Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-6740-HO MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED PUBLIC SECTOR MODERNIZATION TECHNICAL ASSISTANCE CREDIT (PSMTAC) IN THE AMOUNT OF SDR 6.4 MILLION (US$9.6 MILLION EQUIVALENT) TO THE REPUBLIC OF HONDURAS JANUARY 19, 1996 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EOUIVALENTS Currency Unit: Lempira (L) US$1 = L 9.9 (November 1995) SDR 1 = US$1.50374 (October 31, 1995) FISCAL YEAR January 1 to December 31 LIST OF ACRONYMS AND ABBREVIATIONS CCP Comisi6n Consultiva de Privatizaci6n (Consultative Commission for Privatization) CIRHE Comisi6n Interinstitucional para los Recursos Humanos del Poder Ejecutivo (Interinstitutional Comm. for Human Resources in the Executive Branch of Gov't) CPME Comisi6n Presidencial de Modemizaci6n del Estado (Presidential Commission for the Modernization of the State) DGP Direcci6n General de Presupuesto (Budget Directorate or Budget Office) DGID Direcci6n General de Instituciones Descentralizadas (Decentralized Institutions Directorate of SHCP) DGSC Direcci6n General de Servicio Civil (Civil Service Directorate) EDUCREDITO Instituto de Credito Educativo (Education Credit Institute) ENP Empresa Nacional Portuaria (National Ports Enterprise) FHIS Fondo Hondurefio de Inversi6n Social (Honduran Social Investment Fund) GOH Government of Honduras HONDUTEL Empresa Hondurefia de Telecomunicaciones (Honduran Telecom. Enterprise) IDA International Development Association IDB Inter-American Development Bank IHCAFE Instituto Hondurefio del Cafe (Honduran Coffee Institute) IHSS Instituto Hondurefio de Seguridad Social (Honduran Social Security Institute) IMF International Monetary Fund INFOP Instituto Nacional de Formaci6n Profesional (National Institute of Professional Formation) JNBS Junta Nacional de Bienestar Social (National Board for Social Welfare) MIF IDB's Multilateral Investment Fund NFPS Non-Financial Public Sector PANI Patronato Nacional de la Infancia (National Children's Organization) PCU Project Coordinating Unit PPF Project Preparation Facility PSMP Public Sector Modernization Program PSMSAC Public Sector Modernization Structural Adjustment Credit PSMTAC Public Sector Modernization Technical Assistance Credit SDR Special Drawing Rights SECOPT Secretaria de Comunicaciones, Obras Publicas y Transportes (Secretariat of Communications, Public Works, and Transport) SEP Secretaria de Educacion Publica (Public Education Secretariat) SHCP Secretaria de Hacienda y Credito Piublico (Secretariat of Finance and Public Credit) SRN Secretaria de Recursos Naturales (Secretariat of Natural Resources) SSP Secretaria de Salud Publica (Secretariat of Public Health) FOR OFFICIAL USE ONLY HONDURAS PUBLIC SECTOR MODERNIZATION TECHNICAL ASSISTANCE CREDIT (PSMTAC) CREDIT AND PROJECT SUMMARY Borrower: Republic of Honduras Executing Agencies: The Executive Secretariat of the Presidential Commission for the Modernization of the State (CPME), and the Secretariat of Finance and Public Credit (SHCP) assisted by the Consultative Commission for Privatization (CCP) Beneficiaries: Executive Secretariat of the CPME, SHCP, other Central Government Secretariats, and Decentralized Institutions Poverty Category: Not applicable Credit Amount: SDR 6.4 million (US$9.6 million equivalent) Terms: Standard IDA terms, with 40-year maturity including 10 years of grace Commitment fee: 0.50% on undisbursed credit balance, beginning 60 days after signing, less any waiver Financing plan: See Schedule A Net present value: Not applicable Staff Appraisal Report: Not applicable IDA Project ID: HN-PA-34607 Map: IBRD 26280 |This document has a restricted distribution and may be used by recipients only in the performance of their| |official duties. Its contents may not otherwise be disclosed without World Bank authorization.l I - TABLE OF CONTENTS BACKGROUND .1........... .1 PROJECT OBJECTIVES AND DESCRIPTION .2 PRIVATE SECrOR PARTICIPATION IN PUBLIC SERVICES COMPONENT ......................................................2 ADMINisTRATIvE REFORM .......................................................................................4..............................4 Institutional Restruc turing Component .............................4 Honduran Social Security Institute and Social Security System Component .4 PUBLIC MANAGEMENT REFORM ...........................................................5....................................S Human Resource Management Component ...........5 Integrated Fnancial Management and Investment Programming Component ...........5 Public Procurement Component ...........6 PROJECT COORDINATION ............................................................6.................................... 6 PROJECT COST AND FINANCING ............6 PROJECT IMPLEMENTATION ARRANGEMENTS ............7 REPORTING AND MONITORING ............8 LESSONS LEARNED FROM PAST OPERATIONS ............8 RATIONALE FOR IDA INVOLVEMENT ............8 AGREED ACTIONS ............8 ENVIRONMENTAL ASPECTS ............9 PARTICIPATORY APPROACH ..............9 PROGRAM OBJECTIVE AND POVERTY CATEGORIES ............9 SUSTAINABILITY ............9 PROJECT BENEFITS ............9 RISKS .................................................................... 10 RECOMMENDATION ..................................................................... 10 SCHEDULE A: ESTIMATED COST AND FINANCING PLAN ...................................... A-1 SCHEDULE B: PROCUREMENT AND DISBURSEMENT ARRANGEMENTS ........... B-1 SCHEDULE C: TIMETABLE OF KEY PROCESSING EVENTS ................................... C-1 SCHEDULE D: STATUS OF IBRD AND IDA OPERATIONS IN HONDURAS ............. D-1 SCHEDULE E: STATEMENT OF IFC INVESTMENTS .................................................. E-1 MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED PUBLIC SECTOR MODERNIZATION TECHNICAL ASSISTANCE CREDIT (PSMTAC) TO THE REPUBLIC OF HONDURAS 1. I submit for your approval the following memorandum and recommendation on a proposed Public Sector Modernization Technical Assistance Credit (PSMTAC) in the amount of SDR 6.4 million (US$9.6 million equivalent) to the Republic of Honduras. The PSMTAC would be on standard IDA terms. This is an accompanying project to the pro- posed Public Sector Modernization Structural Adjustment Credit (PSMSAC) that is being processed in parallel. Both the proposed PSMTAC and the PSMSAC will be co-financed by the IDB. (The IDB operations were approved on December 20, 1995.) Background 2. The reform program being supported by the proposed PSMSAC and accompany- ing PSMTAC, emerged from policy discussions with the previous Government (Callejas Administration) in June and October 1992, following the completion of a World Bank study on Prospects for Public Sector Reform (Report No. 10318-HO). 3. Stabilization and structural adjustment measures began in 1990. The program, supported by the 1990 IMF stand-by agreement, was designed to reduce fiscal irnbalza-'- and increase private sector participation in the economy. The economy reacted positiveiy to the reform: from no growth in 1990, growth resumed to 5.6 percent in 1992 driven bv expansion of manufacturing and construction, and inflation fell to 8.8 percent in 1992 frtmn its 1991 peak of 34 percent. The fiscal deficit, meanwhile, fell from 6.0 percent in 1995 tio 4.8 percent of GDP in 1992. 4. In 1993, however, the Government, anticipating electoral defeat. lost fiscal disci- pline. The economy continued to expand (at 6.1 percent) in 1993 but the deficit of ':t non-financial public sector (NFPS) more than doubled to 10.7 percent of GDP, as cern-.rI. government increased current spending by 2.3 percent and capital spending by 3.3 perce-ri, All this served to show the depth of structural weaknesses in the public sector, inc!udinr the lack of spending controls and the politicization of the budget process. 5. In response to the fiscal crisis, the Reina Administration, which took office iM. January 1994, is implementing a comprehensive Public Sector Modernization Program (PSMP) aimed at reducing the size and improving the efficiency of the public sector. To ensure the feasibility of the proposed reforms and improve its capacity for implementation, the Government is seeking IDA and IDB financial and technical support through a PSMSAC and a complementary PSMTAC. 2 Project Objectives and Description 6. The PSMSAC and PSMTAC operations are designed to help the Government im- plement its PSMP. The PSMP, based on a profound rethinking of the role of the State in the economy, aims at (a) increasing private sector participation in the delivery of public services, (b) curtailing expenditures through an administrative reform which will restruc- ture public institutions and employment, and (c) improving public management to enhance efficiency, transparency, and accountability. 7. The objectives of the proposed PSMTAC are to provide (a) policy formulation support that the Government needs to design reforms under its PSMP, (b) implementation support to develop the means and information necessary for the reform process and to comply with the conditions and action plans under the PSMSAC, and to modernize human resource management, financial management and public procurement systems, and (c) in- stitutional strengthening support to the entities that will be beneficiaries of these manage- ment systems. A PPF advance of US$0.7 million (P842-HO) has been supporting start-up activities of this program. 8. The main tools of the project are the following: (a) development of strategies to enhance the institutional and organizational framework; (b) design of laws, regulations, methods and procedures; (c) design and implementation of macro management systems; and (d) training of technical staff in the regulatory, institutional and operational aspects of the reform. The areas to be covered under the PSMTAC are: Private Sector Participa- tion in Public Services, Administrative Reform, and Reform of Public Management. 9. The proposed credit will finance international consulting firms, short-term interna- tional consultants, short- and long-term local consultants, systems development, hardware and software, and training. Section A of the Technical Annex provides a detailed project description and Section B discusses project administration and implementation arrange- ments. Schedule 1, the matrix of key project activities, summarizes objectives, activities, expected outputs and impacts, institutional arrangements and responsibilities, timing tar- gets, and links to the PSMSAC. Draft basic implementation plans for the project compo- nents are available in the Project File. Private Sector Participation in Public Services Component (US$3.8 million, 23.5% of project costs)' 10. The PSMTAC will provide assistance to carry out PSMSAC-supported reforms in the telecommunications and civil aviation sectors, and will help the Government de- velop a reform strategy for the ports sector. 11. Telecommunications. On October 31, 1995, Congress passed the new Framework Law for the Telecommunications Sector and amendments to the Hondutel2 Organic 1 Figures in parentheses represent the estimated base cost of the component, including IDA and IDB- financed assistance, and Government contribution. 2 The state telecommunication company. 3 Law-a condition for PSMSAC Board presentation. Consultants financed under the PPF assisted the Consultative Commission for Privatization (CCP) in preparing the strategy for increasing private sector participation, competition and efficiency in telecommunications. The PSMTAC will finance the following activities: (a) marketing of the transaction; (b) design of investment and quality of service obligations by new operator(s), (c) inventory and valuation of assets/liabilities, (d) audit and restatement of financials in the US Interna- tionally Generally Accepted Accounting Principles; (e) financial projections of the new Corporation(s); (f) preparation of the preliminary financial value of the new company(ies); (g) preparation and negotiation of legal documents of the transaction; (h) international bidding process; and (i) a small technical group to manage sector reform. 12. Civil Aviation. The project will build on the work initiated under the IDA-assisted Transport Rehabilitation Project (Cr. 2458-HDS) in restructuring the civil aviation sector. The Civil Aviation Law and the Law for the Honduran Enterprise of Airports and Air Navigation Services were presented to Congress in October 1995 - a condition for PSMSAC Board presentation. These laws incorporate the Government's strategy for re- structuring the sector. They call for the creation of an appropriate regulatory framework, decentralization of enterprise airport management, and a substantial increase of private sector participation in airport management. The PSMTAC will finance the following ac- tivities: (a) preparation of rules and regulations of the Civil Aviation Law and the Law for the Honduran Enterprise of Airports and Air Navigation Services, (b) creation of an autonomous normative regulatory entity, (c) creation of a public enterprise to operate air- ports and air navigation services, (d) extension of concessions to private operators for commercial services, (e) development of norms for selection and recruitment of staff, and (f) training of technical and administrative staff.3 13. Ports. The PSMTAC will finance assistance to (a) prepare a study that will evalu- ate different options for increasing private sector participation in ports operations and its impact on the publicly owned ports entity, ENP; (b) develop policies and define the par- ticipation of private operators in Puerto Cortes and other ports, (c) define the institutional role of the ENP, (d) advise on restructuring ENP, and (e) develop mechanisms for the participation of private operators. 14. In addition, the IDB will provide complementary technical assistance to this com- ponent through its Multilateral Investment Fund (MIF), to (a) establish new regulatory frameworks for the sectors, (b) strengthen the regulatory capabilities of autono- mous/independent entities, and (c) strengthen the regulation functions of a multisectoral entity. Specifically on telecommunications, MIF will finance technical assistance to de- velop the legal framework and regulations, and the establishment of an independent and financially autonomous regulatory entity, CONATEL. 3 Recently, Congress approved the Ley de Concesi6n para la Explotaci6n de los Servicios Aeropor- tuarios (Concession Law for the Exploitation of Airport Services) which authorizes the Executive Branch, (the President) through SECOPT, to extend concession contracts to manage, administer, develop and commercially develop the airports of Honduras. If Congress does not approve the Civil Aviation Law and the Law for the Honduran Enterprise of Airport and Air Navigation Services, then this sub-component will need to be reformulated. 4 Administrative Reform 15. Institutional Restructuring Component (US$2.1 million, 13.2% of project costs). The objectives of this component are to prepare and implement institutional re- structuring plans in priority/selected entities, strengthen the capabilities of selected entities in policy design and implementation, and develop a consistent legal framework. With as- sistance from consultants financed under the PPF, institutional restructuring plans, includ- ing employment reduction targets, have been developed for all the central government Secretariats covered under the PSMP, and a number of Secretariats have begun imple- menting them. Plans have been approved for restructuring some decentralized institutions and implementation has begun. A set of actions agreed in four line Secretariats (education, health, natural resources, and communications, public works and transport), central Secre- tariats (economics and finance), and social services institutions (National Board for Social Welfare/National Children's Organization (JNBS/PANI)) have been incorporated into government action plans. The benchmarks established therein will be used to judge com- pliance under the PSMSAC. PPF-financed consultants helped also to prepare a new Gen- eral Law of Public Administration, which establishes the new structure and composition of the central and decentralized administrations, develops the bases for further administrative reform, and establishes standards of transparency and accountability for public manage- ment. The Law was recently presented to Congress - a condition for PSMSAC Board presentation. The PSMTAC will finance the following activities: (a) formulation of insti- tutional restructuring plans in additional targeted entities, (b) assistance in implementing the institutional restructuring reforms in priority entities, (c) strengthening of the technical capacity of the entities in designing and implementing priority programs, including IDB- financing of technical assistance for strengthening environment units in selected central government Secretariats and Decentralized Institutions, (d) updating of other legal instru- ments as necessary, and (e) provision of appropriate office technology. 16. Honduran Social Security Institute and Social Security System Component (US$1.1 million, 6.6% of project costs). This component will support specific actions needed to avoid short-term insolvency of the Honduran Social Security Institute (lIHSS) and allow sufficient time to develop a longer term strategy for the sector and its links with the reform in the health sector. With assistance from PPF-financed consultants, the Gov- ernment prepared an actuarial-financial study with recommended actions to increase the salary ceilings to social security contributions. Moreover, a computerized system of regis- tered users of IHSS and a program to improve financial and administrative management of ,he Institute were designed. To continue these efforts, the PSMTAC will finance the fol- lowing activities: (a) development and implementation of a computerized system for IHSS in areas of programming and budgeting, accounting, collections and payments, inventories, current accounts of beneficiaries and contributors, and management, (b) updating of IHSS' accounts and affiliate registry, and (c) training of administrators and technical staff of TITSS. As to developing a social security system strategy, the PSMTAC will finance (a) a diagnostic review of the pensions system and provision of health services, (b) cost analysis of the current system and possible future social security schemes, and (c) preparation of strategies for (i) reform of pensions and health systems, and (ii) the development of a sys- tem of professional risk insurance. 5 Public Management Reform 17. Human Resource Management Component (US$2.5 million, 15.4% of proj- ect costs). This component will strengthen the central government's technical capacity to monitor and control human resource levels, composition, pay, and appointments in all central government Secretariats and Decentralized Institutions, and improve the employ- ment and salary regimes at the normative, institutional and operational levels. Actions be- ing supported under the PSMSAC are detailed in a government action plan. The bench- marks established therein will be used to judge compliance under the PSMSAC. With as- sistance from PPF-financed consultants, the Government designed and is developing a human resource management system for the civil service. Diagnostic work of the Civil Service and teachers' employment and salary regimes was also carried out. The PSMTAC will finance the following activities: (a) the systematic monitoring of payrolls of all public sector employment and salary regimes of the Executive, (b) establishment of a permanent system for employment censuses and payroll audits, (c) completion of the implementation of a comprehensive human resource management and payroll system, linked to the budget, which will encompass the civil service, neighboring regimes of the central government in- cluding medical doctors, and all decentralized institutions,4 and extend the system to all Secretariats and at least four decentralized institutions, (d) development of a strategy for improving the civil service regime at the normative, institutional and operational levels, (e) development of a new post classification and grading system, salary structure and incen- tives plan for the civil service, (f) development of a modern human resource policy, includ- ing recruitment and selection criteria; (g) amendments to the civil service law, as neces- sary; (h) institutional strengthening of DGSC and the central government Secretariats in human resource management, (i) assistance to the Secretariat of Education to assess teacher requirements, and (j) assistance to the Secretariat of Health in evaluating human resource supply, training, development, deployment and performance in the health sector. 18. Integrated Financial Management and Investment Programming Compo- nent (US$4.9 million, 30.2% of project costs). The objective of this component is to develop a modern system of public financial management and investment programming. Start-up activities have begun with consultants financed under the PPF. Actions being supported under the PSMSAC are detailed in a government action plan. The benchmarks established therein will be used to judge compliance under the PSMSAC. The PSMTAC will finance the following activities: (a) development and implementation of an integrated financial management system (accounting, treasury, budget and public debt), linked with human resource administration and payroll, (b) further development and implementation of an investment programming system, building on the assistance already provided by IDB and UNDP, (c) design and development of modern methods and procedures to support fundamental financial management functions, (d) development of a strategy to en- hance/reorder the institutional setting and organizational framework of financial manage- ment and investment programming, and (e) training of technical staff to develop or 4 The system for the Secretariat of Education will be financed under the Basic Education Project (Cr. 2694-HO). 6 strengthen the financial management units in each public entity and investment program- ming units within dependencies and entities responsible for the bulk of public investment. 19. Public Procurement Component (US$0.5 million, 2.9% of project costs). The objective of this component is to establish a modern decentralized system of public pro- curement that will allow decentralization of decision-making processes and promote com- petition. PPF-financed consultants helped prepare amendments to the Public Procurement Law aimed to provide a sound basis for institutional changes. The October 1994 Law of Restructuring of Public Sector Revenue Mechanisms and Expenditure Reduction stripped the Central Procurement Office of all operative functions and transformed it into a small normative unit. The PSMTAC will finance the following activities: (a) development of clear and transparent administrative procedures and establishment of the methodologies needed to carry out an adequate register, organization and control of the operations within the new legal framework, (b) development of norms for the selection of technical staff, training on operational procedures and strengthening of the centralized and decentralized entities responsible for procurement and bid evaluation, (c) development and implementa- tion of coordination mechanisms and communication systems among units responsible for procurement and bid evaluations, and (d) seminars on the legal-institutional framework and its incidence on operative procedures. 20. Project Coordination (US$1.3 million, 8.2% of project costs). The PSMTAC will finance a Project Coordinating Unit (PCU) in the Executive Secretariat of the Presi- dential Commission for the Modernization of the State (CPME) that will be responsible for supporting execution and monitoring progress under the project. It will also support the carrying out of the Government activities associated with the incremental operating costs of the PSMTAC. The PCU will be headed by a National Director (the Minister of the Presidency and Executive Secretary of the CPME), and will be staffed with a Project Coordinator and five professionals. The Unit also will have a budget to finance short-term consultant services, training and office technology equipment. Moreover, the PSMTAC will finance an information and consensus-building campaign, which will include consult- ing services, seminars and workshops, publications, and office technology equipment. Project Cost and Financing 21. The PSMTAC will finance consultant services, equipment and training. Total costs for the technical assistance program are estimated at US$16.7 million equivalent. The IDA Credit will finance US$9.6 million, and the IDB loan will finance another US$5.0 million. The Government contribution will be US$2.1 million, primarily to finance counterpart staff, training support costs, office space, supplies, secretarial services, and vehicle opera- tion. Detailed cost estimates and the financing plan are shown in Schedule A. Procurement and disbursement tables are provided in Schedule B. A timetable of key processing events and the status of World Bank operations in Honduras are provided in Schedules C and D. A statement of IFC investments is provided in Schedule E. 7 Project Implementation Arrangements 22. Overall project coordination of the PSMTAC will be the responsibility of the Ex- ecutive Secretariat of the CPME, in association with the Council of Ministers (headed by the President of the Republic) and the Technical Secretariat of the Economic Cabinet. The CPME has been building a track record by successfully managing activities under the PPF and no other entity in Honduras has this type of experience implementing technical assis- tance. To strengthen its capacity, the Executive Secretariat of the CPME will receive as- sistance under the PSMTAC. The day-to-day management of the project will be the re- sponsibility of a National Director who will head the PCU. The PCU will depend directly from the Executive Secretariat of the CPMIE and will be supported by a small staff, includ- ing a Project Coordinator, an accounting/financial administrator, a procurement officer, three technical staff, and a network of technicaUcoordination units for each of the project components. These specialized technical/coordination units will be headed by a coordina- tor reporting to the National Director and assisted with short-term technical assistance. In the case of privatization, the Executive Secretary of the Consultative Commission on Pri- vatization will serve as the head of the Technical/Coordination Unit for the Private Sector Participation in Public Services Component; the bidding and contracting for this compo- nent will be the responsibility of SCHP. 23. The Executive Secretariat of the CPME (supported by the PCU) and the Secretar- iat of Finance and Public Credit (SHCP), supported by the CCP, will be responsible for contracting of consultants, as well as for the acquisition of equipment. The Executive Sec- retariat of the CPME could, however, delegate these responsibilities to the implementing entities. All actions related to the execution of the Private Sector Participation in Public Services Component under the responsibility of SHCP will be transmitted to IDA through the CPME. 24. Each beneficiary entity will select candidates for consulting services, designate a project manager who will serve as the counterpart for the monitoring and coordination of the reform, actively participate in the design of the reform, and be ultimately responsible for its implementation. This will ensure that the entities develop ownership of the reform and gain sufficient autonomy and experience in the process of design and implementation. The project manager will be the counterpart for supervision purposes. However, as the number of public entities benefiting from the project will be large, the final responsibility for ensuring that activities are carried out properly will lie with the project manager in the head of each sector, who will coordinate the activities of the dependent entities. The IDB Field Office in Tegucigalpa will play a substantive role in supporting and monitoring the implementation of the PSMTAC. One short-term international consultant to help monitor the program will be hired under the project. Reporting and Monitoring 25. Project monitoring will be the responsibility of the PCU. The PCU will be respon- sible for (a) preparing semi-annual progress reports (to be submitted to IDA not later than 8 March 31 and September 30 of each year), (b) jointly with IDA, carrying out annual re- views of implementation of the agreed basic implementation plans in each of the compo- nents, and (c) carrying out with IDA, not later than in December 1997, a mid-term review to assess overall progress in project implementation. Lessons Learned from Past Operations 26. The preparation of the proposed project is benefiting from LAC experience in project design and implementation of TA operations for public sector modernization. The proposed PSMTAC will (a) draw on specific but adaptable basic implementation plans and annual work programs for each component that are focused on outputs, define evaluation criteria and performance indicators to judge project progress, and identify pre- conditions for successful implementation; (b) establish criteria to improve administration of the project, especially with regard to procurement; and (c) emphasize the counterpart responsibilities of the beneficiary agencies and, in particular, staffing of key positions. Rationale for IDA Involvement 27. The PSMP, to be supported by the proposed PSMSAC and PSMTAC, is consis- tent with the Bank Group's country assistance strategy, discussed by the Board on August 5, 1993 and the Policy Framework Paper (January 17, 1995), which identify public sector reform as the next major area to be tackled by the Government. The size of the public sector, its inefficiency, and weak institutional capacity are major constraints to Honduras' medium-term growth prospects. The proposed PSMTAC is essential to the success of the PSMSAC, the centerpiece of the Bank's current work in Honduras. Moreover, the PSMTAC will provide the technical assistance needed to strengthen the Honduran public administration. Agreed Actions 28. During negotiations, the Government provided assurances that it will: (a) main- tain, until completion of the project, a PCU with functions and responsibilities satisfactory to IDA, including, inter alia: (i) coordination of the implementation of the project, (ii) monitoring and evaluation of the project, (iii) preparation of progress reports, and (iv) processing of documentation required for the procurement of goods and consultants' services under the project and for the disbursement of Credit proceeds; (b) ensure that the PCU is at all times staffed with full-time professionals with functions and responsibilities satisfactory to IDA, in adequate numbers and with qualifications and experience satisfac- tory to IDA; (c) prepare, through the PCU, semi-annual progress reports and, jointly with IDA, carry out annual reviews of the agreed basic implementation plans in each of the components; and (d) carry out with IDA, not later than December 1997, a mid-term re- view to assess overall progress in project implementation. As part of the negotiations of the PSMSAC, the Government agreed on the content and text of a Letter of Develop- ment Policy (Annex A). The Letter provides an overview of the efforts that the Govern- ment is making in developing and implementing a consistent program of macroeconomic 9 stabilization and public sector modernization, and requests the assistance of the World Bank Group through the PSMSAC and the related PSMTAC. 29. Conditions for Credit effectiveness are the following: (a) the PCU will be estab- lished and staffed in a manner satisfactory to IDA, and (b) the Basic Implementation Plan, agreed in principle during negotiations, will be issued and adopted by the Government; the plan will consist of (i) basic implementation programs for each project component, includ- ing work programs for the first year of activities as well as evaluation criteria and per- formance indicators, and (ii) a strategy for information systems under the project. Environmental Aspects 30. The project is classified as Category C with no adverse environmental impact an- ticipated. Participatory Approach 31. The Government has attached great importance to the PSMP. The CPME and its Executive Secretariat were created in 1992 with the legal authority to design, coordinate, and monitor the execution of the reform. The CPME is a body with representation of all sectors of society, including political parties and the private and public sectors. The PSMP has the support of both the executive (approval of the Council of Ministers) and legislative branches. On September 7, 1993, the CCP was established by Congressional decree (Decreto 03-93). The Law of Restructuring of Public Sector Revenue Mechanisms and Expenditure Reduction of October 28, 1994 (Decreto 135-94), requested the Executive to formulate its privatization strategy for Hondutel. Private sector initiatives have been dis- cussed with the private sector. Program Objective and Poverty Categories 32. The applicable program objective categories for this project are economic man- agement and private sector development. This project does not have a poverty focus. Sustainability 33. The PSMTAC is associated with the Government's PSMP. The program, sup- ported by the PSMSAC/PSMTAC, is expected to generate permanent fiscal savings in the order of 3 percent of GDP. The important legal and institutional reforms already intro- duced and those being implemented during the ongoing modernization process, are creat- ing an adequate environment that has substantially improved the conditions for sustaining the fiscal effects and economic gains being derived from the program. Project Benefits 34. The proposed project will assist the Government improve significantly the man- agement of its economy in a fiscally sustainable manner. The project seeks primarily to assist the Government define the proposed actions under the PSMP and implement the 10 reforms under PSMSAC. It supports also the strengthening of the Honduran public ad- ministration designed to allow the Government to sustain the reforms. Moreover, the re- form program will support private sector development through the transferring of struc- tures and functions that would be better served by that sector. 35. Moreover, the project will contribute to the modernization of human resource management, financial management and procurement. In human resource management, the project will develop mechanisms for human resource administration and expenditure con- trol in an integral fashion. In the area of financial management, the project will build ac- countability in financial management and investment programming. In procurement, the project is expected to build transparency and promptness in public procurement through decentralization of the public procurement function and promotion of competition. All these should result in a more efficient and responsive public management and an improved allocation and use of public resources. Risks 36. The proposed credit will face two potential risks. First, the Government's priorities with regard to the specific technical assistance activities might change over time, especially since during the life of the PSMTAC there will be a change of Administration. To lower this risk, the Government agreed that basic implementation programs for each of the proj- ect's components would be a condition for effectiveness of the proposed credit. Second, the Government does not have enough experience in implementing this type of complex programs. To lower this risk, the project will have a strong and well-staffed PCU with adequate resources supported by short-term experts. The PPF will provide financing of key posts until project effectiveness. Moreover, the World Bank and the IDB will provide implementation support with special participation of IDB's resident mission in Teguci- galpa. Recommendation 37. I am satisfied that the proposed credit would comply with IDA's Articles of Agreement and recommend that the Executive Directors approve it. James D. Wolfenson President Attachments Washington, D.C. January 19, 1996 Schedule A HONDURAS PUBLIC SECTOR MODERNIZATION TECHNICAL ASSISTANCE CREDIT Estimated Costs and Financing Plan (USSlhousand) Foreign Local Total Estimnated Costs PRIVATE SECTOR PARTICIPATION IN PUBLIC SERVICES COMPONENT 2,402.2 1,403.2 3,805.4 ADMINISTRATIVE REFORM InstitutionalRestructuring Component 991.0 1,153.6 2,144.6 Honduran Social Security Institute and Social Security System Component 713.0 358.0 1,071.0 PUBLIC MANAGEMENT REFORM Human Resource Management Component 1,277.1 1,224.9 2,502.0 Integraded Financial Management & Investment Programming Component 3,015.0 1,878.4 4,893.4 Public Procurement Component 195.5 276.7 472.2 PROJECT COORDINATION 323.4 1,003.8 1,327.1 TOTAL BASE COSTS 8,917.2 7,298.6 16,215.7 CONTINGENCIES 211.6 173.2 384.8 IDB LOAN INSPECTION & SUPERVISION a! 49.5 TOTAL PROJECT COSTS 9,128.8 7,471.7 16,650.0 Financing Plan IDA 6,402.2 3,197.8 9,600.0 IDB 2,776.1 2,223.9 5,000.0 GOH 2,050.0 2,050.0 TOTAL 9,178.3 7,471.7 16,650.0 a/ Inspection and supervision fee charged by the IDB on its loans. Schedule B HONDURAS PUBLIC SECTOR MODERNIZATION TECHNICAL ASSISTANCE CREDIT A. Procurement Arrangements (US$ million) Procurement Methods NBF a/ Category ICB NCB Other IDB GOH TOTAL Goods 0.4 2.0 1.0 3.4 (0.4) (2.0) b/ (2.4) Consultancies c/ Studies and Technical Assistance -- 6.6 3.7 10.3 (6.6) (6.6) Training -- 0.6 0.2 0.8 (0.6) (0.6) Operating Expenditures - 2.1 2.1 IDB Inpsection and Supervision 0.1 0.1 TOTAL 0.4 9.2 5.0 2.1 16.7 (0.4) (9.2) (9.6) a/ Non-Bank financing. b/ Procurement under Limited International Bidding (LIB). c/ Contracting of consultants in accordance with IDA's Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency (August 1981). B. Disbursement Arrangements Category Amount (US$ million) Goods 2.2 100% of foreign expenditures, 100% of local expenditures (ex-factory cost) and 93% of local expenditures for other items procured locally Consultants'Services and Training 6.5 100% Refunding of PPF 0.8 Amount due Unallocated 0.2 Total 9.6 Estimated Disbursements (US$ million) Bank FY 1996 1997 1998 1999 2000 Annual 1.7 3.0 2.7 1.5 0.7 Cumulative 1.7 4.7 7.4 8.9 9.6 Schedule C HONDURAS PUBLIC SECTOR MODERNIZATION TECHNICAL ASSISTANCE CREDIT Timetable of Key Processing Events (a) Time taken to prepare: 1 year, 4 months (b) Prepared by: SHCP, CPME with IDA assistance (c) First IDA mission: June 1994 (d) Appraisal mission departure: June 1995 (e) Negotiations: November 1995 (f) Planned date of effectiveness: March 1996 (g) Relevant PCRs/ICRs and PPARs None SCHEDULE D STATUS OF BANK GROUP OPERATIONS IN HONDURAS A. STATEMENT OF BANK LOANS AND IDA CREDITS (As of September 30, 1995) Of which SECALs. SAL,. and Progr. Loans Ln. 2990-HIDS 1 989 Honduras Structural Adjustment 50.00 Cr. 2208-HDS 1991 Honduras Structural Adjustment 20.00 Ln.3257-HDS 1991 Hondura Structural.Adjustment.I 90.00 Cr. 230d-1-HDS 1992 Honduras Energy Sector Adjustment 31.50 Cr. 2306-2-HDS 1 993 Honduras Energy Sector Adjustment 33.08 Subtatsl 140.00 84.50 Ln. 2421-HIDS 1984 Honduras Water Supply and Drainage 19.60O 2.17 Ln. 2703-HIDS 1986 Honduras Third Industrial Credit 35.10 1.69 Ln. 2804-HIDS 1987 Honduras Rural Primary Education 4.40 0.21 Cr. 2308-HDS' 1992 Honduras Energy Sector Structural Adjustment 50.60 18.92 *' Cr. 2401-HIDS 1992 Honduras Social Investment Fund II 10.20 0.94 t- Cr. 241 7-HIDS 1993 Honduras Morazan Darn Emnergency 12.00 0.04 ' Cr. 2452-HIDS 1993 Honduras Nutrition and Health 25.00 12.57*- Cr. 2458-HDS 1993 Honduras Transport Sector Rehabilitation 65.00 57.78 *- Cr. 2540-HDS- 1 994 Honduras Agricultural Sector Adj. Credht 60.00 22.00 *- Cr. 2540-2-HIDS- 1995 Honduras Agricultural Sector Credit 26.30 0.52 *- Cr. 2693-lIDSsa> 1995 Honduras Environment Development 10.80 11 .05 * Cr. 2694-lIDS a> 1995 Honduras Basic Education 30.00 30.47 *- Cr. 2766-HDS a> 199fi Honduras Social Investment Fund III 30.00 28.53 *- Sub-totel 59.10 319.90 184.89 Total 693.91 537.39 Of which has been nepaid 353.89 15.19 Total now held by Bank and IDA 340.02 553.89 Amount sold: 4.46 Of which has been repaid: 4.46 Total Undisbursed 4.07 180.82 184.899 a > Not yet effective. tSAL, SECAL, or Program Loan. *-Difference due to exchange rate fluctuations between SDR and USS. MdeS: LA2CO File: NA:MdeSilva\disbur eehonduras\HN-09-95 xIs October 27, 1995 Schedule E ONC)WRAS STATEXSS 0o lFC mnsTmorrs As of September 30, 1995 (Il XMilliona US Dollars) - Original Gros Commitents - Held sold Oo"b Fiscal Years TeC oyc by by iccl. Ca--4tt-d Obligor Type of Busirsas Loan equily Ptprc. Totals ZPC Ptpot. Prtpt. 1964/66 a/ 2rm -sa du C=rtidos Cantr manufacturing .21 .07 .10 .38 196J/70 a/ Compania Pima Cululoaa de Timber, Pulp and Paper - .08 - .0S - - 1978 Textiles Rio Linde, S.A. Textiles 3.77 1.00 6.00 10.77 1.70 -- 1987 / Granjas Mari-as San erma Food and kgribusinass - .58 - .38 - - 1995 Ulectricidad de Cortes S. Inf:astructure 14.00 2.64 36.30 52.94 15.64 36.30 Total gross c-it-ts b/ 17.38 4.37 42.40 64.75 Less cancellatior,s, ar-4ations, repayment salaes 3.28 .73 6.10 10.11 Total co0L:m=ts now hold c/ 14.70 3.64 36.30 54.64 18.34 36.30 Total cos3itcmts hold ad pending co=it4neots Total undisbursed c-i4=nts - - - 0. 00 a/ Znvestents which bave been fully cancelled, terninated, written-off, sold, redeened, or repaid. b/ Gross comnitents consist of approved and signed projecta. c/ Held coie-ts consist of disbursed and undis4ursed inves -ets. 880 86° BAo BELIZE BEL!ZE HONDURAS ROATANG ! 89 ,Sf raS7 fvf~~~~~~~~~~~~~~~~~~~~~ -16° K GUATEMALA ,NPE0,AN BITUMINOUS,SRFACED,OAD ~~~~~~~~~~YUCAN/ SEODR ROD /1*J40 "* vjfr--t(A W RIVERSERTO GU ( \ fA ILTEGMAlPA' Ef PARAfSO -LMIR - .-. 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