Document of The World Bank Report No: ICR2224 IMPLEMENTATION COMPLETION AND RESULTS REPORT (Loan No.3800 - HO) ON A CREDIT IN THE AMOUNT OF SDR 7,200,000 EQUIVALENT TO THE REPUBLIC OF HONDURAS FOR A FINANCIAL SECTOR TECHNICAL ASSISTANCE CREDIT Finance and Private Sector Development Caribbean Country Management Unit Latin America & the Caribbean Region CURRENCY EQUIVALENTS (Exchange Rate Effective June, 2013) Currency Unit = Lempiras (Lps.) 1 Lempira = US$ 0.05 US$1 = 20.29 Lps. FISCAL YEAR July 1 to June 30 ABBREVIATIONS AND ACRONYMS ACH Automated Clearing House AML Anti-Money Laundering BAC Banco BAC BCH Honduras Central Bank (Banco Central de Honduras) BCP Basel Core Principles BCV Central American Stock Exchange (Bolsa Centroamericana de Valores) BGA Banco Grupo El Ahorro CAR Capital Adequacy Ratio CAS Country Assistance Strategy CD Central Depository CEPROBAN Bank Processing Center (Centro de Procesamiento Bancario) CFT Combating Financing of Terrorism CIC Credit Information System (Central de Informacion Crediticia) CNBS National Banking and Insurance Commission (Comisión Nacional de Bancos y Seguros) CPSS Committee on Payment and Settlement Systems CSD Central Securities Depository DO Development Objective DVP Delivery-versus-Payment FIU Financial Intelligence Unit FOGADE Deposit Guarantee Fund (Fondo de Garantía de Depósitos) FSDPC Financial Sector Development Policy Credit FOSEDE Deposit Insurance Fund (Fondo de Seguro de Depósitos) FSPC Financial Sector Policy Committee FSTAC Financial Sector Technical Assistance Credit FSAP Financial Sector Assessment Program GAFI Grupo Acción Financiera GDP Gross Domestic Product HIPC Heavily Indebted Poor Countries IADB Inter-American Development Bank ICR Implementation Completion and Results Report IDA International Development Association IMF International Monetary Fund IP Implementation Plan ISR Implementation Status Report JPHRD Japan Policy and Human Resources Development Fund LBTR Liquidación Bruta en Tiempo Real LISF Financial System Institutions Law (Ley de Instituciones del Sistema Financiero) LSF Financial System Law (Ley del Sistema Financiero) NPL Non Perfoming Loans OPD Operations and Policy Department (WB) OPDF Organizaciones Privadas de Desarrollo Financiero PAD Project Appraisal Document PCU Project Coordination Unit PDO Project Development Objective PIU Project Implementation Unit PRGF Poverty Reduction and Growth Facility ROA Return on Assets ROE Return on Equity RTGS Real Time Gross Settlement SDR Special Drawing Rights SENDI Electronic Foreign Exchange Trading System (Sistema Electronico de Negociacion de Divisas) SIGEF Economic and Financial Management and Information System (Sistema de Información y Gestión Económica y Financiera) SGPS Supervision Management System (Sistema para Gestión del Proceso de Supervisión) SML Securities Market Law SRA Supervisory Risk Assessment TA Technical Assistance TAL Technical Assistance Loan TTL Task Team Leader Vice President: Hasan Tuluy Country Director: Carlos Felipe Jaramillo Sector Manager: P.S. Srinivas Task Team Leader: Juan Buchenau ICR Team Leader: Juan Buchenau ICR Author: Fernando Montes-Negret 1 1 The author would like to express his gratitude to the staff of the BCH, CNBS and the PCU, as well as to private sector financial institutions and associations, for their cooperation and assistance during his visit to Tegucigalpa. The author also wants to thank Nicolas Montes-Betancourt for his valuable comments. REPUBLIC OF HONDURAS FINANCIAL SECTOR TECHNICAL ASSISTANCE LOAN Contents Data Sheet .................................................................................................................................................... i 1. Project Context, Development Objectives and Design ........................................................................... 1 2. Key Factors Affecting Implementation and Outcomes .......................................................................... 4 3. Assessment of Outcomes ........................................................................................................................ 9 4. Assessment of Risk to Development Outcome ..................................................................................... 12 5. Assessment of IDA and Borrower Performance ................................................................................... 13 6. Lessons Learned.................................................................................................................................... 16 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners....................................... 17 Annex 1: Project Costs and Financing ...................................................................................................... 18 Annex 2: Outputs by Components ............................................................................................................ 20 Annex 3. Bank Lending and Implementation Support/Supervision Process ........................................... 23 Annex 4: PCU Staff Members and Counterparts ...................................................................................... 25 Annex 5: Context at appraisal and in 2012 ............................................................................................... 26 Annex 6: Original Project Components and Sequencing of IDA Interventions ....................................... 30 Annex 7: Improvements in Strengthening the Financial Sector’s Legal and Regulatory Framework and in the Operation of the Central Bank (BCH) under the Project ................................................................ 33 Annex 8: Post-Completion Operation/Possible Next Phase ..................................................................... 36 Annex 9. Honduras: Selected Economic Indicators ................................................................................. 38 Annex 10. Summary of Borrower's ICR and/or Comments on Draft ICR ............................................... 40 Annex 11. List of Supporting Documents ................................................................................................ 46 Figures Figure 1: Cumulative Disbursements.......................................................................................................... 6 Figure 2: Annual Disbursements: ............................................................................................................... 6 Data Sheet A. Basic Information Financial Sector Country: Honduras Project Name: Technical Assistance Credit Project ID: P040177 L/C/TF Number(s): IDA-38000 ICR Date: 08/28/2013 ICR Type: Core ICR REPUBLIC OF Lending Instrument: TAL Borrower: HONDURAS Original Total XDR 7.20M Disbursed Amount: XDR 7.12M Commitment: Revised Amount: XDR 7.12M Environmental Category: C Implementing Agencies: Comision Nacional de Bancos y Seguros Banco Central de Honduras Cofinanciers and Other External Partners: B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 04/21/2003 Effectiveness: 03/15/2004 03/15/2004 04/27/2007 Appraisal: 05/19/2003 Restructuring(s): 04/07/2009 11/29/2010 Approval: 06/24/2003 Mid-term Review: Closing: 09/30/2007 02/28/2013 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Satisfactory Risk to Development Outcome: Moderate Bank Performance: Moderately Satisfactory Borrower Performance: Moderately Unsatisfactory i C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Moderately Quality at Entry: Moderately Satisfactory Government: Unsatisfactory Implementing Quality of Supervision: Moderately Satisfactory Moderately Satisfactory Agency/Agencies: Overall Bank Overall Borrower Moderately Moderately Satisfactory Performance: Performance: Unsatisfactory C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments (if Indicators Rating Performance any) Potential Problem Project Quality at Entry Yes None at any time (Yes/No): (QEA): Problem Project at any time Quality of Supervision Yes None (Yes/No): (QSA): DO rating before Satisfactory Closing/Inactive status: D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Banking 70 33 Law and justice 5 7 Payments, settlements, and remittance systems 25 60 Theme Code (as % of total Bank financing) International financial architecture 11 5 International financial standards and systems 22 15 Legal institutions for a market economy 22 60 Regulation and competition policy 23 20 State-owned enterprise restructuring and privatization 22 ii E. Bank Staff Positions At ICR At Approval Vice President: Hasan A. Tuluy David de Ferranti Country Director: Carlos Felipe Jaramillo Jane Armitage Sector Manager: Subrahmanya Pulle Srinivas Fernando Montes-Negret Project Team Leader: Juan Buchenau Hoth Modibo Khane Camara ICR Team Leader: Juan Buchenau Hoth ICR Primary Author: Fernando Montes-Negret F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The objective of the Project is to assist the Borrower to develop the institutional capacity it requires to be able to address the systemic vulnerabilities of its financial system, through: (a) the design and implementation of a banking sector consolidation program; (b) the reform of the Borrower's payment system; and (c) the improvement of selected aspects of the Borrower's financial system infrastructure. Revised Project Development Objectives (as approved by original approving authority) (a) PDO Indicator(s) Original Target Formally Actual Value Achieved at Values (from Revised Indicator Baseline Value Completion or Target approval Target Years documents) Values Compliance of all systemically important banks with CNBS's prudential Indicator 1 : regulations, including capital adequacy norms that are aligned with international standards. All banks comply All banks comply with with CNBS's According to CNBS, all CNBS's prudential Value prudential banks comply with its regulations, however quantitative or regulations, which prudential regulations, these regulations are not Qualitative) are consistent with which are consistent with always consistent with international international standards. international standards. standards. Date achieved 12/31/2004 02/28/2013 06/30/2012 Comments (incl. % Achieved. Compliance with international standards to be assessed in next FSAP Update. achievement) Indicator 2 : Improved risk management by the banking sector and increased cost efficiency. Value NPL ratio = 8.7% NPL ratio N/A NPL ratio = 2.3% quantitative or Admin Expenses / Admin Expenses / Admin expenses/ Qualitative) Assets = 6.4 Assets = 5.0 Assets= 8.49% iii Date achieved 12/31/2005 02/28/2013 12/31/2012 Comments Largely achieved. Risk management practices in banking sector significantly improved. (incl. % NPL ratio at only 2.2% in December 2012. The near systemic banking crisis at project achievement) inception satisfactorily resolved. Banks today are well capitalized and supervised. Indicator 3 : Reduced legal uncertainty in payment systems and improved risk management. High value payments system The technical fully operational implementation of a modern for all participants payments system finalized in systemically and operating satisfactorily; No clear regulatory important Value connections with all framework for payment transactions. The quantitative or individual financial systems, no functioning legal framework Qualitative) institutions are being lender of last resort. has been established. Legal strengthened and framework strengthened, the BCH has BCH has explicit powers to explicit powers to oversee the payments s oversee the payments system. Date achieved 12/31/2004 02/28/2013 06/30/2013 Largely achieved: 12 banks already submitting transactions electronically to new Comments payments system (71% of the number and 94% of volume); remaining smaller (incl. % institutions in final certification stages. Payments System Law drafted and submitted to achievement) Parliament. Effective special unit against money laundering within the CNBS leading to Indicator 4 : increased volume and quality of on-site examinations. Improved Financial Intelligence Unit effectiveness of working effectively. FIU Value Financial intelligence special unit against has sent 2,000 cases of quantitative or Unit established but not money potential money laundering Qualitative) yet operating effectively. laundering at the cases to the Prosecutor's CNBS. office. Date achieved 12/31/2004 02/28/2013 06/30/2012 Comments Achieved. Financial Intelligence Unit established at CNBS and working effectively. (incl. % Problems remain with other agencies lagging behind, particularly in following up with achievement) investigations (Prosecutor's Office) and enforcement (judicial system and police). Increased quality, transparency and timeliness of the information available to Indicator 5 : CNBS and BCH on bank soundness and major corporate clients. All banks are reporting All banks continue to report requested data to Value Significant delays in the requested data to the CNBS the CNBS and SIC quantitative or provision of data by and the SIC on time, on time, Qualitative) banks. complying with established complying with timelines. established timelines. Date achieved 03/30/2005 02/28/2013 06/30/2012 Comments Achieved. Information on bank soundness readily available to CNBS, allowing to take (incl. % preventive measures. Information on corporate clients available to authorities and all iv achievement) regulated financial institutions through the Credit Information System (SIC). Reduced levels of non-performing loans from the top 50 Honduran corporate Indicator 6 : borrowers. Reduced levels of High level of nonperforming Cannot be verified, likely Value nonperforming loans loans from top achieved as overall level of quantitative or from top 50 Honduran 50 Honduran non-performing loans Qualitative) corporate borrowers. corporate decreased significantly. borrowers. Date achieved 12/31/2004 02/28/2013 06/30/2012 Comments Cannot be verified. Information on performance of loans granted to the top 50 corporate (incl. % borrowers is available in the credit registry to the authorities and regulated financial achievement) institutions, but not accessible to the public. Increased efficiency of corporate restructuring and orderly liquidations, both Indicator 7 : judicial and extra-judicial. Reflecting the increased Inadequate framework Increased relevance granted by the and practices related to efficiency of Honduran authorities to this Value corporate dissolution, judicial and extra- subject, draft legislation on quantitative or liquidation, bankruptcy judicial corporate insolvency was Qualitative) and suspension of corporate presented to Parliament payments. restructuring. (which has not been approved yet). Date achieved 12/31/2004 02/28/2013 06/30/2012 Comments (incl. % Not achieved. achievement) (b) Intermediate Outcome Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised Target approval Completion or Values documents) Target Years Indicator 1 : Banking resolution framework and capitalization fund capabilities. The operational The operational procedures for the procedures for a bank resolution process resolution process have been finalized have been and the fund successfully tested Inadequate banking established. The (Banco del Pais , La Value resolution framework not operational Constancia, Banco de (quantitative based on minimum costs procedures have los Trabajadores). or Qualitative) principles. been proved and all The resolution of the the failed banks in State-owned the system have agriculture bank been resolved or BANADESA merged with another however remains sound financial pending. v institution. Date achieved 03/15/2004 02/28/2013 06/30/2012 Comments Achieved (incl. % achievement) G. Ratings of Project Performance in ISRs Date ISR Actual Disbursements No. DO IP Archived (USD millions) 01 10/23/2003 Satisfactory Satisfactory 0.00 02 6/10/2004 Satisfactory Satisfactory 0.75 03 6/24/2004 Satisfactory Satisfactory 0.75 04 11/30/2004 Satisfactory Satisfactory 1.02 05 4/22/2005 Satisfactory Satisfactory 1.29 06 9/20/2005 Satisfactory Satisfactory 1.86 07 6/1/2006 Moderately Satisfactory Moderately Satisfactory 2.98 08 11/28/2006 Moderately Satisfactory Moderately Satisfactory 3.26 09 06/11/2007 Moderately Satisfactory Moderately Satisfactory 3.38 10 12/19/2007 Moderately Satisfactory Unsatisfactory 3.64 11 05/23/2008 Satisfactory Moderately Unsatisfactory 3.78 12 10/30/2008 Satisfactory Satisfactory 3.94 13 05/18/2009 Satisfactory Satisfactory 4.39 14 12/23/2009 Moderately Satisfactory Moderately Satisfactory 5.17 15 06/30/2010 Moderately Unsatisfactory Moderately Satisfactory 4.98 16 12/17/2010 Moderately Satisfactory Moderately Satisfactory 5.26 17 07/11/2011 Moderately Satisfactory Satisfactory 5.54 18 01/26/2012 Satisfactory Satisfactory 7.27 19 09/02/2012 Satisfactory Satisfactory 8.20 20 03/12/2013 Moderately Satisfactory Moderately Satisfactory 10.44 H. Restructuring (if any) ISR Ratings at Amount Board Restructuring Restructuring Disbursed at Reason for Restructuring & Key Approved PDO Date(s) Restructuring Changes Made Change DO IP in USD millions 1.Extension of the closing date 04/27/2007 MS MS 3.38 2.First amendment to the Development Credit Agreement 1.Extension of the closing date 04/07/2009 S S 4.28 2.Reallocation of the proceeds 11/29/2010 MU MS 5.26 Extension of the closing date vi I. Disbursement Profile vii 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal 2 1. Honduras has experienced several decades of low economic growth. During the 1990s when growth had recovered in the rest of Central America, in Honduras, it barely kept pace with population growth, making it the slowest growth rate in the region. Natural disasters (hurricanes and earthquakes) and a deterioration of the terms of trade, exacerbated by erratic policies and institutional weaknesses, compounded the situation and weakened the banking system. 2. By 2003, the stability of the Honduran banking system was uncertain, given the significant vulnerabilities of the country’s financial sector. The Honduran financial sector suffered a severe shock in October 1998, when Hurricane Mitch hit the country with devastating effects in terms of human lives and disruption of economic activity. In its immediate aftermath, the financial sector was faced with an upsurge in the volume of bad debts and substantial financial losses. A mid-sized bank had to be liquidated by the National Banking and Insurance Commission (Comision Nacional de Bancos y Seguros, CNBS) and most financial institutions were forced to request new injections of capital from their shareholders to restore their solvency. The 2003 Financial Sector Assessment Program Update (FSAP) highlighted significant vulnerabilities in the sector, including weak compliance with the Basel Core Principles (BCP) for effective banking supervision, insufficient provision of loans adversely affected by exogenous shocks, low capital asset ratios and high numbers of non-performing loans (NPL). 3. In response, the Government embarked on an economic reform program focused on ensuring macroeconomic stability and strengthening growth prospects, and made significant progress in addressing financial sector vulnerabilities. Consistent with the recommendations of the FSAP, a series of laws and regulations were approved in 2004 that: (i) strengthened prudential norms (including capital adequacy, loan classification, and provisioning), (ii) enabled consolidated supervision (including offshores, affiliates and subsidiaries), (iii) increased the powers of the supervisory agency, the CNBS, (iv) broadened the circumstances that require corrective actions by banks, and (v) improved the bank resolution framework. Within this context, the International Development Association (IDA) support sought to contribute to the strengthening of the financial sector, considered critical for the achievement of accelerating equitable and sustainable economic growth to levels consistent with the poverty reduction targets, as outlined in IDA’s Country Assistance Strategy (CAS) approved by IDA’s Board simultaneously with this Credit on June 24, 2003. 1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) 4. The Project Development Objective was to assist the Borrower to develop the institutional capacity it required to be able to address the systemic vulnerabilities of its financial system, through: (a) the design and implementation of a banking sector consolidation program, (b) the reform of the Borrower’s payments system, and (c) the improvement of selected 2 See Annex 5 for more details. 1 aspects of the Borrower’s financial system infrastructure. The Project defined seven key performance indicators covering (i) compliance with prudential banking regulations, (ii) improved banks’ risk management systems and increased cost efficiency, (iii) reduced legal uncertainty and payment system risks, (iv) the creation of a Financial Intelligence Unit (FIU) within the CNBS, (v) better information for the CNBS on banks and corporates, (vi) reduced number of NPLs for the largest 50 corporate borrowers, and (vii) an enhanced corporate restructuring and insolvency system (see Datasheet, section F). 1.3 Revised PDO and Key Indicators, and reasons/ justification 5. The original PDO and key indicators were not revised throughout the life of the Project and commitment to the original Components was maintained. This was originally a four-year Project, which was extended three times for a total of six additional years, in response to institutional changes and external events. However, the Project objectives were formulated in broad terms and remained largely relevant throughout the life of the Project. The only variation that could have warranted a reformulation of the PDO is related to the objective of designing and implementing a banking sector consolidation program, as only some aspects of the program were implemented, as detailed below. 1.4 Main Beneficiaries 6. The CNBS and the Central Bank (BCH) were the main direct beneficiaries of this Project. Other beneficiaries were the financial institutions whose performance and safety were expected to improve based on a strengthened regulatory framework and increased access to a modern financial system payments infrastructure. Finally, the Project benefited all users of financial services in Honduras, including depositors, creditors, investors, firms and households, whose savings in the form of bank deposits or other types of investments were expected to be less vulnerable to losses and would benefit from more security and lower funds transfer and investment fees. 1.5 Original Project Components 7. The Project was primarily designed to help reduce the risks of systemic instability in the Honduran financial system and address many of the key policy weaknesses identified in the 2003 FSAP Update. Support was provided through four Components (for a detailed description see Annex 6) 3: Component 1: A banking sector consolidation designed to establish a sound and stable foundation for the recapitalization and recovery of the Honduran financial sector (US$4.50 million). Component 2: A major reform of the payments system to improve the efficiency of the financial system and facilitate business transactions, introducing a Real Time Gross 3 The PAD foresaw a fifth component (unallocated reserve), which is not reflected in the Financing Agreement and which was not implemented. 2 Settlement (RTGS) System and moving away from manual processing of checks and large- value money transfers (US$2.25 million). Component 3: Technical assistance to improve selected aspects of the financial sector infrastructure, including addressing weaknesses in the Anti-Money Laundering/Combating Financing of Terrorism (AML/CFT) framework, enhancing oversight of the corporate sector and improving Honduras’s insolvency regime, facilitating access to finance by small agricultural producers, as well as enabling the early recognition and more efficient handling of future problems in the financial sector (US$2.03 million). Component 4: Project Administration Component to provide support for the Project Coordination Unit (PCU) in the CNBS in order to assure effective project management and coordination, and strengthen the capacity of this unit to implement and supervise the Project (US$1.11 million). 1.6 Revised Components 8. The Project components did not change through the life of the Project. In spite of this, the allocation of funds and resources dedicated to each area was significantly revised to reflect the changes in the needs and priorities of the CNBS and the BCH as will be described below. 1.7 Other significant changes 9. The Project’s closing date was extended three times to allow more time for completion of Project activities. These extensions were motivated mainly by the delays in the implementation of components assigned to the BCH. The approval of the first extension was based on the expectation that project implementation would improve. The second extension was conditional on the signing of the contract between the CNBS and the implementing firm of the Project’s payment system Component, and its subsequent approval by the Honduran Congress. The last extension was given on the condition that the bid evaluation for the payment system at the BCH be presented to IDA no later than mid-June 2011. 10. The three extensions resulted in a major reallocation of Project funds. Credit proceeds were reallocated among components to reflect changing priorities as the reduction of resources allocated to Component 1 allowed for the inclusion of new sub-projects (see below), which were necessary, but not included in the original plan. The first and second extensions brought a substantial reallocation of funds, leading to a significant decrease in the funds allocated to Consultants’ Services, a major increase in the financing of Goods, and a decrease in Training, with minor adjustments in the remaining items (see Annex 1). This reflected the BCH’s need to finance the acquisition of two new modules: the Economic and Financial Management and Information System (Sistema de Información y Gestión Económica y Financiera, SIGEF) and the Electronic Foreign Exchange Trading System (Sistema Electronico de Negociacion de Divisas, SENDI). The Project financed the software, hardware, and consulting services required to improve the BCH’s internal systems. 3 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry 11. The Project correctly diagnosed the institutional weaknesses of the Honduran financial system. Its diagnostic coincided with the FSAP in identifying low bank capitalization and a weak institutional framework for financial sector transactions, regulation and supervision as the main weaknesses of the financial system. In 2003, the banks had high non-performing loans and high operating costs which resulted in low profitability. Moreover, the banks had weak bank risk-management practices. These risks were magnified by the weak legal and regulatory framework and by the poor macroeconomic context and outlook. These factors made the likelihood of a systemic banking crisis a real possibility. 12. The diagnostic correctly pointed to critical issues, such as weak institutional capacity at the CNBS, with major weaknesses in AML/CFT legislation and enforcement, 4 and a restrictive bank resolution framework with limited preventive and intervention tools. 5 Weaknesses in regulatory elements (such as an adequate credit classification and provisioning system, supervision manuals, the training of financial sector supervisors, the use of compliance-based supervision, instead of a risk-based approach and the absence of consolidated supervision) facilitated regulatory arbitrage while hiding aggregate risks. In addition to weak supervision, banks had low and poor quality bank capital, raising concerns about solvency risks in some banking institutions, leading to the establishment of the Bank Capitalization Fund under the Project. An ineffective and seldom used corporate bankruptcy law, focused on the preventive attachment of assets by creditors, raising banks’ losses given default. 6 Another major concern at the project’s inception was the modernization of the payment systems, which had a number of structural shortcomings resulting in high exposure to credit, liquidity, legal, operational and settlement risks both for fund transfers and securities transactions. 13. The PDOs were consistent with the Borrower’s priorities at the time of Board approval and with the CAS. The CAS (submitted to the Board with this credit) identified the weaknesses of the Honduran financial system as a potential constraint to achieving its first objective of accelerating equitable and sustainable economic growth to levels consistent with the poverty reduction targets. While formulated in broad terms, the PDO and Project components addressed the sectoral weaknesses and were relevant throughout the life of the Project, with the exception of Component 1, as discussed below. 4 Law 45-2002 was perceived as a significant step forward in the control of money laundering. However, much work remained to be done for its effective implementation. A major legislative gap was that the crime of financing of terrorism (CFT) was neither criminalized as a separate offense, nor as an AML offence. 5 It contemplated only two possible resolution mechanisms: (i) the authorities could close a failing bank after transferring its deposits to another institution (the “restitution” mechanism) or, (ii) alternatively, they could capitalize and temporarily manage the impaired institution through FOSEDE, the Deposit Insurance Fund (the “extraordinary” mechanism). The latter had been abused beyond systemic crisis situations. 6 This lead to widespread early use of judicial enforcement mechanisms, explaining the significant amount of foreclosed assets owned by the banks. 4 14. The PAD correctly assessed the overall high risk rating of the Project, however it underestimated the country related risks. The risks of the weakening of the authorities’ commitment to the financial reform program and the potential loss of confidence of depositors in the bank recapitalization program were rightly identified during Project design. The PAD underestimated the intrinsic project risks, which ended up delaying significantly its implementation. It was not possible to foresee the political instability that brought additional complications for project implementation. 15. The design of project activities for the implementation of the payments system had some weaknesses and did not build on a comprehensive diagnostic of the capacity of BCH. A more comprehensive diagnostic of the BCH’s weaknesses would have pointed at the need to modernize the general ledger of the BCH as a condition for the successful operation of an automated payments system. It would also have addressed the lack of an automated foreign exchange auction system. As these weaknesses became evident, they forced a major redirection of the Project during implementation. The Project’s design also underestimated the time required and the capacity of the key participating agencies (CNBS and BCH) to implement and coordinate the activities. 16. This technical assistance project was followed by an adjustment operation (the “Financial Sector Development Policy Credit,” FSDPC), which was unusual. Usually the reverse sequence would have taken place. The justification for this unusual sequencing was based on the Government’s need to organize its institutional framework for banking sector consolidation. The Government was also discussing a Stand-by Arrangement with the IMF, thereby making it impossible to move forward first with an adjustment credit (see Annex 6). The expectation was that by moving forward with the technical assistance credit even in the absence of an adjustment operation, the Government would be able to address some of the financial sector issues before committing more resources. 7 2.2 Implementation 17. Government Commitment to the Project fluctuated as a result of changes in leadership. Initially, the Government and the two key participating agencies (CNBS and BCH) demonstrated a very strong commitment to the Project throughout preparation. After the change of administration and the changes in leadership of the CNBS and the BCH, the commitment became lukewarm and recovered in the last phase of the Project, during the tenure of the current administration of President Lobo. 18. The Project made use of almost 99 percent of the Credit’s resources. Figures 1 and 2 show disbursements over time, with three rather distinct phases: (i) 2004-2007 with low and declining annual disbursements; (ii) relative paralysis between 2007 and 2010; and (iii) rapid execution of the Project since 2010. The first closing date extension did not accomplish the expected results and, towards the end of that period, external factors to the Project interfered with implementation (change in Government in June 2009). The second extension yielded results 7 PAD, page 15. 5 in its last year (2011), providing some justification for the third and final one. Notably towards the end of the project, the implementing agencies performed better than in the earlier years and provided significant support to complete successfully the project and make use of the available resources. Figure 1: Cumulative Disbursements Figure 2: Annual Disbursements 2004-2013 (million US$) 2004-2013 (million US$) 12.00 3.5 10.00 3 8.00 2.5 6.00 2 1.5 4.00 1 2.00 0.5 0.00 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 19. Project implementation suffered numerous delays due to external and internal factors. The external factors included: (i) delays in credit effectiveness because of delays in the Congressional approval process (one year), (ii) four changes in Government, one of which led to the suspension of high-level contacts between the Government and the Bank for a period of nine months (June 2009-April 2010) after the removal of President Zelaya; and (iii) multiple changes in the leadership of CNBS and BCH, resulting in an uneven commitment to the Project and a sometimes difficult relationship between the two institutions. The internal factors included: (i) the technical complexity of the tasks which generated difficulties in defining technical specifications and preparing bidding documents, (ii) the difficulties experienced in the procurement of goods and services, and (iii) the limited implementing capacity. In addition, the decision to allow both the CNBS and BCH to implement concurrently and have decision-making authority was also a factor impacting effective coordination and Project implementation. This made it more difficult to supervise the procurement of the appropriate modules required by the SIGEF and RTGS system. 20. The Project’s focus shifted from the initial concentration on bank restructuring to the implementation of the payments and other IT systems at BCH while maintaining the activities to strengthen the regulations and supervisory capacity of the authorities. There were multiple adjustments to the various components to accommodate new needs and changing priorities, particularly of the BCH. In particular, the objective of increasing the capacity of the authorities to promote and lead bank restructurings lost relevance in view of the capacity demonstrated by the private banks to restructure themselves with little CNBS intervention. Consequently the Bank Recapitalization Fund and attached technical assistance under Component 1 was not activated, resulting in a significant shift of resources from Component 1 to Component 2. 6 21. The focus of activities in Component 1 shifted over time. As the Project’s activities related to the rehabilitation of failing banks lost importance, the activities under this Component concentrated on improving the legal and regulatory framework for banking (including the Financial Institutions Law, the Law for Deposit Insurance, the Laws for CNBS and BCH, key prudential regulations, inspections manuals, and risk and governance standards) as well as on developing CNBS’s capacity to oversee the financial system and to deal with high risk institutions by developing an early warning system, training staff, and acquiring software and hardware to improve bank supervision. The activities financed in regards to the rehabilitation of some banks included only some legal and diagnostic work and the preparation of business plans, which were carried out during the early phases of project execution. 22. The size of Component 2 greatly increased over the life of the Project. Under Component 2, the Project’s aim was to “carry-out an upgrade of the current system, including the launching of a special purpose large value payments system and the establishment of a government securities depository. Around 21.3 percent of IDA proceeds were original allocated to this Component; however, it ended up absorbing about 60 percent of the funding and financed the additional activities of SIGEF and SENDI. 23. Activities under Component 3 were reduced as some sub-components were only partially implemented. Component 3 focused on three aspects of Honduras’s financial infrastructure: (i) the institutional framework for the AML/CFT, (ii) the oversight of the corporate sector and the insolvency and creditors’ rights regime, and (iii) the instruments to facilitate access to finance by small agricultural producers. The latter two sub-components were only partially implemented, with the amendment of some regulations. 24. The task force to implement the consolidation program for the financial sector foreseen under Component 4 was eliminated as it was not necessary anymore. Initially, a task force of six members (four from the CNBS and two from the BCH) and an administrative assistant was to be established to implement the bank consolidation program. Given the demonstrated capacity of banks to restructure themselves, the task force was eliminated in 2007 as part of the amendments at the time of the extension of the closing date of the project to 2009. 25. Despite challenges, key Project outputs by Component were largely achieved with the strengthening of CNBS and the establishment of the new payments system (see section 3.2). A summary of the principal outputs is shown in Annex 2 (Outputs by Components). The annex breaks down the existing contracts that were entered into by the CNBS and the BCH and illustrates in detail how the Project Components were implemented. It shows the amounts disbursed by Component and summarizes the objectives that each contract was expected to meet. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 26. Measurement of achievements could have benefited from a stronger M&E framework. While IDA did not put as much emphasis on the M&E framework when the Project 7 was designed, it would have been desirable to develop a more robust framework with measurable quantitative indicators during implementation as a tool to improve Project management and results. 27. Overall, the results indicators were mainly qualitative in nature, such as assessing whether the risk-based supervision carried out by a regulatory agency was consistent with international best practice. The PAD M&E framework did not originally include quantitative indicators, although certain indicators tracking the impact of Component outputs on PDO were later included in the Implementation Status Reports (ISR), including those related to the allocation of funds in 2009 and those associated with the reduction of risk and increase in efficiency of the financial system. Some of the Key Performance Indicators were not causally related to the Components, but depended on macroeconomic framework (for example, increased cost efficiency in the banking system and reduced NPLs for the largest 50 Honduran corporate borrowers) and other factors beyond the scope of the Project. The lack of a causal link of the indicators of the Project impeded management from integrating the M&E framework more closely with Project implementation, since the achievement, or lack thereof, of some of the outcome indicators was largely beyond the scope of the Project. In addition, the indicators related to the monitoring of corporate borrowers could only be tracked indirectly. 8 28. The PCU was moderately effective in terms of maintaining timely information. While information about the execution of all activities was easily available, it did not keep up-to- date detailed records on a consolidated basis in terms of the purpose of each sub-project, costs, disbursements, and output. 2.4 Safeguard and Fiduciary Compliance 29. There were no safeguard issues and fiduciary performance was adequate. The Project did not trigger any social or environmental safeguards policies. The final audit found that the Project complied with all fiduciary requirements. Other audits during the period of execution marked only minor discrepancies in accounting (due to exchange rate fluctuations), as well as problems verifying compliance with some aspects of the loan agreement, which were resolved once issues surrounding the confidentiality of information were addressed. 30. However, the Project faced significant challenges related to procurement, in particular of the payments system component, as well as of other IT components for the BCH. In the case of the payments system, procurement activities had to deal with implementing a system in an environment of a rapidly evolving technology. 9 The procurement process leading 8 The indicators pertaining to corporate restructuring and to the performance of loans granted to the 50 largest corporate borrowers were not tracked in the ISRs, as the corresponding information is confidential and only available to the authorities and regulated lending institutions. The performance of corporate loans was tracked indirectly by looking at the overall behavior of the non-performance loans. In this light, a revision of the indicators related to the corporate sector would have been advisable. 9 While the implementation of a payments system required, at the inception of the Project, the development of a customized IT solution, in the course of time, the industry evolved towards more standardized licensed packages, 8 to the selection of the winning firms (mainly for the RTGS) was slow, complex and disputed.10 On IDA’s side, there were delays in obtaining non-objections. A significant turnover of procurement officers, both at the IDA and in the PCU, was also a complicating factor. While technical and market factors contributed to the delays experienced in the implementation of the payments system, IDA and the Honduran authorities could have taken a more proactive approach to carry out the corresponding procurement processes, as a significant cause for the problems and delays in preparing the bidding documents was due to errors in following adequate procurement processes. 2.5 Post-Completion Operation/Next Phase 31. The authorities have indicated to IDA their interest in further technical assistance for both implementing agencies (BCH and CNBS). The BCH would require support to further improve its systems in order to achieve further gains in security and efficiency, with a preliminary cost estimate of about US$7.8 million. The CNBS would require support to better regulate and oversee financial cooperatives, the agricultural finance system, and the insurance sector as well as to further strengthen its capacity in the area of AML/CFT, among others, with preliminary cost estimates of about US$2.6 million. The combined estimated external financing needs of the two institutions amount to about US$10.5 million (see Annex 8). The lessons derived from the implementation of this technical assistance Project could be valuable in designing any new assistance. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation (Moderately Satisfactory) 32. The institutional strengthening objectives for the CNBS and the modernization of the BCH’s general ledger and payments infrastructure were pertinent at design and remained highly relevant during the long implementation period. The structure of the operation was appropriate to address the challenges faced by the financial sector and its oversight throughout the life of the project. The main shortcoming in the design was a consequence of the weak diagnostic for the payments systems activity, as described above. Based on this, the relevance of objectives, design and implementation are rated moderately satisfactory. 3.2 Achievement of the Project’s Development Objective (Moderately Satisfactory) 33. The PDOs were largely achieved as measured by the seven Key Performance Indicators. The overall assessment of the achievement of the PDOs is judged Moderately Satisfactory since the Project fully achieved three, largely achieved two, and did not achieve one which then had to be customized to meet the requirements of each institution. Overall, expertise on payments systems was very scarce in the market at the time of Project design. 10 The difficulties faced by the payment system’s contractor that won the bidding process of 2009 with the Central Bank ended in a contractual dispute, forcing the cancellation of the contract, payment of the guarantee and re- launching of the whole bidding process. In addition, the bankruptcy of the firm charged with implementing the precursor of the SIGEF system made it necessary to carry out a second procurement process for this activity. 9 of the seven PDO indicators. The only intermediate indicator was also achieved. One indicator - the level of non-performing loans of the top 50 corporations - cannot be verified, as the corresponding information is not publicly available, although the overall bank NPLs (which include those of the corporate sector) fell significantly over the period and it can be reasonably deduced, that the NPLs of the top 50 corporations have fallen as well. 34. Supervision of the banking sector improved significantly, due to the implementation of an ambitious plan to strengthen the CNBS’s supervisory capacity with the help of this Project and additional assistance from the Inter-American Development Bank (IADB). Progress in modernizing and increasing the efficiency of supervision by the CNBS was very significant with the adoption of modern tools (Team Mate, electronic management of documents, and the introduction of a modern credit registry, among other tasks). Although the bank consolidation program and capitalization scheme to facilitate mergers between viable institutions was not activated, the initial diagnostics and business plans funded by the Project were very useful for the authorities to better understand and address the weaknesses of the system. Overall, the improved oversight contributed significantly to restore confidence in the financial system and through this to the growth of the economy through a higher savings rate and greater availability of financing. It’s recommended that these advances be confirmed through an FSAP Update as soon as feasible, covering the assessment of compliance with the various international standards, particularly the BCPs. 35. The Project achieved the modernization of the general ledger of BCH and development of the key financial infrastructure for the operation of the country’s large- value payment and government securities systems (RTGS/SD), in addition to the foreign exchange auction system and the operation of the interbank market and efficient implementation of monetary policy. The new general ledger and connected systems (including the foreign exchange auction module) became operational in 2012. The RTGS/CD began operation on March 4, 2013, replacing numerous fragmented and cumbersome, vulnerable, and error-prone manual systems. These developments will enhance the efficiency and safety of financial transactions in Honduras and will have a significant longer-term development impact (see Annex 7). The adoption of a modern RTGS and the SENDI resulted in an increase in the efficiency and security of the country’s large payments, enhancing the operational efficiency of monetary and exchange rate policies, as well as improving the safety of participants in the interbank market. 36. Although the technical assistance credit was small, it produced relevant and tangible results that enhanced the Honduran financial sector. The Project achieved a number of significant results. The main achievements of the Project were: i. Systemically important banks are meeting CNBS prudential regulations and required CARs. 11 ii. Banks have enhanced their risk management systems, purchasing specialized 11 The Honduran banking system remains solid with an average capital adequacy ratio of 14.5 percent in December 2012, up from 13.5 percent in November 2008, with all the banks in the system presenting capital adequacy ratios above the regulatory minimum of 10 percent. 10 software and consulting services. iii. The BCH’s new automated general ledger, the large payment system and securities depository and the automated foreign exchange auction system are all operational and working efficiently, achieving one of the most important Project objectives. iv. The Financial Intelligence Unit at the CNBS is operating effectively, reporting suspicious transactions to the investigative and enforcement organs of the State, achieving, as far as the CNBS is concerned, the Project objectives. 12 v. The timeliness, quality and granularity of the credit and financial information used for prudential purposes by the CNBS and the BCH have greatly improved with access to a comprehensive and timely database. vi. The level of non-performing loans in the banking system has declined significantly, although this cannot be attributed directly to the Project. vii. The corporate and insolvency creditor rights have made some progress, but further work needs to be done to make the system operate effectively, particularly the interventions by the judicial system. viii. The operational procedures for a bank resolution process were finalized and have been successfully tested. 3.3 Efficiency (Moderately Unsatisfactory) 37. The longer-than-programmed duration of the Project adversely affected the efficiency of the outcomes. Costs were higher for purchases of goods and services and Project management costs rose. The weakness in the procurement office during the early phases of the Project may have materially increased Project costs, and the less than satisfactory financial control reduced the efficiency of implementation. Overall, slow implementation significantly reduced the efficiency of the Project (see figure in the Datasheet Section I showing the gap between originally expected and actual disbursements). The project did not have an economic analysis. 13 While the Project’s efficiency significantly improved in the final phase and all major activities were implemented, the Project experienced a long implementation period due to (i) poor management of the procurement process, and (ii) significant problems with service providers involved with the acquisition of the RTGS/CD that took place during the initial phase. The efficiency is rated as Moderately Unsatisfactory in consequence hereof. 12 These improvements contributed significantly to improve the rating of Honduras in respect to its efforts in the area of ASML/CFT, as acknowledged by the Financial Action Task Force, an international body that oversees the countries’ efforts in regards to AML/CFT activities in its report from May, 2013 13 The PAD stated in the section of economic analysis: “Given the character of this operation, a quantitative economic and financial analysis would not be the appropriate tool to assess the significance of this project. The pace and depth of the reforms envisioned in this operation will determine the ultimate economic benefits of this credit.” 11 3.4 Justification of Overall Outcome Rating 38. The Project has substantially contributed to strengthening the Honduran financial sector and the two main government authorities which have oversight function. While the project took a long time to develop, it contributed substantially to: i. Strengthening the capacity of CNBS to supervise the financial institutions, detect in a timely manner the risks that could potentially affect them and, lastly, to have the mechanisms in place to act fast and deal with any negative developments, thus limiting considerably the potential negative consequences that the failure of a financial institution could have on the economy. ii. Establishing a functioning payments system that reduces the overall costs and uncertainty of financial transactions. iii. Improving significantly the monitoring of suspicious financial transactions that could be related to money laundering or the financing of terrorist activities. 39. The PDOs maintained their relevance throughout the period and the most important institutional objectives were largely met. Nonetheless, significant shortcomings in terms of efficiency and extended delays resulted in increased opportunity cost for the country and higher operational costs. Considering the above, the Development Outcome of this technical assistance credit is rated Moderately Satisfactory. 3.5 Overarching Themes, Other Outcomes and Impacts 40. Although the project contributed to the improvement of the conditions for economic development, it did not have any direct attributable impact on poverty or social development. The focus of the PDOs was on strengthening the institutional framework and of BCH and CNBS and did not address any gender issues. No unintended outcomes or impacts have been reported. 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops 41. There was no formal survey of beneficiaries, but the Bankers’ Association and the Bank Processing Center (Centro de Procesamiento Bancario, CEPROBAN) were very supportive of Project activities, indicating to the ICR mission that its implementation has resulted in a very noticeable improvement in the safety and efficiency of operations for financial intermediaries. CEPROBAN opposed the BCH’s imposition of a rather low cap for RTGS operations, as this reduces the volume of payments channeled by banks through its Automated Clearing House (ACH). The Bankers’ Association mentioned the importance of FSAPs to assess the authorities’ performance in complying with the various international standards assessed, including the BCPs. 4. Assessment of Risk to Development Outcome Rating: Moderate 12 42. A Moderate risk rating is assigned to the development outcome, reflecting the perceived likelihood that changes that are detrimental to the sustainability of the Project objectives could take place. This rating is justified because: i. the risks to the continuity of the payments system reforms can be judged to be small. The RTGS system is operating satisfactorily with 12 of the 17 banks of the financial system (responsible for 71% of the transactions), and the remaining entities in process of joining it. The technology of the system has been proven in other countries and it the payments system can be expected to continue operating in a stable manner. ii. some moderate risks remain to the continuity of the achievements in the area of prudential regulations and supervision of the financial system. In spite of the considerable strengthening of the supervisory capacity of the authorities and the improvements to their framework, the risk of external interference into their operations remains. And, iii. a higher risk is attached to the effectiveness of the AML/CFT efforts beyond the scope of responsibilities of the CNBS. While the FIU at CNBS is operating adequately, the Prosecutor’s Office and judicial system are not yet following up on the suspicious transactions reported to them by the FIU. 5. Assessment of IDA and Borrower Performance 43. Project performance highly depends on six inter-linked critical factors: (i) initial Project design, (ii) flexibility to accommodate changing priorities, (iii) ownership, (iv) implementation capacity and skills, (v) sequencing and prioritization of the reforms; and (vi) absorptive capacity and resources. 5.1 IDA Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Moderately Satisfactory 44. The PDO, Components and activities included in the PAD properly addressed the concerns of a likely systemic banking crisis in Honduras, in view of the deterioration of the quality of bank assets, the weaknesses in prudential supervision and AML/CT systems, and the structural weaknesses in the payment systems of the country diagnosed in the 2003 FSAP. The likelihood of a systemic crisis scenario was even more plausible in view of the existing macroeconomic imbalances addressed by the IMF Stand-by Arrangement being negotiated with the Borrower. The Project correctly focused on the most critical and strategic weaknesses in the financial system. 45. While the diagnostic of the CNBS weaknesses was appropriate, the diagnostic of BCH requirements was weak and the quality of the assessment of the implementing agencies was uneven. Especially the initial, rather incomplete, diagnostic of the BCH’s needs made it difficult to foresee and sequence the necessary activities that culminated in the implementation of the payment system Component, the RTGS system. A broader and more 13 thorough initial assessment of the BCH’s weaknesses would have facilitated Project execution, focusing first on modernizing the general ledger and systems and financing the necessary technical assistance and IT systems for the critical SIGEF. The significant time, effort, and funding required to develop this system delayed the completion of the RTGS. For the above reasons IDA’s performance in ensuring quality at entry is rated Moderately Satisfactory. (b) Quality of Supervision Rating: Moderately Satisfactory 46. IDA proactively identified and resolved threats to the achievement of the development objectives, thus dealing with the consequences of significant political instability that resulted in uneven levels of commitment and high turnover of the senior staff at the implementing agencies. In this context, IDA compensated for weaknesses in implementation capacity by extending the Project implementation period, intensifying supervision and financing additional consulting services. Focusing on the high developmental impact of the tasks financed by the Project, staff maintained in this form an intense supervision (20 ISRs) and added additional consulting services to foster the successful completion of the RTGS. Frequent missions provided support to the Honduran counterparts to better manage the Project activities and to discuss how to address the identified financial system weaknesses. 47. The ratings assigned in the twenty ISRs might have been too sanguine when the Project was experiencing significant delays, possibly not bringing to management’s attention the difficulties encountered: only one of the early ISRs gave an unsatisfactory rating. Similarly, staff recommended the approval of the three extensions, but there was no evidence that the mid-term review flagged implementation problems, or recommended a possible restructuring or even the cancellation of the Project. 14 The Project should probably have been restructured to modify at a minimum the Key Performance Indicators or even the PDO. 48. Based on the ICR guidelines, the quality of supervision was overall instrumental in achieving the objectives of the Project. These factors, combined with the weaknesses in the Project’s M&E, leads the rating for supervision to be Moderately Satisfactory. (c) Overall IDA Performance Rating: Moderately Satisfactory 49. The PDOs remained valid and did not change throughout the nearly 10-year implementation period. However the accumulation of delays, for reasons that were internal and external to the Project, led the authorities to request three extensions of the closing date. Over time, the priority and scope of the objectives changed, with greater emphasis given to the BCH Component, particularly the RTGS system. IDA’s flexibility, staff stamina and patience to carry on with the implementation of the RTGS system until its successful completion allowed the Project to largely achieve its development objectives. However at the same time the prolonged 14 A mid-term review, carried out in early 2007, resulted in an adjustment to the project budget and extension. However, no mid-term review document was issued. 14 implementation period led to increased opportunity costs for Honduras and direct supervision costs for IDA. 50. The combined rating for IDA’s performance considering the above two factors is Moderately Satisfactory. It should be noted that there were significant internal pressures to close the Project, which the authorities effectively resisted in view of the national importance of achieving the key objectives. A second order restructuring of the Project would have been adequate, especially to adjust the Key Performance Indicators and in this way to better reflect the changes in circumstances since inception. 5.2 Borrower Performance (a) Government Performance Rating: Moderately Unsatisfactory 51. The level of commitment and ownership at the highest levels of Government suffered during the long implementation period from the country’s political and institutional instability. Bank experience has shown that government ownership and commitment to achievement of the PDOs are the most critical factors for success. Both factors were in short supply during part of the implementation period, particularly between 2007 and 2010. The political instability, the changes in administrations, and the significant turnover in leadership of the implementing agencies contributed to the delays in implementing the Project (see Annex 4). In addition, the lack of supportive macroeconomic and institutional policies to expedite the approval of critical legislation and reforms 15 contributed to these delays. Finally, the appointment of inadequate staff to the PCU was a factor under the discretion of the government but was not always satisfactorily and promptly resolved. The rating of Moderately Unsatisfactory reflects these issues. 52. Only towards the end of the Project, with the changes at the most senior levels of BCH and CNBS, a renewed and strong commitment was there and the present administration should be congratulated for this and for the achievement of the Project’s objectives. (b) Implementing Agencies Performance Rating: Moderately Satisfactory 53. The implementing agencies contributed decisively to the achievement of the PDO and the disbursement of the available funds despite periods of uneven performance. Overall, CNBS and BCH valued IDA’s assistance and recognized the importance of the development objectives supported by the credit: they actively engaged in implementing the Project’s activities and achieving its goals. Although ownership of the Project at the highest levels, especially of BCH was at some points uneven, reflecting the fluctuating ownership of the 15 E.g. the Payments System Law or the Law on Corporate Insolvency 15 Project by the Government, the continuing efforts of the operational units made it possible for the activities related to the payments system to continue during the period of relative paralysis between 2007 and 2010. The active collaboration of the PCU, and of the units in charge of the modernization of the payments’ and other systems at BCH, were decisive to the achievement of the PDOs. Although the difficulties in the procurement processes for the large IT systems (RTGS, SIGEF and, to a lesser, extent the SENDI) reflected the lack of experience of BCH staff, their technical capacity improved in time, allowing the Project to substantially contribute to a more efficient and secure operation of BCH in those areas. Considering the above, the performance of the implementing agencies is rated as Moderately Satisfactory. (c) Overall Borrower Performance Rating: Moderately Unsatisfactory 54. The rating reflects the average performance over all the phases of the Project. Although the project’s development objectives were largely achieved, the very significant delays in Project execution over time, which were caused largely by the uneven Project ownership by the authorities described above, had a major opportunity cost for the country and led to significant and high additional costs for IDA. As evidenced by the annual and accumulated disbursement charts, only from 2010 onwards did Project funds disburse rapidly, as the most expensive components (related to the SIGEF and the RTGS) were procured. The slight “disconnect” between the ratings assigned in the last ISR and the ratings in this ICR is because the ICR rates the overall performance of the borrower throughout the whole period of Project execution, while the ISR rates just the period preceding it. Given this overall performance, the rating for the borrower is Moderately Unsatisfactory. 6. Lessons Learned 55. The principal lessons learned for Project design and implementation are as follows: • In an environment of limited implementation capacity, Project design should be as simple as possible. While there are limits to the simplification of specific components 16, the overall design of the Project was overly complex for an environment of limited implementation capacity, uneven leadership, and episodic institutional conflicts between the two main implementing agencies (CNBS and BCH). A simpler structure and a better separation and costing of tasks would have been more appropriate. • The largest Project Component in terms of financing—the modernization of the payment system—suffered from an incomplete and superficial diagnostic at inception and an overly complex design. The diagnostic included only a very limited scope of activities to be reformed and financed, making it necessary to incorporate other systems that were sub optimally sequenced and coordinated, which in turn caused additional costs and delays. The diagnostic of BCH’s shortcomings should have gone further to include its 16 The modernization of the payments system, for example, requires a reform of applicable regulations, an update of procedures as well as the management of change by the participating financial institutions, which all have to be implemented together with adjustments to the technological infrastructure. 16 general ledger and its technical capacity before undertaking the modernization of the payment system. The Project should have identified the need for further technical assistance to the implementing agencies and, also, for the need to take a broader approach in modernizing BCH’s systems and processes, sequencing the replacement of the general ledger and the addition of the SENDI as a prior reform to implanting a modern RTGS. In addition, the initial technical proposal to modernize the payment system prepared by BCH included too many modules, adding complexity to the bidding process and contributing to the failure of the first contractor 17. The lesson for IDA was that breaking down the required actions into a phased approach could have simplified the process. This would have allowed for more attention to implementing the individual modules that support the overall structure of the RTGS and the securities depository Components, which should have been implemented in a second phase rather than simultaneously with the supporting modules. In this regard, the IDA team could have been more proactive in assisting and advising the BCH, both in terms of technical specifications and the complex procurement process. • In low-income countries with limited implementation capacity, it is critical to plan for and expect longer-term IDA engagements since these Projects often encounter adverse circumstances and delays. Although this Project had clear implementation arrangements, the initial execution period proved to be too optimistic and three extensions of the closing date were required for successful implementation. An important lesson is that IDA must maintain the flexibility, staff stamina, and patience to carry on with the implementation of such Projects, even under duress, considering that the authorities would not have had the capacity to carry on and modernize a vital Component of the country’s infrastructure. • IDA should agree up-front with Government on the size and composition of the PCU as well as the minimum experience and qualifications for each position. Relative high turnover of staff at the PCU, both at the level of the Director and Procurement Officers, affected the dynamism and normal functioning of the Unit. The Government’s selection of an inadequately qualified Director, who remained in the job for an extended period, ultimately contributed to additional delays in the execution of the credit. The high Senior staff turnover at the CNBS and the BCH and the uneven level of commitment towards the Project also resulted in significant delays in the implementation of the tasks under Components 1 (banking system consolidation) and 2 (financial sector supervision), but these changes were beyond the Project’s control. It would have been useful for the Government and IDA to agree up-front on the minimum requirements and qualifications for PCU personnel as well as criteria to evaluate performance. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners The borrower, i.e. CNBS and BCH, agreed in with the contents of this ICR and had some comments on specific details, which have been incorporated into this document. 17 Between the first and second bidding processes for the payment system the number of components were scaled down in order to increase efficiency and facilitate the procurement process. The implementation of the various modules was successfully accomplished by the second contractor, which won the second bid. It implemented a system that was less complex than the one originally offered by the first contractor, but more responsive to the central bank needs. 17 ANNEXES Annex 1: Project Costs and Financing (a) Project Cost by Component (in USD Million equivalent) Credit Amount Amount Paid Percentage of Components (USD (USD Total Cost thousands) thousands) Technical Assistance for 3,114.90 2,714.80 Banking Sector Consolidation Program (BCP) 28% Reform of Payment System 5,874.10 4,985.90 52% Improvement of Financial 661.80 661.80 System Infrastructure 6% Project Administration 1,293.00 1,254.30 12% Exchange Rate Differential 01/02/13 173.70 0 2% Rotating Fund 0 787 0% Total Project Cost 11,117.50 10,403.80 Note: Total amount as of March 2013 (b) Financing Amount Paid Percentage of Cost Source of Funds Estimate of Reform of Reform of Payment System (USD millions) Payment System International Development 5,874,118.81 85% Agency (IDA) Central Bank of Honduras 1,047,751.78 15% Total 6,921,870.59 100% 18 (c) : Re-allocation of Funds 2007-2013 (SDR Equivalent) Credit First Second Third Development Disbursed* Undisbursed Amendment Amendment Amendment Agreement September 30, June 30, June 30, February 28, July 23, Closing July 23, 2013 2007 2009 2011 2013 2013 Consultant 3,830,000.00 4,440,000 3,220,000 3,220,000 2,782,503 437,497 Services Goods 1,560,000 930,000 3,166,000 3,166,000 3,689,276 -523,276 Training 570,000 780,000 456,000 456,000 391,721 64,279 Audits 70,000 50,000 40,000 40,000 43,882 -3,883 Operational 450,000 280,000 270,000 270,000 199,983 70,017 Costs Unallocated 720,000 720,000 48,000 48,000 0 48,000 Designated 8,125 -8,125 Account A Total 7,200,000 7,200,000 7,200,000 7,200,000 7,115,491 84,509 * The Disbursed column includes amounts as of July 23, 2013 (see draft closing letter to Minister of Finance) for each category. The amount for Designated Account A represents the exchange rate fluctuations between the SDR and the cost currency used to purchase the US Dollars for disbursement purposes. 19 Annex 2: Outputs by Components Summary of Existing Projects Existing Contracts CNBS Amount Objectives met Acquisition of SGPS software (Sistema para Gestion $333,136.08 System has been installed del Proceso de Supervision). Installation, license rights. on CNBS servers. Tests have been run on six (6) supervised entities. 100% Objective: of staff has been trained in Provide CNBS auditors with modern audit software use of software. Team Mate. Acquisition of SGDE (Sistema de Gestion de $549,195.00 Software has been installed Documentos Electronicos). Installation, license rights. on CNBS servers. Usage manuals have been completed and training Objective: programs for technology, Document management software for CNBS. DPUF, legal and admin personnel have been concluded. Consulting Agreement: provide support to risk $47,660.00 60 CNBS employees have supervision and prepare plan of supervision. undergone training. Objective: A supervision strategy is Provide training sessions to BNPS, SBFAAP on being prepared for 2013 supervision manual based on risks faced by banks and SBFAAP financial institutions. Instill best practices. External Audit of project held Jan. 1 through December $16,750.00 Have the benefit of an 31 2012 and at project closing. external auditor independent from the Objective: project Allow external auditor to provide opinion with regard to financial status of project 3800-HO. Provide report and opinion on internal controls and compliance with Credit Agreement and applicable laws and regulations. Existing Contracts BCH Amount Objectives met Acquisition, installation and implementation of LBTR $1,068,271.40 LBTR: Central Bank is (liquidación bruta en tiempo real). running trial runs with SWIFT participant (Nov. Acquisition, installation and implementation of CDV 27, 2012). (sistema central de valores). BCH has completed 80% of Objective: its trial runs. Participants To rely on a real time settlement payment system by have completed 10% of which participating institutions can settle high value their trial runs. transactions in national and foreign currency through accounts held in Central Bank. CDV: BCH started trial Centralized automated registry of securities. runs with participants Nov. 28, 2012. 20 CBH completed 95% of trial runs. Participants have completed 30% of trial runs. Consulting Agreement: payment system and securities $92,600.00 Received advice and settlement system specialist for the Central Bank. guidance from an international expert with Objective: regard to the design of the Provide advice to BCH in the evaluation of offers and system, and the acceptance contract negotiations for the acquisition of LBTR and of the system. CDV systems. Consulting Agreement: $51,600.00 Receive the benefit of a Payment system and securities settlement system conceptual framework with surveillance to BCH. respect to the function of surveillance and to benefit Objective: from a model of Provide advice to BCH/CNBS with the acquisition surveillance functions. process, negotiation and analysis of products with respect to surveillance for payment system and securities settlement system. Provision of hardware and software to strengthen client $359,178.71 Provide BCH with a capabilities related to payment system of BCH. modern technological infrastructure Objective: Provide equipment to be used in connection with software and computer solutions for payment system. Consulting Agreement: $22,000.00 Have the benefit of a pre National legal expert to develop legal framework for program study explaining savings and credit cooperatives and corresponding the existing legal regulations framework and regulations. Objective: Prepare a draft of the legal framework and expand on a regulatory framework to be shared with international consultants. Executed Contracts BCH Amount Objectives met Acquisition of SIGEF (sistema de informacion para la $3,184,978.75 The following capabilities gestion economica y financiera) for BCH. were acquired: 1. Accounting module Objective: implemented; Obtain SAP ECC software modules: for accounting, budget preparation, inventory management, accounts 2. Budget preparation receivable and bills payable etc… module implemented; Software will be provided by Systech, S.A 3. Several different types of Inventory management modules were implemented; 21 4. Fixed asset module implemented; 5. Acquisition module implemented; 6. Accounts payable module implemented; 7. Unusual operation detection module implemented. 22 Annex 3. Bank Lending and Implementation Support/Supervision Process (a) Task Team members Responsibility/ Names Title Unit Specialty TTL at preparation Modibo Camara Senior Financial Sector Specialist LCSPF and Project launch 2003-2004 Juan Carlos Mendoza Manager, Portfolio and Operations EACNF TTL 2004-2005 Aquiles A. Almansi Lead Financial Sector Specialist FCSAB TTL 2005-2008 Juan Buchenau Hoth Senior Financial Sector Specialist LCSPF TTL 2009-2013 Alvaro Larrea Senior Procurement Specialist LCSPT Procurement Andres Mac Gaul Senior Procurement Specialist LCSPT Procurement Andrew McEwen Mason Consultant ECSF3 Payments Systems Senior Financial Management Financial Antonio Leonardo Blasco LCSFM Specialist Management Beate Gisela Mueller Consultant LCSPF Procurement Carlo Corazza Senior Payment Systems Specialist FFIFI Payments Systems Corina Arteche Consultant FFIFI Financial Systems Diomedes Berroa Senior Operations Officer LCSPT Procurement Etel Patricia Bereslawski Senior Procurement Specialist LCSPT Procurement Aberboj Eva M. Gutierrez Lead Financial Sector Specialist LCSPF Financial System Fernando De Mergelina Consultant LCSPF Financial System Gisela Durand Consultant AFTFE Operations Henry Forero Ramirez Senior Information Officer TWICT IT Systems Ilka Funke Consultant LCSHS Financial Inclusion Joaquin G. Gutierrez Lead Financial Sector Specialist FFSAB Financial system Keisgner De Jesus Alfaro Senior Procurement Specialist LCSPT Procurement Luis Tineo Senior Operations Officer EACNF Operations Mary Lou M. Veizaga Procurement LCSPT Procurement Miriam Milquelis Pujols-Tizol Program Assistant LCSSD Operations Monica Patricia Rivero Riveros Program Assistant LCSPF Operations (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY03 28.62 214.00 FY04 18.28 106.50 Supervision/ICR FY05 18.02 82.00 FY06 13.05 98.00 23 FY07 19.62 155.00 FY08 12.81 117.55 FY09 16.28 141.00 FY10 16.92 171.00 FY11 9.25 139.53 FY12 10.71 109.00 FY13 8.28 117.00 Total: 171.84 1,450.58 24 Annex 4: PCU Staff Members and Counterparts PCU Coordinators Gustavo Bonilla February 2004 March2006 Vidal Flores April 2006 January 2008 Fernando Neda February 2008 August 2009 Juan Carlos Fiallos September 2009 December2010 Fernando Neda January 2011 June 2013 Procurement Officers Starting date Ending Date Helka Rodriguez February 2004 January 2006 Karina Portillo February 2006 March 2006 Mercy Hernández May 2006 June 2006 Evelin Galeano July 2006 December 2006 Karla Barahona July 2007 June 2013 Financial Specialists Mario Ramirez February 2004 May 2006 Nahun Flores June 2004 June 2013 Institutional Leadership during Loan Period National Banking and Insurance Term Term Honduras Central Bank Commission 2002 – 2005 Ana Cristina Mejia de Pereira 2002 – 2005 Maria Elena Mondragon 2006 - Feb 2009 Gustavo Alfaro 2006-2008 Gabriela Nuñez Feb – Jul 2009 Milton Jimenez Puerto 2008-2009 Edwin Araque Jul – Aug 2009 Daniel Figueroa (Interim) 2009-2010 Sandra Midence Sep 2009-Feb 2010 Jose Luis Moncada 2010-2014 Maria Elena Mondragon Feb 2010-2014 Vilma Cecilia Morales 25 Annex 5: Context at appraisal and in 2012 Context at Appraisal 18 1. Between 1960 and 2000, Honduras had many years of low economic growth performance. Output growth ranked among the lowest in the region. During the 1990s when growth recovered in the rest of Central America, in Honduras it only kept pace with population growth. Natural disasters (hurricanes and earthquakes) and a deterioration of the terms of trade, exacerbated by erratic policies and institutional weaknesses, adversely affected growth. Slow growth and weak governance contributed to widespread social unrest. In response, the authorities embarked on an economic reform program focused on ensuring macroeconomic stability, strengthening growth prospects through the development of human capital and basic infrastructure, improving the environment for private sector development, and using international trade agreements to boost growth. 2. The government’s program—supported by an International Monetary Fund (IMF) Poverty Reduction and Growth Facility (PRGF) arrangement—improved overall economic performance. The PRGF arrangement, approved in February 2004, contributed to a modest recovery and a significantly improved external position. A two percent annual growth rate in real per capita GDP was finally attained in 2004, after an extended period of zero or even negative rates. The fiscal strategy embedded in the PRGF was based on the gradual reduction of the fiscal deficit, while at the same time orienting spending toward priorities (growth-enhancing investment and poverty spending). Key reforms supporting this strategy included broadening the tax base, strengthening tax administration, upgrading the Integrated Public Financial Administration System, introducing the single treasury account, and the gradual restructuring of the public sector. Nevertheless, the risks to the fiscal strategy were rated as significant. 3. Key policy achievements included fiscal adjustments, in particular, by improving governance, catalyzing the reform of the financial system recommended by the 2003 Financial Sector Assessment Program (FSAP), and containing the increase in the teachers’ wage bill. Successful program implementation was deemed crucial for sustained economic recovery, continued external support, and reaping the benefits of the Heavily Indebted Poor Countries (HIPC) initiative. However, public sector unions resisted the implementation of a prudent wage policy. Combined with rising oil and basic foodstuff prices, this resistance led to broad-based demands to relax fiscal policy. 4. The 2003 FSAP confirmed the significant financial sector vulnerabilities which had led to the establishment of this Project. These were, in particular: • Weak compliance with the Basel Core Principles (BCP). Honduras largely complied with three principles, materially non-complied with 20 principles, and did not comply with another two. • Adversely affected loans not fully provisioned. Banks had still not fully provisioned loans 18 IMF, Honduras, “Staff Report for the 2005 Article IV Consultation, Second Review Under the Three–Year Arrangement Under the Poverty Reduction and Growth Facility”, March 5, 2005; and World Bank- IMF “Joint Staff Advisory Note on the Poverty Reduction Strategy Paper Second Annual Progress Report”, March 8, 2005. 26 adversely affected by exogenous shocks, including Hurricane Mitch (1998) and the coffee crises (1999 and 2001). 5. Since then, the authorities have made significant progress in addressing financial sector vulnerabilities. Consistent with the recommendations of the FSAP, a series of laws and regulations were approved in 2004 that: (i) strengthened prudential norms (including capital adequacy, loan classification, and provisioning), (ii) enabled consolidated supervision (including offshores, affiliates and subsidiaries), (iii) increased the powers of the supervisory agency, the CNBS, (iv) broadened the circumstances that require corrective actions by banks, and (v) improved the bank resolution framework. The CNBS approved a schedule that gradually implemented the new provisioning requirements over three years. The Honduran Economy in 2012 19 6. After reaching 3.75 percent in 2011, economic growth slowed in 2012. Estimated at 3.25 percent, this decline in real GDP growth in 2012 partly reflected a contraction of the “maquila” sector (the light manufacturing sector operating in free zones). Headline inflation reached its lowest level at 4 percent in July 2012, but rose to 5.4 percent by the end of the year. This uptick reflected a reversal of favorable commodity price developments. Core inflation however, remained broadly stable at about 6 percent throughout the year. 7. Fiscal policy became expansionary in 2012. Government real expenditure grew slightly faster than in 2011 and tax revenue growth declined sharply. The latter reflected continuing tax exemptions, weak revenue administration, the expiration of tax measures adopted in 2010, and a Supreme Court ruling against changes to the income tax from 2011. 8. The central government deficit is estimated to have grown to 6 percent of GDP in 2012, from 4.5 percent in 2011. While the performance of state-owned enterprises also weakened, ongoing surpluses by public pensions contained the combined public sector deficit to 4.25 percent of GDP in 2012. Reduced domestic demand for new government paper and limited access to official external financing led to the accumulation of domestic arrears (whose stock is estimated to have reached about 4 percent of GDP at the end of 2012) and to the BCH credit to finance the deficit. 9. Honduras’s external position continued to weaken during 2012. The external current account deficit is projected to have risen to almost 10 percent of GDP in 2012, driven mainly by robust domestic demand, exchange-rate overvaluation, and less favorable terms of trade. Net international reserve losses for 2012 reached about US$370 million, with gross reserve coverage falling to three months of imports (from 3.5 months at the end of 2011). Private capital outflows picked up in the second half of 2012, reflecting partly declining confidence. 10. Monetary policy efforts have not been enough to prevent the deterioration of the external position. Low policy interest rates and a tightly managed exchange rate have supported the expansion of domestic demand since 2010. Bank credit growth rose significantly in 2012, particularly foreign currency loans and consumer credit. Reflecting partly crowding out by the public sector, loan and deposit interest rates in lempiras rose 19 International Monetary Fund, Article IV Consultation with Honduras 2012. 27 substantially since mid-2012, but did not contain credit growth. The heavily managed exchange rate has not helped reduce the excess demand for foreign exchange or contain the real appreciation of the lempira. 11. Today, Honduras continues to face significant social and institutional challenges. It is one of the poorest countries in Central America and social conditions remain depressed, with about two-thirds of the population living in poverty. Policymaking has been constrained by persistent structural problems, including short political cycles, powerful vested interests, and social unrest. The country also faces challenges in the areas of rule of law, corruption, and government effectiveness. The Honduran Banking System 12. The Honduran banking system underwent a severe test as a consequence of the world crises in 2008 and 2009 and of the political crisis of 2009. Although the financial system fared relatively well in terms of stability—or has at least not performed worse than the rest of Central America—the crises’ negative impacts on loan portfolio quality led to widespread loan restructuring and weakened some banks to an extent which may merit a closer review. 13. Notwithstanding the earlier crises, the financial sector remains generally sound. Non- performing loans (NPLs) are low (2.5 percent in November 2012) and have been declining; and capital levels and provisions against NPLs have increased. Recently introduced new regulations to strengthen risk management will be fully implemented during 2013 and 2014. However, the rapid growth of consumer lending poses risks and financial dollarization remains high at about 30 percent. In addition, significant currency mismatches, especially on the borrower’s side, pose risks. The Superintendency of Banks has been addressing this issue through higher capital requirements on un-hedged loans. 14. Banks and financial institutions experienced a significant turnover between 2004 and 2012. In this period, the number of total banks grew from 16 to 17 and the number of financial institutions grew from nine to 10. In addition, there was a significant turnover among participants. Five banks exited and six new banks entered the market; one financial institution exited and two entered the market. The banking system also experienced a gradual and modest consolidation, as some banks were sold (Trabajadores Bamer, and HSBC), merged (Cuscatlan and Uno) or exited the market (Futuro and BGA) and new banks entered (Procredit, Azteca, Lafise, Popular, Davivienda and Citibank). Banco Cuscatlan was absorbed by Banco UNO, which afterwards was bought by Citibank. Banco de los Trabajadores is, at present, under a recapitalization plan ordered by the CNBS. Banco Bamer was absorbed by BAC, which in turn was recently purchased by a Colombian group. BGA, owned by the Panamanian Banco del Istmo, was bought, jointly with the whole group, by HSBC, which recently sold all its operations in Honduras to Davivienda, another Colombian group. Banco Futuro was sold to Banco Lafise, whileBanco La Constancia and Banco de las Fuerzas Armadas were closed. 15. The turnover of financial institutions did not result in a significant market consolidation and a moderate market concentration remains. The three largest banks in 2004 had a 44.3 percent market share, rising in 2012 to 47.6 percent. There is a much higher degree of concentration of non-bank financial institutions; the three largest institutions in 2004 had a market share of 79.9 percent, dropping in 2012 to 60 percent. With very few exceptions, 28 the majority of participating banks and financial institutions have a market share of less than 10 percent. 2004 (absolute values in billion Lempiras) 2012 (absolute values in billion Lempiras) MARKET MARKET BANKS LOANS SHARE BANKS LOANS SHARE BANCATLAN 7,727 15.50% BANCATLAN 31,070 18.30% HONDURAS 470 0.90% HONDURAS 395 0.20% BANCOCCI 5,443 10.90% BANCOCCI 20,800 12.30% BANCOTRAB 1,418 2.80% BANCOTRAB 2,007 1.20% BANCON 1,112 2.20% BANCON 6,046 3.60% FICENSA 1,552 3.10% FICENSA 5,778 3.40% BAMER 5,573 11.20% --- --- --- BANHCAFE 705 1.40% BANHCAFE 1,931 1.10% BANPAIS 5,011 10.00% BANPAIS 18,867 11.10% FICOHSA 6,614 13.30% FICOHSA 27,818 16.40% BANCO UNO 1,523 3.00% --- --- --- BAC HONDURAS 2,504 5.00% BAC HONDURAS 21,961 12.90% PROMERICA 942 1.90% PROMERICA 4,455 2.60% FUTURO 720 1.40% --- --- --- BGA 7,694 15.50% --- --- --- CUSCATLAN 662 1.30% --- --- --- LAFISE 7,757 4.60% DAVIVIENDA 11,516 6.80% PROCREDIT 1,377 0.80% AZTECA 1,838 1.10% POPULAR 993 0.60% CITIBANK 4,962 2.90% TOTAL 49,670 100% TOTAL 169,572 100% FINANCIAL LOANS MARKET FINANCIAL LOANS MARKET INSTITUTIONS SHARE INSTITUTIONS SHARE COFISA 233 17.50% COFISA 848 12.17% CODIMERSA 39 2.90% CODIMERSA 153 2.20% CREDI Q 618 46.50% CREDI Q 2,171 31.15% ACRESA 40 3.00% ACRESA 759 10.89% COFINTER 50 3.80% COFINTER 320 4.59% FPC 80 5.90% FPC 255 3.66% FICASA 40 2.90% --- --- --- FINSOL 212 15.90% FINSOL 969 13.90% FINISA 18 1.30% FINISA 110 1.58% FINCA 172 2.47% ODEF 1,212 17.39% TOTAL 1,329 100% TOTAL 6,969 100.00% Source: CNBS Economic studies 29 Annex 6: Original Project Components and Sequencing of IDA Interventions 1. The original project objectives were broken down into four Components: (i) Technical Assistance for Banking Sector Consolidation, (ii) Reform of the Payments System, (iii) Improvement of Financial System Infrastructure, and (iv) Project Administration. 1. Technical Assistance for Banking Sector Consolidation – (US$4.50 Million): 2. This Component was originally designed to focus on: • Improvement of the legal and regulatory framework for banking, including the review and reform of: (i) the Financial Institutions Law, (ii) the FOSEDE Law, (iii) CNBS and Central Bank Laws, (iv) drafting of key prudential regulations and the inspection manual, and (v) the adoption of governance and risk management standards. The procurement actions are in the form of individual consultancies. • Rehabilitation planning and in-depth diagnostics of selected banks, including the preparation and assessment of rehabilitation plans, special diagnostic of troubled banks and advisory assistance for the resolution of non-viable banks. The procurement actions are in the form of consultants’ services, employing firms and individual, both nationally and internationally. • Enhancing management of systemic risks, including detailed contingency plans, ongoing diagnostic and intensive supervision of high-risk institutions. The procurement actions were for: (i) consultants’ services employing firms and individual, both nationally and internationally, (ii) training, including workshops, seminars, study tours and on-the-job training at similar institutions abroad, and (iii) acquisition of equipment, such as desktops and lap-tops, a database interface, servers and examination and statistical software and licenses. • The design and implementation of incentive packages for self-rehabilitation of banks, including hiring specialized companies to assist eligible institutions. • The design of an effective framework for bank asset liquidations by hiring a firm to carry out this function. 2. Reform of the Payments System – (US$2.25 Million): 3. This Component involved advisory assistance for the formulation of a reform strategy and its implementation, acquiring and implementing a RTGS and acquiring and implementing equipment for the reform of the securities depository. The procurement actions were for: (i) consultants’ services employing individual consultants, (ii) training, including workshops, seminars, study tours and on-the job training at similar institutions abroad, and (iii) equipment purchases (for the RTGS and securities depository). 3. Improvement of Financial System Infrastructure (US$2.03 Million): 4. This Component focused on: • Strengthening the legal and institutional framework for AML/CFT, including strengthening of the Financial Information Unit (FIU), awareness-raising and training. The procurement actions were in the form of: (i) consultants’ services, employing firms 30 and individual consultants, both national and international, (ii) training including workshops, seminars, study tours and on-the-job training at similar institutions abroad, and (iii) acquisition of equipment, such as desktops and lap-tops, a database interface, servers and analytical tools. • Strengthening the framework for corporate restructuring and the initiation of the public oversight function, including the creation of an Oversight Unit for corporate risks at BCH, the reform of Honduras’ Bankruptcy Law and regulations, improving creditor rights, advisory assistance for the implementation of new framework for corporate restructuring mechanisms (both judicial and extra-judicial) and elaboration of a reform proposal for property registries. The procurement actions were for: (i) consultants’ services employing firms and individual consultants, both national and international, (ii) training, including workshops, seminars, study tours and on-the-job training at similar institutions abroad, and (iii) equipment purchases, such as desktops, servers and licenses. • Dissemination of best practices in rural finance. The procurement actions were for: (i) consultants’ services employing firms and individual consultants, both national and international, and (ii) training including workshops, seminars, study tours and on-the-job training at similar institutions abroad. 4. Project Administration (US$1.11 Million): 5. This Component was designed to provide support for the Project Coordination Unit (PCU) in the CNBS in order to assure effective project management and coordination, and strengthen the capacity of this unit to implement and supervise the project. It included the hiring of a project coordinator, a procurement specialist, and a financial/accounting specialist. This was done in accordance with IDA’s guidelines for selection of individual consultants. 6. The sequencing of IDA interventions was unusual, since the TA operation preceded the adjustment operation. Nonetheless, correctly, the decision was made to provide initially support to the authorities through the TA project and to follow later on with the development policy credit. This sequencing was rather unusual, reflecting the constraints at the time of the project’s approval, but, in the end, the adjustment operation came to support the execution of the project and, under normal project implementation circumstances, the project would have saved time. 7. Prior to appraisal of the IDA adjustment operation, the government had negotiated with the IMF an economic program aimed at reversing Honduras’s fiscal deterioration and at creating the basis for faster growth and reduced poverty. The authorities reached a new Poverty Reduction and Growth Facility (PRGF) arrangement with the IMF Board in February 2003. 8. The First Financial Sector Development Policy Credit (First FSDPC) was to be executed over a period of two years, and would support the institutional development of the financial sector through reforms in the following five areas: (i) strategy for management of systemic risks, (ii) strengthening of the legal and regulatory framework, (iii) strengthening of anti- money laundering and financing of terrorism prevention system, (iv) strengthening of 31 supervision and control of systemic risks, and (v) strengthening of the payments system. 20 9. As indicated in the ICR of the First FSDPC, the PDO Indicators were: (i) resolution of the adverse events that have occurred in the financial system within the framework of the new Financial System Law (Ley del Sistema Financiero, LSF), (ii) commitment to maintain Honduras’s status of cooperating country with the Financial Action Task Force (FATF) and improved compliance with the FATF 40+8 recommendations, and (iii) achievement of the goal of clearing of checks in less than 48 hours. 10. Intermediate Outcome Indicators included the requirements for: (i) all banks to have risk management systems according to CNBS norms, (ii) banks to be in compliance with portfolio ratings and provisioning norms, and (iii) CNBS to take steps to carry out consolidated supervision of the financial groups operating in the country.The almost complete overlap of the project and the first programmatic financial sector development policy credit is quite striking. 11. According to the Implementation, Completion, and Results Report for the FSDPC, the implementation of its reform program “was significantly assisted” by the on-going TA project. “The approval of a technical assistance credit before the approval of the adjustment operation was crucial in helping the authorities to implement the financial sector reforms that were later supported by the first FSDPC.” The project “financed the drafting of laws and regulations and the strengthening of the capabilities of the BCH and CNBS to implement the reforms.” In this sense the two operations were mutually reinforcing. 20 ICR of the First FSDPC, page 4. 32 Annex 7: Improvements in Strengthening the Financial Sector’s Legal and Regulatory Framework and in the Operation of the Central Bank (BCH) under the Project 1. The financial sector legal and regulatory framework has been significantly strengthened by the laws approved under the reform program including the enactment of the LSF law, the amendment of other financial sector laws, and the issuing by the CNBS of norms and regulations for the implementation of the LSF. The CNBS is effectively applying the new framework for prompt corrective action, which allows the authorities to detect and require remedial measures if the entities in the financial system suffer deterioration in their financial health due to the risks assumed. Several outcome indicators in this area have been met. Adverse events that have occurred in the financial system have been resolved within the framework of the new LSF. The dissolution in 2006/7 of a savings and loans association was carried out within the new legal framework and the assets and liabilities of the failed entity were sold to a large bank with contributions from FOSEDE. Since then, no adverse event has occurred in the financial sector that required the application of the bank resolution mechanism in the LSF law. 2. The outcome indicator concerning banks' compliance with the new norms has been met. Most of the banks in the system are in the process of adjusting their procedures to comply with the CNBS's norms on credit risk, including the establishment of risk management systems. This norm was fully implemented by December 2009. Foreign owned banks have their own risk management systems in place, as required by their headquarters. Also, according to CNBS reports, all banks are in compliance with portfolio ratings and provisioning norms. These norms have been modified several times. 3. Congress has not yet approved a new legal framework for the payment systems, (although a law has been presented) and the Law on Electronic Signatures (is being drafted). 4. Additional measures will be required to improve the effectiveness of the AML/CFT legislation, particularly since prosecution and the enforcement of sanctions fall under the orbit of the Public Prosecutor (“Ministerio Publico”) and the police, where major deficiencies remain in terms of resources, prosecutors’ integrity, judicial and police enforcement, and imposition of sanctions. While the UIF is functioning well within the CNBS, critical government agencies charged with investigation and enforcement are not performing their duties. 5. By contributing to a greater reliability and efficiency of BCH’s foreign exchange, monetary policy operations and payment processing, the project reduced prior vulnerabilities and costs, enhancing the efficiency and safety of the foreign exchange, money and inter-bank markets. The project will provide tangible benefits for the commercial banking system, particularly by improving the banks’ cash management and treasury operations. This will allow for a significant reduction of inter-bank risks as it will now be possible to conduct collateralized overnight operations in which BCH will block paper issued by itself or the government as collateral in its securities depository. This will eliminate the banks’ bi-lateral pledges via the exchange of letters or uncollateralized short- term loans. The following table provides an oversight over the main improvements in the 33 operation of BCH under the project. Before After Banks: Banks: (i) Account Management (i) Account Management Lack of on-line access to balances the BCH. Allows banks to improve significantly the Forced to request in paper form, by messenger, security, efficiency and profitability of their transfers or provide instructions via SWIFT Treasury operations, with on-line access to their through the International Department. BCH accounts. Banks will be able to manage Signatures must be verified, balances are efficiently their liquidity and invest excesses checked manually and then operation is liquidity faster in the BCH and government paper. entered. Multiple staff and BCH Departments Queuing of payments will bring advantages in intervene during hours of operation (9:00 a.m.- planning and prioritizing payments throughout the 3:00 p.m.). BCH provides via e-mail messages day. Banks’ request for cash and coins will be debits/credits every hour to banks. Banks channeled through the RTGS and BCH will unable to have an efficient management of their instruct its branches to deliver. Efficiency gains in Treasury operations (single account in three managing reserve requirements and forced currencies: Lempiras, US Dollars and Euros). investments. Banks are requesting an extension of the hours (ii) Government and BCH Securities/Bills of operation. Opens the possibility of developing an efficient (ii) Government and BCH Securities/Bills interbank market collateralized with BCH or BCH auctions take place once a week on government paper, improving systemic liquidity Mondays, but only until Wednesday the management and eliminating banks’ credit risk, as operation is finalized and the bank accounts are safe collateral can be pledged overnight. debited. Banks’ offers are made through BCH web page and BCH Liquidity Committee decides auction amounts and prices. Automated Clearing House (ACH) Clearing ACH Clearing and Settlement: and Settlement: ACH is able to clear check balances more often Banks electronically (image) present checks to throughout the day, settling interbank debits or the ACH managed by the Bank Processing credits in the books of the BCH. Center (CEPROBAN) from 9:00 a.m. to 5:00 p.m. Checks are settled the same day, but they are physically exchanged next day. Banks’ debit/credit customer accounts next day at noon. The ACH presents net balances (debits and credits) to the BCH to settle at the end of the day. There is no check truncation yet, due to legal restrictions. 34 Foreign Exchange Operations: FX Operations (SENDI): Operations are manual and paper based, with The FX auction system, financed under the banks sending, by messenger, envelopes the project, started operations in 2009. Banks can day before the auction, with FX allocated the safely enter to buy FX (US dollars only) at BCH following day in the morning, but accounts in auctions between 1:00-4:00 p.m. defining dollars were credited two days later (no amounts and exchange rate offered. Next day at Delivery versus Payment). 8:40 a.m. funds in Lempiras are blocked and at 11:30 a.m. banks’ accounts are debited and US dollars credited in the correspondents’ accounts. Banks are informed via SWIFT messages (Delivery versus Payment). SENDI is connected to the SIGEF. RTGS/SD: RTGS/SD: Large value payments going through the BCH BCH was one of the last central bank in the region are requested in paper form, via messenger, by to introduce an RTGS/SD system (Belize being the banks. Security is a major concern. De the last one). It will bring major improvement in facto a lot of the large value payments are security and efficiency, enhancing the operation channeled through the ACH. Not possible to of the FX, money and government/ BCH establish payment priorities. securities markets. Manual and multiple systems in operation (4 for securities) will be eliminated. BCH intends to limit ACH payments up to US$10,000. The RTGS system completed parallel trials and started to operate March. As of mid- July, 2013 not all banks had been connected due to delays in complying with BCH’s 4-step certification protocol. Small banks faced additional difficulties. Digital signatures lack legal basis until new law is approved and today operate under a CNBS regulation. The new Payments Law is in Parliament for approval. Government Accounts: Government Accounts: The government has a unique centralized National Treasury will enhance timeliness, account at the BCH, but account management security, and efficiency of liquidity management. is paper-based and manual. Multiple accounts Additional enhancements required to facilitate (about 2,000, in addition to accounts with management of SOEs need to be developed. SEEFIN) for state-owned enterprises (SOEs) managed by the BCH Note: DvP= Delivery versus Payment. 35 Annex 8: Post-Completion Operation/Possible Next Phase Moving forward, the BCH and CNBS have identified the following areas, in which they would require further assistance: I. The BCH has identified pressing needs going forward in the following areas: a. Development of a government agencies’ deposit and payment module linked to the RTGS. b. Module of authorized electronic signatures of users of the Central Bank’s RTGS system. c. Purchase of middleware to allow the integration of Central Bank applications. d. Addition of a human resource management and planning modules to the core SAP in use. e. Module to automate the information of the Social Security Department. f. Acquisition of digital document administration to replace current system of microfilming government and Central Bank securities. g. Strengthening the computer centers’ backup and recovery infrastructure. h. Investing in IT systems to further protect the security of information. i. Computer and telecommunication equipment for the new Central Bank building and the Parallel Computer Center in San Pedro Sula. j. Central Bank “cloud” computer services. II. Despite significant strengthening of the CNBS’s institutional capacity achieved in the last decade, going forward, there are significant needs in banking supervision. Thematically the following areas have been highlighted as priority areas for additional TA support: a. Drafting of regulations to implement new laws, including the Social Security Law, the Law on Sureties and Guarantees. b. Analysis, restructuring and development of new regulatory and supervisory frameworks for the cooperative sector, Fund Administration Companies and Mutual Guarantee Funds. c. Development of financial inclusion plans linked to remittances channeled through cooperatives and OPDFs. d. Improve the rural and agricultural finance systems and reform of BANADESA; e. Review of the adequacy of the reinsurance regulations and training of specialists. f. Regulation of micro-insurers and micro-pension companies. g. Assistance to strengthen consolidated supervision. h. Software and training to: (i) analyze the corporate data collected by the Credit 36 Risk Bureau for prudential purposes, (ii) development of stress-testing models, (iii) acquisition of statistical tools to estimate maximum expected losses. i. Assistance to conduct a self-assessment of GAFI’s 40 recommendations for AML/CFT. III. Going forward, Honduras’ CPS aims to define areas of engagement selectively. Selectivity can best be exercised by focusing on those sectors where the government has demonstrated strong demand and commitment, and where IDA is prepared to deliver. With this new focus, IDA should continue to pay attention to strengthening financial supervision, including regulation and supervision of non-bank financial institutions, while assisting the Central Bank to continue improving the country’s payment system. 37 Annex 9. Honduras: Selected Economic Indicators Projections 2008 2009 2010 2011 2012 2013 (Annual percentage change, unless otherwise indicated) National income and prices GDP at constant prices 4.2 -2.4 3.7 3.7 3.3 3.3 GDP deflator 7.8 7.7 4.7 7.7 4.3 5.2 Consumer prices (end of period) 10.8 3.0 6.5 5.6 5.4 5.9 Exchange rate (end of period, depreciation -) Lempiras per U.S. dollar 19.0 19.0 19.0 19.1 … ... Real effective rate 4.9 7.8 1.6 1.2 … ... Money and credit Private sector credit 9.9 5.0 3.1 10.3 16.9 21.6 Broad money 5.3 1.1 9.4 12.4 9.7 15.7 Lending rate (end of period, in percent) 18.5 17.1 15.1 14.2 ... ... Deposit rate (end of period, in percent) 13.1 10.6 8.0 7.4 ... ... (In percent of GDP, unless otherwise indicated) Combined public sector Noninterest revenue and grants 25.7 22.8 22.7 21.9 21.7 22.0 Noninterest expenditure 27.4 28.2 26.1 24.9 25.9 25.9 Primary balance -1.7 -5.4 -3.4 -3.0 -4.2 -3.9 Net interest payments -1.0 -0.9 -0.6 -0.2 0.9 1.0 Public saving 2.8 -0.8 0.6 1.1 0.7 -0.1 Capital expenditure 6.0 5.8 5.4 5.9 5.8 5.7 Overall balance -1.7 -4.5 -2.8 -2.8 -4.3 -4.6 Public sector debt 1/ 22.9 24.6 29.7 32.1 34.7 36.2 Of which: External debt 16.8 16.9 17.9 18.2 19.9 24.5 Public sector external debt service (in percent of non-maquila exports) 2.8 12.2 3.9 4.5 2.9 4.4 Savings and investment Gross fixed capital formation 33.6 22.0 21.6 25.2 23.7 24.5 38 Gross national savings 18.2 18.0 16.3 16.6 13.8 13.3 Gross international reserves (millions of dollars) 2,691 2,331 2,931 3,043 2,778 2,695 GIR (In months of imports) 2/ 4.7 3.6 3.6 3.5 3.0 2.9 Change in net international reserves (increase -) 185 604 -589 50 367 50 External current account balance -15.4 -4.0 -5.3 -8.5 -9.9 -11.2 Exports, f.o.b. (annual percentage change) 7.2 -22.1 26.6 27.6 2.4 1.4 Imports, f.o.b. (annual percentage change) 17.6 -29.4 20.7 23.4 2.5 6.7 Sources: Central Bank of Honduras, Ministry of Finance, and IMF staff estimates and projections. 1/ Debt series revised based on more comprehensive data series provided by the authorities in September 2012. 2/ Refers to the following year's imports of non-maquila goods and nonfactor services. 39 Annex 10. Summary of Borrower's ICR and/or Comments on Draft ICR A) Borrower’s ICR The borrower submitted an ICR which is filed in WB Docs. Annexes “B” (general conclusions) and “C” (lessons learned) of the Borrower’s document are reproduced below: ANEXO B CONCLUSIONES GENERALES 1. La asistencia técnica para el programa de consolidación de la banca, ha sido altamente favorable para mejorar las capacidades normativas de la CNBS, estableciendo un marco regulatorio adecuado para realizar una supervisión basada en riesgos, manejo de instituciones en problemas e implementar los mecanismos de resolución, que permitan fortalecer la solvencia y mantener la estabilidad del sistema financiero. 2. Se elaboró y aprobó el Marco Jurídico Adecuado que regula la Insolvencia Empresarial, reformando los títulos VI y VII del Código de Comercio y artículos del Código Penal, 3. Se aumentó los niveles de solvencia de las instituciones financieras debido al fortalecimiento de las Reservas y del Capital regulatorio. 4. Se obtuvo una reducción y control del riesgo de concentración de operaciones con partes relacionadas mediante la disminución del monto otorgado a los mismos. 5. La aprobación de la reglamentación de Gobierno Corporativo eficientiza la administración de las entidades financieras. 6. Se establecieron los procedimientos para agilizar los mecanismos de aprobación y concesión del prestamista de última instancia. 7. Hay evidencia de logro de mejoras de la supervisión de las instituciones financieras, a través de la prevención de riesgo sistémico y el manejo de contingencias. 8. Se logró un desarrollo de la capacidad y competencias del recurso humano de la CNBS mediante la incorporación de nuevas herramientas de supervisión basadas en riesgo. 9. Las reformas del Sistema de Pagos constituyen un elemento vital en la infraestructura financiera de la economía del país, ya que posibilita y facilita las transacciones económicas, brindando seguridad en el proceso de intercambio de bienes y le proporciona al Banco Central de Honduras, el mecanismo para efectuar las acciones de política monetaria y regular la liquidez de la economía. 10. La implementación del Modelo de Indicadores de Alerta temprana para actuar en forma preventiva y no reactiva ante una eventual crisis sistémica, es un factor muy importante para una sana supervisión prudencial. 11. El Análisis y Actualización de la Regulación y Supervisión de los diferentes tipos de riesgos asociados a las Instituciones Financieras que atienden al Sector de Microfinanzas, permitió obtener conocimiento sobre la importancia de la supervisión de la actividad microfinanciera; así como, sobre los riesgos y retos de dicho sector en la región. 40 12. La nueva Metodología de Supervisión implementada, permitió fortalecer los procesos de supervisión para las instituciones que atienden al sector de microfinanzas, principalmente en lo relacionado a la evaluación del riesgo de crédito. 13. La obtención de nuevos conocimientos respecto al marco conceptual sobre la administración integral de riesgos, permite que la CNBS prevenir a las instituciones supervisadas para que no sufran pérdidas económicas considerables por la exposición al riesgo excesivo y que asuman los riesgos con decisiones acertadas. 14. Las nuevas metodologías específicas para la evaluación de un plan estratégico y de negocios, permitió determinar si los mismos expresan la estrategia real de las instituciones supervisadas, que atienden el sector de microfinanzas. En la actualidad dicha evaluación forma parte de la guía del riesgo estratégico de los procesos de supervisión. 15. En términos generales podemos concluir que al haber estado en el marco de Solvencia I, los organismos supervisores a nivel internacional han tendido a buscar mecanismos de regulación y prácticas de supervisión que les permitan cuantificar y monitorear los riesgos a los que están expuestas las instituciones de seguros por la actividad que realizan, por lo que buscan otro nuevo enfoque que combine las exigencias tradicionales de solvencia (reservas técnicas y suficiencia de capital), con requerimientos de gobierno corporativo y transparencia de mercado, así como fortalecer el perfil financiero de las instituciones de seguros y su calidad crediticia, aplicando el enfoque de solvencia II. 16. La Inestabilidad política del país debido a los sucesos de junio 2009 afectó la ejecución normal de las actividades del Proyecto, lo que trajo como consecuencia postergación de inicio y de ejecución de algunas actividades, cambios en los perfiles y alcances de algunos proyectos importantes. 17. Los cambios de autoridades en la CNBS y el BCH, generaron durante los primeros cinco años de ejecución del proyecto una alta rotación del personal clave del proyecto (Coordinador y personal técnico de adquisiciones) y además esto provocó constantes cambios en la programación de actividades producto de los objetivos que perseguía las autoridades de cada Institución. 18. Para la ejecución del Proyecto fue muy importante el apoyo recibido de expertos del Banco Mundial en actividades estratégicas como es el Sistema de Pagos del BCH. 19. La Comisión Nacional de Bancos y Seguros avanzó significativamente en la modernización del marco regulatorio del sistema financiero, así como en el alcance de su propio fortalecimiento interno en materia de metodologías, sistemas y herramientas desarrolladas para realizar la supervisión basada en riesgos. 20. Con recursos del Proyecto se iniciaron las primeras actividades para la implementación de la supervisión integral basada en riesgos, actividad estratégica que fue concluida a con recursos de otra entidad financiera internacional para la completa implementación del nuevo Manual de Supervisión Integral Basada en Riesgos, basado en las mejores prácticas. 21. La herramienta informática para auditoría denominada Team Mate, adquirida con recursos del Proyecto para las tres Superintendencias, se ha constituido en una plataforma electrónica de alto valor para efectos de mejorar la planificación, ejecución y hacer más efectiva la supervisión in situ y extra situ. 41 22. Con recursos del Proyecto y como parte de las actividades fundamental del mismo, el Banco Central de Honduras ha implementado con todo éxito el Sistema de Liquidación Bruta en Tiempo Real (LBTR) y Central Depositaria de Valores (CDV). 23. El Sistema electrónico de negociación de divisas, es otro proyecto financiado el cual permite la negociación de divisas entre los agentes cambiarios autorizados y el BCH, el que se encuentra funcionado desde el mes de junio de 2009. 24. La Unidad Coordinadora de Proyectos (UCP), dependiente de la Comisión Nacional de Bancos y Seguros (CNBS), fue de gran apoyo tanto como enlace entre Banco Mundial y el BCH, como en el asesoramiento, planificación, control, seguimiento y ayuda en las diversas tareas que implicaron la implementación de estos sistemas. 25. La implementación de estos proyectos impulsó a la elaboración de la Ley de Sistema de Pagos y Liquidación de Valores, así como de varios reglamentos resoluciones y circulares para normar los sistemas de pagos, y de Liquidación de Valores. 26. El Sistema financiero hondureño se ha visto beneficiado por la modernización del Sistema de Pagos y actualmente realiza parte de sus operaciones por medio de la ACH-Pronto y de la Cámara Electrónica de Compensación de Cheques, además poco a poco están procesando sus transacciones de alto valor por medio de la BCH-TR, con lo cual han mejorado substancialmente la seguridad y rapidez de las transacciones que llevan a cabo. 27. El Gobierno Central que es uno de los principales entes que realiza pagos, se ve altamente beneficiado con los nuevos Sistemas de Pagos, tanto por medio de la ACH-Pronto, de la Cámara de Compensación de Cheques, así como próximamente por medio de las transacciones en la BCH-TR. 28. El Banco Central de Honduras, ha visto una mejora considerable tanto desde el punto de vista jurídico; mediante la aprobación de los Reglamentos y Resoluciones del Directorio del BCH, que han venido a normar las diversas transacciones que se dan en el Sistema de Pagos y de Liquidación de Valores, así como desde el punto de vista del aumento en la seguridad, velocidad de las transacciones, costo y ahorro de recursos tanto humanos como de bienes. 29. La economía hondureña en general se ha visto beneficiada por la mejora en el Sistema de Pagos, dada la mayor confiabilidad que tiene debido al uso de los nuevos mecanismos de pagos, de subasta de títulos valores y subasta de divisas. 42 ANEXO C LECCIONES APRENDIDAS 1. La actualización y mejora del marco regulatorio permite enfocar en mejor forma las acciones y los recursos para efectuar un efectivo proceso de supervisión e intervención en instituciones con alto riesgo. 2. La atención a los riesgos sistémicos debe hacerse en coordinación con todas las entidades que conforman la Red de Seguridad Financiera y apoyarse en indicadores de alerta temprana, para actuar en forma preventiva y no reactiva ante una eventual crisis sistémica. 3. El conocer de las debilidades de la Ley y de las normativa vigente, fue un aprendizaje que permite actuar para buscar mecanismos alternos de orientación al sistema asegurador como de los funcionarios de la Superintendencia de Seguros y Pensiones, manteniendo el monitoreo continuo de la solvencia y de las reservas de las instituciones bajo los mecanismos actuales de regulación. 4. Con las normas prudenciales del Reglamento sobre Constitución de Reservas Técnicas, Reglamento del Margen de Solvencia y del Reglamento de Inversiones para la supervisión de las instituciones de seguros, consideramos que fue un aprendizaje continuo y compartido con las instituciones de seguros, al mantener mecanismos de regulación que le permitieran a la institución cuantificar sus riegos y a la Superintendencia de Seguros y Pensiones a monitorear las operaciones realizadas por estas. 5. Los planes de adquisiciones al inicio del proyecto y durante un buen tiempo de ejecución del mismo, fueron muy ambiciosos en función de la inexperiencia que se tenía en la ejecución de los procesos; sin embargo, a partir de 2010 al 2012 por las lecciones aprendidas y la curva de aprendizaje más el apoyo decidido de las autoridades superiores, se replanteo un PAC realista de conformidad con los objetivos del convenio de crédito. 6. Es indispensable que para una buena ejecución de los proyectos, todo su personal, debe tener los conocimientos y experiencia en gestión de proyectos; con esto se evita retrasos en los procesos y por ende en la ejecución de los mismos. 7. Todo el personal de la UCP independientemente de su forma de contratación o financiamiento debe tener una supervisión y evaluación continua de desempeño, y sus recontrataciones deben ser al menos de 12 meses y no por periodos menores, pues con esto se evita crear incertidumbre e inestabilidad laboral. 8. El acompañamiento y empoderamiento de las contrapartes técnicas desde la etapa de inicio hasta la etapa de cierre de los contratos en cada uno de los procesos, es un aspecto fundamental para lograr los objetivos propuestos. 9. Los manuales operativos de los proyectos deben ser revisados y de ser necesario modificados al menos una vez al año, a efecto de irlos adaptando a la dinámica administrativa, financiera, operativa y contable, en base a las mejores práctica. 10. Durante la ejecución del Proyecto se tuvo cuatro (4) cambios de Presidente del país, seis (6) cambios de autoridades tanto en la CNBS como en el BCH, Cinco (5) Coordinadores de la UCP, cinco (5) oficiales de Adquisiciones de la UCP, por parte del BM, cuatro (4) Task Manager y Seis (6) Especialistas de Adquisiciones. Esta altísima rotación de 43 personal se constituyó en un fuerte obstáculo para el acelerado avance en la ejecución de los Planes de Adquisiciones, ya que cada cambio tenía una nueva visión del Proyecto y se hacían las modificaciones respectivas; no obstante a lo anterior, es evidente que una adecuada coordinación, seguimiento y apoyo institucional e interinstitucional, tal y como sucedió durante el período de gobierno 2010 al 2013, fue un factor preponderante para impulsar en forma definitiva las actividades del Proyecto y lograr una ejecución final del 99% de los recursos aprobados. 11. La pausa obligatoria que se originó por los acontecimientos del año 2009, más los tiempos de aprobación por parte del Banco Mundial en alguno de los procesos más importantes que se ejecutaron en el Proyecto, así como también la demora en la aprobación de las enmiendas al convenio de crédito, provocaron atrasos en los primeros cinco años de ejecución del proyecto. 12. Uno de los aprendizajes más importantes durante la ejecución del Proyecto fue la necesaria evaluación y planificación previa de los recursos humanos y tecnológicos con que cuenta una institución, a fin de determinar cuántos proyectos es capaz de ejecutar en forma simultánea, junto a las además tareas rutinarias que se desempeñan. 13. Considerando que la simultaneidad de los proyectos fue una de las principales causas de problemas en el proceso de implementación, se ha establecido en el BCH y en la CNBS, una metodología de priorización de proyectos, tomando en cuenta la disponibilidad de recursos monetarios y humanos, así como también por la importancia en el cumplimiento de los objetivos institucionales, entre otros. B) Borrower comments to this ICR: The borrower sent the following general comments on the ICR: From: Fernando Neda To: "jbuchenau@worldbank.org" Date: 08/27/2013 07:24 PM Subject: INFORME DE CIERRE PROYECTO 3800-HO Estimado Juan: Hago referencia a la videoconferencia sostenida con Ustedes esta mañana, en la que participaron representantes del BCH y de la CNBS, donde se nos presentó los principales hallazgos y conclusiones del informe de cierre del Proyecto 3800-HO elaborado por el Banco Mundial. Tal y como fue manifestado en la videoconferencia, en términos generales los representantes de ambas instituciones han manifestado su conformidad con el contenido de dicho informe, sin perjuicio de unas pequeñas observaciones y comentarios que por aparte se las estamos remitiendo para su consideración. 44 Por otra parte, estamos esperando la autorización de las autoridades superiores, para remitirles nuestro informe de cierre que conjuntamente con el BCH hemos preparado. Nuevamente queremos agradecerle por todas las gestiones que en su calidad de Gerente del Proyecto ha venido realizando en los últimos cuatro años, lo que indudablemente ha sido un importante elemento, para que se hayan logrado los resultados obtenidos durante dicho período. Cordiales saludos Fernando Neda Brito Coordinador Unidad Coordinadora de Proyectos / CNBS In addition to the general agreement with the content of the ICR expressed above, the borrower provided more specific comments in a separate file, which were incorporated into this ICR. Such comments include: • Currently, all large payment transactions are carried out through the RTGS. 71% of the number of transactions (covering 94% of the volume of transactions) are submitted electronically, while the remainder, namely of those banks which are not yet participating fully in the RTGS, are recorded manually in the system; • The borrower asked to revise the wording under Section 4 “Assessment of Risk to Development Outcome” to reflect that the high risk for the outcome in the area of AML is due to the lack of follow-up on suspicious transactions by the Prosecutor’s Office and the judicial branch, and to make clear that the FIU is operating properly. • Under the Section “Lessons Learned”, , the borrower requested to include that some of the project’s activities, such as the modernization of the payments system, require the simultaneous implementation of legal, technical and institutional reforms to be successful and that such reforms therefore cannot be simplified. The borrower stressed in this context the importance of capacity building to enable implementing agencies to address these issues properly. • Some dates in the text, and data on the relative participation of the Finance Companies in Annex 5 were inaccurate and have been corrected. 45 Annex 11. List of Supporting Documents 1. Project Appraisal Document 2. Project Information Document 3. Integrated Safeguards Data Sheet 4. Credit Agreement 5. ISRs from 2003 – 2013 6. Miscellaneous project documents (filed in WB Docs) 46