH, Finance, andSERNA; representatives from a local nonprofit organization, consultants, and PCU staff) participated ina two-day logical framework planning session in February 2003 with participation of the EnvironmentalSpecialist. The main environmental issues were discussed and the Environmental Assessment processwas explained. The Environmental Specialist also visited all project sites and discussed proposed projectactivities with IHAH and IHT staff, and other associated specialists.

The Management Plan for Copan Archeological Park, financed by the PROFUTURO Project, includedconsultation with local residents, nonprofit organizations, and experts. During project implementation,the Management Plans with SEAs for El Puente, Los Naranjos, Cerro Palenque, and Plan Grande will beinformed by a wide consultation process with stakeholders in each respective locale. This process will beguided by the recommendations from the EA and the model used for the development of the ManagementPlan for Copan.

5.5 What mechanisms have been established to monitor and evaluate the impact of the project on theenvironment? Do the indicators reflect the objectives and results of the EMP?

The project is designed to establish a framework for environmental protection and natural resourcemanagement through the development and implementation of comprehensive Management Plans,including a SEA. The EA recognized the complementary value of nearby National Parks and resulted inthe incorporation of an impact indicator as follows: increase by 100 percent the number of hectaresmanaged in an ecologically sustainable manner at end of project. In addition, Management Plans willinclude definition of monitoring indicators related to public use and carrying capacity.

6. Social:6.1 Summarize key social issues relevant to the project objectives, and specify the project's socialdevelopment outcomes.

The key social issues related to the project objectives are: (a) high levels of unemployment due to therecent coffee crisis; (b) local residents are unfamiliar with how the private sector operates and havelimited capacity in terms of marketing and commercialization for tourism development; (c) increasingprice of land forcing poorer residents to move to outlying areas; (d) extremely low education levels,particularly in rural areas; (e) indigenous communities having successfully recuperated their traditionallands but, for several reasons, are still not using them productively; (f) strong and growing Chortimovement which is leading to a resurgence of indigenous culture and pride; (g) growing disparity indegrees of organization in rural communities; and (h) serious gender disparities and segregation of roles,where women work more than men but have much less access to decision making resources, particularlyin the guiding profession, an area that concems the project and where men dominate (see Annexes 11 and12).

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The social development outcomes are related to full participation of the excluded populations in theregional development of zone and equitable access to the resources and opportunities provided bytourism. The main outcomes include: (a) building social capital through capacity-building programs; (b)strengthening community organizations; (c) building skills in marketing and commercialization; (d)increasing the employment rate in the project areas; (e) increasing the number of small enterprises run bylocal residents; (f) expanding employment and income-generating opportunities; and (g) promotinggender equality in employment, income-generation, and leadership opportunities.

6.2 Participatory Approach: How are key stakeholders participating in the project?

During the analysis of the social and indigenous issues, the local populations were consulted throughfocus groups in rural and urban areas and semi-structured interviews with key stakeholders in the projectareas, including patronatos (created by municipalities in each community or barrio to serve as liaisonbetween municipal authorities and civil society--most rural communities have gender mixed patronatosand women only), municipal and community authorities (in Copan, El Puente, and Pimienta), leaders ofthe Consejo Nacional de Indigenas Maya Chort( de Honduras (CONIMCHH - National Council ofIndigenous Chorti Maya of Honduras); and the private sector (owners of hotels and restaurants).

Local residents and communities will continue to be involved in the project through the followingmechanisms: (a) involvement of a local nonprofit organization in technical assistance of part ofComponent 1; (b) CONIMCHH will be consulted during the preparation of the pre-feasibility study andimplementation of Income Generation Opportunity component; (c) participation in project activitiesincluding training events and capacity building programs; and (d) ongoing participatory monitoring andevaluation.

Finally, key stakeholders participated in project design through meetings during the Bank mission traveland an intensive two-day Logical Framework planning session held in February 2003. This sessionincluded over 30 participants and the participation of high-level government representatives from allinvolved agencies, nonprofit representatives, consultants, and PCU staff. The workshop served todevelop a consensus on the project objectives, activities, indicators, risks, and implementationarrangements.

During its preparation, the project design benefited from the Norwegian Trust Fund for GenderMainstreaming (GENFUND) implemented in Copan under the PROFUTURO Project (See Annex 12).The Genfund used a highly participatory approach to integrate Maya Chortf women in the increasingtourism flow in the area. The activities included training and capacity-building and identification ofpotential income-generating opportunities.

6.3 How does the project involve consultations or collaboration with NGOs or other civil societyorganizations?

A local nonprofit organization experienced in archeological work has advised on project design issues.Government has requested that this local non-governmental entity provide technical assistance for part ofComponent 1. The Chorti organization CONIMCHH and the organized women's groups in the rural areaswere consulted during the analysis of social and indigenous issues. It is expected that they will continueto be involved during implementation in the Income Generation Opportunities Component to advise onissues specific to the rural areas and income generation potential. They may also benefit from thecapacity building and training activities.

6.4 What institutional arrangements have been provided to ensure the project achieves its socialdevelopment outcomes?

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A local non-profit organization (Asociaci6n Copan) is expected to be contracted to provide technicalassistance for part of Component 1. The proposed institutional arrangements will take advantage of thestrong project management capacity of the existing PCU of the Sustainable Coastal Tourism Project. Thisproject will involve IHT and IHAH. IlT already has experience with an Implementation Agreement withIHAH in the Sustainable Coastal Tourism Project. For the Copan Valley Project, a Technical SupportAgreement will be established with IHT to facilitate the participation of IHAH in technical support anddevelopment of terms of reference related to the archeological sites. Also, a high-level AdvisoryCommittee, to be convened by IHT, will plan, monitor, and evaluate all steps of the project'simplementation. The Committee will consist of the Ministries of Finance, Tourism and Culture, theDirector of IHAH, local mayors, and local-level government agencies and nongovernmentalorganizations involved in the sector. Also, local Indigenous Maya Chorti and women's organizations willcollaborate with the government and participate in the preparation and implementation of Components 1and 2, particularly Fondo Prosperidad.

6.5 How will the project monitor performance in terms of social development outcomes?

The performance monitoring indicators include attention to social impacts and social developmentoutcomes. A comprehensive baseline study will be carried out during the first six months ofimplementation to help inform the ongoing monitoring and evaluation during implementation.Participatory monitoring, with the involvement of community groups and organizations, is anticipated toreorient training and technical assistance as needed and identify the level of satisfaction with projectactivities. The project will incorporate a framework for learning about the employment impacts ofarcheological site restoration, with information gathering on jobs created (both seasonal and permanent).The progress will be evaluated at the mid-termn and conclusion of the project.

At the level of impacts, initial indicators include: at least 15 percentage points increase in theemployment rate in the project areas at EOP; and an increase of 100 percent in the number of small, localenterprises in the region (with an increase of 35 percent of indigenous enterprises) created andfunctioning sustainably at EOP. Specific to the Income Generation Opportunity component, the mainindicator is the number of tourism initiatives created, including specifically for women or the indigenousand employment disaggregated by type of work, gender, and ethnicity. These indicators will be furtherrefined based on the findings of the baseline study. It is expected that implementation arrangements willbe flexible and respond to ongoing M&E findings.

7. Safeguard Policies:7.1 Are any of the following safeguard policies triggered by the pro ect?

'. T ', '5 Policy~ - - * - TriggeredEnvironmental Assessment (OP 4.01, BP 4.01, GP 4.01) U Yes U No

Natural Habitats (OP 4.04, BP 4.04, GP 4.04) (9 Yes ( No

Forestry (OP 4.36, GP 4.36) (9 Yes (9 No

Pest Management (OP 4.09) C)Yes ( No

Cultural Property (¢:lPP 11.03) Cy-Yes (U) NoIDndigenous Peoples (OD 4.20) U Yes ( No

l[nvoluntary Resettlennent (OP/lBP 4.12) ,^()Yes (U No

Safety of lDams (OP 4.37, lBP 4.37) U Yes (U No

Projects in International Waters (ODP 7.50, BP 7.50, GP 7.50) C Yes U No

Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* ( Yes C) No

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7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

Environmental Assessment. An Environmental Assessment with visits to all project areas was carriedout, taking into account the requirements of the Natural Habitats and Cultural Property safeguards. TheEA has resulted in specific recommendations for the development and implementation of ManagementPlans and for infrastructure improvements and construction, which are reflected in the EA Section (E. 5above).

Cultural Property. A reconnaissance field visit of project areas was carried out by an archeologist, anenvironmental specialist, and a social scientist. An updated reconnaissance survey of the culturalproperty of each site is maintained by IHAH. Through the preparation and implementation ofcomprehensive, participatory Management Plans prior to investments, the project will help prevent anydamage, destruction, or theft of cultural property. The cultural property aspects of the project wereconsulted with a local, well-respected nonprofit organization with extensive experience in archeologicalresearch and education. Indeed, the objective of the project is to create conditions for the preservation thecultural patrimony of the country, currently endangered given lack of security in the Archeological Parksand Sites.

Indigenous Peoples. As the largest proportion of beneficiaries are indigenous peoples (specifically theMaya Chortis), the project itself is designed to follow the principles of the Bank's Indigenous PeoplesPolicy and should thus be understood as an Indigenous Peoples Development Plan (IPDP).

The Involuntary Resettlement Policy is not triggered, as the EA and social analysis indicate that thereare not expected to be any restrictions or prohibitions on populations living near the archeological sites.

F. Sustainability and Risks

1. Sustainability:

Sustainability of the project depends to a large extent on a strong and growing tourism industry inHonduras, particularly in the Copan Valley and surrounding areas. Tourism grew by 20 percent in 2002and it is expected to continue to increase. Honduras has many attractions and the Government is currentlyplacing a priority on the development of new destinations to draw a greater number of tourists andencourage longer stays. The Economic Evaluation indicates that the project is likely to be financially andeconornically profitable. The sensitivity analysis shows that the project's profitability will be sensitive tothe flow of visitors and to the number of days they stay in Honduras. This implies that the project'ssuccess requires the effective promotion of these archeological sites as tourist destinations, and on thesupply of tourism products and services that will make it more attractive for tourists to stay longer andspend more money. Both aspects are backed by specific components in the project's design.

The implementation of Management Plans with an integrated conservation approach will preserve theseattractions for future visitors, increasing the sustainability of the cultural and natural resources. The fiscalimpact of visitors' entrance fees is significant, for they will provide for future operation and maintenanceneeds in these parks/sites.-

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

Risk' Risk Rating Risk Mitigation MeasureFrom Outputs to ObjectiveHonduras is not able to maintain N The GoH seeks to become a regional leader incompetitiveness in tourism market with tourism and has placed a priority on therespect to neighbor countries. development of new destinations and private

sector investment. The project includes a

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strong marketing and promotion strategy.

Insecurity and/or lack of public safety in S Government is addressing the problem of crimetourism destinations affect the number of and the Ministry of Tourism has establishedvisitors. tourism police, which are functioning in

priority sites.

Natural disaster affects quality of M Following Hurricane Mitch, there is greaterattractions. awareness of the need for advance planning

and response to natural disasters. Contingencyplans have been developed. A Bank-financedNatural Disaster Project is helping Governmentto address vulnerable areas and be betterprepared for future disasters. Through its focuson ecologically sustainable management, theproject will address these issues in the parks,sites, and surrounding areas.

Access to Copan and the archeological S A small private airport near Copan has recentlycircuit remains slow and/or complicated opened which has capacity for small planes up(transportation by road from San Pedro to 30 passengers. The design of the proposedSula and/or crossing the border from Rio Amarillo Aerodrome (for planes up to 50Guatemala). passengers) was carried out by IDB. There are

ongoing efforts to improve the border crossing.

Public infrastructure (water and S The GoH has identified this as an urgentsanitation) remains of poor quality and/or priority. The project will finance urbanis nonexistent. planning and municipal strengthening in Copan

Ruinas Municipality and the GoH is alsopursuing public investment and donor supportto implement water and sanitationinfrastructure projects.

Municipalities lack capacity to generate S The decentralization agenda pursued by thelocal revenue (lack of cadastre) to be able GoH will help contribute to municipal capacityto address priority needs. to generate income. Associated land

administration projects will support cadastrework.

Lack of qualified human resource N Government will place a priority on promotingcapacity to sustain and preserve scholarships in archeology and related sciencesarcheological sites. through the Secretaria Tecnica y Cooperacion

(SETCO - Ministry for Technical Cooperation)and IHAH.

Local residents benefiting from training N The expected increase in number of visitorsprograms migrate out of the area. will create opportunities and employment

openings for the trained local residents.

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From Components to OutputsLack of coordination among the M Project preparation has included exemplaryMinistries of Tourism and Culture, IHT, cooperation between the Ministries andand IHAH. Institutes. The project design also includes a

high-level Advisory Commnittee.

Tourism is not considered a priority by N Currently, the GoH considers tourism a topthe Government priority and it forms an integral part of the

Government's economic growth strategy.

Failure to secure technical cooperation N IHAH has already negotiated several technicalfrom institutions and foreign assistance agreements. It is expected that thisgovernments regarding surveying, project will only increase the interest ofconservation, and investigation of researchers and institutions in joining effortsarcheological sites. with the GoH.

Overall Risk Rating M

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

3. Possible Controversial Aspects:

The main controversial aspect is the optimal use of revenue generated by the Copan Archeological Park.This issue is currently under discussion between the central government and the municipality. Theproject has included two dated covenants in the Development Credit Agreement related to this issue: (a)carry out a study on the optimal use of the revenue for the Copan Archeological Park to identify itsimpact on the financing of IHAH (no later than 12 months after Effectiveness); and (b) AdvisoryCommittee shall develop a proposal on the mechanism for the optimal use of revenue generated in theupgraded archeological parks and sites (no later than 24 months after Effectiveness).

The Country Financial Accountability Assessment, currently under preparation as part of the PRSC, hasidentified several problems with the revenue and collections office and the issue of financial transfers tomunicipalities has been identified as a key issue on the decentralization topic in the PRSC. Severalstudies are currently under preparation to identify legislation gaps, financial systems, capacity issues, andspecific sector issues.

G. Main Credit Conditions

1. Effectiveness Condition

a) The Implementation Agreement has been executed on behalf of the Borrower and IHT;b) The Technical Support Agreement has been executed by IHT and IHAH;c) The Operational Manual shall have been adopted by lIHT; andd) The procurement assistant for the PCU to assist the implementation of the Copan Valley Project has

been contracted.

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

Disbursement Conditionsa) Plan Grande/Guanaja. All Plan Grande investments are conditioned on the following issues: (i)establishment of a legal non-profit entity (foundation), with by-laws acceptable to IDA for theappropriate management of Plan Grande; and (ii) the Foundation has title to the Plan Grande land.b) Fondo Prosperidad Subprojects. Engage the services of an Management Agent to manage theimplementation of Fondo Prosperidad subprojects.

Hi. IReadiness for Omplementation

3 1. a) The engineering design documents for the first year's activities are complete and ready for thestart of project implementation.

D 1. b) Not applicable.

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

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

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

D. CompGiance with Blank Policies

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

with all other applicable Bank policies.

Maria-ValeaPena Jane Armica'gMaria-Valerfa Pea J Jhn Redwood Jane AmtetTeam Leader ector Manager/Director Country Manager/Director

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Annex 1: Project Design Summary

HONDURAS: Regional Development in the Copan Valley Project

-; -̂ 1 ' Key Pdrformai`e Data Collection StrategyHierarchy of Objectives AIndicators- _ Critical-Atsumptions

Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Misslon)Poverty reduced in poorest 1.1 Average real per capita Project progress reportsregions (including Copan household income in theValley). region increased by 20 Household survey carried out

percent from baseline at EOP. by INE.

Project Development Outcome / Impact Project reports: (from Objective to Goal)Objective: Indicators:Sustainable tourism 1.1 Average number of Statistics of the archeological 1. The Poverty Reductiondevelopment, based on visitors increased by at least parks/sites and IHT Strategy (linked to HIPC)cultural/natural patrimony, 20 percent above the natural contributes to final objectiveachieved in the Copan Valley historic rate at EOP. of project.and surrounding areas. 1.2 Average length of stay HIT Statistics

increased at least 100 percent 2. Projections of economicwith respect to baseline (2.6 growth, inflation, and otherdays) at EOP. macroeconomic variables are1.3 Level of average IHT Statistics maintained.expenditures by tourist and bylength of stay increased atleast 100 percent with respect,to the baseline ($117) at EOP.1.4 15 percent increase in Project progress reportsrevenues of the municipalities Municipal informationin the area affected by project.1.5 At least 5 percentage Statistics of INE and Centralpoints increase in the Bankemployment rate in the regionaffected by project at EOP (4percentage points women, 6percentage points men).1.6 Increase of 100 percent in Project progress reportsnumber of local smallenterprises in the region (withan increase of 35% amongindigenous) created and/orstrengthened and functioningsustainably at EOP.1.7 Increase by 100 % number Statistics and reports ofof hectares under ecologically SERNA and State Forestrysustainable management at Administration - ForestEOP. Development Corporation1.8 At least 70 percent of thevisitors express satisfaction Client satisfaction surveywith the service received at (IHT)EOP.

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Kie y'Pee r`Krm ance .D .t9a-C:1ection Strategy .,jNerarchy of Objectives In icators j Critical Assumptionsi,

Output from each Output Indicators: Project reports: (from Outputs to Objective)Component:1. Integrated program of 1.1 Management Plan for Supervision missions 1. At least five professionals intourism infrastructure and Copan operating at the end of Project Progress Reports archeology and relatedparticipatory management of first year. Mid-term and Final review sciences trained at the end ofarcheological parks/sites 1.2 Four Management Plans, M&E System year 3 (generation ofimplemented. including educational scholarships by SETCO and

activities, designed and IHAH) and incorporated.executed according totimetable beginning year 4. 2. Establishment of tourism1.3 Visitors Center (with police (Ministry of Tourism)exhibit area, administration, in priority areas.cafeteria, sanitary andcommercial services) 3. Rio Amarillo Aerodromeconstructed and operating in (50 passenger planes)Los Naranjos at end of year 2. constructed and operating1.4 Investigation centers in (IDB project).Los Naranjos and El Puenteremodeled and operating in 4. Public infrastructure (wateraccordance with national and sanitation) improvedsuccessful experiences at end through public investment.of year 3.

5. Mechanism to provideincentives for local incomecollection (cadastre and taxes)approved by nationalauthorities.

6. Personnel trained use newabilities in the area.

7. Contingency plans forpotential natural catastrophesfunction efficiently.

2. Program of formation and 2.1 The Fondo Prosperidad 8. The Migration Policyincentives for income established and operating at Department facilitates thegeneration initiatives beginning of year 2. arrival of visitors.implemented. 2.2 At least 44 tourism guides

(archeologists, ecologists, and 9. The tourism offer of theothers) trained at EOP. region maintains its2.3 At least 60 archeological competitiveness with respectassistants/service workers to neighbor countries.trained at EOP.2.4 At least 30 subprojectscreated and functioning ( 10for women) at EOP.

3. Program of strengthening of 3.1 At least 280 individualsinstitutional capacity in (functionaries of IHT, IHAH,

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tourism/cultural management and SCAD; mayors;for public, private, and civil community leaders; tourismsociety actors, designed and entrepreneurs and operators)operating. trained in cultural and tourism

management at EOP (70/year).3.2 Strategy of national andinternational marketingdesigned and operating at endof year 2.3.3 Management systembased on objectives installedand operating at beginning ofmonth 6.3.4 Communication strategyincluding change in conduct inobjective audience, resolutionof conflicts, products andservices to provide, operatingat month 6.3.5 Plan to improve the impactbased on results of M&E,applied annually beginningyear 2.3.6 IHAl equipped,rehabilitated, and strengthenedtechnically at end of year 1.

Project Components / Inputs: (budget for each Project reports: (from Components toSub-components: component) Outputs)1. Integrated Development US$6.9 million Quarterly disbursement reports 1. Effective coordinationof Archeological Parks/Sites between Ministries of Culture1.1 Implement Copan Project progress reports and Tourism, IHT, and IHAH.Management Plan prioritiesincluding improvements and 2. Tourism is maintained as ainterpretation. government priority.1.2 Design and carry outimprovements in Casa 3. Technical cooperationKin'ich. between IHAH and institutions1.3 Design and develop and foreign governments isenvironmental/cultural maintained.education materials and itemsfor Casa K'inich and theVisitor's Centers.1.4 Contract according toprocedures Management Plansfor El Puente, Los Naranjos,Cerro Palenque, Plan Grande.1.5 Implement priorities fromManagement Plans for ElPuente, Los Naranjos, CerroPalenque, Plan Grande.

2. Income Generation US$2.9 millionOpportunities2.1 Contract, according to

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procedures, Pre-feasibilityStudy to identify marketopportunities for FondoProsperidad.2.2 Contract Agency tomanage FondoProsperidad--support eligibleproposals/initiatives throughFondo Prosperidad, superviseand monitor, and evaluateprogress.2.3 Design and implementtraining program forarcheological assistants,tourism guides, tourismservice workers.2.4 Design and implementtraining program forvulnerable groups, based onpre-feasibility study.2.5 Design and providetechnical assistance tovulnerable groups fordevelopment oftourism-related initiatives.

3. Institutional Development US$3.5 mlllion3.1 Design and implementtraining program forstakeholders.3.2 Design and implementnational and internationalmarketing strategy.3.3 Contract Baseline Studyand design of M&E System.3.4 Carry out consistentmonitoring and evaluation.3 5 Design and implementsocial communication strategy.3.6 Establishinter-governmental AdvisoryCommittee.3.7 Strengthen the PCU enTegucigalpa and establish abranch in Copan.3.8 Design and implementinstitutional strengtheningprogram in culturalmanagement and planningcapacity.

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Annex 2: Detailed Project DescriptionHONDURAS: Regional Development in the Copan Valley Project

The project is expected to take four years to implement. The project has the following components:

By Component:

Project Component 1 - US$6.90 millionIntegrated Development of Archeological Parks and SitesThe objective of this component is to assist the GoH to implement an integrated program of tourisminfrastructure and participatory management that links the main parks and sites of the region - Copan, ElPuente, Los Naranjos, Cerro Palenque and Plan Grande - in an archeological-ecological tourist circuit.This concept is based on the: (a) preservation and management of environmental resources; (b) respectfor the social and cultural diversity of the resident population; (c) partnership between local andinternational research communities; and (d) promotion of attractive tourism opportunities for privateinvestors. There are five subcomponents:

A. Sub-component Implementation of the Copdn Archeological Park Management Plan. Copan hasbeen managed as a protected area since the 1950s and the first Management Plan was developed in 1982.The entire Copan Valley including all the archeological ruins (even those on private land) was declared aNational Monument in 1984. An updated Management Plan covering the entire Valley was financed bythe PROFUTURO Project and carried out during 2000-2002. This Plan addresses the measures needed toprevent further deterioration of the archeological ruins and establishes priorities for investments inpreservation, restoration, security, and interpretation. This subcomponent will finance the prioritiesresulting from this Management Plan and environmental and cultural education activities. Two activitieswill be financed under this subcomponent:

(a) Implementation of priorities identified in the PROFUTURO-financed Management Planincluding: (i) a Natural Resource Management Plan to restore and protect the park and its surroundingareas (activities including: investigation, monitoring, and scientific cooperation; protection of nativespecies; natural resource management and conservation strategies); (ii) a Public Use Plan to disseminateknowledge about ruins to visitors; improve linkages among all parts of the park; integrate all museums inthe same archeological-ecological tourism circuit; (iii) Interpretation and Security Plan with signs andsecurity infrastructure for park and museums (activities including: making and improving trails,interpretative signs, safety for visitors, maps, fences, video cameras, alarms, identification and repair ofvandalism); (iv) Community Outreach Plan to promote knowledge and visits from local residents(activities including: social communications, public relations, recreation, community learningopportunities); (v) an Infrastructure Plan to execute small civil works to increase the flow of tourists,including: enhancement of the Visitor's Center, ticketing center, and parking (design financed by IDB);Sculpture Museum repair; protection of monuments and sculptures; strengthening of underground tunnels(there are three kilometers of tunnels and only about 40 percent have been consolidated-the rest are inurgent need of consolidation with stone and concrete so they do not cave in); improvements in theRegional Archeology Museum; and improvements in the Regional Center for Archeological Research(contains administrative offices, research laboratories, inventories of items removed from the site); and(vi) a Monitoring Plan to collect information about visitors in order to plan future expansion (activitiesincluding: monitoring limits of acceptable change, numbers of visitors, ticket sales, time waiting fortickets, popular sites, use of trails and paths, number and use of guides, visitor satisfaction).

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(b) Environmental and cultural education for children andfamilies on biodiversity and thehistorical characteristics of the Copdn Valley. The Casa K'inich, a small interactive learning center inCopan for children and families was financed by the PROFUTURO Project and is now visited by over1,000 students a month. This activity will finance: (i) expansion of Casa K'inich and enhancement of itssurroundings; (ii) development and/or acquisition of cultural and environmental education materials forstudents and families to be used by Casa K'inich; (iii) development of community outreach programs byCasa K'inich; and (iv) new interactive educational materials to be developed in other parks and sitesinvolved in the project.

B. Sub-component Development of El Puente Archeological Park in the Copdn Cultural TourismCircuit. The El Puente Park, located close to Copan along the road to San Pedro Sula, is smaller, but it iscurrently the second most important archeological site available to tourists. The objective of thissubcomponent is to include El Puente in the same Copdn Park tourism circuit by improving its facilities,promoting research, and enhancing visitor attractions. Three activities will be financed under thissubcomponent:

(a) Development of a Management Plan that will include inter alia: (i) a Strategic EnvironmentalAssessment (SEA) of the park with recommendations for its preservation, for the archeologicalinvestigation to be conducted, and for planning future use given its unique characteristics; (ii) communityoutreach planning; (iii) plan for interpretation with recommendations on how to improve accessibility forlocal residents and visitors; and (iv) public use plan with recommendations for future expansion of thepark.

(b) Implementation of the Management Plan priorities.

(c) Promotion of tourism in the park through: (i) enhancement and expansion of the Visitor'sCenter; (ii) rehabilitation of the parking space; (iii) expansion of transmission line or generator to bringelectricity to the park; (iv) security infrastructure; (v) construction and equipping of a visible laboratoryfor archeological research, cleaning, and restoration; and (vi) reconstruction of a Maya village and Mayahousehold from circa 8th century A.D.

C. Sub-component Development of Cerro Palenque Archeological Site. Cerro Palenque is located onthe sides and top of a hill near the confluence of the luhia and Comayagua river valleys near San PedroSula and it is the only archeological site remaining in the Sula Valley. The site has significant potential interms of archeological interest and natural resources, but it is not developed for visitors. Three activitieswill be financed under this sub-component:

(a) Development of a Management Plan that will include inter alia: (i) a SEA of the site withrecommendations for its preservation, for the archeological works to be conducted, and for planningfuture use given its unique characteristics; (ii) community outreach planning; (iii) plan for interpretationwith recommendations on how to improve accessibility to local residents and visitors; and (iv) public useplan with recommendations for future expansion of the site.


(c) Promotion of tourism in the site through: (i) rehabilitation of access road; (ii) construction andequipping of a Visitor's Center with parking and a laboratory for archeological research; (iii) expansionof electricity and water; and (iv) installation of security infrastructure.

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D. Subcomponent Development of Los Naranjos Eco-Archeological Park. To the east of Copan, theLos Naranjos Eco-Archeological Park, is located in a forest along Lake Yojoa and contains an extensive.set of non-Maya ruins of a civilization one thousand years older than the Maya. The park is located in anatural habitat in an extremely fragile area. Los Naranjos is a relatively underdeveloped park with richbiodiversity characteristics. This subcomponent will finance some infrastructure improvements, but thepark will largely remain an environmental attraction with archeological research planned in order to notcause any negative impacts. Three activities will be financed under this sub-component:

(a) Development of a Management Plan that will include inter alia: (i) a SEA of the park withrecommendations for its preservation, for the archeological works to be conducted, natural resourcemanagement, and for planning future use given its unique characteristics; (ii) community outreachplanning; (iii) plan for interpretation with recommendations on how to improve accessibility to localresidents and visitors; and (iv) public use plan with recommendations for future expansion of the park.


(c) Promotion of tourism in the park through: (i) enhancement of the existing Visitor's Center; (ii)rehabilitation of the parking space; (iii) rehabilitation of the access road; (iv) security infrastructure; (v)construction and equipping of a laboratory for archeological research; (vi) construction of a smallInteractive Environmental Learning Center for children based on the biodiversity of the park.

E. Subcomponent Development of Plan Grande in Guanaja. The Plan Grande archeological site,located on the island of Guanaja in the Bay Islands is the only Maya site in the Caribbean. This sitecomplements the tourism complex accessible through San Pedro Sula and provides a diversification ofattractions in the Bay Islands. Two activities will be financed under this subcomponent:

(a) Development of a Management Plan that will include inter alia: (i) a SEA of the site withrecomrnendations for its preservation, for the archeological works to be conducted, and for planningfuture use given its unique characteristics; (ii) community outreach planning; (iii) plan for interpretationwith recommendations on how to improve accessibility to local residents and visitors; and (iv) public useplan with recommendations for future expansion of the site.


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Project Component 2 - US$2.90 millionIncome Generation OpportunitiesThe objective of this component is to assist the GoH to take advantage of the expected tourism inflow tofoster income generation opportunities for the populations in the project areas, particularly the very poor.It draws on lessons learned from the Nicaragua Rural Municipalities Project - Protierra; Mexico GenderEquity Project - Generosidad and two grants associated with the PROFUTURO Project in Cop6n: aPHRD for implementation and the GENFUND (which piloted income generation activities for poorresidents, particularly women). This subcomponent will support incentives for the poorest women andhouseholds in the Copan Valley and surrounding areas as a means to obtain employment or a source ofsustainable income. There are two subcomponents:

A. Sub-component Local Capacity Building. Three capacity building windows will be financed:

(a) Specialized technical training to build capacity of local residents in skills needed for thedevelopment and enhancement of the archeological sites financed under Component 1. This training willtarget current and potential technicians, archeology assistants, conservation and restoration assistants,laboratory assistants, paraprofessionals, and local workers required for archeological research andinvestigation.(b) Capacity building for local residents as eco/archeological guides for the archeological parks andsites, surrounding museums, and other tourism-related activities. Training topics may include: the Maya,history and descriptions of the parks and sites, museums and villages in area, natural resourcesmanagement, main tourist attractions, basic English, and communication skills. The training will also beperiodically updated with new information.(c) Capacity building in tourism services delivery for local residents including tourism operators andmunicipal staff in the tourism service sector and/or in technical and administrative positions related totourism development.

B. Subcomponent Income Generation. Three activities will be financed:

(a) Pre-feasibility study (contracted by the PCU) to identify profitable market niches for thedevelopment of tourism-related income generation opportunities;

(b) Development of capacity building, training and technical assistance programs (by a firmcontracted by the PCU according to Bank procurement procedures) to respond to tourism increase forsmall local tourism operators and local services providers, including indigenous communities, in additionto funding other studies and activities related to sustainable development, including the preparation offuture investment projects;

(c) Through Fondo Prosperidad, make resources available to subprojects that respond to marketniches identified by the pre-feasibility study menu, including capacity building, training andcommercialization. The menu of the Fund will be defined through a pre-feasibility study contracted bythe PCU within the first six months of the project. The menu will be appropriate to the characteristics ofthe visitors of archeological parks/sites, potential channels of commercialization, and local traditions.The fund will be financed by Credit proceeds and it is expected that a NGO (Management Agency), willbe selected according to Bank procedures to administer the subprojects. The Agency will haveexperience in the management of subprojects and a history of trust dealing with communities. It will alsohave a presence and a staff in the area. At least one representative of a local organization will participatein the decisions of the Agency regarding the Fund. The Agency will report financially and in terms of

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development results each six months to the PCU. The Agency will identify subprojects and request IHTto disburse funds for the subprojects to the Agency, which will then disburse to beneficiary groups.Disbursements to the Management Agency will be based on the commitments of the Agency withbeneficiaries and on the results achieved each six months.

Proponents for proposals should be communities recognized by customary law according to theprinciples accepted by indigenous community organizations in the area. Proposals will be selected basedon the linkages with the menu and an analysis by the Agency of their economic return potential. TheAgency will be able to assist proponents to make proposals with potential, to fit those criteria. If moreproposals are presented than funds allow, a committee of specialists will be selected to make theallocation. All participants in a proposal should sign off their contractual obligation and reporting,according to procedures proposed by the Management Agency. Proposals are estimated at a maximum of$25,000. The amount of resources to be disbursed will depend on the type of activity to be financed, andalso based on the results of the financial reporting of the activities carried out. Communities will sign anagreement with the Management Agency prior to receiving funds, detailing a 10 percent cash or in-kindcontribution, and will present reports, to the Management Agency every three months. Communities willchoose from a list of qualified technical assistance/training providers.

This Fondo is based on the successful experience of Porto Sol in Rio Grande do Sul, Brazil which hasbeen studied by the Bank and presented in several best practice workshops sponsored by the Bank. TheOperational Manual of the Project will detail all the procedures and be presented to the Bank as acondition of effectiveness.

Project Component 3 - US$ 3.50 millionInstitutional DevelopmentThe objective of this component is to assist the GoH to design and operate a program of institutionalstrengthening in tourism/cultural management for public, private, and civil society actors at national andlocal levels. This component will also support coordination of the project and capacity building in projectmanagement, including finance and administration, procurement, and monitoring and evaluation. Thereare two subcomponents:

A. Subcomponent Institutional Strengthening and Communications. This subcomponent will fmnanceinstitutional strengthening for IHT, 1HAH, and SCAD; a strategic participatory plan for development ofarcheological-ecological tourism circuit including technical assistance and training for municipalities; amarketing and promotion strategy; and a social communications strategy.

B. Subcomponent Enhance Project Coordination Unit/Monitoring and Evaluation. This subcomponentwill finance enhancement of the existing Project Coordination Unit and the Monitoring and Evaluationsystem. The existing PCU will add personnel to handle the increased responsibility. It will also financethe creation of a branch of the PCU in Copan. This component will finance the recruitment ofinternational and national specialists for short periods of time to provide training and carry out studiesrelated to project implementation. A Baseline Study will be financed and regular monitoring andevaluation of project activities will be carried out.

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Annex 3: Estimated Project CostsHONDURAS: Regional Development in the Copan Valley Project

-Local Foreign TotalProjectCost By Component - US,$mi11ion US $million-.; US $million

Integrated Development of Archeological Parks/Sites 5.28 0.71 5.99Income Generation Opportunites 2.44 0.24 2.68Institutional Development 2.42 0.81 3.23Total Baseline Cost 10.14 1.76 11.90

Physical Contingencies 0.37 0.03 0.40Price Contingencies 0.99 0.06 1.05

Total Project Costs' 11.50 1.85 13.35Total Financing Required 11.50 1.85 13.35

Local- Foreign Total. .Project cost By Cat' gory - US $million US $million-- US, millioin

Goods 0.09 0.72 0.81Civil Works 3.95 0.00 3.95Consultant Services 3.69 0.88 4.57Training 0.36 0.25 0.61Archeological Services 1.02 0.00 1.02Subprojects 1.79 0.00 1.79Audits 0.04 0.00 0.04Incremental Operating Costs 0.56 0.00 0.56

Total Project Costs 11.50 1.85 13.35Total Financing Required 11.50 1.85 13.35

Identifiable taxes and duties are 1.1 (US$m) and the total project cost, net of taxes, is 12 25 (US$m). Therefore, the project cost sharing ratio is 97.96% of total project cost net of taxes.

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Annex 4: Cost Benefit Analysis SummaryHONDURAS: Regional Development in the Copan Valley Project

Summary of Benefits and Costs:This project makes a public investment in public goods (archeological parks and sites, roads and

the like) and private goods (training and financing for small tourism businesses), to promote growth inthe tourism industry. The benefits expected from the project's implementation are additional jobs,production and incomes in the project's areas of influence and the increased flow of tourist demand takesup the slack in the hotel industry.

At present, occupation rates in the hotel industry in Copan Ruins and the Yojoa lake area arevery low, estimated at under 20 percent. The project will invest in the development of additional visitorattractions, will support the marketing of the industry and will strengthen the capacity of private actors toprovide good quality services of the sort demanded by visitors. This should lead to a rapid increase in theflow of visitors.

The project's rate of return is analyzed in terms of the relationship between the stream of costsincurred both publicly (the project costs) and privately (the costs of the industry) due to the project'sintervention, compared with the incremental revenues to be derived by tourism industries in the zone ofinfluence as a result of the project. In the first variant of the analysis, all the costs and benefits areanalyzed at their market prices. The financial IRR is estimated at 20.7 percent.

The project's economic rate of return was analyzed by comparing the public investment cost ofthe project with the project's stream of expected net benefits in terms of additional net incomes toHonduran factors of production. In this variant of the analysis the costs and benefits are all accounted forat their economic opportunity costs. The economic IRR is estimated at 20.5 percent.

The distributive and fiscal impact of the project was analyzed to determine the distribution of thecosts and benefits between the public sector (public investment and tax revenues) and the private sector(additional factor incomes, net of taxes).

Sensitivity analysis was undertaken to identify the impact of changes in key assumptions. Thecritical assumptions are those related to the growth of the number of tourists and the number of days theystay overnight. The rates of return are found to be reasonably robust in the face of changes in the keyparameters of the model.

The project's macroeconomic impact via the strengthening of the Balance of Payments is likelyto be very positive. This component of the benefits is not incorporated into the rate of return analysis. Asa result, the estimated rate of return should be considered a lower bound estimate.1. Sector Context and Project Strategy

In recent years, according to data from IHT, between 20 percent and 25 percent of tourists inHonduras visit the archeological sites located in the Copan Valley, especially Copan Ruins. However,only 3.5 percent of the visitors to Copan Ruins spend the night in the city, reporting an average 2.6 daysstay. According to our analysis of Instituto Hondurenio del Turismo (IHT) data, the average occupationrate for hotels in Copan Ruins the Yojoa area (which is the zone of influence for Los NaranjosArcheological Park and Cerro Palenque archeological site) is under 20 percent. Hotel industry sources inCopan Ruins (interviews with hotel owners) estimate occupancy in Copan ruins at 54 percent, but this isnot consistent with the data supplied by IHT. This point is discussed in more detail in section 2.

In this context, the Copan Valley Project intends to boost tourism development and to increasethe income of Copan Valley residents, through an increase in the flow of visitors to the differentarcheological sites that make up the circuit, and an increase in the amount of time that tourists stay tovisit the area, and in their daily expenditures on tourism products, helping to realize the potential of theinstalled capacity of the tourist industry in the areas.

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It will also develop new sites near to Copan and in other areas of Honduras (the Yojoa lake areaand Plan Grande on the island of Guanaja) in order to increase the attraction of Honduras for touristsinterested in this sort of product. Based on the experience acquired with the Copan Ruins ArcheologicalPark over the last two decades, the Project will develop and implement archeological restoration andmanagement plans in four other sites at El Puente, Los Naranjos, Cerro Palenque and Plan Grande. All ofthese have potential to replicate in future years the recent increases in the flow of visitors to Copan.

The project's timing is good, since the Government has prioritized tourism as one of the keysectors for the country's economic development. There is much expectation and interest from the privatesector in providing complementary tourism products (bird observatories, tour operators, tourist guides,souvenirs and quality local products). Private investors have shown strong interest in the sector and itspotential. In 2003, private investment established a landing strip at Copan Ruins, and the government ispromoting the construction of an airport at Rfo Amarillo, near Copan.

This is a classic situation where public-private cooperation can help unleash the economicpotential of an industry in which Honduras is known to have high competitive potential in theinternational market. Conditions are ripe for investments to improve the quality of the principal touristattractions that will provide the main underlying motive for future visitor flows, and for working to helpthe industry develop its products to promote these attractions and then meet the increased flow ofdemand.2. Methodology2.1. Data sources

The projections are based on data from IHT, which carries out an annual Establishment Inventoryand Tourism Spending Survey, which is available for the last three years. The data give numbers ofvisits, length of stay and spending per visit-day, separating the reported totals according to the visitor'snational origin. These data were validated and adjusted based on the information directly acquired in sitevisits and in key informant interviews, carried out by the study team.

The study also draws on labor market data from the Honduran Govemment's national bi-annualmulti-purpose household survey and on data for the cost structure of the industry that were gatheredspecially for this study. Table A8, at the end of this report, presents a more detailed description of thetype of data utilized, specifying the corresponding source in case of secondary data, and the assumptionsmade in case of data constructed within the model.2.2. Scenarios

For analysis purposes, three scenarios are set: one scenario without a project, one scenario with aproject and medium expectations, and one scenario with a project and high expectations. Projections aremade for 15 years (2003-2017). At the new sites to be developed, visits are expected to start to growquickly only after the 4th year, when the project's investment is completed.

The modeling parameters for these scenarios were established according to interviews with keyinformants and with experts on Honduras' tourism industry. The characteristics of the scenarios are asfollows:

Scenario 1: Without project scenario. The projection is made considering parameters and growthrates based on recent performance and the present level of tourist spending and visits.

Scenario 2: With project scenario - medium expectations. The project's investment costs weredistributed among the years for its execution and among the different sites to be supported. Theparameters for the variables in the model were adjusted to reflect a moderate increase in the number ofvisits, in the average length of stay and in spending per day, due to the program' s implementation.

Scenario 3: With project scenario - high expectations. The parameters for each variable areadjusted assuming a very favorable performance.The parameters used and their expected performance in each of the scenarios are summarized in Table 1.

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Table 1Parameters used in the Projections

Base (2002) Scenario I Scenario 2 Scenario 3Variable No project Medium HighVisitors to sites People Initial and Final Growth Rates, percent *Copan Rums 135,540 5 / 2.5 15/5 18/ 6El Puente 6,703 4/ 10 6 /40 10 45Los Naranjos 16,940 4/ 15 10/25 20/30Cerro Palenque 0 5/ 10 15 /35 20/40Visitors to site who stay overnight PercentageCopAn Ruins 3.5% 3.5% 6% 10%El Puente 1% 1% 2% 3.5%Los Naranjos 5% 5% 10% 15%Cerro Palenque 0% 0% 1% 2%Average nights' stay DaysCopan Ruins 2.56 2.56 3.6 5.0El Puente I 1 1.4 1.7Los Naranjos 1.4 1.4 2.0 2.52Cerro Palenque I 1 1.4 1.7* Expected growth rates dunng first years/ and expected growth rates for final years.

The projected growth rates in the "with project" scenarios are quite high: 15 percent a year in themost important sites in the medium scenario and as much as 20 percent in the high scenario. At first glacethey might seem unrealistic. However, the projections were constructed after careful conversations withindustry specialists.

The key to the reasonableness of these projections is to be found in the low starting point, whichis due in part to the impact of the September 11th attacks and continuing unease about airline travel. Thisexplains why projected growth even without the project is quite high, due to an expected "bounce-back"when the international security climate improves.

Table 2 details the numbers of visitors and ovemight stays implicit in the medium scenario. Atpresent, a very smallproportion of visitors stay overnight (3.5 percent). This leads in tum to a very lowbase level of overnight visits, which makes it reasonable to project a pretty fast rate of growth in thenumber of overnight visitors.

At present, according to Tourism Ministry data, on an average night, only 90 people are stayingovemight while visiting any of these sites. Even with the high growth rates of visitor numbers andmodest increase in the percentage who stay overnight assumed in the medium scenario (up from 3.5percent to 6 percent), the average total number of people projected to be staying overnight while visitingone of these attractions per night only reaches 508 in 2017.

Given the size of the market for Central American / Mexican tourism and the quality of theseattractions, this target is well within the reach of the Honduran tourist sector.

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Table 2 - Projected visitor now, number of visitors staying the night and hotel rooms needed(Medium scenario).

Hotel rooms availableat present

percentTotal Hotel occupation

No that visilor Aver- rooms based onsItay nstbts per age per aeeted present num-be

Year Visitors overshlit year /I day 12 Costn YOIoa Total of rooms2002 159,183 9,960 32,800 90 119.8 399 132 531 17%2003 181.610 11.358 37,536 103 137.1 399 132 531 19%2004 211,240 12,995 43,021 118 157 2 399 132 531 22%

2005 242.549 14.937 49,464 136 180.7 399 132 531 26%

2006 278,518 17.169 56,872 16 207 8 399 132 531 29%2007 321.913 19.882 65,673 180 239 9 399 132 531 34%2008 372.140 23,031 75.849 208 277 1 399 132 531 39%

2009 431,270 26,700 87,638 240 320 1 399 132 531 45%2010 499,968 30,963 101,278 277 370 0 399 132 531 52%2011 545,817 33,792 108,776 298 397 4 399 132 531 56%2012 600.437 37.105 117,287 321 428.4 399 132 531 61%2013 667.446 41,030 127,050 348 464 1 399 132 531 66%2014 749,966 45,716 138,342 379 505 4 399 132 531 71%

2015 852,977 51,360 151,526 415 553 5 399 132 531 78%2016 983.227 58.218 167,066 458 610.3 399 132 531 86%

2017 1,149,884 66.621 185,554 508 677 8 399 132 531 96%1/ Supposes on average 3.3 nights per stay in the early years, this declines slightly over time due to ashift in the weight of visitors to the sites where the stay is expected to be shorter2/ Supposes average occupancy of 50% and 1 5 people per room

Table 2 also underlines another important point about the rationality of the project: the existingnumber of hotel rooms is sufficient to allow a large increase in demand before the industry reaches itscapacity constraints. This point is further discussed in Section 3.2.3. Financial Analysis3.1. Benefits stream

The project's benefits derive mainly from increased spending by national and foreign touristswho will visit the supported archeological sites and will increase their average stay in the areas. Thisspending is classified into entrance fees to the sites, hotel expenses, food, use of tourist guides, andconsumption of other available goods and services, based on the Tourism Spending Survey of 2002. Thesurvey shows that spending varies according to the tourists' origin (nationality).

If recent trends were to continue (Without Project Scenario), at the end of the 15th year, visits toCopan Ruins would be 1.8 times the level observed in 2002 (244,000); while at El Puente, it would risefrom 6,700 to 24,100 visitors; at Los Naranjos there would be 91,000 people (from 16,900 in 2002); andat Cerro Palenque it would increase to nearly 12,000 visitors.

Table Al presents the projection for tourist flow expected under the parameters of the WithProject - Moderate impact scenario. Under this scenario the total number of visitors would increase from159,183 in 2002 to 242,549 in 2005, to 500,000 in 2010 and to 1,150,000 in the year 2017. As argued inSection 2, although these growth rates seem high, they are not unreasonable, given the very low startingpoint.

The growth rates are different, based on each site's initial situation. By the end of 15 yearsCopan Ruins would have 4.3 times the number of visitors received in 2002. El Puente would receive onethird of Copan Ruins' total. Los Naranjos would receive an equivalent to 46 percent of Copan Ruins'visitors; while Cerro Palenque would receive an equivalent to 43 percent of Los Naranjos' visitors. Ineach case these volumes of tourists would be within the archeological parks and sites' estimatedload-bearing capacity. Copan Ruins currently has the greatest load, with 135,000 visitors between 8 and11 in the morning. The total number of visits could be increased considerably by making a betterdistribution of visits throughout norrnal business hours (interviews with archeologists).

The income stream is made up by spending from visitors to the sites and from tourists that stayovernight in the project's zone of influence. These estimates are based on survey data for touristexpenditures at market prices in lempiras, converted to dollars at the present official nominal exchangerate.

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Annex table A2 sumrnarizes the projections for income from entrance fees to archeological sites,hotel, food, local transportation, various purchases (including souvenirs and other tourism products andservices) and payment for use of archeological guides. The projections were generated in site-specificanalysis also taking account of the nationality structure of the visitor flow and are available in projectfiles.

The Present Value for this income flow during the 15 years of the projection is US$107.8million, discounted at 11.5 percent (medium scenario). In scenario 3 this rises to $188.4 million. Theincrease in the Present Value of the income flow in the medium scenario, compared with the baselinescenario, is $61.6 million (Table A4). In the high impact scenario, this rises to $142.2 million (Table A5).All these data are summarized in Table 3.

Table 3 - Summary of results of financial analysis

With project-- With projectMedium impact - High

impactIncome (PV, 11.5%) 61.6 142.2

Costs (PV, 11.5%) 55.5 116.6

Net flow (NPV, 11.5%) 6.1 25.6

IRR 20.7% 46.7%Source: Annex Tables A2 , A3 and A4. In each case thedata shown measure the incremental Impact on the revenueand cost streams of the "with project" scenarios comparedwith the baseline scenario.

3.2. Cost streamThe project's costs include the public investment in the project itself and the privately incurred

costs in the production of the goods and services that tourists consume. These costs were classified intooperation and maintenance costs. The present value of the incremental cost stream - all at market pricesin lempiras converted to dollars at the official exchange rate - is $55.5 rnillion in the medium scenarioand $116.6 in the high scenario (Table 3).

Note that there is no provision in the cost stream for additional private investment in hotelcapacity, since the data supplied to the project team suggest that existing capacity will be sufficient forthe duration of the projection.

As illustrated in Table 2, in the previous section, LIHT statistics show that there are at present 399hotel rooms available in Copan Ruinas and another 132 in the Yojoa area, making a total of 531 in theproximity of these two major attractions. This so, even without taking account of the 2,355 hotel roomsin San Pedro Sula that are within an easy one hour drive of the Yojoa sites and just over two hours fromCopAn Ruinas.

Based on the IHT data for the number of visitors and overnights, the occupancy rate in CopanRuinas and Yojoa is at present very low indeed. Only one hotel (the Marina) has a high occupancy rate(over 70 percent); the average is under 20 percent. That means that the industry can handle enormousexpansion in demand without needing significant additional private investment in hotels. In this setting,the central rationality of the public investment in the project is that it releases the potential of existingprivate investments.

There might arguably be a need for further private investment around 2012, when the occupancyrate would reach 61 percent, unless one were to suppose increased placement of visitors in the San PedroSula hotels. Even so, with a discount rate of 11.5 percent, the present value of such investments wouldmake little material difference to the findings of the evaluation.

The details of this analysis are presented in Annex Tables A2 to A5 and the supportingspreadsheets are available in project files.

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3.3. Financial rate of returnThe rate of return results from the financial analysis are summarized in Table 3. The analysis

shows that the overall financial rate of return of the project is positive, with a Net Present Value (NPV)of $6.1 million and an Internal Rate of Return (IRR) of 20.7 percent in the medium scenario; and NPV of$25.6 million and IRR of 46.7 percent in the high scenario.

The results for financial projections are detailed in Annex Tables A4 and AS and the Excelspreadsheets used to make the calculations are available in project files.

Note that some of the archeological sites themselves are "loss leaders" whose entrance chargescannot recover the cost of their development. An analysis of the financial situation of the archeologicalsites can be found in Tables A9, at the end of this document. This, combined with the overall positiverate of return of the combined public and private costs and revenues, is the justification for providingpublic funding for investment in these developments, which can be considered public goods.4. Economic Analysis

This section presents the results of the economic analysis. This analysis takes as its starting pointthe financial data presented in the previous section. However, the analysis is adjusted to take account ofdivergences between financial costs and revenues and the economic opportunity costs of the resourcesthat are mobilized.

In addition, the presentation of the benefit stream is re-conceptualized to emphasize and highlightthe development goal of the project, which is: to increase the net factor incomes of Honduran productiveresources. This differs from the normal approach of traditional project economic analysis, where thebenefit stream is often based on the benefits derived by the consumers from the outputs of the project,focusing on the analysis of consumers surplus derived from demand elasticity estimates.4.1. Conversion Factors

The financial as well as the economic analyses are done in local currency at domestic prices, andthen converted to US Dollars at border prices. That is, the estimates are in real prices, in 2003 US dollars.In the economic analysis, the factor of minus 4 percent was used as a general conversion factor to adjustnational prices to international opportunity costs (border prices in dollars). This reflects the differencebetween the nominal exchange rate and the account (shadow) exchange rate, estimated at 4 percent.

This small divergence reflects the fact that the nominal exchange rate of the Lempira in relationto the US dollar is the product of a relatively competitive exchange market in which the Central Bankauctions available currency to the market. The Bank uses its exchange reserves to support themanagement of the exchange rate. However, the Bank uses a floating peg system which leads to a slightlag in price adjustments. The country has experienced significant real exchange rate appreciation inrecent years, but this reflects underlying currency flows rather than administrative actions. The exchangerate cannot be considered to be seriously misaligned based on market criteria.

The most important adjustment factor considered in the analysis is the opportunity cost estimatefor labor. This was determined by analysis of the Honduran Government's National bi-annual householdsurvey (May 2001), which collects detailed labor market data. The survey does not provide valid regionaldata for Copan, so the national average was used. Since a significant part of the employment generatedby the project is indirect employment (in the production of inputs to the tourist industry that might takeplace anywhere in the national economy), the use of a national conversion factor is not regarded asinappropriate. If it leads to a bias in the estimated returns, the bias will be downwards.

The analysis used standard techniques to establish the opportunity cost of labor, based on theratio between average wages for unskilled labor commerce, hotels and restaurants, compared with theeconomy-wide average for agriculture, trade and services. On this basis, the average opportunity cost ofthe labor that works in the tourism industry is estimated at 70 percent of the wage paid. This reflects thevery high under-employment rate registered in the Honduran labor statistics. Although in May 2001 openunemployment was only 4.2 percent and open under-employment (people working under 30 hours aweek) was 3.3 percent, hidden under-employment (people earning less than the minimum wages) stood at23.1 percent).

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4.2. Conceptualization of Costs and BenefitsFor the purpose of the economic analysis, costs are the project's publicly-financed investment

costs. The benefit stream is the net supplementary income to Honduran factors of production arising as aconsequence of the project's existence. To this end, the private costs of the industries that are stimulatedby the project are "carried over" onto the other side of the equation and netted out from the incomesgenerated by those providing services to the sector.

The critical consideration justifying the project's existence is the fact that without the project, thelabor that will be employed in the tourist sector due to the project, would eam a lot less elsewhere. Thisis quantified on the basis of the estimated opportunity cost of labor explained in the previous section.

The analysis of incremental (pre-tax) income was based on the relevant components of thefinancial analysis. Based on the income estimates for the sector, an estimate is made for incrementalincome to national factors of production.

In order to equate the estimate to the industry's gross product at factor cost, since our base dataare market price data, the transfer payment represented by indirect taxes was reassigned to the factors ofproduction for the economic analysis. Although indirect taxes are acquired by the state, they capture partof the value added by the productive factors working in the taxed sector. Taxes (including sales taxes,and specific tourism taxes) will capture an estimated 15 percent of the value stream generated by theindustry. It should be noted that if the productive resources were used in other sectors, most of this taxrevenue would not arise, due to the high level of exemptions - especially for food products - under theHonduran sales tax system. In contrast, when food is sold in restaurants and hotels it pays full sales tax.

The input output matrix for the tourist industry was then modeled, based on the detailed datagathered for the financial analysis, allowing all the industry's expenditures to be assigned eventually tofactor payments to labor, capital or imports. These payments were then analyzed in the following way:

* Payments to imports were excluded as they are not for the benefit of national factors ofproduction. The import component for the services to be provided is relatively small.

* Payments to capital were excluded. This reflects the assumption that the after tax rate of returnon capital will reflect the (risk adjusted) opportunity cost of capital, and no more than that. Thisis a conservative assumption. If the marginal and average returns to capital were to increase inHonduras as a result of the greater profitability of the tourism investments in Copan, there wouldbe an additional benefit from the project, not quantified in the present analysis. However, wehave no good empirical basis for estimating the likely impact of the project on the nationalcapital market.

* The total expenditure on labor (including direct and indirect labor expenditure) was adjusted toremove the estimated opportunity cost of the labor (70 percent of the total). This is tantamount tosupposing that without the project, 70 percent of this labor income would have been generated inother activities. The project team considers that this is a conservative assumption since thelikelihood is that for labor in the Copan region, opportunity cost is significantly lower than thenational average.

This leaves an estimated net benefit stream equivalent of 30 percent of incremental direct andindirect payments to labor in the tourist industry and its supply industries due to the project.4.3. Economic Net Present Value and Economic Rate of Return

The Net Present Value and Economic Rate of Return for the project were then estimated bycomparing the cost of the project with the net benefit stream under the two "with project" scenarios. Inthis case, the "without project" scenario is simply zero investment and zero net gains.

Table 4 summarizes the results of the economic analysis. The detailed calculation is reported intables A6 and A7.

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Table 4- Summary of results of economic analysis

With project - With projectMedium impact - High

impactBenefits (PV, 11.5%) 17.2 40.1

Costs (PV, 11.5%) 7.8 7.8

Net flow (NPV, 11.5%) 9.4 32.4

ERR 20.5% 78 5%Source: Annex Tables A6 and A7. In each case, the datashown measure the incremental impact on the revenue andcost streams of the "with project" scenarios compared withthe baseline scenario.

Under Scenario 2, of medium growth in demand, the Present Value of the benefit stream is $17.2million. This is just 28 percent of the increase in the present value of the total spending attributable to theproject, calculated at $61.7 million, so can be regarded as a very conservative appraisal. The otherbenefits (payments to capital and imports, plus 70 percent of the payment to labor) are regarded as beingequivalent to the opportunity cost of those resources, and so do not constitute a net social gain. Underscenario 3, the net benefit increases to $40.1 million.

In each case, the economic cost is the same: it is the present value of the investment in theproject, corrected to take account of the opportunity cost of labor (this results in a 30 percent reduction inthe estimated cost of the labor component, compared with the financial version) and the adjustmentfactor of 4 percent for the cost of foreign exchange.

The NPV in the medium scenario is US$ 9.4 million with a 20.5 percent ERR. Under Scenario 3,of high growth in demand, the NPV is US$ 32.4 million with a 78.5 percent ERR. We may conclude thatthe project is likely to be socially profitable under reasonable scenarios for demand growth and costs.5. Fiscal Impact Analysis

The analysis of fiscal impact allows us to separate the public and private components of theeconomic costs and benefits of the project. This exercise was done for Scenario 2 - Moderate Impact,allowing us to analyze the components of the NPV of $6.8 million projected in this scenario. The resultsare shown in Table 5.

The analysis shows that the project has a negative fiscal impact of US$1.421 million, indicating arecovery rate of 82 percent on the public investment. The government invests $7.79 million and gets backin taxes $6.37 million. The taxes that the government collects within the framework of this project are:from hotel activities (12% sales tax + 4% for tourism services), and 12% sales tax from restaurants, localtransportation and general sales (souvenirs and tourism services provided by private citizens). Under theTourism Incentives Law, this type of business is exempt from income tax.

Table 5Fiscal Impact from the Project's Execution /IThousands of US Dollars, NPV discounted at 11 5%Concept National Central Total

Factors of Gov'tProduction

Benefit /2 17,207 17,207Taxes to Central Gov't (6,370) 6,370 0Project Investment (7,791) 7,791Net Benefit 10,837 (1,421) 9,416

I Comparing results of Scenario 2, versus the no projectsituation.2 Total incremental economic benefits, before taxes

The projected net benefit derived from payments to national factors is US$ 10,837 million. Sincethe net private benefits after taxes are positive, and greater than the project cost, it might be argued basedon these numbers that if the private sector undertook the investment it would have a positive net return.

However, given the public-good nature of the investments in the development of the

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archeological parks and sites, coupled to the fact that the economic return is derived entirely from a netbenefit to labor not to capital, it is most unlikely that private companies would undertake the investmentif the government did not do so. This same fact indicates that the distributive impact of the project interms of benefits to labor and capital is very positive. Additionally, it's worth pointing outthat the loan terms (IDA) for the project - with an interest rate of 1 percent for the first 10 years and 2percent from the 10th year on, much below the discount rate of 11.5 percent used here - imply that theCentral Government's cash flow will be positive in this project. As a result, the fiscal balance asmeasured by the IMF will be improved, not worsened, by the project.6. Sensitivity Analysis

Table 6 presents the results of a sensitivity analysis showing the impact on the estimated projectrates of return and fiscal impact of changing the estimated values of key parameters (such as the flow oftourists and the number of average days of stay). The variations were simulated in percentage terms, inrelation to the parameters specified in Table 1, above, for each scenario.

For the financial return rate, the most sensitive variable is the flow of tourists to archeologicalsites. If the real outcome for this variable were 10 percent below what was specified in the middle andhigh scenarios, the financial IRR descends to 16.5 percent in the middle scenario (compared to 20.7percent with the initial parameters of Table 1) and to 40.5 percent in the high scenario (compared to 46.7percent). Similarly, the economic rate of return would fall to from 20.5 percent to 15.9 percent in themedium scenario and from 78.5 percent to 67.8 percent in the high scenario.

The table reports a critical value for each parameter defined as the limit value that would lowerthe project's financial IRR to 11.5 percent, which is the discount rate used in the analysis. At this point,NPV would reach zero. For this to happen, the tourist flow would have to turn out to be 21.3 percentbelow the projected value in the moderate scenario and 57 percent below the value projected in the highscenario.

Table 6. Sensitivity AnalysisChange IRR ERR Fiscal Impact

in (US$Millions)Variable variable Scenario Scenario Scenario

Medium High Medium High Medium HighEstimate with Initial 20.7% 46.7% 20.5% 78.5% (1.42) 8.07ParametersTourist Flow -10% 16.5% 40.5% 15.9% 67.8% (2.43) 5.7Critical Value of Variation* -21.3% -57.0%No of days of stay 10% 23.0% 52.5% 25.6% 105.4% (0.53) 9.84

-10% 18.5% 41.6% 15.7% 61.3% (2.31) 6.29Critical Value of Variation* -41.3% -85.5%* % of change in variable, that leaves the rate of return equal to the discount rate.

The number of days that visitors stay also has a significant impact. In this case, an increase of 10percent above the established initial parameters will bring increase the financial IRR to 23 percent in themiddle scenario and to 52.5 percent in the high scenario. On the other hand, a decrease of 10 percent willlower the financial IRR to 18.5 percent and to 41.6 percent, respectively. The critical values for thisvariable are decreases of 41.3 percent in the middle scenario and of 85.5 percent in the high scenario.

The economic return rate is equally sensitive to variations in tourist flow and in the number ofdays they stay, with a 10 percent fall in the value of the parameter leading to decreases to 15.7 percentand 61.3 percent in the ERR, in the medium and high scenarios, respectively.

These results indicate that the project's implementation strategy should give a high priority to thepromotion strategy geared to increase the flow of tourists to these archeological sites.7. Balance of payment impact

Honduras has a chronic balance of payments deficit which is a strategic constraint on themacroeconomic balance. Any intervention tending to strengthen the balance of payments allows the

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equilibrium level of output and income to rise. This is the underlying strategic reason why Honduras -like many other countries with small open economies - has opted in recent years for an export-led growthstrategy.

The tourism sector is part of this strategy, and has contributed an important part of the growth offoreign exchange revenues in recent years. At a macroeconomic level, the Project will also contribute toHonduras' export-led growth strategy, giving a boost to archeological tourism as a new source ofdynamism in the generation of foreign earnings, to complement the large gains registered in the maquilasector over the last decade, and helping further to diversify the economy's trade dependence.

In this light, a very positive macroeconomic impact is expected. In the execution of theinvestment component, an estimated 94 percent of the original investment is for national goods andservices, generating a net contribution to the balance of payments in the investment phase of US$ 3.9million. Furthermore, during the next 13 years of the projection, an average US$ 5.4 million in currencyis expected to be generated annually, which will strengthen the balance of payments and contribute todevelopment in other sectors of the economy.

The economic analysis presented above does not take account of this effect, which would beadditional to the benefits from increased employment incomes in the tourism sector as such.8. Conclusions

The project is likely to be financially and economically profitable. The estimated financial rate ofreturn is 20.7 percent in the middle scenario and 46.7 percent in the high scenario. The economic rate ofreturn is projected at 20.5 percent in the middle scenario and at 78.5 percent in the high scenario.

The sensitivity analysis shows that the project's profitability will be sensitive to the flow ofvisitors and to the number of days they stay in Honduras. This implies that the project's success requiresthe effective promotion of these archeological sites as tourist destinations, and on the supply of tourismproducts and services that will make it more attractive for tourists to stay longer and spend more money.Both aspects are backed by specific components in the project's design. The implementation of theproject must also be complemented with continuing Government actions in exploration and research atthe selected sites, including acquisition of property rights of lands where archeological sites are located.

Annex TablesTable Al: Numbeir of Visitors to Archeological Sites, Total byYier,Accordin to Visitor's Oirigin

Year Origin Total %

Honduras CA USA Europe Others Growth

2001 - 119,493

2002 125,323 16,678 5,048 4,666 7,468 159,183 0.33

2003 143,009 19,078 5,721 5,284 8,518 181,610 0 14

2004 166,225 21,989 6,805 6,304 9,917 211,240 0.16

2005 190,861 25,245 7,816 7,240 11,387 242,549 0 15

2006 219,162 28,985 8,978 8,317 13,076 278,518 0.15

2007 253,250 33,398 10,454 9,694 15,118 321,913 0.16

2008 292,692 38,485 12,177 11,303 17,483 372,140 0.16

2009 339,103 44,434 14,236 13,229 20,268 431,270 0.16

2010 393,004 51,311 16,653 15,493 23,506 499,968 0.16

2011 428,546 55,151 18,825 17,591 25,703 545,817 0.09

2012 470,825 59,618 21,493 20,174 28,326 600,437 0.1

2013 522,604 64,942 24,884 23,467 31,550 667,446 0.11

2014 586,290 71,363 29,159 27,626 35,527 749,966 0 12

2015 665,713 79,243 34,597 32,925 40,499 852,977 0.14

2016 766,063 89,077 41,569 39,726 46,791 983,227 0.15

2017 894,397 101,546 50,576 48,518 54,847 1,149,884 0 17

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Table A2. Projection of Gross Income for businesses and sites, by type of spendingScenario Medium

(US Dollars) Growth 14%

Expenditure category

Year Entrance Hotel Food Transport. Misc. Guides Total

Fees to sites Purchases

2001

2002 888,103 521,205 1,392.619 1,410,137 1,690.678 261,195 6.163,937

2003 1.019,460 596,629 1,590.019 1,616,560 1,935,552 297,895 7.056.115

2004 1,178,305 684,138 1,842,960 1,863,013 2.239,085 346,899 8,154,401

2005 1,354,733 786.560 2,116,841 2,140,768 2,573,089 398,322 9,370,313

2006 1,557,593 904,325 2,431,549 2,460,017 2,957,006 457,397 10,767,888

2007 1,793,919 1,043,944 2,809,884 2,833,45 1 3.41 1.257 528,869 12,421,324

2008 2,066,230 1,205,300 3,247,690 3,263,787 3,935,784 611,634 14,330,425

2009 2,381,298 1,392,229 3,761,095 3,763,354 4,546,694 709,148 16,553,817

2010 2,744,728 1,608,433 4.357.017 4,339,947 5,253,564 822,509 19.126,199

2011 2.9 12,106 1,725,348 4.738,292 4,624.337 5.642.788 899,661 20,542,532

2012 3.096,867 1,857,806 5.188.089 4,944,746 6,089,632 991,785 22,168,925

2013 3,304,845 2,009,512 5,732,819 5,312,930 6,615.177 1,105,118 24,080,401

2014 3,540,277 2.184.745 6.395.931 5,740,503 7,237,542 1,244,952 26,343,950

2015 3,810,306 2,389,161 7,214,058 6,244.978 7.985.312 1,419,781 29,063,595

2016 4,124,481 2,630,017 8,236,511 6.850.095 8,896,885 1,641,096 32,379,085

2017 4,495,627 2,916.661 9,529,896 7,588,164 10,024,032 1,924.500 36,478.879

NPV 15,019,009 8,988,958 25,306,347 24,052,107 29.618,251 4,850,937 107,835,610

Exchange rate L 17 x USS I

Table A3. Financial Evaluation of the Tourism IndustryIncome, Operating Costs and Investments and Net Flow Scenario:

(In US Dollars) Medium

Years Income Investment Operating Costs Subtotal Net

Without Operation Maintenance Costs FlowTaxes'

2001 . - -

2002 5,536,913 - 3,353,841 1,396,022 4,749,863 787,050

2003 6,338,240 2,115,853 3,812,799 1,586,260 7,514,911 -1,176,671

2004 7,326,028 3,181,253 4,386,142 1,817,257 9,384,651 -2,058,624

2005 8,418,466 5,077,444 5,012,443 2,071,403 12,161,290 -3,742,824

,2006 9,674,124 1,848,634 5,730,796 2,361,826 9,941,256 -267,132

2007 11,159,958 216,453 6,583,593 2,700,955 9,501,001 1,658,957

2008 12,875,610 - 7,567,372 , 3,090,002 10,657,375 2,218,235

2009 14,873,836 - 8,713,959 3,539,373 12,253,332 2,620,504

2010 17,185,827 - 10,040,175 4,055,927 14,096,102 3,089,725

2011 18,461,020 - 10,826,046 4,359,499 15,185,545 3,275,475

2012 19,925,731 - 11,736,276 4,702,749 16,439,025 3,486,706

2013 21,647,927 - 12,816,451 5,097,356 17,913,807 3,734,120

2014 23,687,951 - 14,107,060 5,554,644 19,661,704 4,026,247

2015 26,139,719 - 15,671,151 6,091,377 21,762,527 4,377,192

2016 29,129,389 - 17,593,440 6,729,884 24,323,324 4,806,064

2017 32,827,071 - 19,988,186 7,500,069 27,488,256 5,338,815

NPV 96,923,480 9,441,015 57,551,241 23,106,749 90,099,005 6,824,475

Exchange rate L.17 x US$ I

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Table A4. Financial IRR, Scenario 2. Based on ]Income and Ihncremental Costs for Businesses andEntities (Situation with Medium projection MNUS Situation without project)

Scenario' Medium

Growth: 14%

(In US Dollars)

Years Total Investment Operating Costs Subtotal Net

Income Operation Mainten Costs Flow

2003 2,083,877 2,115,853 1,380,424 415,436 3,911,712 -1,827,836

2004 2,873,936 3,181,253 1,798,306 560,963 5,540,521 -2,666,585

2005 3,812,164 5,077,444 2,286,200 733,141 8,096,785 -4,284,621

2006 4,917,077 1,848,634 2,858,465 935,623 5,642,723 -725,645

2007 6,249,298 216,453 3,550,472 1,178,578 4,945,504 1,303,795

2008 7,818,299 - 4,363,725 1,464,163 5,827,888 1,990,412

2009 9,655,855 - 5,316,052 1,798,722 7,114,774 2,541,082

2010 11,814,688 - 6,433,635 2,191,047 8,624,682 3,190,006

2011 12,946,681 - 7,063,049 2,388,214 9,451,262 3,495,418

2012 14,267,504 - 7,804,636 2,615,882 10,420,518 3,846,986

2013 15,849,646 - 8,702,561 2,884,769 11,587,330 4,262,316

2014 17,757,204 - 9,795,699 3,205,127 13,000,827 4,756,378

2015 20,090,907 - 11,145,264 3,592,526 14,737,790 5,353,117

2016 22,986,747 - 12,833,887 4,067,966 16,901,853 6,084,8932017 26,628,891 14,973,453 4,659,865 19,633,318 6,995,573

NPV 61,609,863 9,441,015 55,465,197 6,144,666IRR 20.70%

Exchange rate L.17 x USS 1.

Discount rate 11 5%

Table A5. IEIRR Scenario 3. Based on incremental Income and lincremental Costs for Businesses andEntities (Situation with project - High M S Situation witho pt project)

Scenario High.in U§ i5ohars5 Growth 18%

(in U S Doilara)j, 4| _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Years Total Innvestment Operating Costs Subtotal NetIncome } Operation IM_aintenance | Costs Flow

200 M. 0§ , J I j,l,83j j,3,i5§,i i,ig85,i4 0,5650g§ l2.l

i 6,sii.46s 3,1ii,2s3 3,i 1,28i i,5I6.i63 s.60s.i0i -1,i67.936

20 I 8.758,409 s507.i44 i4.i9,441 i so3.s6i ii.soo,iis -,i42,040

1 i,o s.5,4i0 1,84i.63i 6,iis.i6i ,377,258 10,341,059 iii.iis

2007i Ij. 50.so i216.453 i,5 1,37 2,949,204 io.isi,is4 3.122,325

ioos ii.i7i,0is - 9,365,389 3,63i4,36 1i3.000,325 4,i2i.6s3

Hi i i .1J3 22 . i ii.4s.69s 4.i4s.894 is,.s6.sss 5,393,533

Hi60 ig,6,W i94 l4.06;iJ i ,4ii,J49 i 4,i06,gA Oi,M4.8

2011 29.033.470 15.595.657 5,982.083 21.5 740 i,4ss45.7i30

21ii 3i,.7i0J6 ii.434.si6 6,6ii,568 ii24..083 s,isi.62i2

2013 36.331.563 Is9673,22 7,369.507 2i.042,760 9,288,803

Hi4 4i,3i6,494 - 22,497.919 is,isi.sis i307953ji io0.2,i660

2015 47.57,9I1i . 6.07,i.331 9.450-.084 3,S2i,415 12,052,497

2016 55.581.652 . 30,685.664 I0.904,676 41.590,339 13,991,313

i217 65,966,360 366.707.408 i2,77i.633 49s7i9,0o4i i6.487.3i9

NPV 1114i,161,488 9,i41,0iS 116,584,537 25,576,950iRtt _ __ __ _ __ __ _ __ _ _ _ _ _ _ _ 6.-70%

Exchange rate L.17 x USS I

Discount rate ii 5e

- 52 -

Table A6. Economic Internal Rate of Return, Scenario 2(In US Dollars)

Years Benefits to Investment Benefits

Nat'Il Factors Costs Net Flow

2003 600,783 2,123,962 -1,523,180

2004 819,559 2,546,949 -1,727,391

2005 1,078,984 3.908,950 -2,829,966

2006 1,384.309 1.423,200 -38,891

2007 1,752,326 166,640 1,585,686

2008 2.185,553 2,185,553

2009 2,692,855 2,692,855

2010 3,288,653 3,288,653

2011 3,602,155 3.602,155

2012 3,968,049 3,968,0492013 4,406,377 4.406,377

2014 4,934,987 4,934,9872015 5,581.845 5,581.845

2016 6,384,709 6,384,709

2017 7,394,721 7,394,721

NPV 17,206,862 7,790,972 9,415,890

ERR 20.50%

Exchange rateL.17 x USS I

Param eters:

Scenario Medium

Average Annual Growth of 14%Tourist Flow

Opporlunsty Cosrfor Labor 70%

Table A7. Economic Internal Rate of Return, Scenario 3.

(In US Dollars)

Years Benefits to Investment Benefits

Nat'lI Factors Co sts Net Flow

2003 1,506,930 2,123,962 -617,033

2004 1,961,277 2,546,949 -585,672

2005 2,499,031 3,908,950 -1,409,920

2006 3,143,802 1,423,200 1,720,602

2007 3,934,401 166,640 3,767,761

2008 4.884,634 - 4,884,634

2009 6,026,668 - 6.026,668

2010 7,398,632 - 7,398,632

2011 8,178,620 - 8,178,620

2012 9,105,669 - 9,105,669

2013 10,224,358 - 10,224,358

2014 11,621,375 - 11,621,375

2015 13,376,594 - 13,376,594

2016 15,618,851 - 15,618,851

2017 18,528,756 - 18,528,756

NPV 40,144,127 7,790,972 32,353,155

ERR 78.50%

Exchange rateL 17 x US$ I

Param eters:

Scenario High

Average Annual Growth of 18%Tourist Flow

Opportunuty Costfor Labor 70%

- 53 -

Table Ag. Data source and main assumptions utilized in this study

No. Variable Type of data Source Assumption/Procedure

I Visitors to the parks and sites Secondary IHT Statistics and of the Fact2002 parks and sites

2 Visitor projecton Result Current Study Rate of Increase of vsitors by park and nationabty3 Pnce of entry ticket Secondary Pnces charged by park in Pnces of 2002 masntained in US$ by park, except

2002 Cerro Palenque, which was determined a price higherthan Los Naranjos.

4 Revenue per ticket Result Current Study Visitors per year and ticket pnce given park andnationality of visitor

5 Stay-overs in the area Secondary IHT Statistics and interviews Fact for 2002. Increased determined in the study formedium and high scenanos

6 percent of visitors that stay Secondary Survey of Revenues and Fact for baseline Accumulated medium and highover Tourism Expenditure in scenanos determined in the study

._______________________ Honduras, 20027 Tounst expenditure in hotels, Secondary Survey of Revenues and Distnbution of hotel, food, transportation and

restaurants and others Tourism Expenditure in shopping expenditure, maintained constantHonduras, 2002

8 Hotel revenues Result Current Study For each projected year, number of visitors timesnumber of nights and average expenditure in the hotel

____ ___ ___ ___ ___ ___ ___ per person

9 Restaurant revenues Result Current Study For each projected year, number of visitors in hotelsand nights times average expenditure in food per

______________________ ___ _________________person

10 Transportation revenues Result Current Study For each projected year, visitors and averageexpenditure per person in local transportation

II Store revenues Result Current Study For each projected year, number of visitors timesaverage expenditure per person in shopping

12 Revenue to guides Result Current Study A percentage of guide usage according to visitornationahty (average 52 percent) and an average priceper guide is determined

13 Operatng and Maintenance Result Current Study For 2002, IHAH data. Projection of annual increasecosts of parks and sites of 5 percent for personnel, 10 percent for others.

14 Costs for Tounsm Result Current Study Based on private referencesProduction and Revenue(benefits) per national factor

Tables A9: Projected Financial Situation of the Archeological Parks and SitesSummary: The consolidated projected financial situation of the parks and sites is positive, with an NPVof US$8.6 million, as a result of favorable balances in the Copan Park and Cerro Palenque site, thatcompensate for the negative balances of the El Puente and Los Naranjos Parks. The result is derived froman initial situation of low tourist flows in these more deficient parks given their underdevelopment interms of infrastructure, and low prices entry tickets. Revenue by entry ticket for each park. Thereported revenues derive form the number of projected visitors under a medium scenario, multiplied bythe price of the ticket paid by each visitor, which vary by park and origin of visitor. These prices weremaintained constant in the projection and are shown in Table A9- 1:

Table A9-1. Ticket entry Prices to the Parks/Sites, According to Visitor's Origin

US$ per person

Visitor's Origin Copan El Puente Los Naranjos Cerro Palenque 1/

Honduras & Central. Am. 4.12 0.59 1.47 1.76

Other Countnes 27 00 3 24 2 06 2.94

Source: IHAH Data and registers of each park, gathered in 2002 and 2003.Note 1/ Limited visitors Suggested pnces cover Operatng and Mamtenance costs.

Operating and Maintenance Costs. These costs are derived from costs reported by IHAH in 2002. Inthe projection, these costs were given annual increases of 5 percent in personnel costs and 10 percent inmaintenance and other costs, reflecting an increase in tourist flows which will require more Operatingand Maintenance spending. Individual results per Park. Under the parameters specified, the projections

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show that CopAn would accumulate a positive balance of NPV US$9.9 million and Cerro Palenque with aslight positive balance of US$0.2 million (Table A9-2). On the other hand, El Puente would have anegative balance of US$1.2 million and Los Naranjos of US$0.3 million.

Table A9-2. Net Balance of Revenues and Costs per Park

In Millions of US$, NPV discounted at 11.5%Concept Copfn El Puente Los Naranjos Cerro Total

PalenqueRevenue per Ticket 14.0 0 2 0.7 0.2 15.0O & M Costs 4.1 1.4 1.0 0.1 6.5

Net balance 9.9 -1.2 -0.3 0.2 8.6

Universal results. The data consolidated for all parks and sites is presented in Table A9-3 and reflect apositive NPV of US$ 8.6 million throughout the entire projection in favor of IHAH. This is a net result,after absorbing the negative balances of El Puente y Los Naranjos Parks. The results for each park arepresented in the full Economic Analysis in the project files.Recommendations. The following recommendations are made given the data generated:

* Contemplate in the project implementation the necessary support and technical assistance to IHAHso that they can establish a universal model of equilibrium price determination for the parks and sitesthat reflect administration costs and the value of the park's attractions.* In the first years of implementation, subsidies should be allowed from the parks and sites withpositive to the ones with negative balances until the equilibrium price is established.* Given that the net flow of all the parks and sites is positive in all the years, the necessaryregulations for the revenue's allocation, which will reach US$2.0 million in the 10th year ofprojections.

Table A9.3. Consolidated situation of revenues and expenditure In the Parks and Sites

(In US Dollars) Scenario MediumIncre:se 14%

Year Revenue per Operating Maintenance Costs SubtotalCosts

Entries Personnel Deficit

2002 888.103 228,586 31,123 280,106 539.8142003 1,019,460 240,015 34,235 308.117 582,367 348,2892004 1,178,305 253,606 38,454 343,699 635,758 437.0932005 1,354,733 266,286 42,299 378,069 686,654 542,5472006 1,557,593 279,600 46,529 415,876 742,005 668,0792007 1,793,919 293,580 51,182 457,463 802,225 815,589

2008 2,066,230 308,259 56,300 503.209 867.769 991,6932009 2.381,298 323,672 61,930 553,530 939,133 1,198,4612010 2,744,728 339,856 68.123 608,883 1,016,863 1,442,1652011 2,912,106 356,849 74,936 669,772 1,101,556 1,727,8662012 3.096,867 374,691 82,429 736,749 1,193,869 1,810,550

2013 3,304.845 393,426 90,672 810,424 1,294,521 1.902,99S2014 3,540.277 413,097 99,739 891,466 1,404.302 2,010,3242015 3,810,306 433,752 109,713 980.613 1,524,078 2,135,9752016 4,124,481 455,439 120,684 1,078,674 1,654,798 2,286,2282017 4.495,627 478,211 132,753 1,186,541 1,797,506 2,469,683NPV 15,019,009 2,205,186 427,832 3,825,855 6,458,872 2,698,121

Main Assumptions:See above.

Sensitivity analysis / Switching values of critical items:See above.

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Annex 5: Financial Summary


Years EndingOctober 1, 2003 to September 28, 2007

MPLENEATiON .PERIOD

| Year I Year 2 ' Year 3 | Year 4 | Year 5 Year 6 | Year 7Total Financing Required

Project CostsInvestment Costs 2.6 3.7 4.7 1.8 0.0 0.0 0.0Recurrent Costs 0.1 0.1 0.1 0.2 0.0 0.0 0.0

Total Project Costs 2.7 3.8 4.8 2.0 0.0 0.0 0.0Total Financing 2.7 3.8 4.8 2.0 0.0 0.0 0.0

FinancingIBRDnADA 2.4 3.6 4.3 1.8 0.0 0.0 0.0Government 0.3 0.2 0.4 0.2 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 0.0Beneficiaries 0.0 0.1 0.0 0.0 0.0Total Project Financing 2.7 3.8 4.8 2.0 0.0 0.0 0.0

Main assumptions:

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Annex 6(A): Procurement ArrangementsHONDURAS: Regional Development in the Copan Valley Project

ProcurementAll procurement will be done in accordance with IDA's guidelines on procurement of goods,

works, and using standard contract documents acceptable to IDA (Guidelines, Procurement under IBRDLoans and IDA Credits, dated January 1995 and revised in January and August 1996, September 1997and January 1999 and Guidelines: Selection and Employment of Consultants by World Bank Borrowersdated January 1997 and revised in September 1997 and January 1999, and May 2002) and the provisionsstipulated in the Development Credit Agreement.

Procurement Responsibilities and CapacityThe Government has proposed that the existing PCU in IHT for the Sustainable Coastal Tourism

Project will serve as the PCU for the proposed project. The PCU will be responsible for all procurementactivities in the project. A Procurement Capacity Assessment of this unit was carried out and approvedby the RPA Office on March 24, 2003.

The assessment shows that the current PCU capacity and internal controls are adequate for thelevel and type of procurement required for the project. The PCU includes an experienced ProcurementOfficer, a good filing system, and an integrated financial system with a procurement monitoring module.The PCU is subject to the internal auditing of the Ministry of Tourism. While there are procedures toprevent fraud and corruption under national laws, there is no regulation that enforces ethical performanceof staff or consultants involved in project execution. The PCU has expressed an interest in adopting aCode of Ethics for the project. The project will also finance two additional procurement andadministrative assistants for the PCU that will allow a better distribution of workload between the twoprojects.

The PCU has presented the procurement packages for the four-year project and the draftprocurement plan for the first year of implementation. An action plan was discussed and agreed atNegotiations and includes the following:

Procurement Action PlanPlanning:a) A detailed procurement plan for first year of the project. Complied by Negotiations.Code of Ethics: To be included in Operational Manual.b) A draft Code of Ethics will be developed for the project staff.Staffing: As a condition of effectiveness.c) Appointment of procurement assistant for the PCU.Training: At project launch workshop and during thed) Specific procurement training to procurement staff of the different life of the project and on-the-job training byimplementing agencies. PCU procurement specialist.Procedures: As a condition of effectiveness.e) Operational Manual (OM) should describe clearly the procedures,methodologies, coordinating arrangements, filing and records, andinternal control mechanisms for all procurement and relateddisbursement activities to be carried out by the different agencies and thePCU.

Procurement Arrangements

Procurement of Works. The project will finance works identified by the Management Plan ofCopan Ruins that was financed under the PROFUTURO Project (Credit 3250-HO), and basic

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infrastructure for the archeological parks and sites that are part of a proposed archeological-ecologicaltourist circuit. These works consist of construction, rehabilitation or expansion of visitor centers,archeological research centers, security infrastructure and museums in the parks and sites and in CopanRuinas. Due to the nature and estimated amount of the works, no International Competitive Bidding(ICB) is expected. To the extent possible works will be grouped to be procured by National CompetitiveBidding (NCB) procedures up to an aggregate amount of US$2.3 million. Standard bidding documentsagreed with IDA will be used. Works estimated to cost less than US$150,000 equivalent per contract willbe procured, up to an aggregate amount of US$1.7 million, on the basis of at least three quotationsreceived in response to a written invitation, which will include a detailed description of the worksrequired, including basic specifications, the necessary completion date, a basic form of request forquotations and lump-sum fixed-contract, acceptable to the IDA.

Procurement of Archeological Services. The project will also finance archeological protectionand conservation of monuments, sculptures and tunnels that have been identified by the ManagementPlans in Component 1. All archeological work will be carried out by IHAH with the technical assistanceof Asociaci6n Copdn. These works will be financed under force account up to an aggregate amount ofUS$1.02 million that covers mostly the specialized labor.

Procurement of Goods. Goods to be procured under this project will include vehicles, computerequipment, security equipment, museum exhibits, office equipment, and furniture. Due to the estimatedamounts and schedule for the procurement of these goods, no ICB is expected. To the extent possible,goods would be grouped in bidding packages of more than US$25,000 to be procured following NCBprocedures, using Standard Bidding Documents agreed with IDA, up to an aggregate amount of US$0.36million. Contracts for goods which cannot be grouped into larger bidding packages and estimated to costless than US$25,000 equivalent per contract, up to an aggregate amount of US$0.45 million, may beprocured using shopping (national or international) procedures based on a standard request forquotations agreed with IDA to at least three suppliers.

Selection of Consultants. Consulting services will be contracted for technical assistance inimplementation of the components, design of management plans for the archeological parks and sites,design of expansion or construction of visitors centers, museums in the parks/sites, training, socialcommunication strategy, marketing strategy, studies, monitoring and evaluation system, etc. All contractswith consultants would be financed net of income taxes, using the standard disbursement percentage forHonduras.

Consultingfirms will be selected following Quality and Cost-Based Selection (QCBS)procedures using the IDA Standard Request for Proposals (RFP). Short lists for consulting assignmentsestimated to cost less than US$ 100,000 may consist of national firms. Auditing services will becontracted using Least-Cost Selection (LCS) procedures (paragraph 3.6 of Guidelines).

Individual consultants will be selected for advisory services and other technical assistance,including long-term consultants for the Project Coordination Unit (PCU). These consultants will selectedby comparison of qualifications of at least three candidates and hired in accordance with the provisionsof paragraphs 5.1 and 5.2 of the Consultant Guidelines, up to an aggregate amount of US$1.2 million.

Training. Training activities in the project will finance non-consultant expenditures related tothe delivery of training events and workshops to archeological assistants, tourism guides, tourism serviceworkers, vulnerable groups and government and project staff, reasonable costs of travel and per diem oftrainees, rental of training facilities and equipment, training materials, promotion and publicity costs, andnational and international study tours.

Subprojects. The project will finance Fondo Prosperidad to make resources available tosubprojects that respond to market niches identified by the pre-feasibility study menu, including capacitybuilding, technical assistance, training, and commercialization. A nonprofit organization (ManagementAgency) will be contracted to administer the Fondo. This Agency will be selected following QCBSprocedures for consultant services. Subprojects will be approved for only those proposals that meet the

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eligibility criteria established in the Operational Manual. The eligible beneficiaries should becommunities recognized by customary law according to the principles accepted by indigenouscommunity organizations in the area. Proposals will be a maximum of US$25,000 each and shouldinclude a minimum in-kind or cash community contribution of ten percent. Subprojects may consist ofgoods, works, technical assistance, training or any combination of these four. Procurement undersubprojects may be done directly by the beneficiaries and to the extent possible following shoppingprocedures. Communities will choose technical assistance or training from a list of qualified providers.At the request of the beneficiaries, the Agency could provide assistance on procurement following Bank'sguidelines for shopping or selection of consultants. The Operational Manual of the Project will detail allthe procedures and be presented to the Bank as a condition of effectiveness. The aggregate amount forsubprojects totals US$1,700,000.

Operating Costs. The project will finance incremental recurrent costs for the implementation ofthe project, i.e. incremental support staff for the PCU, office supplies, operation and maintenance ofvehicles and equipment, communication expenses, travel and per diem for supervision activities of PCUstaff and implementing agencies. Public entities in Honduras are required by law to procure these goodsand services through comparison of at least three quotations, which was found satisfactory to IDA duringthe capacity assessment. No government salaries would be financed under the IDA credit.Procurement methods (Table A)

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

%~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

'Procurement Methodx- nd!ture Category19 ' r ICB , NCB -tOher N F Total Cost

1. Works 0.00 2.29 1.68 0.00 3.97(0.00) (2.00) (1.48) (0.00) (3.48)

2. Goods 0.00 0.36 0.45 0.00 0.81b/includes publications and (0.00) (0.33) (0.40) (0.00) (0.73)furniture3. Services 0.00 0.00 4.56 0.00 4.56Firms and individuals (0.00) (0.00) (4.33) (0.00) (4.33)4. Miscellaneous 0.00 0.00 1.02 0.00 1.02Archeological services/Force (0.00) (0.00) (0.90) (0.00) (0.90)account5. Training 0.00 0.00 0.64 0.00 0.64

(0.00) (0.00) (0.57) (0.00) (0.57)6. Subprojects 0.00 0.00 1.79 0.00 1.79

(0.00) (0.00) (1.61) (0.00) (1.61)7. Operating Costs 0.00 0.00 0.56 0.00 0.56

(0.00) (0.00) (0.40) (0.00) (0.40)Total 0.00 2.65 10.70 0.00 13.35

(0.00) (2.33) (9.67) (0.00) (12.00)

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

vIncludes civil works and goods to be procured through local shopping, direct contracting, force account, consultingservices, services of contracted staff of the project implementation office, training, technical assistance services, andincremental operating costs related to managing the project.

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Sole source contract with CopAn Association. Copan Association will provide technical support for partof the Integrated Development of Archeological Parks and Sites component, in terms of providingspecialized expertise and short term inputs to the proposed activities in the three archeological parks andtwo sites and the implementation of the Copan Management Plan. Copan Association is the only NGO inthe Copan Valley with specialized experience in the delicate archeological ruins. The direct contract isjustified due to Copan Association's successful experience developing the Copan Archeological Park; theuniqueness of its experience with the development objectives of the project in the Copan Valley; and itsexcellent performance as an implementing entity in carrying out the activities in Copan financed by theWorld-Bank through the PROFUTURO Project (Credit 3250-HO).

Copan Association is managed by a Board of Directors (representing the private sector, differentpolitical parties, the current Vice Present of Honduras, and scientific researchers) and the ExecutiveDirector is Dr. Ricardo Agurcia. Over the last ten years, Dr Agurcia has directed extensive fieldwork atthe Copan site, published and lectured widely, and consulted internationally on the management andpreservation of archeological resources and is particularly known for his views on site conservation andthe rational use of sites for tourism (see Annex 13 for additional information).

The contract with Copan Association will include involvement of a core team of researchersrepresenting different disciplines to provide technical support for the simultaneous development andimplementation of Management Plans in the proposed three archeological parks and two archeologicalsites, with most work occurring in the first three years. The full time core team of experts over four yearsconsist of a Director, Conservator, Archeologist, Architect, Biologist, and Expert in Park Services andSite Interpretation. The organization will have a specific focus on the requirements of archeologicalresearch, biological impacts, surveying, preservation, public use, and inventory/record keeping. The teamwill provide specialized expertise in many cross-cutting areas and travel to all project sites. Specifically,the team will provide technical assistance in conservation (to ensure archeological pieces are notdamaged during construction or improvements); preparation of terms of reference and technicalspecifications when needed on specific topics; architectural guidance in terms of designing simpleVisitors Centers with an archeological laboratory; biological expertise in terms of placement of theinfrastructure and precautions to comply with all environmental guidance; and specialized expertise inpark services and interpretation to advise on security, paths, signs, access, and presentation of writtenmaterials for tourists. The PCU will determine the timetable for activities and advise on the technicalspecifications and requirements needed for each specific activity.

In sum, CopAn Association has a comparative advantage in its ability to convene a highlyqualified team to be involved in this project due to the history of this organization in the Copan area,international and national contacts in the fields of cultural and natural patrimony, and also a strong levelof integration with the local institutions, municipality, and community members. The estimated amountof the contract is US$850,000."Other" below in firms refers to the sole source contract with Asociacion Copdn.

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

Selection Method7Cdnsu~ltan't'Services -

;Ex=nditureoCate ory QCBS BS 7 SFB oLCS CQ ^stOther NBF T Cost-

A. Firms 2.40 0.00 0.00 0.06 0.00 0.85 0.00 3.31(2.27) (0.00) (0.00) (0.06) (0.00) (0.83) (0.00) (3.16)

B. Individuals 0.00 0.00 0.00 0.00 0.00 1.25 0.00 1.25(0.00) (0.00) (0.00) (0.00) (0.00) (1.17) (0.00) (1.17)

Total 2.40 0.00 0.00 0.06 0.00 2.10 0.00 4.56(2.27) (0.00) (0.00) (0.06) (0.00) (2.00) (0.00) (4.33)

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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), CommercialPractices, etc.N.B.F. = Not Bank-financedFigures in parentheses are the amounts to be financed by the Bank Credit.

Prior review thresholds (Table B)

Table B: Thresholds for Procurement Methods and Prior ReviewContract Value . . Contracts Subject to

Threshold Procurement. Prior ReviewExpenditureCtegor. (US$ th s jethodii&.... (US$ millions)

1. Works >1,500 ICB All150-1,500 NCB First two

<150 Three quotations, lump-sum First twofixed price contracts (US$0.4 m)

2. Goods >250 ICB All25-250 NCB First two

<25 National/international First twoshopping (US$0.3 m)

3. Services Firms >100,000 QCBS All<100,000 QCBS Only TORs

Individuals >50,000 Chapter V Consultant All<50,000 Guidelines Only TORs

(US$ 3.2 m)4. Archeological N/A Force account NoneServices

5. Training and N/A N/A N/AOperating Costs .

6. Subprojects N/A Three quotations or NoneChapter V Consultant

Guidelines

Total value of contracts subject to prior review: US$3.9 millionOverall Procurement Risk Assessment: Average

Frequency of procurement supervision missions proposed: One every 12 months(includes special procurement supervisionfor post-review/audits)

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Annex 6(B): Financial Mianagement and Disbursement ArsangementsHIONDURAS: Regional Development in the Copan Valley Project

Financial Management

1. Summary of the Financial Management AssessmentAn accredited Financial Management Specialist carried out the Financial Management

Assessment. The PCU within IHT has a well-established finance and accounting division, with clearpolicies, rules and procedures in place. There is a strong segregation of duties, with a junior staff tohandle routine processing and a Director to oversee operations (internal and donor funded operations)and to present key documents (including disbursement applications and audit papers) to other seniorofficials within IHT.

During the first year of the Sustainable Coastal Tourism Project, the PCU has successfullyimplemented an integrated and comprehensive financial management system. The Unit is able to generatefinancial management reports and has submitted withdrawal applications. The Unit has initiated projectactivities, including civil works in Trujillo, an international bidding process for the tourism strategy, andhas contracted consultancies.

Accounting Policies and ProceduresAdministrative procedures are in place to ensure that financial transactions are made with

consideration to safeguarding project assets and ensuring proper entry in the accounting/monitoringsystems. The PCU has a well developed Operational Manual, which outlines the roles andresponsibilities for staff, clearly details the segregation of duties and defines the standard operatingprocedures for the unit. The Operational Manual was developed during the preparation of the SustainableCostal Tourism project, and has subsequently been reviewed and found acceptable by IDA.

The PCU utilizes a cash basis of accounting with accruals used primarily at year-end. Theproject accounting system has the capacity to record assets, liabilities and financial transactions of theproject, and produce financial statements useful to project management and meeting Bank fiduciaryrequirements. The accounting system was designed to be able to capture all financial information andallocate between both categories (the Bank's legal/disbursement categories), GoH Expenditure Objectsand project component/activity. This is due to the flexibility of the accounting system, and the system istruly an integrated management system, with varying degrees of controls and safeguards. Procurementinformation is linked to the accounting and budget information to enable the finance division toeffectively carry out contract management.

Internal Audit. The internal audit unit for IHT operates under the auspices of the TribunalSuperior de Cuentas (formerly the Contraloria General de la Republica). The internal audit teamcustomarily reviewed expenditures on an ex-post basis, however under the recently passed law of theTribunal Superior de Cuentas, there is a requirement for ex-ante review of expenditures. The law issomewhat unclear as to how this ex-ante review is to be applied (e.g., does the requirement call for 100percent or is there a criteria or application of expenditure thresholds to determine the ex-ante expenditurereview).

Under the new law, the internal audit team will carry out an annual internal control review ofIHT, with the report being submitted to the central office of the Tribunal Superior de Cuentas. Thereview of IHT will also include a review of the PCU, as this will fall under the scope of work of theinternal audit program.

Safeguard over assets. Assets acquired by the PCU will be in the custody of IHT. The amountsin this register will be reconciled monthly against the respective accounting balances. At least one annualphysical inspection will be undertaken by PCU/IHT staff (in addition to verification by external

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auditors), and there is adequate insurance policy coverage to ensure against the loss of physical assets.

Reporting and MonitoringFinancial statements and reports will be prepared in formats satisfying PCU/IHT and the Bank's

monitoring and fiduciary requirements. On a monthly basis, the finance division will prepare theproject's Statement of Expenditure, a matrix classifying receipts by financing source and expenditures byfinancing source and disbursement category, as required by PCU/IHT's operational guidelines fordonor-funded projects. The expenditures would be compared to the projected figures per the budgetsprepared for the project.

In addition to Statement of Expenditure, the monthly financial reports will include the SpecialAccount Reconciliation Statements. Any difference in the amount of expenditures reported under the twofinancial statements must be clearly explained. The project financial statements, along with the physicalprogress and procurement sections of the Financial Monitoring Reports (FMRs), will be submitted to theBank on a semi-annual basis, and will be submitted no later than forty-five (45) days after the end of6-month period. The contents of the FMRs have been discussed and the initial design of the reports hasbeen agreed by the finance division and the Bank.

For Bank purposes, the annual financial statements will include, as well, the schedule ofStatements of Expenditure (SOEs) presented during the year in support of Withdrawal Applications.

Financial Management Action PlanAction Responsible Entity Completion Date1. Audit terms of reference for IHT Complied by Negotiationsannual external audit cleared by theBank2. Draft Financial Monitoring IHT Complied by NegotiationsReports (FMRs)3. Open dedicated bank account IHT effectiveness(Special Account) and providecomfort letter to Loan Department4. Submnit first FMRs IHT 45 days after the end of the first 6

month period after effectiveness

Risk AnalysisGiven the moderate to high risk associated with various aspects of implementation (Fondo

Prosperidad for community income generating activities), it is recommended that at least for the first yearof implementation, financial management supervision should take place approximately every 6 months.

Risk Ana ysisRisk Risk Rating Risk Mitigation MeasuresInherent risk

Country specific Moderate Establishment of specialized project unitwithin PCU/IHT and appointment of qualifiedstaff as point of contact; restrict location ofSpecial Account; use of SOEs fordisbursement with lower threshold in theSpecial Account

Control riskImplementing Entity Low to Build capacity to carry out procurement

Moderate functionsFunds Flow: counterpart funding Moderate to High Approval of budget units prior to

commencement of fiscal year; advances to

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meet local expenditures not eligible untilactivity completion and full documentationprovided to PCU/IHT

Fondo Prosperidad to be closely supervised atleast every 6 months for at least one year

Staffing Low Financial Management Director position hasbeen filled

Accounting policies and procedures low Recent re-organization to improve quality andefficiency of work. Comprehensive andflexible accounting system, which meetsrequirements of various donors

Internal Audit Moderate N/AExternal Audit Moderate Appointment of auditors before effectivenessReporting and Monitoring Moderate Finance division has experience preparing

reports for multiple donors

2. Audit ArrangementsAnnual project financial statements will be audited in accordance with International Standards onAuditing, by independent auditors (X) acceptable to the Bank and in accordance with the terms ofreference (TORs) already reviewed and cleared by the Bank. Standard project special purpose financialstatements and audit opinions on project financial statements, Special Accounts and Statements ofExpenditures (SOEs) will be required. The reports will be required to be submitted to the Bank no laterthan 4 months following the end of the fiscal year (January - December). The table below summarizesaudit requirements:

Audit Report Due DateProject financial statements 4 months after the end of the reporting periodSOE same as aboveSpecial Accounts same as above

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3. Disbursement ArrangementsDisbursements will be made against the categories of expenditures indicated in Table C. The proceeds ofthe Credit are expected to be disbursed over a period of four years. The project closing date is expectedto be March 31, 2008.

Allocation of credit proceeds (Table C)

Table C: Allocation of Credit Proceeds

7 C ' e Expenditure CategorY Am jl gount in 'US$mlllionh F . Financing Percentage 7 l1. Civil Worksa) Civil Works/Plan Grande a! 0.24 88%b) Civil Works 2.90 88%2. Goods 0.70 100% of foreign expenditures and 88%

of local expenditures3. Consultant Services 4.30 98%4. Archeological Services 0.80 98%5. Training 0.60 100%6. Fondo Prosperidad Subprojects c/ 1.60 100% of amounts disbursed by IHT to

Fondo Prosperidad subprojects7. Auditing 0.04 . 98%8. Incremental Operating Costs 0.40 90% up to 200,000

60% up to 320,00030% thereafter

9. Unallocated 0.42

Total Project Costs 12.00

Total 12.00al Disbursement Condition. Plan Grande. All Plan Grande investments are conditioned on the following issues: (i)establishment of a legal non-profit entity (foundation), with by-laws acceptable to IDA for the appropriatemanagement of Plan Grande; and (ii) the Foundation has title to the Plan Grande land.c/ Fondo Prosperidad Subprojects. Engage the services of a Management Agent to manage the implementation ofFondo Prosperidad subprojects.

Use of statements of expenditures (SOEs):

The special account will be replenished via the use of Statements of Expenditure (SOE) due to theexperience that IHT already has utilizing the traditional method of disbursements under the SustainableTourism Project. Disbursements will be made on the basis of full documentation for all expendituresmade under contracts requiring prior review by IDA and contracts whose value will be raised above theprior review limnits as a result of amendments. For all other expenditures disbursements will be madeagainst SOEs: (a) contracts for works costing less than 1,500,000 equivalent; (b) goods costing less than250,000 equivalent; (c) contracts for consulting firms costing less than 100,000; (d) contracts forindividual consultants costing less than 50,000; (e) training expenses; (f) archeological services; (g)subprojects; and (h) incremental operating costs.

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Special account:Flow of Funds. In order to facilitate project implementation, credit funds will be disbursed to a

Special Account (US dollar account for Bank funds to be held at the Central Bank of Honduras),managed by IHT with an authorized allocation of US$1,000,000 equivalent and an initial advance ofUS$500,000 equivalent, corresponding to the average of four months of expenditures that are expected tobe made from the account. The PCU will submit request for replenishments on a monthly basis. Thereplenishment application will be supported by the necessary documentation: a bank statement of theSpecial Account and a reconciliation of the Special Account against bank records.

PCU/IHT will carry out the procurement for services and/or goods in accordance with Bankprocurement guidelines, and payment orders for eligible expenditures will be executed to the PCU/IHTfinance division for financing and execution. This arrangement will not require additional accounts forBank funds, as all financial transactions will flow directly from the Special Account. This arrangementwill also fall under the normal scope of work for the annual external audit.

Payments and operation of bank accounts. Before payments for acquisition of goods and servicescan be processed, a purchase order or contract must exist. On the basis of these documents, electronicchecks/transfers are issued, provided that there's available budget. Bank account reconciliation will beprepared on a monthly basis and will be available within 15 days after the'end of the month.

Retroactive Financing. IDA will finance expenditures incurred after February 18, 2003. The amountof the retroactive financing will not exceed 10 percent of the total Credit amount.

Flow of Funds/Fondo Prosperidad. It is expected that a NGO (Management Agency), withexperience in the management of subprojects and a history of trust dealing with communities, will beselected, according to Bank procurement procedures, for the administration of the Fondo Prosperidad.The Management Agency will report financially and in terms of development results each six months tothe PCU. The Management Agency will identify subprojects and request IHT to disburse funds for thesubprojects to the Management Agency, which will then disburse to beneficiary groups. Disbursementsto the Management Agency will be based on the commitments of the Management Agency withbeneficiaries and on the results achieved each six months. The advances to the subprojects will beconsidered as eligible expenditures with respect to disbursement of funds from the Special Account.

The menu of the Fondo will be defined through the pre-feasibility study contracted by the PCUwithin the first six months of the project. The menu will be appropriate to the characteristics of thevisitors of archeological parks/sites, potential channels of commercialization, and local traditions.Proponents for proposals should be communities recognized by customary law according to theprinciples accepted by indigenous community organizations in the area. Proposals will be selected basedon the linkages with the menu and an analysis by the Agency of their economic return potential. Theagency will be able to assist proponents to make proposals with potential, to fit those criteria. If moreproposals are presented than funds allow, a committee of specialists will be selected to make theallocation. All participants in a proposal should sign off their contractual obligation and reporting,according to procedures proposed by the Management Agency. Proposals are estimated at a maximum of$25,000. The amount of resources to be disbursed will depend on the type of activity to be financed, andalso based on the results of the financial reporting of the activities carried out. Communities will sign anagreement with the Management Agency prior to receiving funds, detailing a minimum of 10 percentcash or in-kind contribution, and will present reports, to the Management Agency each three months. TheOperational Manual of the Project will detail all the procedures and be presented to the Bank as acondition of effectiveness.

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Annex 7: Project Processing ScheduleHONDURAS: Regional Development in the Copan Valley Project

ProjectiSchedule ;) ,,,,.i>" "K' - 17 Planned Actual 7Time taken to prepare the project (months) 8 8

First Bank mission (identification) 09/01/2002 09/15/2002

Appraisal mission departure 03/20/2003 02/07/2003

Negotiations 04/15/2003 04/09/2003

Planned Date of Effectiveness 09/30/2003

Prepared by:Honduras Institute of Tourism

Preparation assistance:

Bank staff who worked on the project included:Name Speciality

Maria-Valeria Pena Task Team Leader/Lead Sociologist, LCSEOBarbara Brakarz Sustainable Development Consultant, LCSEOCelina Albano Tourism and Urban Development ConsultantKathryn Johns Swartz Operations Management Consultant, LCSEOLucia Fort Gender Specialist, PRMGEGrissel Prieto Team Assistant, LCSEOJuan David Quintero Lead Environmental Specialist, LCSENLuz Meza-Bartrina Senior Counsel, LEGLASergio Jellinek Principal Communications Officer, EXTRNRajeev Swami Financial Management Officer, LCOAARebecca Santos Operations Officer, LCSHHTeresa Roncal Operations Analyst/Procurement Specialist, LCSERFabio Arjona Environmental EngineerMary Lisbeth Gonzalez Social Scientist ConsultantAlexandra Ortiz Peer Reviewer, Sr. Urban Economist, LCSFULuis Constantino Peer Reviewer, Lead Operations Officer, SASRDGunars Platais Peer Reviewer, Senior Environmental Economist, ENVCecilia Valdivieso Peer Reviewer, Sector Manager, PRMGE

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Annex 8: Documents in the Project File*


A. Project Implementation Plan

Project Implementation Plan, February 2003

B. Bank Staff Assessments

Country Assistance Strategy, January 27, 2000Poverty Reduction Strategy Paper and Joint IDA-IMF Staff Assessment, September 17, 2001.Environmental Assessment, Fabio Arjona, 2003Economic and Financial Analysis, ESA Consultores, 2003.Social and Indigenous Issues, Mary Lisbeth Gonzalez, 2003Urban Issues, Celina Albano and Barbara Brakarz, 2003GENFUND Lessons for the new project, Lucia Fort, 2003.Financial Management Assessment, Rajeev Swami, 2003Assessment of Agency's Capacity to Implement Project Procurement, Teresa Roncal, 2003BTO and Ayuda Memoria Preparation Mission, September 2002BTO and Ayuda Memoria Pre-Appraisal Mission, February 2003Cultural Properties in Policy and Practice, OED Precis, Spring 2002.en breve, "Guiding the Way to New Opportunities in the CopAn Valley," December 2002, Latin Americaand the Caribbean Region.Honduras Perfil de los Pueblos Ind(genas y Negros de Honduras, Honduras Secretaria deGobernaci6n/RUTA/World Bank, 2002.Making Sustainable Commitments - An Environment Strategy for the World Bank, Strategy for the LatinAmerica and Caribbean Region.World Bank Rural Development Strategy: Reaching the Rural Poor.

C. Other

Ashley, Roe Dilys, and Goodwin, Harold. Pro-Poor Tourism Strategies: Making Tourism Workfor thePoor: A Review of Experience. PPT Report No. 1, April 2001.

Assessment of the Tourism Potential of Honduras (report prepared for the Sustainable Coastal TourismProject, Hawkins and Associates), 2002.

Copdn en Cifras, IHT, January 2003.

Country Procurement Assessment Report, Honduras, 1999. Inter-American Development Bank.

Ecotourism Statistical Fact Sheet, International Ecotourism Society, 2000.

Fash, William, Tourism and the Archaeology of State Facing Challenges: the Case of Copdn, Hondurasin Vista, Tourism in the Americas, Harvard Review of Latin America, Winter 2002

Flynn, Sharon and Juan Carlos Bonilla. Tourism and the Future of the Maya Biosphere Reserve:Strategies for Success, April 1998. on www.planeta.com

Honduras Country Strategy, IDB, 2002.

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Honduras Tips: Official Travel Guide of Honduras, Spring summer 2002 (approved by IHT).

Mader, Ron. Latin America's Ecotourism: What is it? 2002. updated on www.planeta.com

Spenceley, Anna and Seif, Jennifer. Strategies, Impacts, and Costs of Pro-Poor Tourism Approaches inSouth Africa, PPT Working Paper, No. 11, January 2003.

Sustainable Tourism and Cultural Heritage: A Review of Development Assistance and Its Potential toPromote Sustainability, NWHO (Nordic), November 1999.

Universidad Pedagogica Nacional Francisco Morazan, Final Technical Report: Formacion yCaptacitacion de Maestros y Guias en la Zona de Copdn, December 15, 2001.

USAID/Honduras Annual Report, 2002.

Wood, Megan Epler. Developing a Framework to Evaluate Ecotourism as a Conservation andSustainable Development Tool, presented at the Conference on Ecotourism and Conservation in theAmericas, May, 2002.

Statistics from: IHT and 2001 Population Census.

Websiteswww.Copanmayafoundation.orgwww.Copanruinas.comwww.ecotourism.orgwww.hondurasthisweek.comwww.planeta.comwww.propoortourism.org.uk

*Including electronic files

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Annex 9: Statement of Loans and CreditsHONDURAS: Regional Development in the Copan Valley Project

20-Mar-2003Difference between expected

and actualOnginal Amount in US$ Millions disbursements

Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm ReVd

P053575 2002 HN- HEALTH SYSTEM REFORM PROJECT 0 00 2710 0 00 0 00 29 54 0.00 0 00P057859 2002 SUSTAINABLE COASTAL TOURISM PROJECT 0 00 5 00 0 00 0 00 4.76 1 06 1 22

P060785 2001 HN ECONOMIC & FIN.MANAGEMENT PROJECT 0.00 19.00 0 00 000 1334 1287 0.00

P057538 2001 HN ROAD RECONSTRUCTION AND IMPROVEME 0 00 66.50 0 00 0.00 47.26 1 02 0 00

P064895 2001 HN FiFTH SOCIAL INVESTMENT FUND PROJE 0.00 80 00 0 00 0 00 27.55 -4.13 0 00

P073035 2001 Access lo Land Pilot (PACTA) 0 00 0o 0.00 0 00 6 57 2.79 0 00

P007397 2001 HN COMMUNITY-BASED EDUCATION PROJECT 0 00 41.50 0 00 0.00 40.49 12.20 0 00

P064913 2000 EMERG DISASTER MGMT(TAL) 0.00 10.82 000 000 805 -274 000

P057350 1999 PROFUTURO 0.00 8 30 0 00 0 00 417 -0 07 3 07

P044343 1998 GEF HN-BIODIVERSITY COSERVATION 0.00 0 00 7.00 0 00 3 04 6 66 0 00

P007398 1997 RURAL LAND MGMT 0 00 34 00 0 00 0 00 5.41 -0 75 -0 74

Total 0 00 280 22 7 00 0 00 190.19 28 91 3 56

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HONDURASSTATEMENT OF IFC's

Held and Disbursed PortfolioJun 30 - 2002

In Millions US Dollars

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic1998 Camino Real Plaz 9.00 0o00 0.00 0.00 9.00 0.00 0.00 0.001995/98 Elcosa 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001986/99 Granjas Marinas 4.50 0.00 0.00 0.00 4.50 0.00 0.00 0.00

Total Portfolio: 13.50 0.00 0.00 0.00 13.50 0.00 0.00 0.00

Approvals Pending Commnitment

FY Approval Company Loan Equity Quasi Partic

Total Pending Commitment: 0.00 0.00 0.00 0.00

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Annex 10: Country at G llance

HONDURAS: Regional Devegopment in the Copan Valley ProjectLatin Lower-

POVERTY and SOCIAL Amerca middle-Honduras & Carib. Income Devaloprtenrt dbamolnd

2001Population, mid-year (millions) 6.6 524 2,164 Ute expectancyGNI per capita (Atlas nethod, US$) 890 3,560 1,240GNI (Atlas method, US$ billIons) 5.9 1 862 2,677

Average annual growth, 199541

Population (%) 2.6 1.6 1.0Labor force (X) 3.7 2.2 1.2 GNI Gross

eatimate ~~~~~~~~~~~~~~~~~~~per primaryMost recent cm& (latect year aovileble, 1995"1) capita ernilment

Poverty (% of population below national poverty line)Urban populabtion (% of total populatlon) 54 76 46Ufe expectancy at birth (years) 66 70 69Infant mortality (per ,OOO live births), 35 29 33Child malnutriton (% of children under 5) 425 9 11 Access to Improved water sourceAccess to an Improved water source (% ofpopulatIon) 90 85 80Illiteracy (% ofpopulation age 1t6) 25 11 15Gross primary enrollment (% of school-age population) 108 130 107 Honduras

Male 107 131 107 -- Lower-middle-income groupFemale 110 128 107

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1981 1991 2000 2001Ecronomic ratoe

GDP (US$ billions) 2.8 3.1 5.9 6.4

Gross domestic investment/GDP 21.1 24.7 32.5 30.6 TradeExports of goods and servlcslGDP 30.8 33.0 42.1 '38.3Gross domestic savings/GDP 14.1 20.0 18.8 13.9Grossnational savingsGDP 10.0 15.3 23.5 20.3

Current account balance/GDP -11.1 -9.2 -9.0 -10.3 Domestic InvestmentInterest payments/GDP 3.4 4.8 2.8 2.1 savingsTotal debt/GDP 60.5 110.7 88.7 80.2 sTotal debt servIce/exports 25.6 27.6 14.8 13.2Present value of debt/GDP 52.5Present value of debt/exports . 102.0'

Indebtedness198141 1991-01 2000 2001 2001-05

(average annual growth)GDP 3.0 3.0 4.9 2.6 4.0 HondurasGDP percapita -0.1 0.2 2.3 0.1 1.2 Lower-rnuddle-nrcorm groupExports of goods and services 1.4 1.7 7.3 4.6 7.5

STRUCTURE of the ECONOMY1981 1991 200 2001 Growt of inveatment and GDP (%)

(% of GDP) 10Agriculture 22.4 22.7 15.1 13.7Industry 22.9 27.3 32.2 31.6

Manufactunng 14.4 16 9 20.0 203 0Services 54.7 50.0 52.7 54.7 4 907 c o

Private consumption 73.1 68.1 68 5 72.2 .10General govemment oonsumption 12.8 12.0 12 8 13.9 - GDI GDP

Imports of goods and services 37.7 37.7 55.9 55.0 -

19t1-91 1991-01 200 2001 Growth of exports and imports (%)(average annual growth) 2

Agricuture 3.1 1.7 9.5 -0.9 2Industry 3.4 3.5 5.2 1.6 10

Manufacturing 3.9 4.1 5.5 5.2 oServices 2.6 3.7 4.4 4.5

Private consumption 2.9 2.8 4.6 3.8 10General govemment consumption 2.5 4.0 15.7 11.3Gross domestic Investment 6.2 5 0 -0.8 -3.9 Exports ImportsImports of goods and services 2.8 3.5 3.8 3.6

Note: 2001 data are preliminary estimates.The diamonds show tour key Indlcators in the country (in bold) compared with its income-group average. If data are missing, the diamond wilt be incomplete

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Honduras

PRICES and GOVERNMENT FINANCE1881 1991 2000 2001 Inftatlon (%)

Domestic prices(% change) 40Consumerpnces .. 340 11.0 97 30Implicit GDP deflator 7.1 26.0 8.7 976 a0

Govemment finance 10(% of GDP, includes current grants) 0Current revenue 13.5 18.2 18.0 18.2 96 97 98 99 00 01

Current budget balance -0.6 -0 3 0.5 -0.4 - GDP deflator CPIOverall surplus/deficit -9.5 -5 3 -6.8 -8.1

TRADE

(US$ millions) 1991 2000 2001 Export and Import levels (USS mill.)Total exports (fob) 784 835 1,426 1,379 4.o0o

Bananas 213 314 124 204Coffee 173 146 339 161 3.e00Manufactures ..

Total Imports (cifl 976 1 001 2,855 2,997 2,000Food 160 140 470 480 ,D

Fuel and energy 163 150 384 402Capital goods 216 188 722 867 o A

Export price index (1995-100) 92 98 90 rS 9s 07 sa 90 o Import price index (1995-100) .. 79 131 133 t Exports *importsTerms of trade (1995=100) .. 117 75 68

BALANCE of PAYMENTS

(US$ millions) 1981 1991 2000 2001 Current account balance to GDP (%)Exports of goods and services 884 997 2,497 2,447 oImporls of goods and services 1,061 1,139 3,313 3,512Resource balance -177 -142 -816 -1,064

Net Income -153 -192 -165 -141Net current transfers 18 53 447 550

Current account balance -313 -281 -534 -656 -10

Financing items (net) 239 350 554 736Changes in net reserves 74 -69 -20 -80 15-

Memo:Reserves Including gold (US$ millions) .. 198 1.285 1.386Conversion rate (DEC, local'US$) 2.0 5.3 14.8 15.5

EXTERNAL DEBT and RESOURCE FLOWS1981 1991 2000 2001

(US$ millions) Composition of 2001 debt (USS mill.)Total debt outstanding and disbursed 1,705 3,396 5,255 5,121

IBRD 176 551 152 125 G 329 A-125IDA 77 126 838 901

Total debt service 236 307 450 410 F 586660

IBRD 20 88 48 36IDA 1 2 8 10 C 220

Composition of net resource flowsOfficial grants 25 549 292 344Official creditors 172 121 316 195 E 1 sPrivate creditors 61 5 16 -72Foreign direct investment -4 52 262 186Portfolio equity 0 0 0 0 0

World Bank programCommitments 0 91 154 66 A -IBRD E -BilateralDisbursements 42 78 38 98 B -IDA D -Other multilateral F -PrivatePnncipal repayments 6 45 35 27 C -IMF 0 -Short-termNet flows 37 33 3 71Interest payments 15 45 21 19Net transfers 22 -12 -18 52

ueveiopment Economics aitsuz

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Additional Annex 11 Assessment of Project Areas and the Impact of TourismHONDURAS: Regional Development in the Copan Valley Project

Project Areas

1. The three archeological parks and two archeological sites benefiting from the project involve sixdifferent municipalities and three departments, as shown in Table 1. All five parks/sites are accessiblethrough the San Pedro Sula International Airport, and can be reached in less than 3 hours by road and forGuanaja in less than one hour by air).

Table 1: Location of the Archeological Parks and SitesArcheological Park/Site Municipality DepartmentCerro Palenque Pimienta and Potrerillos CortesCopan Copan Ruinas CopanEl Puente La Jigua CopAnPlan Grande Guanaja Islas de la BahiaLos Naranjos S.C. de Yojoa Cortes

2. The Cerro Palenque Archeological Site is located in the Sula Valley, near San Pedro Sula, in theDepartment of Cortes, which has a population of 1,202,510. Cerro Palenque extends over an areabelonging by two municipalities: La Pimienta and Potrerillos, with populations of 13,127 and 18,945respectively. The nine kilometer access road to the site is in poor condition and needs to be rehabilitated(this has been planned in project) and there is little infrastructure and no services (such as electricity andwater). A small, poor community with about twelve houses is located near the site.

3. The Copdn and El Puente Archeological Parks are located in the Copan Valley in the Department ofCopan, which has a population of 288,766. The capital of the Copan Department is Santa Rosa de Copanwith a population of 25,000. This city is also a tourist attraction and it has a colonial atmosphere andoffers many outdoor activities, including thermal pools, guided tours, and hiking. The Copan Park islocated within the Municipality of Copan Ruinas, which has a population of 30,703; El Puente is locatedin the Municipality of La Jigua, with a population of 7,807. The access to El Puente is a four kilometerpaved road in good condition from the small town of La Entrada.

4. The Los Naranjos Eco-Archeological Park is located in the Department of Cortes, along thenortheast side of the Yojoa Lake, which also borders the Departments of Comayagua and Santa Barbara.The park is located in the Municipality of Santa Cruz de Yojoa, which has a population of 65,901.Access to the park is from the main paved road from San Pedro Sula to Tegucigalpa, turning at the pavedroad to the town of Penla Blanca, then taking a two kilometer access road. This road is in need ofrehabilitation (which is planned for in the project). This area has basic infrastructure and hotels in thenearby town of Pefia Blanca. Lake Yojoa is the largest natural lake in Honduras, with good fishing, andthe area has other diversions such as caverns, waterfalls, access to two national parks (Santa Barbara andAzul Meambar) and excellent bird watching (379 bird species identified in archeological area).

5. There are two Municipal partnerships- or "mancomunidades" in this area. These partnerships havebeen created between local governments to protect the environment, develop tourism and controlunrestricted private profiting from the national parks. These efforts show that there is a strong interest atlocal level to protect the environment and to develop tourism. The Municipalities of Santa Cruz of Yojoa(Los Naranjos), La Paz, Taulab6, Sigatepeque, Villa de San Antonio y Comoyagua joined forces to createthe "mancomunidad del Lago de Yojoa," with the aim of protecting the environment and promoting

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tourism. There is another organization, constituted by the mancomunidad del Lago de Yojoa, and themunicipalities of La Paz, Amapala, and Valle de los Angeles and their main concern is urban planningand tourism. This group has already prepared a strategic plan to work in the entire region, including thefollowing sites: Los Naranjos, Lake Yojoa, the Cafiaveral reservoir, and the ecological corridorSolo-Pefia Blanca Caniaveral.

6. The Plan Grande Archeological Site is located in the island of Guanaja in the Bay Islands (accessibleby air or by boat). The Department of the Islas de la Bahia has a population of 38,073, and theMunicipality of Guanaja has a population of 4,856, concentrated in two small cays (Bonacca) to the eastof the main island. There are no roads or cars on the island and access to the hotels is by water taxi.Access to the "Plan Grande" site is by boat, then foot.

The Spatial Impact of Tourism Development on the Urban Setting: The Copan Ruinas Case

7. General Overview of Copdn Ruinas. Copan Ruinas is the most important Municipal site, but it is alsothe most complicated. Urban and rural areas are generally poor, with rural villages making up the poorestareas. Copan Ruinas contains 4.5 percent of the Honduras population, most of which is rural since itcontains 6.2 percent of total rural population and only 2.5 percent of the urban (Instituto Nacional deEstadistica - INE, National Statistics Institute, 2001 Census). The small town of Copan Ruinas is locatedin the western end of the country, in the Department of Copan, near the border with Guatemala. Itspopulation is approximately 33,000 people, of which one-third lives in the urban core and two-thirds inthe 102 rural villages. The CopAn Archeological Site, declared a World Heritage Site by UNESCO in1980, is located in the Copan Valley. Although the main economic activity in the region is stillagriculture, specifically coffee and tobacco, the tourism industry has grown. In 2002, Copan Ruinasattracted about 135,000 visitors, and, if more and appropriately explored, tourism can be used as a tool tobring a new dynamism to the local economy.

8 Natural and Cultural Attractions. Twenty-two per cent of tourists to Honduras visit Copan Ruinas.The main attraction in the area is certainly the Copan Archeological Heritage, containing the legacy ofthe great Mayan civilization, which includes: the main Site, Las Sepulturas and Los Sapos sites, thestelae surrounding the valley, the Museum of Maya Sculpture and the Museum of Archeology. In recentyears, the increasing flow of tourists has led to a diversification of attractions in the region. They include:Casa K'inich - an interactive learning center dedicated specifically to children (financed byPROFUTURO); El Puente Archeological Site, one hour drive from Copan Ruinas, in the municipality ofNueva Arcadia; The Bird Park; The Butterfly House; The Hot Springs - 23 kilometers from CopanRuinas; Eco-Hacienda San Lucas/Los Sapos - a typical Honduran farm; Macaw Mountain Bird Park; andEl Jahal Aqua Park.

9. Tourism Facilities. In order to receive its tourists, Copan Ruinas has 31 hotels and B&Bs, of whichfive offer a set of standard facilities and services for guests with a higher purchasing power, and two newhotels are being built. In the year 2002, the average "stay over" of these tourists was nearly two days.

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Box 1: Visitors to CopanArcheological Site in 2002

Honduras 71,935Europe 26,305Central America 15,714USA 14,355Others 7,231Total 135,540

10. Access to Copdn Ruinas. Visitors can reach Copan through two ways: (a) by land via the WesternHighway (a paved road in good condition) that connects San Pedro Sula and the municipalities of SantaRita de Copan (the main municipality of the Department) and Copan Ruinas or via the border withGuatemala (road in good condition); or (b) by air, through a private airstrip located in the outskirts oftown, in the community of La Estanzuela. The airstrip, owned by local residents, is 1000 meters long and30 meters wide, and receives small airplanes with carrying capacity of 20 to 30 passengers. A largerairport in Rio Amarillo, about 20 kilometers from Copan Ruinas, has been designed with financing fromIDB and it is currently in planning stage. Access to rural areas is only possible through unpaved, dirtroads, making access difficult in the rainy seasons.

11. Infrastructure Services in the Urban Settlement. One of the most important problems in urbanCopan is pollution and waste management (solid and sewage). This issue imposes clear limitations on anincrease in the number of tourists. It also increases social and health risks and vulnerabilities contributingto greater poverty. Urban infrastructure in Copan Ruinas is highly precarious: (a) only 20 percent of theurban area has clean, drinkable water; (b) only 30 percent has sewage-others let the sewage waters runacross the streets; (c) the lack of a sewage system pollutes the Copan River, since waste runs directly intoit; (d) electricity coverage is limited; (e) garbage collection needs to be strengthened with clearly definedschedules and local residents need learn about basic environmental education on how to manage theirgarbage; (f) garbage treatment is carried out inappropriately; (g) the municipality has only one hospitaland four health posts in the rural area, of which only two are functioning albeit in precarious conditionsdue to lack of material and human resources, and (h) in terms of public security, there is no fire brigadeand the police service is ineffective, consisting of no more than six men.

12. Rural Infrastructure. The situation in the rural areas is even more unfavorable: 48 percent of thepopulation has no potable water and 80 percent of households do not meet minimum standards of living,reflecting the low quality and overall lack of social services and infrastructure. Deforestation continues tospread because people use wood for cooking. Some rural communities, such as La Candelaria, usepolluted water to satisfy their basic needs.

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13. Social Structure of the Urban Space. Copan Ruinas still maintains the urban design of a Spanishcolonial town, with the main square encompassing the church, the town hall, and a few stylish buildings,presenting a harmonious urban landscape. The 10,000 inhabitants of the urban core live in two mainareas: 'Parte Baja' (Lower Town), inhabited by upper middle and higher classes, and 'Parte Alta' (UpperTown), occupied by the lower income sectors. The former presents a mixed occupation, consisting ofresidences, shops, hotels, public buildings, restaurants, banks, museums, among others. In this area, landis most valued, averaging US$30 per square meter, and one of the real estate market's indicators is thepurchasing of property by foreigners. Another tendency of the land market is for people outside CopAn topurchase older houses in the historical center and restore them for housing or commercial purposes. Eventhough this contributes to the embellishment of the area, it also leads to an increase in land prices. In thelast few years, the increasing price of land, the coffee crisis and the development of tourism activitieshave contributed to a change in the use of houses, where a number are either sold or rented for variedcommercial activities.

Box 2: Copan Ruinas Indicators 2002

HDI - 0.458 (ranking it 16th among the 23municipalities of the Department of Copan)Malnourishment rate - 55 percentIlliteracy rate - 45 percentInfant Mortality Rate - 41 per 1000Average family income - US$96.41

14. Socioeconomic Profile. This kind of process directly affects the socioeconomic profile of residentsin the 'Parte Alta,' who sell their property to the more affluent sectors of expanding 'Parte Baja.' In turn,the lower class residents of 'Parte Alta' are forced to leave and settle in the city's peripheries, speciallyin Ostuman, located in the direction of Guatemala, and Sesesmil, north of town. To the east, however,these settlements are limited by the boundaries of Copan Archeological Park and tobacco and coffeeplantations. Given the lack of public infrastructure services and of a Urban Plan for Land Use andOccupation, the possibility of creating slum neighborhoods exists. Although the majority of CopanRuinas' residents own their homes, the land surrounding the urban core is concentrated in the hands of afew traditional families, including in the areas neighboring the archeological sites. This situation couldcause problems and limitations in terms of improvements, expansion and protection of the entire valleygiven its archeological richness. It could, as well, restrict the expansion of the land market, leading largertourism investments to locate in neighboring municipalities. For instance, a large scale hotel investment,Hacienda el Jahal, has been made in the municipality of Santa Rita, 11 kilometers from Copan Ruinas.This hotel complex includes a shopping mall, movie theater and Honduras' first water park. Furthermore,a large plot of land has recently been purchased in Santa Rita by one of Honduras' most powerful realestate investors dealers.

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15. Local Government Capacity. The situation of Copan Ruinas is critical given the municipality'ssmall budget. In 2002, its revenue amounted to 4 million Lempiras (US$236,000) that carne from twosources: 2,400,000 Lempiras in taxes and 1,800,000 Lempiras in government transfers. Of this amount,the administration allocated 60 percent to personnel and operational costs and 40 percent to investmentsin public services. In order to increase revenues, the municipality should improve its legal and fiscaltools, such as an efficient land ownership, a commercial establishment cadastre and the ability for taxcollection. During an interview, the mayor affirmed that the expansion of the tourism industry has onlybenefited bar, restaurant and hotel owners. The municipality has not felt a positive impact for two mainreasons: (a) only twenty percent of the economically active population in Copan Ruinas benefits fromtourism, and (b) the five largest hotels have benefited from the Ley de Zonas Libres Turisticas (Law ofFree Tourism Zones) that afforded hotels with tax exemptions for a period of 10 years. This situation isbeing gradually resolved and in 2008 the last hotel will 'retire' from this benefit. Related to this issue, themayor, like previous mayors, has called attention to a past claim that the revenue produced by CopanArcheological Park is not equitably allocated, for it is entirely appropriated by the central government.For instance, in 2002, the site collected around 15 million Lempiras in tickets, which is more than threetimes the municipality's budget. Thus, the municipality suffers the pressure for improved public servicesand infrastructure resulting from the tourism flow, but does not receive the benefits. To deal with thissituation, the mayor is preparing a Strategic Plan to establish investment priorities, and needs a cadastreand database to improve its administrative and fiscal efficiency.

Key Recommendations

a Implement a Plan for Regulation of the Use and Occupation of Land to maintain urban developmentthat is compatible with the concept of sustainable development.a Decentralize the tourism flow from Copan Ruins, by building hotels/bed and breakfast with attractionssuch as horseback riding or bird watching in other areas of the Valley.a Apply a Historical Protection and Conservation Law that can guarantee the maintenance of theoriginal urban landscape of Copan Ruinas.a Elaborate a Visual Communication Code to control the use of outdoor signs and advertisements toavoid a visual pollution incompatible with the town's atmosphere.o Define conflict resolution mechanisms for land tenure in and around archeological sites.o Implement urban and environmental education activities that involve and empower the localpopulation, especially children and youth, to reduce the gap between the municipality and the federalgovernment's tourism and cultural agencies.o Take measures to prevent a repeat of the current situation in Copan Ruinas in other municipalitiesaffected by the expansion of tourism. A careful consideration of the impact of tourism in urban spacesshould also help promote sustainable tourism development in the other archeological sites that composeHonduras' cultural and natural heritage, such as El Puente, Los Naranjos, Cerro Palenque and PlanGrande.

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Additional Annex 12 Social and Indigenous Issues(Should be read in conjunction with Annex 11)


Introduction

1. Background. Honduras ranks among the lowest-income countries in the Western Hemisphere. Policyreforms beginning in 1990 sparked a turnaround in Honduras' economy and prior to Hurricane Mitch,GDP growth was 5 percent. The economy is once again recovering, with a GDP growth rate of 6.4percent in 2001. However, the economic growth has not reached the poorest and most vulnerable groupssuch as the rural poor, especially indigenous peoples and more particularly, indigenous women. With anaverage of 5.3 years of schooling for adult workers, Honduras is well behind the average for most ofLatin America. The PRSP finds a low-quality labor force as one of the main causes of the fluctuating andweak economic growth, and despite seemingly high investment and savings rates in the country, a moredynamic poverty reduction has not takeri place. This suggests that it is imperative to identify alternativeways to increase households' revenues mainly in the most deprived and ethnic regions such as the CopanValley.

2. Copdn Valley. Honduras has a rich environmental diversity and cultural heritage. These resources arethe patrimony of the poor and the challenge for the Copan Valley Project is to make them productivethrough a pro-poor tourism approach. Over 3,000 years, the Maya created a remarkable heritage ofimmense structures, intricate carvings and a highly accurate language based on detailed representativesymbols. Tourist attention to Honduras' archeological heritage has traditionally focused on the Maya siteof Copan. The excellent condition of Copan makes it the most detailed source of information on theMaya that exists today. Southernmost of the great Maya cities, Copan was geographically isolated fromthe Maya realm, yet became a center of art and culture. Copan is known for its sculptures and longhieroglyphic texts. More than 100,000 tourists from over 60 countries visited Copan Archeological Parkin 2002.

3. Tourism Transformation. Over the past decade, tourism in Honduras has evolved dramatically andmost visitors go to Copan. Archeological research and the declaration of the Copan National Monumenthave contributed to this increase, but also international media coverage of new findings at the site andmore recently, international events such as the terrorist attack on September 11, 2001, have fostered anincrease in the number of tourists since Central America is perceived as a safe destination. Economically,the region faces a major recession due to agricultural crises primarily in the tobacco plantations andsecondly, in coffee. As a result, the majority of the population is currently unemployed, works in tourism/services or are self-sufficient peasants and artisans. Most people have few assets and productioninputs--a situation that leads them to perceive low revenues. A quantitative survey being carried out.separately will provide additional statistics.

4. Objectives of the Analysis. The main objectives of this annex are to: (a) determine who are the mainbeneficiaries and stakeholders of the project and their respective stakes; (b) what are the constraints tothe participation of the poor in tourism development and how to overcome them: (c) what are the risks ofthe project and how to overcome them; (d) what are the social development outcomes of the project andinclude these in the monitoring and evaluation system of the project; (e) what institutional arrangementsare needed to guarantee that the social development outcomes are reached; and (f) how to make theproject as participatory as possible in order to achieve ownership, sustainability, and projected outcomes.

5. Data Sources. This analysis draws on qualitative and quantitative data sources and methodological

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techniques. It used the 2001 Population Census and statistics collected by IHT. As the census data ishighly aggregated - geographically, socially and ethnically - the analysis relies mainly on qualitativedata. Focus groups were conducted with five urban and seven rural communities. Semi-structuredinterviews were conducted with key actors such as patronato leaders (municipalities create patronatos ineach community or barrio--the social function is to serve as liaison between municipal authorities andcivil society and most rural communities have a gender mixed patronatos and those working only forwomen), municipal and community authorities, and leaders of the Consejo Nacional Indigena MayaChorti de Honduras (CONIMCHH - National Council of Indigenous Maya Chorti of Honduras); and theprivate sector (owners of hotels and restaurants). It also draws from lessons learned from the GENFUNDwhich piloted different ways of reaching the poorest population close to Copan, integrating them in theflourishing tourism flow.

Main Results

6. Socioeconomic Characteristics. According to the 2001 National Census, the Department of Copan ispredominantly rural (74 percent) and about 85 percent of the rural population is illiterate. Vial access torural communities is very difficult and often insecure. For example, Otuta (Santa Rita Municipality) is apoor, insulated community with no piped water or electricity. However, it seems to hold a strong internalcohesion; it has strong social capital development with a well coordinated patronato and outspokenleaders. This community has clear ideas how to use their ecological beauty to develop tourism.

7. Stakeholders and Beneficiaries. Key stakeholders include the rural and urban local population of theCopan Valley and surrounding areas, especially those living near the archeological parks and sites orinvolved directly in the project's activities, the Government of Honduras (and within it, IHT and 1HAH),the municipalities, the private sector, community-based organizations and NGOs. All municipalitiesvisited - Copan, El Puente, and Pimienta - are interested in developing a new integral approach totourism. Private sector and municipal authorities agree on a vision of the entrepreneurship opportunitiesin the tourism facilities; development of strategies for creation of various tourism facilities; and markettourism using trained professionals.

Table 2: Populati n Benefiting from ProjectMunici ality Department

Name Population Name PopulationCopan Ruinas 30,703 Copdn 288,766La Jigua 7,807

Guanaja 4,856 Islas de la Bahia 38,073

S.C. Yojoa 65,901Pintienta 13,127 Cortes 1,202,510Potrerillos 18,945 1Total 141,339 Total 1,529,349

8. Overall, the Copan Valley Project will benefit the national and regional economy by increasinginvestment opportunities derived from the increase of the tourism flow and improving and expandingsectors related to it through production of goods and provision of services, while benefiting eitherdirectly or indirectly the most vulnerable groups in the region, where the majority of the country's poor islocated. Above all, the benefits of tourism development in the region should be targeted at thecommunities themselves, to whom the region's natural and cultural patrimony belong. The indirectbeneficiaries are expected to be the approximately 1.5 million people living in the departments in which

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the parks and sites are located, both rural and urban, poor and non-poor, men and women, and indigenousand non-indigenous. In particular, the project is expected to directly benefit the Maya Chortfs who live inthe Copan Valley in caserias (villages of less than 200 residents each) or aldeas, where the projectactivities and subprojects are designed to take place. Also, specific income and employment generatingactivities, such as training of archeological and eco-tourism guides and those involved in the FondoProsperidad, are expected to directly and indirectly benefit at least 3,000 families by end of project.

9. The expected benefits for these groups include poverty reduction and increased household incomes asa result of employment generation, diversification of economic activities, and expansion of marketopportunities, given the increased flow of tourism. The development and conservation work ofarcheological sites and the activities that increase tourist access to the attractions will benefit directly,aside from local urban and rural residents, the municipalities involved, the private sector, the national andinternational visitors, researchers, scholars and students. Lastly, the Government of Honduras will benefitfrom the institutional enhancement of the IHT and IHAH and the consolidation of its cultural andenvironmental resource management.

Box 1: The Chortis

The Chortis are direct descendants of the Maya. Due to a history of disparity, the Chortis wereforced to move away from their traditions, and today most wear western clothing and take westernnames. Immigration of criollos and mestizos to the Copan Valley in previous centuries displacedChortis from their native land. There are approximately 4,000 Maya Chorti in the Western area ofHonduras In 1997, the Chortd movement strengthened and demanded the Government to return theland as it was promised in the agreement signed with the Spanish Colonial Government in the 18thCentury. As a result, there has been a resurgence of indigenous culture and pride along with a landrecovery process. In rural Copan, most communities have or are in process of recuperating theirland. Otuta in the Santa Rita Municipality, has recovered some land and more are in process. Withthe exception of Otuta, however, most of the recovered land in other communities is notproductive. This is explained by the lack of assets and production inputs, but also because thesecommunities have been land-workers and not land owners. There is a differentiated degree ofdevelopment of social capital and community-based organizations, despite organizing byCONIMCHH. Also, there is a correlation between the historical structures of social internalrelations within communities' current organizational capabilities and there is a correlation betweencommunities' social capital and their entrepreneurial capabilities.

10. Social Factors Affecting Poverty, Participation and Project Success. All sites and parks formingthe tourist circuit and their surroundings have different limitations, social scenarios, and touristadvantages.

* Micro-credit, grants, funds, individual and collective incentives: Although there is a demand foraccess to resources, the demand needs to be tailored. In focus groups held with various barrios(neighborhoods), those consulted stated that unemployment has been increasing due to the coffee crisis.The urban citizens rely on hotels, restaurants, and souvenir stores for job opportunities. A few work orhave worked for the Copan Park as guards or janitors. However, this source of work is seen as unstablebecause it relies on donors' financial support. As self-employed artisans, some produce handicrafts, butthere is little variety. As artisans' supply increases, the market competition and prices drop. In general,these communities have no clear idea regarding the tourist potential available in urban areas besides thepark and handcrafts. Urban communities have no experience or knowledge regarding Cajas Rurales, atype of revolving fund used in Honduras. These cajas have used different funding modalities and control

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measures to ensure accountability. The general idea that prevails is that what is needed are incentives toproduction, without any clarity about market niches or requirements.

Box 2: Cajas Rurales of Savings and Credit

Cajas Rurales have been created across Honduras. They are formed by men and women as aprivate enterprise with no political affiliation. The goal is to provide credit to poorersocioeconomic groups who have not had access to traditional or formal lines of credit due tolack of collateral. The Organizaci6n Cristiana para el Desarrollo Integral de Honduras(OCDIH) provides training on accounting, management and enterprise development. One ofthe most successful ones is Dalias del Campo localed in Sesesmil 1 in Copan. This Cajaprovided credit to produce organic coffee and elaboratejams.

D In principle, communities are interested in the development of small enterprises. None of the peopleconsulted had previous experience in the private sector or how to organize a firm. Most are willing tobenefit from well-targeted technical assistance to learn how to manage an enterprise. It would be usefulto use the Brazilian experience with the Rural Poverty Projects and process of certifying and selling tothe European Community.o The Carrizalito village has some level of community-based organization, but vague ideas on how togenerate potential for tourism. Other communities such as La Pintada show low levels of organization,social capital, and vision to enter into the tourist development. Residents of La Laguna are veryenthusiastic and perceive that they have great potential, but they need to receive appropriate markettraining. They have discussed a Tilapia fish enterprise to supply hotels and restaurants with a limitedsupply of fresh fish, but their lagoon is too small. The nearby mountain area has some eco-tourismpotential, but lodging and eating facilities need to be developed nearby.

Lessons from GENFUND

11. A pilot initiative funded by the GENFUND sought to explore and identify possible types ofincome-generating activities for poor men and women in rural communities in the Copan Valley, in thevicinity of the Copan Archeological Park. Although this Fund was targeted towards women, lessonslearned have moved beyond this, and in great part, allowed for the design of specific activities togenerate and/or increase income among the Chortfs in the Copan Valley Project. This pilot providedtraining and capacity building to women in the rural communities and identified possibleincome-generating opportunities. As such, as it became clear that a new project was being prepared, italso created expectations about what this project would provide to the communities. The pilot providesuseful lessons that were taken into account in designing the Copan Valley Project, including addressingsustainability, expectations, and coverage. In practical tenrs: the women who participated in the pilotactivities learned how to produce or improve ceramics, how to make bread and pastries, how to set upand maintain plant nurseries, and how to make candles. Although these activities did not necessarily leadto an immediate improvement in their lives, the following benefits resulted from the experience:

. Participation in the program increased the women's awareness of their unexploited potential, that theycould contribute ideas for their own improvement, and that their efforts are valuable, as demonstrated bythe sale of their products. It also made them aware of the importance of producing quality goods, itexpanded their perspective and allowed them to see things in a larger framework.a Women's employment does not negatively affect or disrupt family life in the villages. In fact, womenwho work together, for example in producing pottery, share the benefits of their work by providing

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employment for other women, such as in childcare.* One area where significant progress was made was in the support from the men in the villages whocame to see the initiative not as a threat to the gender relations, but as a form of assistance. The men inthe rural communities became aware of women's potential and were ready to work together with womenand support their work. Even the male CONIMCHH leaders in the villages expressed strong support. Theprocess of consulting the women participants and letting them decide about which activities to carry outhad an impact on the men's attitude and increased their respect towards them. The men in the village ofCarrizal6n, for example, supported the women's work on ceramics and participated in building the fencearound the women artisans' workroom. Men in different villages accepted leadership and instructionprovided by the project promoter who was a woman.

12. Issues that needfurther attention for their impact on sustainability. Marketing is a key issue thatneeds further development to ensure that the pilot activities will last after the pilot ends including issuessuch as: how to find and keep a market for selling the products such as ceramics and candles; lack ofknowledge of how the market works; and the perception that it was enough to produce a product forpeople to buy it. There was no understanding of the concept of competitiveness, quality, or marketing.The women who participated in the pilot activities now have a better understanding of these issues. Therewas misunderstanding among certain women village leaders and members about what the pilot wouldprovide -- they expected to receive funds or to be paid for their participation in the training events.

Box 3: Women in the Village of La Pintada

In the village of La Pintada, a group of women who had been successfully working together toproduce their dolls decided to work on their own and compete with each other. Their competitionand misguided decisions about marketing resulted in the collapse of the sale of their products. Thisled them to decide to get back together to work as a group. The benefit was that they learned aboutthe importance of working and marketing together as a group. The women who produce soap in thecommunity of Cabainas have also realized that it is better for them to work together as a group.

In the meetings with representatives from different urban barrios and rural communities on February14-16, 2003 it became clear that the participants had expectations about the benefits of both theGENFUND pilot and the new project. The different possibilities for income-generating activitiesidentified by the exploratory process under the GENFUtND pilot led the participants (urban or ruralresidents) to believe that these activities (or other similar ones) would be part of the new project. Theyalso believed that the new project would be led by the same coordinator who was in charge of theGENFUND pilot and would benefit the same population. There is a need to communicate clearly andoften the project objectives, and to repeat in different settings the message about what the pilot projectwould and would not do. It is also important not to create additional expectations about future projects.

13. Gender Analysis. The following are gender-relevant issues that need to be taken into account indesigning the new project:

* The GENFUND Pilot worked primarily with women in response to gender specific needs identified bythe PROFUTURO Project. It followed a "women in development" approach of targeting and integratingwomen into the project activities.* Participation in the pilot activities has increased the women's awareness of their potential andimproved their self-esteem. It opened a new perspective to them of their value and possibilities forimproving their economic well-being and contributing to their household's welfare.

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a Women in Chorti communities are already mobilized and organized in women's groups although thesedo not threaten men's dominance in the movement. The groups' purpose is to address women's needs orto find additional income-generating activities for women, for example, in handicrafts (as artisans).a The gender division of labor and gender roles in the communities is still quite traditional: men workin agriculture and/or paid employment while women work at home. Even women's income-generatingactivities are performed as part of their domestic activities and usually at home. Girls perform householdtasks such as taking care of younger siblings, doing laundry and carrying water, while boys may helpfathers in farming.a GENFUND did change somewhat men's opinion about women's work and value but did not greatlyaffect the gender division of labor or gender roles. Even when men were or became positive towardswomen's income-generating activities, they did not change their gender roles to support women'sincreased workload.o There are almost no women among the village leaders and authorities-either in the patronatos or theMaya-Chorti councils-although a few women are leaders or representatives among the leadership of theCONIMCHH.

14. Advantages for Copdn Valley Project. The GENFUND pilot faced constraints and also tookadvantage of certain resources already available in the project area including:a An organized and mobilized population, functioning as communal groups as part of CONIMCHH;a Most villages have women's groups;o Local residents are very interested in participating and benefiting from the new project;- Local residents are very open to receiving training to produce goods and services and to learning aboutmarketing.including, farming and skills in

producing handicrafts such as ceramics, working with com husks, candle-making or wood carving;• Most men have a positive attitude towards women's income-generating activities; anda Some villages that initially decided not to participate in the activities now want to join.

15. Missing Services. All hotels and restaurants in Copan Ruinas buy eggs, vegetables, fish and meat inSan Pedro Sula. Most of these goods are produced in Guatemala. The transaction cost could be reduced iflocal enterprises produce these goods, but they need quality control, and supply and tax control to trustlocal producers. Services that are lacking include: local place to sample local fruits, juices, salads, andMayan food; books in English and/or Spanish compiling all Maya medicinal herbs or recipes; a place tofind Mayan herbs; a handicraft market on weekends in the Central Plaza to allow indigenous peoples andlocal residents to sell their goods-from handicrafts to sugarcane juice, fresh fruit juices, pineappleand/or banana pies, coffee tasting, Copan typical fruit non-alcoholic liqueur, Mayan recipes, hand madeice cream, fresh made tortillas and marimba and guitar music. This type of event could be negotiated withthe Municipality of Copan Ruinas.

16. Monitoring and Evaluation. The following indicators should be used and monitored:a Households' revenues at the beginning and end of the project;a Number of small enterprises created near sites (number of partners by gender, type of trained received,amount of money provided):

o Investments and transaction costsa Main clientsa Amount of salesa Periodic Revenues statements (3 months)

Small enterprises' niche and main activityo Number of enterprises legally established (taxes) - monitored every six months;o Number of international and national tourists at the beginning of project - monitored every 3 months;

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and* Average days of stay at the beginning of project - monitored every 3 months.

17. Project Risks. The main risks include:* Create false expectations in communities by not clearly explaining the rules, their rights andresponsibilities;* Not to create well-established small enterprises oriented to create a cultural change and increasehousehold's revenues;* Not to develop a private mentality and promote and enhance "clientelistic" attitudes amongcommunity people;* Not to provide a "private or marketing" meaning to the concept of "sustainability;"* Increase poverty instead of developing well-being and increasing people's revenues - if smallenterprises are not well designed;• Not to follow a balanced gender approach;* Not designing and executing a clear stakeholder participatory strategy;* Not designing an appropriate marketing strategy and not involving communities and local authoritiesin understanding it; and* Not designing a monitoring and evaluation system to keep IHT well-informed to make strategicbackstopping decisions.

Recommendations

18. The main recommendations of the social analysis are:* Facilitate entrepreneurial opportunities such as: (a) lodging and eating facilities near the tourist places;(b) rescue Maya Cuisine -- small funding could be provided to rescue basic Maya culinary tradition (thiscould be created through the organization of focus groups with Mayan women); (c) restaurants--there areno eating places near the tourist sites with gourmet Maya cuisine. Small, good ethnic restaurants could bepromoted using the small enterprise funding and arrangement with administrators of cafeterias located inthe parks could be reached.* Tourist guides. Expectations were raised regarding the training of guides to work for the Copan Parksince IHAH did not approve certifying or licensing the trained guides. To continue with this training, it ishighly recommended to negotiate in advance with IHAH to obtain their training support to ensurerequired standards are met.* Museum Specialists. Appropriate specialists are needed for technical advice regarding strategicdisplay of ceramics, lighting and use of the space in museums located in parks and sites. This support isalso needed to improve signs located along trails.* Simple and clear institutional arrangements to keep all key actors and stakeholders - such asMunicipalities, NGO's, community-based organizations, and private sector - on board. IHT must be theleader of this strategy.• Marketing strategies based on a sound market research.* In Copan, initiate an environmental campaign involving the municipality and private sector.• Involve students in re-forestation activities.* Prepare a pre-feasibility study to clearly identify areas and activities that could help households' toincrease revenues through small enterprise development.* Carry out short, but well-targeted customer satisfaction surveys. The target population is private sectorowners of hotels and restaurants and tourists. The main question could be: What would you recommendto improve tourist leisure and enjoyment in the area?

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Additional Annex 13: Non-governmental Organization ProfileHONDURAS: Regional Development in the Copan Valley Project

Asociaci6n Copan/Copan AssociationCasa Yaxna, Bo. El Centro; Copan Ruinas, Copan, Honduras, C.A.Tel. 504.651.4103, Fax: 504.651-4625 Email: [email protected] InformationFounding Date: July 31, 1990Type of Organization: Non-Profit Civil Society

Main Objective: To promote and support: (a) scientific research and conservation of Honduras' cultural and naturalheritage; (b) the dissemination of technical information on these issues; (c) capacity-building of Hondurans inAnthropology and other related sciences; and (d) the development of projects that stimulate the harmoniousinteraction between humans, their culture and the environment.

1. Research and Conservation Projects1.1 Rescue and Stabilization of the Copdn Acropolis Wall, October 1990 to June 1994. This unique projectconstituted of one of Latin America's biggest archeological monument stabilization works. The project savedremains of the structure that were nearly falling into the Copan River on one side and the 'Jaguar Plaza' on the other.Financing was provided mainly by the Honduran Fund for Social Investment (FHIS) in six stages with a total cost ofLpr 1,058,144.24.1.2 Construction of the Copdn Maya Sculpture Museum, May 1993 to March 1996. One of Copln Association'smain activities was the management, administration and supervision of this project. The museum represents theculmination of ten years of work in the rescue of sculptures of the Copan Archeological site. The building has fourthousand square meters on two levels. Most of the building's structure is underground so that it will not interrupt thenatural landscape. Inside the building is an exact replica of the Temple of Rosalila, around which 59 exhibits andover 3,000 pieces of sculpture are displayed. This project cost Lpr 6,245,443.00 and was financed mainly by thecentral government, but Copan Association realized a series of fundraising events to cover the remaining balance andguarantee its completion.1.3 Expansion.of the Maya Sculpture Museum, November 1995 to April 1996. Association Copan received acontract in the amount of Lpr. 309,828.17 from the Honduran Fund for Social Investment (FHIS) to speed up themuseum works inside the building and create replicas of the original sculptures of the archeological park.1.4 Expansion of the Maya Sculpture Museum Phase 2, April 1996 to October 1996. In order to inaugurate themuseum on time, FHIS financed a second phase of the museum's expansion. During this time a metallic protectivestructure was built over the original Temple of Rosalila and as well as a tunnel with glass windows to allow visitorsobservation.1.5 Management and Development Plan of the Archeological and Eco- Park of 'Los Naranjos,' May 1996 toNovember 1996. Copan Association received a Lpr. 185,070.00 contract with FHIS to undertake a feasibilityassessment and prepare a management plan to afford the Government of Honduras with a practical and efficientinstrument to direct the development of an Archeological and Eco-Park in Los Naranjos. The study was completedand presented to the Honduran Institute of Anthropology and History (IHAH) and FHIS.

2. Publications2.1 History Written in Stone: A Guide to the Archeological Park of Copdn Ruins. The guide with the largestcirculation on Copan Ruins, first published in 1992 and republished in 1998.2.2 Copdn and Tikal: Secrets of Two Maya Cities. Written in 1994 by Ricardo Agurcia and Juan Antonio Valdezand sponsored by 'Credomatic de Honduras.' The sale of this book was so successful that a second edition waspublished in 1995.2.3 Visions of the Maya Past. Published in 1996, this book was written by the main archeologists involved in initialexcavations since 1988 and explains about the Maya religion, culture and scientific knowledge.2.4 Video Version of 'Historv Written in Stone: A Guide to the Archeological Park of Copan Ruins.' Available inEnglish and Spanish, this video was first published in 1994 and then in 1997.2.5 Copan: A Brief History and Guide for the Young Visitor. Written by Maria Amalia de Agurcia and published in2002, it contains vivid and simple explanations on the Mayan heritage.

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3. Partnerships Cooperation with the Honduran Institute of Anthropology and History (IHAH): A Covenant ofCooperation with IHAH was established in which Copdn. Also, the association supports and cooperates with IHAHby developing high impact projects for cultural heritage.

4. The EnvironmentIn 1996, the Juan Agurcia Ewing Nature Fund was created in order to support environmental conservation and otherprograms aimed at the harmonious integration of humans and nature. The Fund supports research, protection anddissemination of Honduras natural patrimony. In the last few years, Copan Association has collaborated with'Cervecaria Hondurena, S.A.' and educational institutions of the town of Copan Ruinas in the implementation ofcommunity plant nurseries.

5. Other Activities5.1 International Archeological Conference. In July 2001, Copan Association in collaboration with IHAH and'Archeology Magazine' carried out the 'International Conference on Copln Ruins: Science, Art and Religion in theMaya World.' The goal of the conference, in which approximately 400 people participated, was to promote aprofessional multidisciplinary exchange between experts in the area.5.2 Scholarships. A scholarship was awarded to a local student to study Archeology in the University ofGuatemala. Currently, he is pursuing a Masters Degree in Archeology in the United States under a FullbrightScholarship. In 1997, another scholarship was awarded to another student to study Hotel Management and Tourism.

5.3 Project Copdn 2000. In 1999, a Covenant of Implementation was signed with the Honduran Council forScience and Technology (COHCIT) to carry out the Pre-Hispanic Heritage Subcomponent of the PROFUTUROProject, financed by the World Bank. The sub-project consisted of: (a) scientific environmental research in theCopan Valley; (b) training and capacity-building for local scientists and technicians; (c) educational activities forchildren/youth on Maya culture through interactive exhibits; and (d) a program of integration of the local populationwith the region's cultural resources.5.4 Copdn Maya Foundation. This Foundation was created in 1999 in California, United States with the goal ofhelping to channel funds from the U.S. to projects in Copan, among them a children's museum (Casa K'inich), theManagement Plan for the Copan Archeological Park and a conference room.5.5. Instructional Museum 'Casa K'inich.' Inaugurated in February 2003, this interactive children's museum aim isto educate and increase awareness about the Maya Civilization and its importance in Honduras' cultural andhistorical heritage. The museum's main themes are: man and the environment, Maya science and technology,including their writing system, math, astronomy, architecture, art, sports, religion, and government. The project wasfinanced by the World Bank (under the PROFUTURO Project) and COHCIT.

Board of Directors 2002-2006President: Jorge Bueso AriasVice-President for Technical Issues: Ricardo Agurcia F.Vice President for Administrative Issues: Angel Castillo GaloSecretary: Eileen AgurciaTreasurer: Fernando Fiallos FasquelleFiscal: Cristiana Nufio de FigueroaPrincipal Members: Cesar Batres G., Mario Galeano B., Marco A. Rietti, Rene VielDeputy Members: Vicente Williams, Maria Antonieta de Bogran, Carlos Gonzales 0

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Report No.: 25798 HOType: PAD